Azarga Uranium Corp. CONSOLIDATED FINANCIAL STATEMENTS December 31, 2019 (Expressed in U.S. Dollars) Tel: 604-688-5421 Fax: 604-688-5132 www.bdo.ca BDO Canada LLP 600 Cathedral Place 925 West Georgia Street Vancouver, BC V6C 3L2 Independent Auditor’s Report To the Shareholders of Azarga Uranium Corp. Opinion We have audited the accompanying consolidated financial statements of Azarga Uranium Corp. (“the Company”), which comprise the consolidated statements of financial position as at December 31, 2019 and 2018 and the related consolidated statements of loss and other comprehensive loss, changes in equity and cash flows for the years then ended, and a summary of significant accounting policies and other explanatory information. In our opinion, the accompanying consolidated financial statements present fairly, in all material respects, the financial position of Azarga Uranium Corp. as at December 31, 2019 and 2018 and the consolidated statements of loss and other comprehensive loss, changes in equity and cash flows for the years then ended, and a summary of significant accounting policies and other explanatory information in accordance with International Financial Reporting Standards (“IFRS”). Basis for Opinion We conducted our audit in accordance with Canadian generally accepted auditing standards. Our responsibilities under those standards are further described in the Auditor’s Responsibilities for the Audit of the Consolidated Financial Statements section of our report. We are independent of the Company in accordance with the ethical requirements that are relevant to our audit of the consolidated financial statements in Canada, and we have fulfilled our other ethical responsibilities in accordance with these requirements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Material Uncertainty Related to Going Concern We draw attention to Note 1 in the consolidated financial statements, which indicates that the Company has not generated revenues from operations, is currently in the exploration and development stage and has an accumulated deficit of $26,988,501. These events or conditions, along with other matters as set forth in Note 1, indicate that material uncertainties exist that may cast significant doubt on the Company's ability to continue as a going concern. Our opinion is not modified in respect of this matter. Other Information Management is responsible for the other information. The other information comprises: · The information, other than the consolidated financial statements and our auditor’s report thereon, included in Management’s Discussion & Analysis. Our opinion on the consolidated financial statements does not cover the other information and we do not express any form of assurance conclusion thereon. In connection with our audit of the consolidated financial statements, our responsibility is to read the other information identified above and, in doing so, consider whether the other information is materially inconsistent with the consolidated financial statements or our knowledge obtained in the audit, or otherwise appears to be materially misstated. We obtained Management’s Discussion & Analysis prior to the date of this auditor’s report. If, based on the work we have performed on this other information, we conclude that there is a material misstatement of this other information, we are required to report that fact in this auditor’s report. We have nothing to report in this regard. BDO Canada LLP, a Canadian limited liability partnership, is a member of BDO International Limited, a UK company limited by guarantee, and forms part of the international BDO network of independent member firms. Page 1 of 12 Responsibilities of Management and Those Charged with Governance for the Consolidated Financial Statements Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with IFRS, and for such internal control as management determines is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error. In preparing the consolidated financial statements, management is responsible for assessing the Company’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless management either intends to liquidate the Company or to cease operations, or has no realistic alternative but to do so. Those charged with governance are responsible for overseeing the Company’s financial reporting process. Auditor’s Responsibilities for the Audit of the Consolidated Financial Statements Our objectives are to obtain reasonable assurance about whether the consolidated financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with Canadian generally accepted auditing standards will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these consolidated financial statements. As part of an audit in accordance with Canadian generally accepted auditing standards, we exercise professional judgment and maintain professional skepticism throughout the audit. We also: · Identify and assess the risks of material misstatement of the consolidated financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control. · Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control. · · · Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by management. Conclude on the appropriateness of management’s use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Company’s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor’s report to the related disclosures in the consolidated financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor’s report. However, future events or conditions may cause the Company to cease to continue as a going concern. Evaluate the overall presentation, structure and content of the consolidated financial statements, including the disclosures, and whether the consolidated financial statements represent the underlying transactions and events in a manner that achieves fair presentation. · Obtain sufficient appropriate audit evidence regarding the financial information of the entities or business activities within the group to express an opinion on the consolidated financial statements. We are responsible for the direction, supervision and performance of the group audit. We remain solely responsible for our audit opinion. We communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit. We also provide those charged with governance with a statement that we have complied with relevant ethical requirements regarding independence, and to communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, related safeguards. The engagement partner on the audit resulting in this independent auditor’s report is Bryndon Kydd. (signed) “BDO Canada LLP” Chartered Professional Accountants Vancouver, British Columbia March 26, 2020 TABLE OF CONTENTS CONSOLIDATED FINANCIAL STATEMENTS Consolidated Statements of Financial Position Consolidated Statements of Loss and Other Comprehensive Loss Consolidated Statements of Changes in Equity Consolidated Statements of Cash Flows NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 1. Corporate information and going concern 2. Basis of presentation 3. Summary of significant accounting policies 4. Segmented information 5. Acquisition of URZ Energy 6. Exploration and evaluation assets 7. Loans payable 8. Decommissioning liabilities 9. Warrant liabilities 10. Equity 11. Share option reserve 12. Administrative expenses 13. Finance costs 14. Discontinued operations 15. Related party transactions and balances 16. Financial instruments and risk management 17. Capital risk management 18. Commitments 19. Supplemental cash flow information 20. Non-controlling interest 21. Deferred income tax 22. Subsequent events Page 6 7 8 9 10 11 14 26 27 29 34 35 35 36 40 42 42 43 43 45 49 49 50 51 53 55 AZARGA URANIUM CORP. Consolidated Statements of Financial Position (Expressed in U.S. Dollars) ASSETS Current assets Cash Total current assets Other assets Non-current assets Restricted cash Exploration and evaluation assets Property, plant and equipment Right-of-use assets Total non-current assets Reclamation bonds Total assets LIABILITIES AND EQUITY Current liabilities Trade and other payables Total current liabilities Operating lease obligations Non-current liabilities Trade and other payables Deferred income tax liabilities Decommissioning liabilities Operating lease obligations Total non-current liabilities Warrant liabilities Total liabilities Equity Common shares Contributed surplus Share option reserve Foreign currency translation reserve Accumulated deficit Equity attributable to the equity holders of the Company Total equity Non-controlling interest Total liabilities and equity Notes 2019 2018 As at December 31, $ 184,447 23,913 208,360 $ 352,001 26,810 378,811 22,716 41,440,616 67,577 111,357 - 41,642,266 41,850,626 $ 39,963 46,696,473 90,106 - 99,000 46,925,542 47,304,353 $ $ 793,864 45,014 838,878 $ 1,302,085 - 1,302,085 70,000 3,112,193 251,550 70,445 265,029 3,769,217 4,608,095 60,303,924 1,117,679 2,809,429 - (26,988,501) 37,242,531 - 37,242,531 41,850,626 $ 150,000 4,233,790 223,442 - 247,654 4,854,886 6,156,971 57,976,321 1,001,818 2,500,078 (863,092) (18,973,266) 41,641,859 (494,477) 41,147,382 47,304,353 $ 6 8 15 21 8 9 10 10 11 20 Corporate information and going concern Approved by the Board of Directors of the Company: 1 “Joseph L. Havlin”, Director “Matthew O’Kane”, Director The accompanying notes are an integral part of these consolidated financial statements. Page | 6 AZARGA URANIUM CORP. Consolidated Statements of Loss and Other Comprehensive Loss (Expressed in U.S. Dollars) Administrative expenses Foreign exchange loss Loss from operations Impairment of exploration and evaluation assets Finance costs Gain on settlement of trade and other payables Loss before income tax Unrealized gain on warrant liabilities Net loss from continuing operations Deferred income tax recovery (expense) Net loss Net loss from discontinued operations Net loss attributable to: Equity holders of the Company Net loss Non-controlling interest Basic and diluted loss per share Notes Year ended December 31, 2019 2018 12 6 13 10 9 21 14 20 $ (1,943,285) (93,382) (2,422,398) (4,459,065) (9,734) - 371,983 (4,096,816) 122,000 (3,974,816) (3,763,180) (7,737,996) $ (2,040,580) (946) - (2,041,526) (154,913) 34,485 51,789 (2,110,165) (181,000) (2,291,165) (117,560) (2,408,725) (7,464,073) (273,923) (7,737,996) $ (2,379,290) (29,435) (2,408,725) $ Basic and diluted loss per share from continuing operations Basic and diluted loss per share from discontinued operations Weighted average number of common shares outstanding Basic and diluted loss per share Net loss Other comprehensive income (loss) Item that may be reclassified subsequently as profit or loss Total other comprehensive loss Foreign currency translation adjustment Other comprehensive income (loss) attributable to: $ $ $ (0.02) (0.02) (0.04) $ $ $ (0.02) (0.00) (0.02) 181,477,536 125,183,747 $ (7,737,996) $ (2,408,725) 1,080,330 (6,657,666) $ (50,154) (2,458,879) $ Equity holders of the Company Other comprehensive income (loss) Non-controlling interest 20 1,065,341 14,989 1,080,330 $ (35,108) (15,046) (50,154) $ The accompanying notes are an integral part of these consolidated financial statements. Page | 7 AZARGA URANIUM CORP. Consolidated Statements of Changes in Equity (Expressed in U.S. Dollars) Attributable to equity holders of the Company Number of shares Common shares Contributed surplus Share option reserve Foreign currency translation reserve Accumulated deficit Total equity Non-controlling interest Total equity Balances, December 31, 2018 Issuance of shares for private placement Issuance of shares to settle employee remuneration Issuance of shares to settle ESPP Issuance of shares to settle DSA Compensation to be settled by equity Share-based compensation NCI adjustment on acquisition of 23.1% of UrAsia Net loss for the year Balances, December 31, 2019 Other comprehensive income for the year 169,833,806 13,106,046 $ 57,976,321 1,871,110 900,000 1,380,521 323,553 - - - - - 170,068 231,424 55,001 - - - - - 185,543,926 $ 60,303,924 $ 1,001,818 $ 2,500,078 $ (863,092) $ (18,973,266) - (170,068) (231,424) (55,001) 572,354 - - - - - - - - - 309,351 - - - - - - - - - (202,249) - 1,065,341 $ 2,809,429 Attributable to equity holders of the Company $ - 1,117,679 $ - - - - - - (551,162) (7,464,073) - $ (26,988,501) $ 41,641,859 1,871,110 - - - 572,354 309,351 (753,411) (7,464,073) 1,065,341 37,242,531 $ $ (494,477) - - - - - - 753,411 (273,923) 14,989 $ - $ 41,147,382 1,871,110 - - - 572,354 309,351 - (7,737,996) 1,080,330 37,242,531 $ Number of shares Common shares Contributed surplus Share option reserve Foreign currency translation reserve Accumulated deficit Total equity Non-controlling interest Total equity Balances, December 31, 2017 Acquisition of URZ Energy Issuance of shares to settle Shareholders' Loan Issuance of shares for private placements Issuance of shares on exercise of warrants Issuance of shares for repurchase of royalties Issuance of shares to settle trade and other payables Issuance of shares to settle employee remuneration Issuance of shares to settle ESPP Issuance of shares to settle DSA Issuance of warrants Compensation to be settled by equity Share-based compensation Net loss for the year Balances, December 31, 2018 Other comprehensive loss for the year 83,619,850 58,107,109 11,269,243 780,000 11,950,866 104,166 $ 41,286,853 11,273,920 2,201,024 140,804 2,347,295 19,391 2,033,334 391,014 550,000 1,115,301 303,937 - - - - - 93,500 215,344 58,669 (51,493) - - - - $ 768,652 686,314 $ 1,427,563 769,169 - - (520,217) - - (93,500) (215,344) (58,669) - 434,582 - - - - - - - - - - - - - 303,346 - - 169,833,806 $ 57,976,321 $ 1,001,818 $ 2,500,078 $ (827,984) $ (16,593,976) - - - - - - - - - - - - - (35,108) (863,092) $ - - - - - - - - - - - - (2,379,290) - $ (18,973,266) $ 26,061,108 12,729,403 2,201,024 140,804 1,827,078 19,391 391,014 - - - (51,493) 434,582 303,346 (2,379,290) (35,108) 41,641,859 $ $ (449,996) - - - - - - - - - - - - (29,435) (15,046) (494,477) $ $ 25,611,112 12,729,403 2,201,024 140,804 1,827,078 19,391 391,014 - - - (51,493) 434,582 303,346 (2,408,725) (50,154) 41,147,382 $ The accompanying notes are an integral part of these consolidated financial statements. Page | 8 AZARGA URANIUM CORP. Consolidated Statements of Cash Flows (Expressed in U.S. Dollars) OPERATING ACTIVITIES Net loss from continuing operations Adjustments for: Depreciation Share-based compensation Impairment of exploration and evaluation assets Gain on settlement of trade and other payables Unrealized gain on warrant liabilities Deferred income tax expense (recovery) Equity compensation expense Finance costs Unrealized foreign exchange (gain) loss Operating cash flows before changes in non-cash working capital items Change in other assets Change in trade and other payables Net cash used in operating activities of continuing operations Net cash used in operating activities of discontinued operations INVESTING ACTIVITIES Cash received on acquisition of URZ Energy, net of transaction costs Expenditures on exploration and evaluation assets Recoveries of expenditures on exploration and evaluation assets Sale of property, plant and equipment Net cash used in investing activities of continuing operations Reclamation bonds Net cash generated by financing activities of discontinued operations Notes Year ended December 31, 2019 2018 $ (3,974,816) $ (2,291,165) 11 6 10 9 21 10 13 5 6 6 8 44,560 252,790 2,422,398 - (371,983) (122,000) 572,354 9,734 12,277 (1,154,686) 2,897 (296,541) (1,448,330) (41,176) - (1,316,974) 2,000 1,126 99,000 (1,214,848) 2,696 266,044 - (34,485) (51,789) 181,000 434,582 154,913 (75,398) (1,413,602) 145,542 (465,357) (1,733,417) (117,560) 423,924 (1,304,967) - - (2,000) (883,043) FINANCING ACTIVITIES 99,700 260,172 10 Proceeds from issuance of common shares 10 Share issue costs Loan proceeds received 7 Net cash generated by financing activities of continuing operations Payment of other loans payable 7 Net cash generated by financing activities of discontinued operations Decrease in cash from continuing operations Effect of foreign exchange rate changes on cash Increase in cash from discontinued operations Cash, beginning of year Cash, end of year 2,266,169 (16,553) - - 2,249,616 191,409 (3,925) (417,487) 249,933 352,001 1,984,444 - 515,000 (105,000) 2,394,444 - (787) (222,803) 142,612 432,192 Supplemental cash flow information, see Note 19 $ 184,447 $ 352,001 The accompanying notes are an integral part of these consolidated financial statements. Page | 9 AZARGA URANIUM CORP. Notes to the Consolidated Financial Statements (Expressed in U.S. Dollars and in shares, unless otherwise indicated) For the year ended December 31, 2019 1. CORPORATE INFORMATION AND GOING CONCERN Azarga Uranium Corp. (“Azarga Uranium”) was incorporated on February 10, 1984 under the laws of the Province of British Columbia, Canada. Azarga Uranium’s common shares are publicly traded on the Toronto Stock Exchange (“TSX”) (Symbol: AZZ), the Frankfurt Stock Exchange (Symbol: P8AA), and the OTCQB Venture Market (Symbol: AZZUF). Azarga Uranium, together with its subsidiaries (collectively referred to as the “Company”), is an integrated uranium exploration and development company. The Company controls uranium properties located in the United States of America (“USA”) with a primary focus of developing in-situ recovery uranium projects. The Company’s Dewey Burdock Project, located in South Dakota, USA, is the Company’s initial development priority. The Company also owns uranium projects in Wyoming, Colorado, and Utah. Until sold in October 2019, the Company also held an interest in a project in the Kyrgyz Republic, see Note 6. The Company’s corporate and registered and records office address is Unit 1 – 15782 Marine Drive, White Rock, BC, V4B 1E6. These consolidated financial statements have been prepared on a going concern basis, which contemplates that the Company will continue operations for the foreseeable future and will be able to realize its assets and discharge its liabilities in the normal course of business as they fall due. To date, the Company has not generated revenues from operations and is currently in the exploration and development stage. As at December 31, 2019, the Company had a working capital deficit of $630,518 and an accumulated deficit of $26,988,501 and will continue incurring losses for the foreseeable future. Additional funding will be required by the Company to complete its strategic objectives and continue as a going concern. There is no certainty that additional financing, at terms that are acceptable to the Company, will be available. Further, at present, the COVID-19 pandemic is negatively impacting financial markets globally and this may adversely affect the Company’s ability to raise capital for future operations and exploration and development of the Company’s mineral properties. The Company has successfully raised financing in the past and will continue to assess available alternatives; however, there is no assurance that the Company will be able to raise additional funds in the future. These material uncertainties cast significant doubt on the Company’s ability to continue as a going concern. These consolidated financial statements do not reflect adjustments that would be necessary if the going concern assumption were not appropriate. Page | 10 AZARGA URANIUM CORP. Notes to the Consolidated Financial Statements (Expressed in U.S. Dollars and in shares, unless otherwise indicated) For the year ended December 31, 2019 2. BASIS OF PRESENTATION 2.1 Statement of compliance These consolidated financial statements, including comparatives, have been prepared in accordance with and using accounting policies in compliance with International Financial Reporting Standards (“IFRS”) and interpretations issued by the International Accounting Standards Board (“IASB”) and interpretations of the IFRS Interpretations Committee (“IFRIC”). These consolidated financial statements for the year ended December 31, 2019 were approved and authorized for issue by the Company’s Board of Directors on March 26, 2020. Basis of presentation 2.2 These consolidated financial statements have been prepared on a historical cost basis, except for financial instruments which are measured at fair value. The Company’s financial instruments are further disclosed in Note 16. Presentation currency 2.3 These consolidated financial statements are presented in United States Dollars, unless otherwise indicated. All references to $ refer to the United States Dollar and all references to C$ refer to the Canadian Dollar. Significant accounting judgments and estimates 2.4 Information about judgments and estimates in applying accounting policies that have the most significant effect on the amounts recognized in the consolidated financial statements are as follows: Liquidity and going concern assumption In the determination of the Company’s ability to meet its ongoing obligations and future contractual commitments, management relies on the Company’s planning, budgeting and forecasting process to help determine the funds required to support the Company’s normal operations on an ongoing basis and its expansionary plans. The key inputs used by the Company in this process include forecasted capital deployment, progress on permitting, results from the exploration and development of its properties and general industry conditions. Changes in these inputs may alter the Company’s ability to meet its ongoing obligations and future contractual commitments and could result in adjustments to the amounts and classifications of assets and liabilities should the Company be unable to continue as a going concern, see Note 1. Page | 11 AZARGA URANIUM CORP. Notes to the Consolidated Financial Statements (Expressed in U.S. Dollars and in shares, unless otherwise indicated) For the year ended December 31, 2019 2. BASIS OF PRESENTATION (Continued) 2.4 Significant accounting judgments and estimates (Continued) Indicators of impairment of exploration and evaluation assets In accordance with the Company’s accounting policy for its exploration and evaluation assets, expenditures on its uranium properties are capitalized. There is no certainty that the expenditures made by the Company in the exploration of its property interests will result in discoveries of commercial quantities of uranium. The Company applies judgment to determine whether indicators of impairment exist for these capitalized costs. Management uses several criteria in making this assessment, including the period for which the Company has the right to explore, expected renewals of exploration rights, whether substantive expenditures on further exploration and evaluation of its properties are budgeted, and evaluation of the results of exploration and evaluation activities up to the reporting date. Carrying value of exploration and evaluation assets If any indicators of impairment are noted then management reviews the carrying value of the Company’s exploration and evaluation assets to determine whether an impairment charge should be recorded on any of its projects. Management determines the recoverable amount of its individual exploration and evaluation assets using the higher of fair value less costs to sell or value-in-use. This determination and the individual assumptions require that management decide whether impairment should be recorded based on the best available information at each reporting period. Changes in these assumptions may alter the results of impairment testing, impairment charges recognized in profit or loss and the resulting carrying amounts of assets. During the year ended December 31, 2019, the Company recorded an impairment charge of $4,140,444 on its Kyzyl Ompul project in Kyrgyzstan and an impairment charge of $2,422,398 on its Centennial project in Colorado, see Note 6. Page | 12 AZARGA URANIUM CORP. Notes to the Consolidated Financial Statements (Expressed in U.S. Dollars and in shares, unless otherwise indicated) For the year ended December 31, 2019 2. BASIS OF PRESENTATION (Continued) 2.4 Significant accounting judgments and estimates (Continued) Capitalization of exploration and evaluation costs Management has determined that exploration and evaluation costs incurred or acquired during the year will have future economic benefits and are economically recoverable. In making this judgment, management has assessed various sources of information including, but not limited to, the geologic and metallurgic information, scoping studies, preliminary economic assessments, proximity of operating facilities, operating management expertise and existing permits. Determining if an acquisition is a business combination or an asset acquisition Business Combinations As required by IFRS 3 (“IFRS 3”), the Company is required to determine whether the acquisition of URZ Energy should be accounted for as a business combination or an asset acquisition, see Note 5. Under IFRS 3, the components of a business must include inputs, processes and outputs. Management has determined that URZ Energy did not include all the necessary components of a business. Accordingly, the acquisition of URZ Energy has been recorded as an acquisition of URZ Energy’s net assets, consisting principally of exploration and evaluation assets and working capital. Identifying the acquirer in an acquisition Consolidated Financial Statements , the Company is As required by IFRS 3 and IFRS 10 required to determine whether it is the acquirer or acquiree in the URZ Energy acquisition. The acquirer is the entity that obtains control of the acquiree in the acquisition. If it is not clear which company is the acquirer, additional information must be considered, such as the combined entity’s relative voting rights, existence of a large minority voting interest, composition of the governing body and senior management, and the terms behind the exchange of equity interests. Management has determined that Azarga Uranium is the acquirer of URZ Energy. Determination of asset and liability fair values Business combinations and asset acquisitions require judgment and estimates to be made at the date of acquisition in relation to determining asset and liability fair values. The information necessary to measure the fair values as at the acquisition date of assets acquired and liabilities assumed requires management make certain judgments and estimates about future events, including but not limited to estimates of mineral resources acquired, exploration potential, future operating costs and capital expenditures, future metal prices, and long-term foreign exchange rates. Page | 13 AZARGA URANIUM CORP. Notes to the Consolidated Financial Statements (Expressed in U.S. Dollars and in shares, unless otherwise indicated) For the year ended December 31, 2019 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES 3.1 Basis of consolidation The consolidated financial statements include the financial statements of Azarga Uranium and its controlled subsidiaries. Name of subsidiary Powertech (USA) Inc. Ucolo Exploration Corp. * UrAsia in Kyrgyzstan LLC ** URZ Energy Corp. * Azarga Resources Limited Azarga Resources (Hong Kong) Limited Azarga Resources Canada Ltd. Azarga Resources USA Company Place of incorporation Ownership interest at December 31, 2019 USA USA Kyrgyz Republic Canada BVI Hong Kong 100% 100% 0% 100% 100% 100% Principal activity Operating uranium exploration company Operating uranium exploration company Operating uranium exploration company Holding company Holding company Holding company Canada 100% Holding company USA 100% Holding company * acquired in July 2018, see Note 5 ** sold in October 2019, see Note 6 The Company controls an entity when the Company is exposed to, or has rights to, variable returns from its involvement with the entity and has the ability to affect those returns through its power over the entity. The results of subsidiaries acquired or disposed of during the year are included in the consolidated statements of profit or loss and other comprehensive income or loss from the effective date of acquisition or up to the effective date of disposal, as appropriate. All intercompany transactions, balances, income and expenses are eliminated on consolidation. Page | 14 AZARGA URANIUM CORP. Notes to the Consolidated Financial Statements (Expressed in U.S. Dollars and in shares, unless otherwise indicated) For the year ended December 31, 2019 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) 3.2 Foreign currency translation The functional currency of each entity is determined by the currency of the primary economic environment in which the entity operates. The functional currency of each entity is the United States Dollar, with the exception of UrAsia in Kyrgyzstan LLC, whose functional currency is the Kyrgyz Som. Transactions and balances Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the transactions. Foreign currency monetary items are translated at the period-end exchange rate. Non-monetary items measured at historical cost continue to be carried at the exchange rate at the date of the transaction. Non-monetary items measured at fair value are reported at the exchange rate at the date when fair values were determined. Exchange differences arising on the translation of monetary items or on settlement of monetary items are recognized in profit or loss in the consolidated statements of profit or loss and other comprehensive income or loss in the period in which they arise. Exchange differences arising on the translation of non-monetary items are recognized in other comprehensive income or loss in the consolidated statements of profit or loss and other comprehensive income or loss to the extent that gains and losses arising on those non- monetary items are also recognized in other comprehensive income or loss. Where the non- monetary gain or loss is recognized in profit or loss, the exchange component is also recognized in profit or loss. Parent and subsidiary companies The financial position and results of operations whose functional currency is different from the presentation currency are translated as follows: • Assets and liabilities are translated at period-end exchange rates prevailing at that reporting date; and • Income and expenses are translated at the average exchange rates for the period. Exchange differences are transferred directly to other comprehensive income or loss and are included in a separate component of shareholders’ equity titled foreign currency translation reserve. These differences are recognized in profit or loss in the period in which the subsidiary is disposed of. Page | 15 AZARGA URANIUM CORP. Notes to the Consolidated Financial Statements (Expressed in U.S. Dollars and in shares, unless otherwise indicated) For the year ended December 31, 2019 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) 3.3 Restricted cash Restricted cash consists of deposits held for collateral pursuant to bonds provided to state authorities in connection with exploration and evaluation property activities. The Company makes such cash deposits for restoration provisions related to rehabilitation obligations. Property, plant and equipment 3.4 Property, plant and equipment (“PPE”) includes the Company’s machinery and equipment, office equipment, furniture and fixtures, vehicles and buildings. PPE is stated at cost less accumulated depreciation and accumulated impairment losses. Initial recognition The cost of an item of PPE consists of the purchase price or construction cost, including vendor prepayments, any costs directly attributable to bringing the asset to the location and condition necessary for its intended use, borrowing costs during construction, if applicable, and the estimated costs associated with dismantling and removing the assets. Depreciation Depreciation is recorded based on the cost of an item of PPE, less its estimated residual value, using the straight-line method over the following estimated useful lives: • • • • • Machinery and equipment Vehicles Office equipment Furniture and fixtures Building 5 to 10 years 3 years 3 to 5 years 4 to 5 years 10 to 40 years When major components of an item of PPE have different useful lives, they are accounted for as separate items of PPE and depreciated as per each component’s useful life. The cost of replacing a component of PPE is recognized as part of the carrying value of the item if it is probable that the future economic benefit will flow to the Company and its cost can be measured. The carrying amount of the replaced component is derecognized. Page | 16 AZARGA URANIUM CORP. Notes to the Consolidated Financial Statements (Expressed in U.S. Dollars and in shares, unless otherwise indicated) For the year ended December 31, 2019 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) 3.4 Property, plant and equipment (Continued) An item of PPE is derecognized upon disposal, when held for sale or when no future economic benefits are expected to arise from the continued use of the asset. Any gain or loss arising on disposal of the asset, determined as the difference between the net disposal proceeds and the carrying amount of the asset, is recognized in profit or loss. The Company conducts an annual assessment of the residual balances, estimated useful lives and depreciation methods being used for PPE and any changes arising from the assessment are applied by the Company prospectively. Exploration and evaluation assets 3.5 Exploration and evaluation expenditures are recognized as assets in the period in which they are incurred once the legal right to explore a property has been acquired. This includes any acquisition costs associated with such property. These direct expenditures include such costs as drilling/engineering, salaries and consulting, rehabilitation costs and license fees, inclusive of land payments and claims maintenance. Costs not directly attributable to exploration and evaluation activities, including general and administrative overhead costs, are expensed in the period in which they occur. Payments received by the Company from exploration and evaluation partners are credited to the capitalized cost of the exploration and evaluation asset. If the payments received exceed the capitalized cost of the exploration and evaluation asset, the excess is recognized as a gain. The Company assesses exploration and evaluation assets for impairment when facts and circumstances suggest that the carrying amount of the asset may exceed its recoverable amount. Any such impairment charges are recognized in profit or loss. Once the technical feasibility and commercial viability of extracting the resource has been determined and management plans to develop the property, the property will be considered a mine under development and will be classified as “mines under construction” in the consolidated statement of financial position. As part of the reclassification, “mines under construction” will be tested for impairment. Page | 17 AZARGA URANIUM CORP. Notes to the Consolidated Financial Statements (Expressed in U.S. Dollars and in shares, unless otherwise indicated) For the year ended December 31, 2019 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) 3.6 Rehabilitation provisions The Company recognizes provisions for statutory, contractual, constructive or legal obligations, including those associated with the reclamation of environmental disturbances caused by exploration and evaluation activities. The nature of the rehabilitation activities includes restoration, reclamation and re-vegetation of the affected exploration sites. Initially, a provision for a decommissioning liability is recognized as its present value in the period in which it is incurred. Upon initial recognition of the liability, a corresponding amount is added to the carrying amount of the related asset and the cost is amortized as an expense over the economic life of the asset using either the unit-of-production method or the straight-line method, as appropriate. Following the initial recognition of the decommissioning liability, the carrying amount of the liability is increased for the passage of time and adjusted for changes to the current market-based discount rate and the amount or timing of the underlying cash flows needed to settle the obligation. Taxation 3.7 Income tax expense represents the sum of current and deferred income tax. Current income tax Current income tax assets and liabilities are measured at the amount expected to be recovered from or paid to taxation authorities. The tax rates and tax laws used to compute current income taxes for each jurisdiction in which the Company operates, are those that are substantively enacted at the end of each reporting period. The Company incurred no current income taxes for the years ended December 31, 2019 and 2018. Deferred income tax Deferred income tax is provided for using the liability method on temporary differences between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes. Page | 18 AZARGA URANIUM CORP. Notes to the Consolidated Financial Statements (Expressed in U.S. Dollars and in shares, unless otherwise indicated) For the year ended December 31, 2019 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) 3.7 Taxation (Continued) Deferred income tax (Continued) Deferred income tax liabilities are recognized for all taxable temporary differences, except: • • Where the deferred income tax liability arises from the initial recognition of goodwill or of an asset or liability in a transaction that is not a business combination and, at the time of the transaction, affects neither the accounting profit nor taxable profit or loss; and In respect of taxable temporary differences associated with investments in subsidiaries, associates and joint ventures, where the timing of the reversal of the temporary differences can be controlled by the parent, investor or venturer and it is probable that the temporary differences will not reverse in the foreseeable future. Deferred income tax assets are recognized for all deductible temporary differences, carry forward of unused tax credits and tax losses, to the extent that it is probable that taxable profit will be available against which the deductible temporary differences and the carry forward of unused tax credits and tax losses can be utilized except: • • Where the deferred income tax asset relating to the deductible temporary difference arises from the initial recognition of an asset or liability in a transaction that is not a business combination and, at the time of the transaction, affects neither the accounting profit nor taxable profit or loss; and In respect of deductible temporary differences associated with investments in subsidiaries, associates and joint ventures, deferred income tax assets are recognized only to the extent that it is probable that the temporary differences will reverse in the foreseeable future and taxable profit will be available against which the temporary differences can be utilized. The carrying amount of deferred income tax assets is reviewed at the end of each reporting period and reduced to the extent that it is no longer probable that sufficient taxable profit will be available to allow all or part of the deferred income tax asset to be utilized. Unrecognized deferred income tax assets are reassessed at the end of each reporting period and are recognized to the extent that it has become probable that future taxable profit will allow the deferred tax asset to be recovered. Deferred income tax assets and liabilities are measured at the tax rates that are expected to apply to the year when the asset is realized or the liability is settled, based on tax rates and tax laws that have been substantively enacted at the end of each reporting period. Page | 19 AZARGA URANIUM CORP. Notes to the Consolidated Financial Statements (Expressed in U.S. Dollars and in shares, unless otherwise indicated) For the year ended December 31, 2019 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) 3.7 Taxation (Continued) Deferred income tax (Continued) In consolidated financial statements, temporary differences are determined by comparing the carrying amounts of assets and liabilities in the consolidated financial statements with the appropriate tax base. The tax base is determined by reference to the tax returns of each entity in the group. Deferred income tax relating to items recognized directly in equity or other comprehensive income or loss are recognized in equity and not in profit or loss or other comprehensive income or loss. Deferred income tax assets and deferred income tax liabilities are offset if, and only if, a legally enforceable right exists to set off current tax assets against current tax liabilities and the deferred tax assets and liabilities relate to income taxes levied by the same taxation authority on either the same taxable entity or different taxable entities which intend to either settle current tax liabilities and assets on a net basis, or to realize the assets and settle the liabilities simultaneously, in each future period in which significant amounts of deferred tax assets or liabilities are expected to be settled or recovered. Financial Instruments 3.8 Classification The Company classifies its financial instruments in the following categories: at fair value through profit and loss (“FVTPL”), at fair value through other comprehensive income (loss) (“FVTOCI”) or at amortized cost. The Company determines the classification of financial assets at initial recognition. The classification of debt instruments is driven by the Company’s business model for managing the financial assets and their contractual cash flow characteristics. Equity instruments that are held for trading are classified as FVTPL. For other equity instruments, on the day of acquisition the Company can make an irrevocable election (on an instrument-by-instrument basis) to designate them as FVTOCI. Financial liabilities are measured at amortized cost, unless they are required to be measured at FVTPL (such as instruments held for trading or derivatives) or the Company has opted to measure them at FVTPL. Page | 20 AZARGA URANIUM CORP. Notes to the Consolidated Financial Statements (Expressed in U.S. Dollars and in shares, unless otherwise indicated) For the year ended December 31, 2019 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) 3.8 Financial Instruments (Continued) Measurement Financial assets and liabilities at amortized cost Financial assets and liabilities at amortized cost are initially recognized at fair value plus or minus transaction costs, respectively, and subsequently carried at amortized cost less any impairment. Financial assets and liabilities at FVTPL Financial assets and liabilities carried at FVTPL are initially recorded at fair value and transaction costs are expensed in the consolidated statements of profit or loss. Realized and unrealized gains and losses arising from changes in the fair value of the financial assets and liabilities held at FVTPL are included in the consolidated statements of profit or loss in the period in which they arise. Where management has opted to recognize a financial liability at FVTPL, any changes associated with the Company’s own credit risk will be recognized in other comprehensive income or loss. Financial assets at FVTOCI Financial assets, such as investments in equity instruments, classified at FVTOCI are initially recognized at fair value plus transaction costs. Subsequently they are measured at fair value, with gains and losses recognized in other comprehensive income or loss. Derivative financial instruments 3.9 The Company may issue or hold compound financial instruments with embedded derivatives. An embedded derivative is separated from its host contract and accounted for as a derivative only when three criteria are satisfied: • • • When the economic risks and characteristics of the embedded derivative are not closely related to those of the host contract; A separate instrument with the same terms as the embedded derivative would meet the definition of a derivative; and The entire instrument is not measured at fair value with changes in fair value recognized in the consolidated statements of profit or loss and other comprehensive income or loss. Financial assets The Company designates financial assets with embedded derivatives as FVTPL on the initial recognition and accordingly does not bifurcate between the host contract and the embedded derivative. The embedded derivative is measured at each reporting period using an appropriate valuation model with changes in the fair value being recognized immediately in profit or loss. Page | 21 AZARGA URANIUM CORP. Notes to the Consolidated Financial Statements (Expressed in U.S. Dollars and in shares, unless otherwise indicated) For the year ended December 31, 2019 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) 3.9 Derivative financial instruments (Continued) Financial liabilities The Company designates certain financial liabilities with embedded derivatives as FVTPL on the initial recognition and accordingly does not bifurcate between the host contract and the embedded derivative. However, other financial liabilities with embedded derivatives are bifurcated depending on the instrument. In the case of the latter, the debt host component is classified as other financial liabilities and is measured at amortized cost using the effective interest rate method. The embedded derivatives are classified as FVTPL and all changes in fair value are recorded in profit or loss. The difference between the debt host component and the principal amount of the loan outstanding is recorded as profit or loss over the expected life of the financial liabilities. Impairment of financial assets 3.10 Assets carried at amortized cost At the end of each reporting period, the Company assesses whether a financial asset is impaired. If there is objective evidence that an impairment loss has been incurred, the amount of the loss is measured as the difference between the asset’s carrying amount and the present value of estimated future cash flows discounted at the financial asset’s original effective interest rate. The carrying amount of the asset is then reduced by the amount of the impairment and the amount of the loss is recognized in profit or loss. If, in a subsequent period, the amount of the impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognized, the previously recognized impairment loss is reversed to the extent that the carrying value of the asset does not exceed what the amortized cost would have been had the impairment not been recognized. Any subsequent reversal of an impairment loss is recognized in profit or loss. Impairment of non-financial assets 3.11 At the end of each reporting period, the Company reviews the carrying amounts of its tangible and intangible assets to determine whether there is an indication that those assets have suffered an impairment loss. If any such indication exists, the recoverable amount of the asset is estimated in order to determine the extent of the impairment loss, if any. Where it is not possible to estimate the recoverable amount of an individual asset, the Company estimates the recoverable amount of the cash-generating unit to which the assets belong. Page | 22 AZARGA URANIUM CORP. Notes to the Consolidated Financial Statements (Expressed in U.S. Dollars and in shares, unless otherwise indicated) For the year ended December 31, 2019 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) 3.11 Impairment of non-financial assets (Continued) The recoverable amount is the higher of fair value less costs to sell and value in use. In assessing fair value less costs to sell, recent market transactions are taken into account. The Company also considers the results of an appropriate valuation model, which would generally be determined based on the present value of estimated future cash flows arising from the continued use and eventual disposal of the asset. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects the current market and the risks specific to the asset. If the recoverable amount of an asset or cash-generating unit is estimated to be less than its carrying amount, the carrying amount is reduced to its recoverable amount and the impairment loss is recognized in profit or loss. Where an impairment loss subsequently reverses, the carrying amount is increased to the revised estimate of its recoverable amount, but not above the original carrying amount. Derecognition of financial assets and financial liabilities 3.12 Financial assets are derecognized when the rights to receive cash flows from the assets expire or the Company has transferred substantially all the risks and rewards of ownership. On derecognition, the difference between the asset’s carrying amount and the sum of the consideration received and receivable and the cumulative gain or loss that had been recognized directly in equity is recognized in profit or loss. Financial liabilities are derecognized when the obligation specified in the underlying contract is discharged, cancelled or expired. The difference between the carrying amount of the financial liability derecognized and the consideration paid and payable is recognized in profit or loss, unless the financial liability is settled with the Company’s shares, in which case it is recognized in profit or loss or equity. 3.13 Common shares Common shares are classified as equity. Costs directly attributable to the issuance of common shares are shown in equity as a reduction, net of tax, of the proceeds. Share purchase warrants 3.14 Share purchase warrants are considered a derivative liability, as the currency denomination of the exercise price is different from the functional currency of the Company. As a result, the fair value of the share purchase warrants are calculated on the issuance date using the Black- Scholes option pricing model. Any foreign exchange or change in the fair value of the warrant subsequent to the initial recognition is recorded in profit or loss. Page | 23 AZARGA URANIUM CORP. Notes to the Consolidated Financial Statements (Expressed in U.S. Dollars and in shares, unless otherwise indicated) For the year ended December 31, 2019 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) 3.15 Share-based compensation Where equity-settled share options are granted to employees, inclusive of directors of the Company, the fair value of the options granted is measured using the Black-Scholes option pricing model and is charged to the statement of profit or loss or capitalized to exploration and evaluation assets over the vesting period. An individual is classified as an employee when the individual is an employee for legal or tax purposes (a “direct employee”) or provides services similar to those performed by a direct employee. Certain employees of the Company receive a portion of their remuneration in the form of share-based payments. Where equity-settled share options are granted to non-employees, they are measured at the fair value of the goods or services received. However, if the value of goods or services received in exchange for the options cannot be reliably estimated, the options are measured using the Black-Scholes option pricing model. All equity-settled share-based compensation is reflected in share option reserve, until exercised. Upon exercise, shares are issued from treasury and the amount reflected in share option reserve is credited to common shares, together with any consideration received. 3.16 Loss per share Basic loss per share is calculated by dividing the net loss attributable to equity holders of the Company by the weighted average number of shares outstanding during the reporting period. Diluted loss per share is calculated by adjusting the net loss attributable to equity holders of the Company and the weighted average number of shares outstanding for the effects of all dilutive share equivalents. The Company’s dilutive share equivalents include stock options, share purchase warrants and convertible securities. In the Company’s case, diluted loss per share is the same as basic loss per share, as the effect of outstanding share options on loss per share would be anti-dilutive. 3.17 Related party transactions Parties are considered 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. Parties are also considered related if they are subject to common control. 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. Page | 24 AZARGA URANIUM CORP. Notes to the Consolidated Financial Statements (Expressed in U.S. Dollars and in shares, unless otherwise indicated) For the year ended December 31, 2019 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) 3.18 Segment 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 executive management that makes strategic decisions. 3.19 Adoption of new standards, interpretations and amendments Leases The Company adopted the requirements of IFRS 16 – (“IFRS 16”) as of January 1, 2019. IFRS 16 applies a control model to the identification of leases, distinguishing between a lease and a service contract on the basis of whether the customer controls the leased asset. For assets that meet the definition of a lease, IFRS 16 requires a single, on-balance sheet accounting model similar to finance lease accounting, with exceptions for short-term leases, leases of low value assets, and mineral exploration leases. Accordingly, IFRS 16 applies only to the Company’s office leases. The Company has applied the modified retrospective approach in adopting IFRS 16. On January 1, 2019 the Company recorded right-of-use assets totaling $152,214 with a corresponding entry to operating lease obligations. The Company calculated the present value of the minimum lease payments using an incremental borrowing rate of 7% and an exchange rate of $/C$ 1.3642. Thereafter, the right-of-use assets are depreciated on a straight-line basis over the term of the leases, which range from 2 to 5 years. During the year ended December 31, 2019, the Company recorded interest expense of $9,734, accretion of $46,489, and depreciation of $40,857. Standards issued but not yet effective 3.20 A number of new standards, amendments to standards and interpretations are not yet effective as of December 31, 2019 and have not been applied in preparing these consolidated financial statements. These standards are not expected to materially impact the Company’s financial position or results of operations. Page | 25 AZARGA URANIUM CORP. Notes to the Consolidated Financial Statements (Expressed in U.S. Dollars and in shares, unless otherwise indicated) For the year ended December 31, 2019 4. SEGMENTED INFORMATION The Company had two reportable business segments being the United States Uranium Division and the Kyrgyzstan Uranium Division. The Company’s chief operating decision maker reviews both business segments’ discrete financial information to make decisions about resources to be allocated to each segment and to assess their performance. The carrying amount of the Company’s assets, liabilities and exploration and evaluation assets and the Company’s loss before income tax and impairment of exploration and evaluation assets analyzed by operating segment are as follows: Kyrgyzstan Uranium Division * United States Uranium Division Unallocated ** Consolidated Total Segment assets As at December 31, 2019 As at December 31, 2018 Segment liabilities $ $ 41,614,854 42,730,212 $ - $ 4,389,464 $ $ 235,772 184,677 $ $ 41,850,626 47,304,353 As at December 31, 2019 As at December 31, 2018 Exploration and evaluation assets (Note 6) $ $ 3,529,037 3,589,458 $ - $ 1,633,878 $ $ 1,079,058 933,635 $ $ 4,608,095 6,156,971 As at December 31, 2019 As at December 31, 2018 Net loss before income tax $ $ 41,440,616 42,471,383 $ - $ 4,225,090 $ - $ - $ $ 41,440,616 46,696,473 Year ended December 31, 2019 Year ended December 31, 2018 $ $ (2,625,178) (443,236) $ $ (3,763,180) (117,560) $ $ (1,471,638) (1,666,929) $ $ (7,859,996) (2,227,725) Impairment of exploration and evaluation assets (Note 6) Year ended December 31, 2019 Year ended December 31, 2018 (2,422,398) $ $ - (4,140,444) $ $ - $ - $ - (6,562,842) $ $ - * the Company sold the Kyrgyzstan Uranium Division in October 2019, See Note 6. ** the unallocated amount contains all amounts associated with the corporate division. Page | 26 AZARGA URANIUM CORP. Notes to the Consolidated Financial Statements (Expressed in U.S. Dollars and in shares, unless otherwise indicated) For the year ended December 31, 2019 5. ACQUISITION OF URZ ENERGY On July 5, 2018, the Company completed the acquisition of URZ Energy through the issue of 57,920,716 common shares of the Company valued at $11,237,756. Each URZ Energy shareholder received two Azarga Uranium shares for each URZ Energy share held (the “Exchange Ratio”). All outstanding share purchase warrants and stock options of URZ Energy were adjusted in accordance with their terms and the Exchange Ratio such that Azarga Uranium reserved for issue: • • • 14,806,700 share purchase warrants with an exercise price of C$0.20 expiring August 15, 2018. The share purchase warrants were valued at $644,530 using the Black-Scholes option pricing model with the following assumptions: a risk-free interest rate of 1.90%; an expected volatility of 55.1%; an expected life of 0.11 years; a forfeiture rate of zero; an expected dividend of zero; and an exchange rate of 1.3143; 2,304,184 share purchase warrants with an exercise price of C$0.375 expiring June 19, 2019. The share purchase warrants were valued at $41,784 using the Black-Scholes option pricing model with the following assumptions: a risk-free interest rate of 1.90%; an expected volatility of 55.1%; an expected life of 0.96 years; a forfeiture rate of zero; an expected dividend of zero; and an exchange rate of 1.3143; and 4,480,000 stock options with an exercise price of C$0.075 expiring March 14, 2027. The stock options were valued at $769,169 using the Black-Scholes option pricing model with the following assumptions: a risk-free interest rate of 2.12%; an expected volatility of 76.5%; an expected life of 8.7 years; a forfeiture rate of zero; an expected dividend of zero; and an exchange rate of 1.3143. The Company paid transaction costs of $146,601 in cash and issued 186,393 common shares of the Company valued at $36,164. URZ Energy, a British Columbia Corporation, owns all the issued and outstanding shares of Ucolo Exploration Corp. (“Ucolo”), a Utah Corporation. As discussed further in Note 6, at acquisition, Ucolo held certain uranium projects located in Wyoming, Colorado and Utah. Page | 27 AZARGA URANIUM CORP. Notes to the Consolidated Financial Statements (Expressed in U.S. Dollars and in shares, unless otherwise indicated) For the year ended December 31, 2019 5. ACQUISITION OF URZ ENERGY (Continued) Consideration Shares issued Warrants issued Options issued Transaction costs - shares Transaction costs - cash Due from Azarga Uranium * Total Net assets received Cash Other assets Exploration and evaluation assets Property, plant and equipment Reclamation bonds Trade and other payables Decommissioning liabilities Total $ $ 11,237,756 686,314 769,169 36,164 146,601 (468,567) 12,407,437 $ 570,525 49,192 12,167,005 2,894 97,000 (417,035) (62,144) 12,407,437 $ * In May 2018, URZ Energy advanced $465,000 to the Company, see Note 7.2. The loan accrued interest at 5% through completion of the acquisition. All principal and interest was settled on completion of the acquisition. Page | 28 AZARGA URANIUM CORP. Notes to the Consolidated Financial Statements (Expressed in U.S. Dollars and in shares, unless otherwise indicated) For the year ended December 31, 2019 6. EXPLORATION AND EVALUATION ASSETS South Dakota Dewey Burdock Gas Hills Wyoming Juniper Ridge Colorado Utah Other Centennial JB Ticaboo Kyrgyz Republic Kyzyl Ompul Total Balance, December 31, 2018 Salaries and consulting License fees Decommissioning liabilities Share-based compensation Depreciation Option payments received Recoveries Currency translation effect Impairment Balance, December 31, 2019 $ 26,908,029 468,525 342,758 - 31,676 - - - - - $ 27,750,988 South Dakota Dewey Burdock $ $ $ 8,634,378 78,819 104,756 12,308 2,180 - - - - - $ 2,747,392 50,743 23,370 - 872 - - - - - $ 911,128 43,504 140,762 - 2,617 - - - - - $ 2,379,738 21,000 6,000 11,607 4,053 - - - - (2,422,398) $ 8,832,441 $ 2,822,377 $ 1,098,011 $ - 427,716 7,000 11,006 - 872 - - - - - 446,594 $ $ 463,002 12,833 5,898 8,292 2,180 - - (2,000) - - 490,205 Gas Hills Wyoming Juniper Ridge Colorado Utah Other Centennial JB Ticaboo Balance, December 31, 2017 Acquisition of URZ Energy Acquisition costs Salaries and consulting License fees Decommissioning liabilities Share-based compensation Depreciation Repurchase of royalties Option payments received Recoveries Currency translation effect Balance, December 31, 2018 $ 25,909,535 $ - $ - - 31,250 652,800 276,072 - 18,981 - 19,391 - - - 8,512,595 2,724,761 - 21,097 97,525 1,806 1,355 - - - - - - 1,580 20,509 - 542 - - - - - $ 26,908,029 $ 8,634,378 $ 2,747,392 $ $ 692,775 63,645 - 25,427 127,653 - 1,628 - - - - - 911,128 $ 2,332,215 - - 28,000 2,530 14,281 2,712 - - - - - $ 2,379,738 - $ 415,467 - 1,400 10,307 - 542 - - - - - 427,716 $ - $ 450,537 - 3,500 5,317 2,293 1,355 - - - - - 463,002 $ $ 4,225,090 17,940 67,810 - 12,111 2,943 (130,000) (25,779) (29,671) (4,140,444) $ - Kyrgyz Republic Kyzyl Ompul $ 4,069,145 - - 46,409 468,918 - 10,187 5,930 - (290,000) (68,697) (16,802) 4,225,090 $ $ 46,696,473 700,364 702,360 32,207 56,561 2,943 (130,000) (27,779) (29,671) (6,562,842) 41,440,616 Total $ $ 33,003,670 12,167,005 31,250 780,213 1,008,831 18,380 37,302 5,930 19,391 (290,000) (68,697) (16,802) 46,696,473 $ Page | 29 AZARGA URANIUM CORP. Notes to the Consolidated Financial Statements (Expressed in U.S. Dollars and in shares, unless otherwise indicated) For the year ended December 31, 2019 6. EXPLORATION AND EVALUATION ASSETS (Continued) 6.1 Dewey Burdock Project, South Dakota The Dewey Burdock Uranium Project is an in-situ recovery uranium project located in the Edgemont uranium district in South Dakota. The Dewey Burdock Uranium Project is the Company’s initial development priority. In 2006, the Company entered into an option agreement to purchase mineral rights on certain areas of the Dewey Burdock Project for consideration of $200,000 plus contingent payments of $750,000 payable in four equal instalments of $187,500 commencing 12 months subsequent to the receipt of all regulatory permits and licenses allowing uranium production on the area of the Dewey Burdock Project pertaining to these mineral interests. The Company has disclosed these contingent amounts as a commitment in Note 18. In 2008, the Company entered into an option agreement to purchase mineral rights on certain areas of the Dewey Burdock Project for consideration of $600,000 plus contingent payments of $1,300,000. On October 31, 2018, the Company entered into an amending agreement whereby the $1,300,000 contingent payments are payable as follows: $31,250 on signing the amending agreement; nine payments of $31,250 payable each May 31 and October 1; and ten payments of $98,750 payable thereafter each May 31 and October 1 with the final payment of $98,750 being made on May 31, 2028. If the Company receives all regulatory permits and licenses allowing uranium production on the area of the Dewey Burdock Project pertaining to these mineral interests before completion of the aforementioned payments, then the balance of payments owing shall be payable in four equal installments annually beginning one year from that date with a minimum payment of $98,750 a year until paid in full. The Company has disclosed these contingent amounts as a commitment in Note 18. On December 7, 2017, the Company entered into an agreement to repurchase royalties related to uranium production on certain areas of the Dewey Burdock project for C$25,000 which was settled on March 23, 2018 by the issue of 104,166 common shares valued at $19,391, see Note 10.2. Page | 30 AZARGA URANIUM CORP. Notes to the Consolidated Financial Statements (Expressed in U.S. Dollars and in shares, unless otherwise indicated) For the year ended December 31, 2019 6. EXPLORATION AND EVALUATION ASSETS (Continued) 6.2 Centennial Project, Colorado The Centennial Uranium Project is located in the western part of Weld County in northeastern Colorado. In 2006, the Company entered into an option agreement, as amended, to purchase uranium rights on certain areas of the Centennial Project for consideration of $1,895,000 plus contingent payments of $3,165,000. Pursuant to the agreement, the contingent payments are payable upon receipt of regulatory permits and licenses allowing uranium production on the area of the Centennial Project pertaining to these uranium interests. Further, unless otherwise agreed, if the Company does not obtain such permits and licenses by September 27, 2019, the uranium rights, at the option of the seller, can be transferred back to the seller. To date, the Company has neither obtained the required regulatory permits and licenses nor has the Company been able to renegotiate the option agreement. However, the Company is attempting to renegotiate the option agreement and the seller has not exercised its option to have the uranium rights transferred back. As a result of the uncertainty surrounding this option agreement, which represents 5,760 of the 6,238 mineral acres at the Centennial Project, significant doubt over the future recoverability of the carrying value exists. Accordingly, during the year ended December 31, 2019, the Company recognized an impairment charge of $2,422,398 for the Centennial Project. The Company has disclosed the contingent amount of $3,165,000 as a commitment in Note 18. URZ Energy uranium projects 6.3 In July 2018, the Company acquired URZ Energy and the Gas Hills, Juniper Ridge and Shirley Basin uranium projects in Wyoming, the JB uranium project in Colorado and the Ticaboo uranium project in Utah, See Note 5. Page | 31 AZARGA URANIUM CORP. Notes to the Consolidated Financial Statements (Expressed in U.S. Dollars and in shares, unless otherwise indicated) For the year ended December 31, 2019 6. EXPLORATION AND EVALUATION ASSETS (Continued) 6.4 Kyzyl Ompul Project, Kyrgyz Republic In October 2019, the Company sold its interest in UrAsia in Kyrgyzstan Limited Liability Company (“UrAsia”) to Central Asian Uranium Company Limited Liability Company (“Central”). UrAsia held a 100% interest in the Kyzyl Ompul Project. In April 2018, as amended, UrAsia entered into an earn-in agreement (the “Earn-in Agreement”) with Central pursuant to which Central had an option to earn a 100% interest in the Kyzyl Ompul Project in exchange for $5,850,000 in cash payments and a commitment to fund $1,500,000 of exploration and development expenditures through December 1, 2020. During the year ended December 31, 2019 and 2018, Central made cash payments of $130,000 and $290,000, respectively, to the Company under the Earn-in Agreement. In May 2019, the Kyrgyz Republic’s parliament voted to ban uranium exploration and mining in the country. The Kyzyl Ompul Project exploration license was subsequently suspended due to force majeure circumstances, among other reasons, resulting from the Kyrgyz Republic government’s actions. The Company determined that these events in the Kyrgyz Republic cast significant doubt over the future validity of the Company’s exploration license on the Kyzyl Ompul Project as well as on the future cash flows expected under the Earn-in Agreement. Accordingly, during the year ended December 31, 2019, the Company recognized an impairment charge of $4,140,444 for the Kyzyl Ompul Project. Page | 32 AZARGA URANIUM CORP. Notes to the Consolidated Financial Statements (Expressed in U.S. Dollars and in shares, unless otherwise indicated) For the year ended December 31, 2019 6. EXPLORATION AND EVALUATION ASSETS (Continued) 6.4 Kyzyl Ompul Project, Kyrgyz Republic (Continued) In October 2019, the Company sold its 93.1% interest in UrAsia for cash consideration of $232,750. In addition, UrAsia granted the Company a 1.862% net smelter return royalty on any future uranium production from the Kyzyl Ompul Project up to $4,655,000. Consideration received Cash * NSR royalty ** Total Net assets (liabilities) sold Cash Restricted cash Exploration and evaluation assets *** Property, plant and equipment Trade and other payables Total Gain on sale of UrAsia $ $ 192,250 - 192,250 $ 841 17,314 - 13,091 (338,169) (306,923) $ $ 499,173 * the cash consideration has been grossed up to 100% and adjusted for the cash consideration of $57,750 not received to date ** the Company did not assign a value to the 1.862% net smelter return royalty due to the uncertainty over its realization. *** As described above, the Company recognized a full impairment charge of the Kyzyl Ompul Project prior to the sale of UrAsia. Accordingly, the net book value of exploration and evaluation assets at the time of sale was $Nil. Page | 33 AZARGA URANIUM CORP. Notes to the Consolidated Financial Statements (Expressed in U.S. Dollars and in shares, unless otherwise indicated) For the year ended December 31, 2019 7. LOANS PAYABLE 7.1 Loan payable to shareholders On July 31, 2012, the Company entered into a convertible loan agreement with certain shareholders of the Company for $1,776,000 (the “Shareholders’ Loan”). Pursuant to the agreement, as amended, the Shareholders’ Loan accrued interest at 15% per annum payable on each anniversary of the agreement, was unsecured, was convertible into shares of the Company at the shareholders’ option at C$1.23, and matured July 31, 2020. The annual interest that was due on July 31, 2017 was deferred until July 31, 2018. During the year ended December 31, 2018, the Company recorded interest expense of $143,219. In July 2018, the Company issued 11,269,243 common shares of the Company valued at $2,201,024 in full and final settlement of the Shareholders’ Loan, including principal of $1,776,000 and accrued interest to the date of settlement of $425,024. 7.2 URZ Energy Loan In May 2018, URZ Energy advanced $465,000 to the Company. The loan accrued interest at 5% through completion of the acquisition of URZ Energy. All principal and interest was thereafter settled on completion of the acquisition. During the year ended December 31, 2018, the Company recorded interest expense of $3,567. 7.3 Other loans payable As at December 31, 2017, the Company had other loans outstanding of $46,873. During the year ended December 31, 2018, the Company received $50,000 from a third party and recorded interest expense of $8,127 on other loans. During the year ended December 31, 2018, principal and interest totaling $105,000 was repaid in full. Page | 34 AZARGA URANIUM CORP. Notes to the Consolidated Financial Statements (Expressed in U.S. Dollars and in shares, unless otherwise indicated) For the year ended December 31, 2019 8. DECOMMISSIONING LIABILITIES Year ended December 31, 2019 2018 Balance, beginning of year Assumed on acquisition of URZ Energy Additions Accretion Balance, end of year $ $ 223,442 - - 28,108 251,550 142,918 62,144 1,281 17,099 223,442 $ $ Decommissioning liabilities include the net present value of the estimated cost of reclaiming exploration ground on the Company’s Centennial, Gas Hills and Ticaboo projects. The Company has no material restoration, rehabilitation and environmental obligations on its other uranium projects as environmental disturbance to date has been minimal or reclamation has been completed. The Company assumed reclamation bonds on acquisition of URZ Energy of $63,000 for Gas Hills and $34,000 for Ticaboo. These reclamation bonds, along with an additional $2,000 bond posted in 2018, were recorded on the consolidated statement of financial position as at December 31, 2018, until surety bond financing was obtained in 2019. 9. WARRANT LIABILITIES Year ended December 31, 2019 2018 Balance, beginning of year Issuance of warrants - private placements Un realized gain on revaluation Currency translation effect Balance, end of year $ $ 247,654 378,506 (371,983) 10,852 265,029 258,116 68,055 (51,789) (26,728) 247,654 $ $ Share purchase warrants are considered a derivative liability, as the currency denomination of the exercise price is different from the functional currency of the Company. Warrant liabilities were revalued as at December 31, 2019 and 2018 using the Black-Scholes option pricing model with the following assumptions: a risk free interest rate of 1.68% (2018 – 1.85%); an expected volatility of 61.8% (2018 – 58.4%); an expected life of 1-3 years (2018 – 1-3 years); a forfeiture rate of zero (2018 – zero); an expected dividend of zero (2018 – zero); and an exchange rate of 1.2988 (2018 – 1.3642). Page | 35 AZARGA URANIUM CORP. Notes to the Consolidated Financial Statements (Expressed in U.S. Dollars and in shares, unless otherwise indicated) For the year ended December 31, 2019 10. EQUITY 10.1 Authorized share capital The Company has authorized the issuance of an unlimited number of common and preferred shares with no par value. As at December 31, 2019 and 2018, the Company had 185,543,926 and 169,833,806 common shares outstanding, respectively, and no preferred shares were outstanding. Issued share capital 10.2 During the year ended December 31, 2019, the Company completed the following equity transactions: • In March 2019, the Company closed a non-brokered private placement for gross proceeds of $2,266,169 (C$3,014,391) through the issuance of 13,106,046 units at a price of C$0.23 per unit. Each unit consists of one common share and one-half of one share purchase warrant. Each whole warrant entitles the holder thereof to purchase one common share at a price of C$0.31 per share until March 20, 2022. The warrants were valued on a relative fair value basis at $378,506 using the Black- Scholes option pricing model with the following assumptions: a risk-free interest rate of 1.61%; an expected volatility of 63.4%; an expected life of 3 years; a forfeiture rate of zero; an expected dividend of zero; and an exchange rate of $/C$ 1.3335. The Company paid cash finder’s fees of $5,696 and other share issue costs of $10,857. In July 2019, the Company issued 900,000 common shares to settle $170,068 of outstanding employee remuneration. As a result, $170,068 was reclassified from contributed surplus to share capital. During the year ended December 31, 2019, the Company issued 1,380,521 common shares to settle $231,424 owing pursuant to the Company’s employee share purchase plan (“ESPP”) and 323,553 common shares to settle $55,001 owing pursuant to the Company’s director services agreements (“DSA”). • • During the year ended December 31, 2018, the Company completed the following equity transactions: • In January 2018, the Company closed the second and final tranche of its non-brokered private placement for gross proceeds of $157,366 (C$195,000) through the issuance of 780,000 units at a price of C$0.25 per unit. Each unit consists of one common share and one-half of one share purchase warrant. Each whole warrant entitles the holder thereof to purchase one common share at a price of C$0.35 per share until December 22, 2020. Page | 36 AZARGA URANIUM CORP. Notes to the Consolidated Financial Statements (Expressed in U.S. Dollars and in shares, unless otherwise indicated) For the year ended December 31, 2019 10. EQUITY (Continued) 10.2 Issued share capital (Continued) • • • • • • • • • The warrants were valued on a relative fair value basis at $16,562 using the Black- Scholes option pricing model with the following assumptions: a risk-free interest rate of 1.99%; an expected volatility of 61.1%; an expected life of 3 years; a forfeiture rate of zero; an expected dividend of zero; and an exchange rate of 1.2321. In March 2018, the Company issued 186,512 common shares to a shareholder in settlement of $36,169 (C$46,628) of trade and other payables. In March 2018, the Company issued 104,166 common shares valued at $19,391 (C$25,000) to repurchase royalties on the Dewey Burdock Project, see Note 6. In June 2018, the Company issued 578,822 common shares to a director valued at $108,828 to settle trade and other payables of $187,500 and accordingly recorded a gain on settlement of $78,672. In July 2018, the Company issued 550,000 common shares to settle $93,500 of outstanding employee remuneration. As a result, $93,500 was reclassified from contributed surplus to share capital. In July 2018, the Company issued 57,920,716 common shares valued at $11,237,756 for the acquisition of URZ Energy, see Note 5. In addition, the Company issued 186,393 common shares valued at $36,164 for transaction costs. In July 2018, the Company issued 1,268,000 common shares valued at $246,017 to settle trade and other payables of $201,830 and accordingly recorded a loss on settlement of $44,187. In July 2018, the Company issued 11,269,243 common shares valued at $2,201,024 in full and final settlement of the Shareholders’ Loan, see Note 7.1. During the year ended December 31, 2018, the Company issued 11,950,866 common shares for gross proceeds of $1,827,078 pursuant to the exercise of share purchase warrants. During the year ended December 31, 2018, the Company issued 1,115,301 common shares to settle $215,344 owing pursuant to the Company’s ESPP and 303,937 common shares to settle $58,669 owing pursuant to the Company’s DSA. Page | 37 AZARGA URANIUM CORP. Notes to the Consolidated Financial Statements (Expressed in U.S. Dollars and in shares, unless otherwise indicated) For the year ended December 31, 2019 10. EQUITY (Continued) 10.3 Share purchase warrants The continuity of share purchase warrants for the year ended December 31, 2019 is as follows: Expiry date Balance, December 31, 2019 Balance, December 31, 2018 Exercise price C$ Exercised Expired Issued June 19, 2019 September 23, 2019 July 27, 2020 December 22, 2020 March 20, 2022 $ $ $ $ $ 0.375 0.35 0.36 0.35 0.31 2,304,184 4,621,665 2,333,968 1,567,500 - 10,827,317 - - - - 6,553,022 6,553,022 - - - - - - (2,304,184) (4,621,665) - - - (6,925,849) - - 2,333,968 1,567,500 6,553,022 10,454,490 Weighted average exercise price (C$) $ 0.36 $ 0.31 $ - $ 0.36 $ 0.33 The weighted average remaining contractual life is 1.67 years. The continuity of share purchase warrants for the year ended December 31, 2018 is as follows: Expiry date Balance, December 31, 2017 Balance, December 31, 2018 Exercise price C$ Exercised Expired Issued September 23, 2019 July 27, 2020 December 22, 2020 August 15, 2018 June 19, 2019 $ $ $ $ $ 0.35 0.36 0.35 0.20 0.375 4,621,665 1,833,968 677,500 - - 7,133,133 - 500,000 890,000 14,806,700 2,304,184 18,500,884 - - - - - - (11,950,866) (2,855,834) - - (11,950,866) (2,855,834) 4,621,665 2,333,968 1,567,500 - 2,304,184 10,827,317 Weighted average exercise price (C$) $ 0.35 $ 0.23 $ 0.20 $ 0.20 $ 0.36 In July 2018, the Company issued 1,000,000 share purchase warrants to an insider of the Company as part of two private placements completed in 2017. The Company issued 500,000 share purchase warrants with an exercise price of C$0.36 and an expiry date of July 27, 2020 and 500,000 share purchase warrants with an exercise price of C$0.35 and an expiry date of December 22, 2020 upon receipt of disinterested shareholder and TSX approval. The 1,000,000 warrants were valued at $51,493. The warrants were valued using the Black- Scholes option pricing model with the following assumptions: a risk free interest rate of 1.99%; an expected volatility of 61.09%; an expected life of 2-3 years; a forfeiture rate of zero; an expected dividend of zero; and an exchange rate of 1.3143. Page | 38 AZARGA URANIUM CORP. Notes to the Consolidated Financial Statements (Expressed in U.S. Dollars and in shares, unless otherwise indicated) For the year ended December 31, 2019 10. EQUITY (Continued) 10.4 Equity settled compensation arrangements ESPP In 2015, the Company adopted an ESPP which was amended in July 2018. The Company is authorized to issue up to 6,000,000 common shares pursuant to the terms and conditions of the ESPP. Employees, who elect to participate in the ESPP, can contribute up to 50% of their salary (the “Employee Contribution”). The Company will then match 66.67% of the Employee’s Contribution (the “Matching Contribution”). The purchase price of the common shares is calculated based on the five-day volume weighted average trading price of the common shares on the TSX immediately preceding the end of each calendar quarter. The Employee Contribution and the Matching Contribution are expensed in the period in which they are incurred with the offsetting amount being recorded in contributed surplus until the common shares are issued. For the years ended December 31, 2019 and 2018, Employee Contributions totaled $149,701 and $124,941, respectively, and Matching Contributions totaled $99,807 and $83,296, respectively. As at December 31, 2019, a cumulative total of 5,062,690 common shares have been issued pursuant to the ESPP. Subsequent to December 31, 2019, the Company issued 457,648 common shares pursuant to the ESPP, see Note 22. DSA In 2015, the Company adopted the DSA. The Company is authorized to issue up to 2,000,000 common shares pursuant to the terms and conditions of the DSA. Directors who elect to participate in the DSA contribute 50% of their director fee/salary to the ESPP and the remaining 50% of their director fee/salary is settled through the issuance of common shares in accordance with the DSA. The purchase price of the common shares is calculated based on the five-day volume weighted average trading price of the common shares on the TSX immediately preceding the end of each calendar quarter. Amounts settled in accordance with the DSA are expensed in the period in which they are incurred with the offsetting amount being recorded in contributed surplus until the common shares are issued. For the years ended December 31, 2019 and 2018, $55,001 and $56,277, respectively, were expensed under the DSA. As at December 31, 2019, a cumulative total of 1,556,594 common shares had been issued pursuant to the DSA. Subsequent to December 31, 2019, the Company issued 87,543 common shares pursuant to the DSA, see Note 22. Page | 39 AZARGA URANIUM CORP. Notes to the Consolidated Financial Statements (Expressed in U.S. Dollars and in shares, unless otherwise indicated) For the year ended December 31, 2019 11. SHARE OPTION RESERVE 11.1 Stock option plan In July 2018, the Company adopted a new rolling stock option plan, which permits the Board of Directors of the Company to grant stock options for up to 10% of the outstanding common shares of the Company. The exercise price of an option shall not be less than the discounted market price at the time of granting as prescribed by the policies of the TSX. The maximum term of the stock options is ten years from the grant date. Vesting terms are at the discretion of the Board of Directors. Stock option continuity 11.2 The continuity of stock options for the year ended December 31, 2019 is as follows: Expiry date Expired/ Forfeited Exercised Issued Exercise price C$ Balance, December 31, 2018 Balance, December 31, 2019 October 27, 2019 May 19, 2020 May 19, 2021 May 16, 2022 August 22, 2023 May 23, 2024 March 14, 2027 $ $ $ $ $ $ $ 1.20 0.335 0.36 0.32 0.24 0.23 0.075 393,336 1,015,000 1,165,000 2,040,000 3,692,500 - - - - - - 2,395,000 4,480,000 12,785,836 - 2,395,000 - - - - - - - - (393,336) (85,000) (35,000) (45,000) - - - (558,336) - 930,000 1,130,000 1,995,000 3,692,500 2,395,000 4,480,000 14,622,500 Weighted average exercise price (C$) $ 0.24 $ 0.23 $ - $ 0.94 $ 0.21 As at December 31, 2019, 11,795,000 stock options were exercisable. The weighted average remaining contractual life is 4.30 years. Page | 40 AZARGA URANIUM CORP. Notes to the Consolidated Financial Statements (Expressed in U.S. Dollars and in shares, unless otherwise indicated) For the year ended December 31, 2019 11. SHARE OPTION RESERVE (Continued) 11.2 Stock option continuity (Continued) The continuity of stock options for the year ended December 31, 2018 is as follows: Expiry date Expired/ Forfeited Exercised Issued Exercise price C$ Balance, December 31, 2017 Balance, December 31, 2018 April 30, 2018 August 6, 2018 November 3, 2018 November 3, 2018 October 27, 2019 May 19, 2020 May 19, 2021 May 16, 2022 March 14, 2027 August 22, 2023 $ $ $ $ $ $ $ $ $ $ 1.20 0.35 1.20 1.50 1.20 0.335 0.36 0.32 0.075 0.24 165,163 1,000,000 15,513 54,750 393,336 1,030,000 1,185,000 2,060,000 - - 5,903,762 - - - - - - - - 4,480,000 3,692,500 8,172,500 - - - - - - - - - - - (165,163) (1,000,000) (15,513) (54,750) - (15,000) (20,000) (20,000) - - (1,290,426) - - - - 393,336 1,015,000 1,165,000 2,040,000 4,480,000 3,692,500 12,785,836 11.3 Weighted average exercise price (C$) Share-based compensation $ 0.43 $ 0.15 $ - $ 0.52 $ 0.24 During the years ended December 31, 2019 and 2018, the Company recognized share-based compensation expense of $309,351 and $303,346, respectively, of which $252,790 and $266,044, respectively has been allocated to administrative expenses and $56,561 and $37,302, respectively has been allocated to exploration and evaluation assets. In May 2019, the Company granted 2,395,000 stock options to officers, employees, directors and other eligible persons at an exercise price of C$0.23 with an expiry date of May 23, 2024. The weighted average fair value of the options granted was estimated at C$0.12 per option at the grant date using the Black-Scholes option pricing model with the following assumptions: a risk-free interest rate of 1.57%; an expected volatility of 62.6%; an expected life of 5 years; a forfeiture rate of zero; an expected dividend of zero; and an exchange rate of 1.348. In August 2018, the Company granted 3,692,500 stock options to officers, employees, directors and other eligible persons at an exercise price of C$0.24 with an expiry date of August 22, 2023. The weighted average fair value of the options granted was estimated at C$0.14 per option at the grant date using the Black-Scholes option pricing model with the following assumptions: a risk-free interest rate of 1.53%; an expected volatility of 68.5%; an expected life of 5 years; a forfeiture rate of zero; an expected dividend of zero; and an exchange rate of 1.302. Page | 41 AZARGA URANIUM CORP. Notes to the Consolidated Financial Statements (Expressed in U.S. Dollars and in shares, unless otherwise indicated) For the year ended December 31, 2019 12. ADMINISTRATIVE EXPENSES Year ended December 31, 2019 2018 Salaries and benefits Consulting and professional fees Corporate administration Depreciation of property, plant and equipment Depreciation of right-of-use assets Share-based compensation 13. FINANCE COSTS $ $ 932,070 394,747 319,118 3,703 40,857 252,790 1,943,285 929,232 399,197 443,411 2,696 - 266,044 2,040,580 $ $ Note Year ended December 31, 2019 2018 Interest expense on operating lease obligations Interest expense on Shareholders' Loan Interest expense on URZ Energy Loan Interest expense on other loans payable 7.1 7.2 7.3 $ $ 9,734 - - - 9,734 - $ 143,219 3,567 8,127 154,913 $ Page | 42 AZARGA URANIUM CORP. Notes to the Consolidated Financial Statements (Expressed in U.S. Dollars and in shares, unless otherwise indicated) For the year ended December 31, 2019 14. DISCONTINUED OPERATIONS In October 2019, the Company sold its Kyzyl Ompul project located in Kyrgyzstan, see Note 6. The Company’s operations in Kyrgyzstan represented a separate geographical segment and accordingly the Company has presented these operations as discontinued operations for years ended December 31, 2019 and 2018. Year ended December 31, 2019 2018 Administrative expenses Foreign exchange loss Reversal of deferred income tax liabilities on impairment of exploration and evaluation assets Impairment of exploration and evaluation assets Gain on sale of UrAsia Net loss from discontinued operations $ 41,176 1,080,330 $ 104,715 12,845 (999,597) 4,140,444 (499,173) 3,763,180 $ - - - 117,560 $ 15. RELATED PARTY TRANSACTIONS AND BALANCES 15.1 Related party transactions During the year ended December 31, 2019, the Company recorded related party transactions with management including: • The issuance of 800,000 common shares to executive management of the Company to settle employee remuneration, see Note 10.2. During the year ended December 31, 2018, the Company recorded related party transactions with directors, management and shareholders including: • • • • • Interest accruing to certain shareholders of the Company on the Shareholders’ Loan, see Note 7.1; The issuance of 11,269,243 common shares to settle the Shareholders’ Loan, see Note 7.1; The issuance of 186,512 common shares to a shareholder of the Company to settle trade and other payables, see Note 10.2; The issuance of 578,822 common shares to a director of the Company to settle trade and other payables, see Note 10.2; and The issuance of 450,000 common shares to executive management of the Company to settle employee remuneration, see Note 10.2. Page | 43 AZARGA URANIUM CORP. Notes to the Consolidated Financial Statements (Expressed in U.S. Dollars and in shares, unless otherwise indicated) For the year ended December 31, 2019 15. RELATED PARTY TRANSACTIONS AND BALANCES (Continued) 15.2 Key management personnel compensation The remuneration of the Company’s directors and other key management personnel, who have the authority and responsibility for planning, directing and controlling the activities of the Company, consisted of the following: Year ended December 31, 2019 2018 Salaries and benefits * Consulting and professional fees Share-based compensation $ $ 837,365 161,881 207,595 1,206,841 841,476 139,926 200,791 1,182,193 $ $ * Salaries and benefits are included in administrative expenses (Note 12) and exploration and evaluation assets (Note 6). 15.3 Related party liabilities As at December 31, 2019 2018 Trade and other payables - current Trade and other payables - non-current $ $ 276,042 70,000 346,042 176,422 150,000 326,422 $ $ Included in trade and other payables as at December 31, 2019 and 2018 is $346,042 and $326,422, respectively, owing to related parties of the Company, of which $170,000 and $230,000, respectively, is owed to a former director of the Company. On February 14, 2018, the Company entered into an amended severance agreement with this director to pay the remaining severance payments over 49 months, whereby the amount payable was increased to $370,000. During the year ended December 31, 2019 and 2018, the Company paid the former director $60,000 and $140,000, respectively, towards the outstanding balance. The Company has classified $100,000 as current and $70,000 as non-current as at December 31, 2019 and $80,000 as current and $150,000 as non-current as at December 31, 2018. In June 2018, the Company settled other deferred compensation of $187,500 with this same former director through the issuance of 578,822 common shares of the Company, see Note 10.2. Page | 44 AZARGA URANIUM CORP. Notes to the Consolidated Financial Statements (Expressed in U.S. Dollars and in shares, unless otherwise indicated) For the year ended December 31, 2019 16. FINANCIAL INSTRUMENTS AND RISK MANAGEMENT 16.1 Categories of financial instruments Financial instruments are classified into one of the following categories: FVTPL; FVTOCI; or, at amortized cost. The carrying values of the Company’s financial instruments are classified into the following categories: As at December 31, Financial assets Amortized cost Cash Restricted cash Reclamation bonds Financial liabilities Amortized cost 2019 2018 $ $ $ 184,447 22,716 - 207,163 As at December 31, $ 352,001 39,963 99,000 490,964 2019 2018 Trade and other payables Decommissioning liabilities Operating lease obligations Fair value through profit or loss $ 863,864 251,550 115,459 $ 1,452,085 223,442 - Warrant liabilities $ 265,029 1,495,902 $ 247,654 1,923,181 Page | 45 AZARGA URANIUM CORP. Notes to the Consolidated Financial Statements (Expressed in U.S. Dollars and in shares, unless otherwise indicated) For the year ended December 31, 2019 16. FINANCIAL INSTRUMENTS AND RISK MANAGEMENT (Continued) 16.2 Fair value The fair value of financial assets and financial liabilities measured at amortized cost is determined in accordance with generally accepted pricing models based on discounted cash flow analysis or using prices from observable current market transactions. The Company considers that the carrying amount of all its financial assets and financial liabilities measured at amortized cost approximates their fair value. The Company’s financial instruments recorded at fair value require disclosure about how the fair value was determined based on significant levels of inputs described in the following hierarchy: • • • Level 1 fair value measurements are those derived from quoted prices in active markets for identical assets or liabilities. Level 2 fair value measurements are those derived from inputs other than quoted prices included within Level 1, that are observable either directly or indirectly. Level 3 fair value measurements are those derived from valuation techniques that include inputs that are not based on observable market data. The fair value of the Company’s warrant liabilities is recorded at fair value using Level 3 of the fair value hierarchy. The carrying value of the warrant liabilities is determined using the Black-Scholes option pricing model. The carrying values of cash and trade and other payables approximate their fair values because of the short-term nature of these financial instruments and are classified as financial assets and liabilities at amortized cost and are reported at amortized cost. The carrying values of restricted cash, reclamation bonds, decommissioning liabilities, and operating lease obligations approximate their fair values and are classified as financial assets and liabilities at amortized cost and are reported at amortized cost. Page | 46 AZARGA URANIUM CORP. Notes to the Consolidated Financial Statements (Expressed in U.S. Dollars and in shares, unless otherwise indicated) For the year ended December 31, 2019 16. FINANCIAL INSTRUMENTS AND RISK MANAGEMENT (Continued) 16.3 Financial risk management objectives and policies The financial risk arising from the Company’s operations are market risk, credit risk, and liquidity risk. These risks arise from the normal course of operations and all transactions undertaken are to support the Company’s ability to continue as a going concern. The risks associated with these financial instruments and the policies on how to mitigate these risks are set out below. Management of the Company manages and monitors these exposures to ensure appropriate measures are implemented on a timely and effective manner. During the year ended December 31, 2019, there were no significant changes in the Company’s financial risk management objectives and policies. The Company’s risk exposure and the impact on the Company’s financial instruments are summarized below: Market risk Market risk is the risk that the fair value of the future cash flows of a financial instrument will fluctuate due to changes in market factors. Market risk comprises three types of risks: currency risk, price risk and interest rate risk: Currency risk Currency risk is the risk that the fair values or future cash flows of the Company’s financial instruments will fluctuate because of changes in foreign currency exchange rates. The Company is exposed to currency risk through financial assets and liabilities denominated in currencies other than the United States Dollar. Management believes the currency risk related to currency conversions is minimal and therefore, does not hedge its currency risk. Price risk Price risk is the risk that the fair value of future cash flows of the Company’s financial instruments will fluctuate because of changes in market prices. The Company is exposed to the risk of fluctuations in prevailing market prices for its uranium products. However, as the Company is currently an exploration and development stage company, the risk is insignificant. Interest rate risk Interest rate risk is the risk that the fair values and future cash flows of the Company will fluctuate because of changes in market interest rates. The Company is exposed to interest rate risk to the extent that the cash maintained at the financial institutions is subject to a floating rate of interest. The interest rate risk on cash is not significant. Page | 47 AZARGA URANIUM CORP. Notes to the Consolidated Financial Statements (Expressed in U.S. Dollars and in shares, unless otherwise indicated) For the year ended December 31, 2019 16. FINANCIAL INSTRUMENTS AND RISK MANAGEMENT (Continued) 16.3 Financial risk management objectives and policies (Continued) Credit risk Credit risk is the risk of potential loss to the Company if the counterparty to a financial instrument fails to meet its contractual obligations. The Company is exposed to credit risk associated with its cash. The Company’s maximum exposure to credit risk is equal to the carrying amount of its cash. The Company’s credit risk on cash arises from default of the counterparty. The Company limits its exposure to counterparty credit risk on cash by only dealing with financial institutions with high credit ratings. Liquidity risk Liquidity risk is the risk that the Company will not be able to settle or manage its obligations associated with financial liabilities. The Company’s approach to managing liquidity is to evaluate current and expected liquidity requirements under both normal and stressed conditions to ensure that it maintains sufficient reserves of cash, access to financing facilities or access to cash generating opportunities, such as the liquidation of non-core and redundant assets to meet expected expenditures. The Company prepares annual expenditure budgets that are updated as necessary depending on various factors, including capital deployment, progress on permitting, results from the exploration and development of its properties and general industry conditions. The annual and updated budgets are approved by the Board of Directors. The Company’s current and expected remaining contractual maturities for its financial liabilities with agreed repayment periods are presented below. The table includes the undiscounted cash flows of financial liabilities based on the earliest date on which the Company can be required to satisfy the liabilities. As at December 31, 2019 1-3 months 3 months - 1 year Trade and other payables Operating lease obligations $ $ 728,864 15,573 744,437 $ 65,000 40,610 105,610 $ 1-5 years Total $ 70,000 124,526 194,526 $ $ 863,864 180,709 1,044,573 $ Page | 48 AZARGA URANIUM CORP. Notes to the Consolidated Financial Statements (Expressed in U.S. Dollars and in shares, unless otherwise indicated) For the year ended December 31, 2019 17. CAPITAL RISK MANAGEMENT The Company’s capital risk management objectives are to safeguard the Company’s ability to continue as a going concern to support the Company’s exploration and development of its mineral properties and to maintain a flexible capital structure which optimizes the costs of capital at an acceptable risk. The Company depends on external financing to fund its activities and there can be no guarantee that external financing will be available at terms acceptable to the Company. The Company manages its capital structure and adjusts it in light of changes in economic conditions and the risk characteristics of the underlying assets. To maintain or adjust the capital structure, the Company may issue new shares, issue new debt or acquire or dispose of assets. To facilitate management of its capital requirements, the Company prepares annual expenditure budgets that are updated as necessary depending on various factors, including capital deployment, progress on permitting, results from the exploration and development of its properties and general industry conditions. The annual and updated budgets are approved by the Board of Directors. During the year ended December 31, 2019, there were no significant changes in the processes used by the Company or in the Company’s objectives and policies for managing its capital. The Company is not subject to any externally imposed capital requirements. As at December 31, 2019, the Company’s capital structure consists of its equity, see Note 10. 18. COMMITMENTS Within 1 year 2-4 years Over 4 years Total Annual license payments * Centennial option agreement ** Dewey Burdock option agreements $ 540,356 $ 390,097 $ 1,338,783 $ 2,269,236 - - 3,165,000 3,165,000 62,500 602,856 $ 255,000 645,097 $ 1,638,750 6,142,533 $ 1,956,250 7,390,486 $ * annual license payments include lease, mineral claim, and exploration license payments ** the contingent payments are payable upon receipt of regulatory permits and licenses allowing uranium production on the area of the Centennial Project pertaining to these uranium interests. Further, since the required licenses and permits were not received by September 27, 2019, the uranium rights, at the option of the seller, can be transferred back to the seller. The Company is attempting to renegotiate the Centennial Project option agreement, see Note 6. Certain of the Company’s commitments may provide the Company with the ability to avoid funding those commitments; however, the Company discloses the contractual maturities of the Company's commitments based on management's intent. Page | 49 AZARGA URANIUM CORP. Notes to the Consolidated Financial Statements (Expressed in U.S. Dollars and in shares, unless otherwise indicated) For the year ended December 31, 2019 19. SUPPLEMENTAL CASH FLOW INFORMATION During the year ended December 31, 2019, the Company completed the following non-cash investing and financing activities: • • • • • Issued 1,380,521 common shares to settle $231,424 owing pursuant to the Company’s ESPP; Issued 323,553 common shares to settle $55,001 owing pursuant to the Company’s DSA; Issued 900,000 common shares to settle $170,068 of outstanding employee remuneration; Issued 6,553,022 share purchase warrants valued at $378,506 as part of the March 2019 financing; and No cash interest or income taxes were paid. During the year ended December 31, 2018, the Company completed the following non-cash investing and financing activities: • • • • • • • • • • Issued 57,920,716 common shares valued at $11,237,756 for acquisition of URZ Energy; Issued 186,393 common shares valued at $36,164 for transaction costs; Issued 11,269,243 common shares to settle the Shareholders’ Loan of $2,201,024; Issued 1,115,301 common shares to settle $215,344 owing pursuant to the Company’s ESPP; Issued 303,937 common shares to settle $58,669 owing pursuant to the Company’s DSA; Issued 104,166 common shares to repurchase royalties for $19,391; Issued 2,033,334 common shares to settle trade and other payables of $391,014; Issued 550,000 common shares to settle $93,500 of outstanding employee remuneration; Issued 390,000 share purchase warrants valued at $16,562 as part of the January 2018 financing; and No cash interest or income taxes were paid. Page | 50 AZARGA URANIUM CORP. Notes to the Consolidated Financial Statements (Expressed in U.S. Dollars and in shares, unless otherwise indicated) For the year ended December 31, 2019 20. NON-CONTROLLING INTEREST As at December 31, 2018, the Company held a 70.0% interest in UrAsia. On May 23, 2019, the Company acquired an additional 23.1% interest from two minority shareholders for a nominal cost giving the Company a 93.1% interest in UrAsia. In October 2019, the Company sold its 93.1% interest in UrAsia, see Note 6. Changes in the Company’s non-controlling interest for the years ended December 31, 2019 and 2018 were as follows: Year ended December 31, 2019 2018 Balance, beginning of year Non-controlling interest adjustment on acquisition of 23.1% of UrAsia Non-controlling interest share of net loss Non-controlling interest from other comprehensive income (loss) Balance, end of year $ (494,477) $ (449,996) 753,411 (273,923) - (29,435) 14,989 $ - $ (15,046) (494,477) Set out below is the summarized financial information for 100% of UrAsia’s net assets (liabilities), total comprehensive income (loss) and cash flows. The information is presented before considering inter-company consolidation and elimination adjustments. As at September 30, 2019 As at December 31, 2018 Current Assets Liabilities Total current net liabilities Non-current Assets Liabilities Total non-current net assets $ 841 (338,169) (337,328) $ 129,395 (424,147) (294,752) 30,405 - 30,405 4,187,711 (975,342) 3,212,369 Net assets (liabilities) $ (306,923) $ 2,917,617 * September 30, 2019 financial information is presented above, being the assets and liabilities sold Page | 51 AZARGA URANIUM CORP. Notes to the Consolidated Financial Statements (Expressed in U.S. Dollars and in shares, unless otherwise indicated) For the year ended December 31, 2019 20. NON-CONTROLLING INTEREST (Continued) Period ended September 30, 2019 Year ended December 31, 2018 Net loss before tax Deferred income tax recovery (expense) Net loss Other comprehensive income (loss) Total other comprehensive loss $ $ (3,763,180) (16,238) (3,779,418) 863,092 (2,916,326) (117,560) 17,222 (100,338) (35,108) (135,446) $ $ * Nine months ended September 30, 2019 financial information is presented above, being the loss for the period prior to the sale of UrAsia Period ended September 30, 2019 Year ended December 31, 2018 $ $ Net cash used in operating activities Net cash generated from investing activities Net cash generated from financing activities Change in cash Cash, beginning of period Effect of foreign exchange rate changes on cash Cash, end of period (228,218) 99,700 - (128,518) 129,395 (36) 841 $ $ (160,580) 260,172 - 99,592 30,556 (753) 129,395 * Nine months ended September 30, 2019 financial information is presented above, being the cash flows for the period prior to the sale of UrAsia Page | 52 AZARGA URANIUM CORP. Notes to the Consolidated Financial Statements (Expressed in U.S. Dollars and in shares, unless otherwise indicated) For the year ended December 31, 2019 21. DEFERRED INCOME TAX 21.1 Deferred income tax Taxation on profits or losses has been calculated on the estimated assessable profits or losses for the year at the rates of taxation prevailing in the jurisdictions in which the Company operates. 21.2 Deferred income tax expenses Year ended December 31, 2019 2018 Net loss before income tax Statutory tax rate Deferred income tax recovery based on statutory rate Effect of different tax rates applicable in foreign jurisdictions Effect of disposition of subsidiary Unrecognized deferred tax assets Effect of non-deductible expenses and non- taxable revenue and other Deferred income tax (expense) recovery 21.3 Deferred tax balances $ 4,096,816 27% $ 2,110,165 27% $ 1,106,000 $ 570,000 (163,000) (346,000) (270,000) (46,000) - (966,000) $ (205,000) 122,000 $ 261,000 (181,000) The Company’s deferred tax liabilities consist of the following amounts: As at December 31, 2019 2018 Exploration and evaluation assets Inter-company loans eliminated on consolidation Deferred tax liabilities $ 3,112,193 $ 3,119,790 - $ 3,112,193 $ 1,114,000 4,233,790 As at December 31, 2019 and 2018, the Company has not recognized any deferred tax assets. Page | 53 AZARGA URANIUM CORP. Notes to the Consolidated Financial Statements (Expressed in U.S. Dollars and in shares, unless otherwise indicated) For the year ended December 31, 2019 21. DEFERRED INCOME TAX (Continued) 21.3 Deferred tax balances (Continued) Changes in the Company’s deferred tax liabilities for the years ended December 31, 2019 and 2018 were as follows: Year ended December 31, 2019 2018 Opening balance Reversal of deferred income tax on inter- company loans Deferred income tax (recovery) expense Deferred tax liabilities $ 4,233,790 $ 4,052,790 (999,597) (122,000) 3,112,193 $ - 181,000 4,233,790 $ 21.4 Unrecognized deductible temporary differences and unused tax losses The Company’s deductible temporary differences and unused tax losses for which no deferred tax asset is recognized consist of the following tax affected amounts: As at December 31, 2019 2018 Non-capital losses Deductible temporary differences Total unrecognized amounts $ $ 3,812,000 44,000 3,856,000 3,565,000 21,000 3,586,000 $ $ As at December 31, 2019 and 2018, the Company had unrecognized deferred tax assets attributable to deductible temporary differences of $44,000 and $21,000, respectively, which are primarily related to value added tax receivables and certain deferred payments not being recognized. The deferred tax assets related to the temporary differences and non-capital losses were not recognized as their recoverability was not considered to be probable. Corporate taxpayers in the USA that generate a loss in a taxable year beginning after December 31, 2017, will be able to carry forward the NOL indefinitely but utilization will be subject to an annual deduction limitation of 80 percent of taxable income. The losses will not be allowed to be carried back. Page | 54 AZARGA URANIUM CORP. Notes to the Consolidated Financial Statements (Expressed in U.S. Dollars and in shares, unless otherwise indicated) For the year ended December 31, 2019 21. DEFERRED INCOME TAX (Continued) 21.5 Expiry dates The expiry dates of the Company’s unused tax losses are as follows: Non-capital losses As at December 31, 2019 United States Canada Hong Kong 22. SUBSEQUENT EVENTS $ $ 7,688,000 8,092,000 651,000 16,431,000 2027 to indefinite 2027 to indefinite Indefinite Subsequent to December 31, 2019, the Company completed the following transactions: • In January 2020, the Company issued 457,618 common shares to settle $71,877 owing pursuant to the Company’s ESPP and 87,543 common shares to settle $13,750 owing pursuant to the Company’s DSA; and • In February 2020, the Company received third party loans of C$325,000 that bear interest at 12% per annum, are unsecured, and mature August 4, 2020. Page | 55 Azarga Uranium Corp. MANAGEMENT’S DISCUSSION AND ANALYSIS For the year ended December 31, 2019 (Expressed in U.S. Dollars) AZARGA URANIUM CORP. Management’s Discussion and Analysis For the year ended December 31, 2019 The following is management’s discussion and analysis (“MD&A”) of the results of operations and financial condition of Azarga Uranium Corp. (“Azarga Uranium”) for the year ended December 31, 2019 and up to the date of this MD&A, and should be read in conjunction with the accompanying audited consolidated financial statements for the year ended December 31, 2019, together with the notes thereto (the “Financial Report”). All financial information in this MD&A is derived from the Company’s consolidated financial statements prepared in accordance with International Financial Reporting Standards (“IFRS”). All references to $ in this MD&A refer to the United States dollar and all references to C$ refer to the Canadian dollar. Additional information relating to the Company, including the Annual Information Form, is available under the Company’s profile on SEDAR at www.sedar.com The effective date of this MD&A is March 26, 2020. DESCRIPTION OF THE BUSINESS Azarga Uranium was incorporated on February 10, 1984 under the laws of the Province of British Columbia, Canada. Azarga Uranium’s common shares are publicly traded on the Toronto Stock Exchange (“TSX”) (Symbol: AZZ), the Frankfurt Stock Exchange (Symbol: P8AA), and the OTCQB Venture Market (Symbol: AZZUF). The Company is an integrated uranium exploration and development company. The Company controls uranium properties in the United States of America (the “USA”), located in South Dakota, Wyoming, Utah and Colorado, with a primary focus of developing in-situ recovery (“ISR”) uranium projects. The Dewey Burdock ISR uranium project in South Dakota, USA (the “Dewey Burdock Project”) is the Company’s initial development priority and has received its Nuclear Regulatory Commission (“NRC”) license and draft Class III and Class V Underground Injection Control (“UIC”) permits from the Environmental Protection Agency (the “EPA”). The Company also owns the Gas Hills, Juniper Ridge, Dewey Terrace and Aladdin Projects in Wyoming, the Centennial Project in Colorado, and uranium exploration properties in Wyoming, Utah and Colorado. 2 AZARGA URANIUM CORP. Management’s Discussion and Analysis For the year ended December 31, 2019 OPERATIONAL HIGHLIGHTS The Company’s significant events and highlights for the year ended December 31, 2019 and to the date of this MD&A are as follows: • Dewey Burdock Project • • • In January 2020, the Company filed a National Instrument 43-101 (“NI 43- 101”) Technical Report and Preliminary Economic Assessment (“PEA”) for the Dewey Burdock Project. The base case economic assessment resulted in a pre-income tax internal rate of return (“IRR”) of 55% and a pre-income tax net present value (“NPV”) of US$171.3 million when applying an eight percent discount rate. Using the same discount rate, the post-income tax IRR is 50% and the post-income tax NPV is US$147.5 million. In December 2019, the Atomic Safety and Licensing Board (the “ASLB”) issued its Final Initial Decision and resolved the final remaining contention on the Company’s Dewey Burdock Project NRC License in favor of the Company and NRC Staff. In August 2019, the Company received notice that the EPA issued revised draft permits for the Dewey Burdock Project. The revised draft permits incorporate comments submitted to the EPA on the original draft permits, including comments submitted by the Company and pertain to the Company’s planned Class III and Class V UIC activities. The revised draft EPA permits addressed the majority of the comments submitted by the Company. This is a significant step towards the issuance of the final EPA permits and continues to advance the Dewey Burdock Project towards development. The Company remains focused on working with the EPA to obtain the final permits in the near-term. • Private Placement – In March 2019, the Company closed a non-brokered private placement for gross proceeds of $2,266,169 (C$3,014,391) through the issuance of 13,106,046 units at a price of C$0.23 per unit. Each unit consists of one common share and one-half of one share purchase warrant. Each whole warrant entitles the holder thereof to purchase one common share at a price of C$0.31 per share until March 20, 2022. • Kyzyl Ompul Project – Kyrgyz Republic – In October 2019, the Company sold its 93.1% interest in the Kyzyl Ompul Project located in the Kyrgyz Republic for cash consideration of $232,750. In addition, the Company was granted a 1.862% net smelter return (“NSR”) royalty on any future uranium production from the Kyzyl Ompul Project up to $4,665,000. 3 AZARGA URANIUM CORP. Management’s Discussion and Analysis For the year ended December 31, 2019 INDUSTRY TRENDS AND OUTLOOK Although uranium prices have recovered from their lows in the fourth quarter of 2016, the Company believes that the following key elements will contribute to further improvements in the uranium sector: • Global reactor pipeline indicates growth 1 – the global reactor pipeline consists nuclear reactors that are operable, under construction, planned or 1 1 . A total of 163 of 935 proposed. Of the 935 nuclear reactors, 442 reactors are operable nuclear reactors are under construction or planned, which represents approximately 37% of the current operating fleet. China, and India lead the world in terms of the number of nuclear power plants under construction, with eleven 1 and seven, respectively . China continues to accelerate their nuclear growth plans 2 and intends to have 120-150 GWe of installed capacity by 2030 (currently 46 GWe 1 ). • Current prices are constraining supply – low prices are forcing producers to curtail mining, development and exploration. In 2016, Cameco Corp. (“Cameco”) placed its Rabbit Lake Mine, which produced 4.2 million pounds of uranium in 3 , on care and maintenance, and curtailed its United States uranium 2015 operations. In 2017, Cameco announced temporary production suspensions at its McArthur River/Key Lake operation, which Cameco expected would remove 18 4 . In July 2018, Cameco million pounds of uranium from the market in 2018 announced the decision to continue the shutdown of McArthur River/Key Lake indefinitely. Further, Kazatomprom announced a 20% production cut over a 5 and subsequent to this period of three years commencing in January 2018 announcement that the 20% production cut would be extended until at least 2021. This 20% production cut by Kazatomprom is expected to remove approximately 3 from global primary supply in 2021. Global primary O 14.6 million pounds of U supply is well below nuclear reactor requirements. 8 • United States Nuclear Fuel Working Group – In July 2019, President Trump established the United States Nuclear Fuel Working Group (the “NFWG”) to develop recommendations for reviving and expanding domestic nuclear fuel production. President Trump acknowledged that the “United States uranium industry faces significant challenges in producing uranium domestically and that this is an issue of national security.” Subsequently, in February 2020, President Trump’s fiscal 2021 budget proposal requested an annual allocation of US$150 million for a 10-year period, totalling US$1.5 billion, to establish a United States uranium reserve, noting that “establishing a uranium reserve provides assurance 1 World Nuclear Association – World Nuclear Power Reactors & Uranium Requirements (January 2020) 2 World Nuclear Association – Nuclear Power in China (January 2020) 3 Cameco 2016 Annual Information Form dated March 23, 2017 4 Cameco Corp. Management Discussion & Analysis for the quarter ended June 30, 2018 5 NAC “Kazatomprom” JSC news release dated December 4, 2017 4 AZARGA URANIUM CORP. Management’s Discussion and Analysis For the year ended December 31, 2019 of availability of uranium in the event of a market disruption and supports strategic U.S. fuel cycle capabilities.” The proposed fiscal 2021 budget “addresses immediate challenges to the production of domestic uranium and reflects the Administration's NFWG priorities. The NFWG will continue to evaluate issues related to uranium supply chain and fuel cycle.” Despite the Company’s belief that a uranium sector turnaround has commenced, its strategies are focused on making prudent plans to progress its business, while conserving its financial resources. At this time, the Company’s strategy involves the following key elements: • Continue with the advancement of the Dewey Burdock Project – the Company remains focused on working with the EPA to obtain the final Class III and Class V UIC permits in the near-term. In August 2019, the EPA issued revised draft permits that addressed the majority of the comments submitted by the Company. In parallel with advancing the Dewey Burdock Project on the permitting front, the Company will continue to evaluate project-financing options, with a view to having a funding solution in place prior to or concurrent with the finalization of permits. • Focus on identifying uranium resources at the Dewey Terrace Project – the Company is continuing the evaluation and analysis of historical data at the Dewey Terrace Project with the goal of identifying additional uranium mineralization. • Focus on identifying additional uranium resources and ISR amenability at the Gas Hills Project – the Company is in the process of reviewing historical data at the Gas Hills Project with the goal of identifying additional uranium mineralization. The Company has also completed hydrological studies, which indicate that permeability and piezometric surface conditions are suitable for ISR uranium mining. The Company will continue to evaluate future ISR development options at Gas Hills, consistent with the Company’s strategy of developing ISR uranium projects in the USA. • Future uranium production off-take – the Company will continue engaging with potential customers for future uranium production off-take. Although the Company plans to continue these discussions, in parallel with the advancement of the Dewey Burdock Project, the level of these activities will be dependent on the market environment. The Company expects to successfully execute its strategy as the Company believes that: • • uranium prices will move higher in the near to medium term; the December 2019 PEA demonstrates that the Dewey Burdock Project is one of the United States’ preeminent undeveloped ISR uranium projects; 5 AZARGA URANIUM CORP. Management’s Discussion and Analysis For the year ended December 31, 2019 • • • on completion of permitting at the Dewey Burdock Project, the Company expects to be able to attract financing and move into the construction phase; the Company’s asset suite includes mineral properties at various stages of development, providing a pipeline for continued growth; and management and the Board of Directors have extensive experience in uranium, the broader mining sector and financial markets. MINERAL PROPERTIES The Dewey Burdock Project (100% interest) – South Dakota, USA The Company’s 100% owned Dewey Burdock Project is an ISR uranium project located in the Edgemont uranium district, in South Dakota, USA. Through property purchase agreements, mining leases and/or mining claims, the Dewey Burdock Project is comprised of approximately 12,613 surface acres and 16,962 net mineral acres. The Dewey Burdock Project is the Company’s initial development priority. Summary of Mineral Resources and PEA In January 2020, the Company filed a NI 43-101 compliant independent Technical Report and PEA for the Dewey Burdock Project prepared by Woodard & Curran and Rough Stock Mining Services (the “Dewey Burdock PEA”) with an effective date of December 3, 2019. Dewey Burdock Project ISR Mineral Resource Estimate Measured Resources 5,419,779 0.132 5.56 0.733 Indicated Resources 1,968,443 0.072 5.74 0.413 Measured plus Indicated Resources 7,388,222 0.116 5.65 0.655 Inferred Resources 645,546 0.055 5.87 0.324 14,285,988 2,836,159 17,122,147 712,624 Tons 8 3 ) Average grade (%U O Average thickness (feet) Average grade-thickness (“GT”) Uranium (pounds) at a 0.20 GT cut-off Note: mineral resources that are not mineral reserves do not have demonstrated economic viability. In addition to the ISR mineral resource estimate, the NI 43-101 resource estimate includes a non-ISR (located above the water table) mineral resource estimate containing 8 3 measured resources of 857,186 pounds at 0.060% U , indicated resources of 407,851 O 3 8 3 pounds at 0.053% U at a O and inferred resources of 114,858 pounds at 0.051% U O 0.20 GT cut-off. The non-ISR mineral resource estimate is not included in the mineral 8 6 AZARGA URANIUM CORP. Management’s Discussion and Analysis For the year ended December 31, 2019 resource figures presented in the economic analysis for the Dewey Burdock PEA. Mineral resources that are not mineral reserves do not have demonstrated economic viability. The Dewey Burdock PEA resulted in a pre-income tax NPV of $171.3 million at a discount rate of 8% and an IRR of 55% compared to a post-income tax NPV of $147.5 million at a discount rate of 8% and an IRR of 50%. The Dewey Burdock PEA post- income tax calculations do not include a corporate level assessment of income tax liabilities; taxes have only been calculated at the Dewey Burdock Project level. The estimate of income tax at the corporate level is subject to a number of additional considerations that have not been factored in when calculating income taxes at the project level, including, but not limited to, the capital structure to finance the Dewey Burdock Project, which has not yet been determined and loss carry forwards available at the corporate level. 8 3 The Dewey Burdock PEA estimated uranium prices of $55/lb U , direct cash operating O costs of $10.46 per pound of production and royalties and local taxes (excluding property tax) of $5.15 per pound of production. The total pre-income tax cost of uranium production is estimated to be $28.88 per pound of production. Income taxes are estimated to be $3.39 per pound of production. Initial capital expenditures are estimated at $31.7 million. The Dewey Burdock Project is 3 8 over its 16 years of production and the O forecast to produce 14.3 million pounds of U projected cash flows of the Dewey Burdock Project are expected to be positive in the second year of production, two years after the commencement of construction. Details of the assumptions and parameters used with respect to the Dewey Burdock PEA, including information on data verification, are set out in the “NI 43-101 Technical Report Preliminary Economic Assessment, Dewey Burdock Uranium ISR Project, South Dakota, USA, dated January 17, 2020, with an effective date of December 3, 2019, a copy of which is available under the Company’s profile at www.sedar.com. The Dewey Burdock PEA is preliminary in nature; it includes inferred mineral resources that are considered too speculative geologically to have the economic considerations applied to them that would enable them to be categorized as mineral reserves. There is no certainty that the Dewey Burdock PEA will be realized. Mineral resources that are not mineral reserves do not have demonstrated economic viability. 7 AZARGA URANIUM CORP. Management’s Discussion and Analysis For the year ended December 31, 2019 Summary of Permitting Permit, License or Approval Name Agency UIC Class III Permit EPA UIC Class V Permit Final Source and By-product Materials License NRC Ground Water Disposal Plan DENR Water Rights Permit Large Scale Mine Plan Permit Plan of Operations BLM • • • • • • Status Revised draft permits issued August 2019 Working with EPA to obtain final permits in near-term Issued April 2014 and in good standing Applications complete and recommended for conditional approval by DENR staff Hearings for final approval commenced in late-2013, continuance ordered until completion of federal regulatory approvals (NRC and EPA) Approval anticipated to follow resolution of final NRC license contention DENR EPA NRC BLM South Dakota Department of Environment and Natural Resources United States Environmental Protection Agency United States Nuclear Regulatory Commission Bureau of Land Management The NRC issued the final Supplemental Environment Impact Statement (“SEIS”) for the Dewey Burdock Project in the first quarter of 2014. The Section 106 programmatic agreement (“PA”) was executed on April 7, 2014 by the Advisory Council on Historic Preservation, the NRC, the South Dakota State Historic Preservation Office and the BLM. Subsequent to the PA being executed, the NRC issued a final Safety Evaluation Report and the Company’s Dewey Burdock Project received its Source and Byproduct Materials License SUA-1600 on April 8, 2014, covering 10,580 acres. In the fourth quarter of 2016, the Company received approval from the NRC for the first amendment to the NRC license, which completed certain NRC license conditions. The Company controls the mineral and surface rights for the area pertaining to the NRC license. In August 2014, an evidentiary hearing was held with the ASLB in regard to the contentions raised with respect to the Dewey Burdock Project. These ASLB hearings are normal practice and are undertaken after the NRC license has been granted to determine 8 AZARGA URANIUM CORP. Management’s Discussion and Analysis For the year ended December 31, 2019 whether the NRC staff has considered all issues related to the NRC license. In April 2015, the ASLB ruled on seven contentions raised by the consolidated intervenors and the Oglala Sioux Tribe (collectively, the “Intervenors”) regarding the NRC license for the Dewey Burdock Project. For five contentions, including those related to groundwater usage, groundwater quality, ability to contain fluid migration, mitigation measures, and connected actions, the ASLB ruled in favor of the NRC staff and the Company. For the remaining two contentions, which related to identification and protection of historic and cultural resources, the ASLB requested additional consultation between the NRC staff and the Oglala Sioux Tribe. The ASLB also ruled inadmissible two new contentions that were filed by the Intervenors after the evidentiary hearing. Subsequent to the ASLB partial initial decision in April 2015, the Company and the NRC staff filed petitions for review of the ASLB decision to the NRC Commission with respect to their ruling that additional consultation efforts were required between the Oglala Sioux Tribe and the NRC staff regarding the two contentions relating to the identification and protection of historic and cultural resources. The Intervenors filed petitions for review of the ASLB decision to the NRC Commission covering most of the contentions heard by the ASLB. Upon consideration of the information presented, the NRC Commission denied the party’s petitions for review of the ASLB decision, with the exception of 1) the NRC staff’s and the Company’s petition for review with respect to the ASLB’s direction to the NRC staff regarding the resolution of the outstanding two contentions relating to the identification and protection of historic and cultural resources, in which the NRC Commission ultimately affirmed the ASLB’s decision and 2) a petition for review filed by the Oglala Sioux Tribe claiming that the draft SEIS had been issued without the requisite scoping process, in which the NRC Commission affirmed the ASLB’s decision and dismissed the contention. In August 2017, the Company received notice that the NRC staff filed a motion for summary disposition before the ASLB to resolve the remaining two contentions from the ASLB partial initial decision. The Company filed a brief in support of the NRC staff motion, while the Intervenors filed briefs opposing the motion. In October 2017, the ASLB issued a memorandum and order pertaining to this motion. With respect to the outstanding contention requiring additional consultation between the NRC staff and the Oglala Sioux Tribe under the National Historic Preservation Act, the ASLB granted the motion for summary disposition in favor of the NRC staff and the Company. With respect to the outstanding contention pertaining to the identification and protection of historic and cultural resources for the purposes of compliance with the National Environmental Policy Act (“NEPA”), the ASLB did not grant the motion for summary disposition. As a result, the Company filed an appeal with the NRC Commission in an effort to resolve the remaining contention; however, the appeal was not successful. In 2018, the Company, the NRC staff and the Oglala Sioux Tribe agreed, in principle, to a process for resolving the remaining contention; however, due to differences in approach between the Oglala Sioux Tribe and the NRC staff, both parties filed motions for summary disposition. The Company filed a brief in support of the NRC staff motion. The ASLB denied the Oglala Sioux Tribe’s motion for summary disposition and its request to stay or 9 AZARGA URANIUM CORP. Management’s Discussion and Analysis For the year ended December 31, 2019 revoke the Company’s Dewey Burdock Project NRC license and the NRC staff’s summary disposition motion to resolve the remaining contention. In May 2019, the ASLB issued an order granting the NRC staff’s motion to set a schedule for an evidentiary hearing pertaining to the final contention. The ASLB decision provides the NRC staff and the Company with an opportunity to resolve the final contention for the Dewey Burdock Project NRC license within legally established timelines. The NRC staff determined that an evidentiary hearing, one of the two options previously presented by the ASLB to address the only remaining contention, was the most appropriate path forward as the other approach did not have a reasonable expectation of agreement in an acceptable timeframe. In December 2019, the ASLB issued its Final Initial Decision and resolved the final remaining contention for the Dewey Burdock Project NRC license in favor of the Company and NRC staff. Subsequently, the Intervenors have appealed this decision to the NRC Commission. In February 2017, the Oglala Sioux Tribe filed an appeal of the decision made by the NRC Commission to the United States Court of Appeals for the District of Columbia Circuit (the “DC Circuit Court”). On July 23, 2018, the Company reported that the DC Circuit Court issued an order dismissing most of the rulings challenged by the Oglala Sioux Tribe due to lack of jurisdiction; however, the DC Circuit Court remanded the decision to keep the Company’s NRC license in effect to the NRC Commission due to the unresolved NEPA contention. On January 31, 2019, the NRC Commission issued a decision upholding the effectiveness of the Company’s NRC license in consideration of the remand from the DC Circuit Court. The NRC license for the Dewey Burdock Project continues to remain in good standing. The Company continues to be in compliance with the existing conditions of the NRC license and other permitting and licensing requirements. Prior to commencing construction and operations at the Dewey Burdock Project, the Company requires regulatory approvals from two other major agencies, the EPA and the DENR. These approvals include the final Class III and Class V UIC permits from the EPA and three state permits to be issued by the DENR. Additional requirements that need to be addressed prior to commencing construction and operations at the Dewey Burdock Project include the satisfaction of pre-operational conditions under the NRC license and the development and implementation of mitigation plans for protection of cultural resources under the PA. In August 2019, the Company received notice that the EPA issued revised draft permits for the Dewey Burdock Project. The revised draft permits incorporate comments submitted to the EPA on the original draft permits, including comments submitted by the Company and pertain to the Company’s planned Class III and Class V UIC activities. The revised draft EPA permits addressed the majority of the comments submitted by the Company. This is a significant step towards the issuance of the final EPA permits and continues to advance the Dewey Burdock Project towards development. The Company remains focused on working with the EPA to obtain the final permits in the near-term. 10 AZARGA URANIUM CORP. Management’s Discussion and Analysis For the year ended December 31, 2019 The Company submitted applications to the DENR in 2012 for its Groundwater Discharge Plan (“GDP”), Water Rights (“WR”) and Large Scale Mine Plan (“LSM”) permits. All permit applications have been deemed complete and have been recommended for conditional approval by the DENR staff. The GDP and WR permits are subject to hearing with public participation. The hearing commenced on October 28, 2013 and continued through November 25, 2013, at which point it was determined that the hearing will resume once the NRC and EPA have ruled and set the federal surety. The LSM permit has been finalized subject to continuation of a hearing before the Board of Minerals and Environment, which commenced the week of September 23, 2013 and continued through November 5, 2013, at which point it was determined that the hearing will resume once the NRC and EPA have ruled and set the federal surety. Subject to improved market conditions, the Company plans to re-commence the regulatory process with the DENR once the final EPA Class III and Class V UIC permits have been issued. On July 8, 2014, the BLM requested additional information on the Company’s plan of operations for the Dewey Burdock Project. The Company submitted the requested information and anticipates that the BLM will approve the plan of operations in the near- term now that the final contention on the Dewey Burdock Project NRC license has been resolved. Dewey Terrace Project (100% interest) – Wyoming, USA – adjacent to Dewey Burdock The Company’s 100% owned Dewey Terrace Project is located in the Weston and Niobrara Counties of Wyoming. The Company acquired this project primarily through the staking of federal mining claims, along with the acquisition of lease agreements. Through mining leases and mining claims, the Dewey Terrace Project is comprised of approximately 1,874 acres of surface rights and approximately 7,514 acres of net mineral rights. The Dewey Terrace Project is located adjacent to the Company’s NRC licensed Dewey Burdock Project. The Company has identified uranium mineralization at the Dewey Terrace Project through the review and analysis of historical data owned by the Company (the “Data Set”). The Data Set identified 259 mineralized drill holes indicating significant potential for a new resource area at the Dewey Terrace Project. Further, deposition is consistent with sand channel systems categorized within the Dewey Burdock Project and conditions that indicate possible ISR amenability. Several drill holes encountered multiple intercepts demonstrating a vertically stacked group of separate mineralized zones similar to those at the Dewey Burdock Project. The uranium mineralization covers seven separate mineralized zones over a trend of approximately 2.5 miles. As announced on October 31, 2017, the Data Set analysis has identified 91 mineralized drill holes with 129 intercepts equal to or exceeding a 0.2 GT cutoff using a 0.02% grade 8 3 grade of 0.062% and an average thickness of 7.4 feet. The O cutoff with an average eU Company also identified 93 drill holes with 112 intercepts that had GT values ranging from 0.1 to 0.2 GT based on review of the Data Set. These intercepts had an average 11 AZARGA URANIUM CORP. Management’s Discussion and Analysis For the year ended December 31, 2019 thickness of 4.1 feet with an average grade of 0.041% eU holes reviewed range from barren to an average GT of 0.1. 8 3 . The remaining 187 drill O The Data Set includes historical drilling information that has been reviewed by the Company’s geological team, as well as 20 exploratory drill holes completed by the Company in a previous exploration campaign. The exploratory drill holes completed by the Company confirm the presence of uranium mineralization at the Dewey Terrace Project. The Company’s review of the records and information within the Data Set reasonably substantiate the validity of this information; however, the Company cannot directly verify the accuracy of the historical data, including the procedures used for sample collection and analysis. Therefore, the Company encourages investors not to place undue weight on these results. The objective of the Data Set analysis is to identify uranium mineralization in a cost- effective manner in the vicinity of the Company’s Dewey Terrace and Dewey Burdock Projects. The Company is continuing its review of the Data Set with the objective of identifying additional uranium mineralization. Gas Hills Project (100% interest), Wyoming, USA The Company’s 100% owned Gas Hills Project is located in the historic Gas Hills uranium district situated 45 miles east of Riverton, Wyoming. The Gas Hills Project consists of approximately 1,280 surface acres and 12,960 net mineral acres of unpatented lode mining claims, a State of Wyoming mineral lease, and private mineral leases, within a brownfield site which has experienced extensive development including mine and mill site production. Summary of Mineral Resources In June 2017, a technical report was prepared by BRS Inc. on the Gas Hills Project titled “Amended and Restated Gas Hills Uranium Project, Mineral Resource and Exploration Target NI 43-101 Technical Report, Fremont and Natrona Counties, Wyoming, USA” (the “Gas Hills Report”) with an effective date of June 9, 2017. The Gas Hills Project contains 8 3 (2.4 million tons at an average O indicated uranium resources of 4.7 million pounds U 8 3 8 3 (2.3 ) and inferred uranium resources of 2.5 million pounds U O grade of 0.098% U O 8 million tons at an average grade of 0.054% U ) at a 0.10 GT cut-off. Mineral resources that are not mineral reserves do not have demonstrated economic viability. 3 O The uranium mineralization is contained in roll-front deposits hosted by arkosic sandstone beds of the Eocene Wind River Formation. The deposits are stratabound and occur from the surface to depths of approximately 450 feet in areas amenable to open-pit mining, and to depths in excess of 1,200 feet, which may be amenable to ISR. Based on areas of wide-spaced limited historical drilling and areas of past mine production, the Company believes that there is sufficient geological evidence to interpret that mineralization may extend from current mineral resource areas along identified trends. Based on a detailed review of previous work, the Company has outlined five high priority 12 AZARGA URANIUM CORP. Management’s Discussion and Analysis For the year ended December 31, 2019 exploration targets within the project for follow-up including Day Loma, Day Loma/Loco- Lee, Loco-Lee, George-Ver, and Bullrush. Details of the assumptions and parameters used with respect to the Gas Hills Report, including quality estimates and information on data verification, are available under the SEDAR profile of URZ Energy at www.sedar.com. Subsequent to issuing the Gas Hills Report, the Company commenced detailed ISR studies on the Gas Hills Project. These studies focused on piezometric surface conditions and permeability of the Wind River formation confined aquifer, the primary host of uranium mineralization at the Company’s Gas Hills Uranium Project. The first study, announced by URZ Energy on May 1, 2018, focused on piezometric surface conditions and demonstrated that three of the primary deposits at the Gas Hills property, being Day Loma, George-Ver and Loco-Lee, were principally located within a confined aquifer that contains current hydrostatic head well above the minimum requirements to allow for the successful use of ISR mining techniques. The second study focused on permeability (also referred to as hydraulic conductivity). A comprehensive review of pump test data for the Gas Hills Project and pump test data for other mining operations and planned mining operations in Wyoming proximal to the Gas Hills Project was conducted by Hydro-Engineering L.L.C (“Hydro-Engineering”). A summary of the review is presented below for each project: Project Name and Owner Hydraulic Conductivity Range (feet/day) Permeability Range (darcy) Gas Hills; Azarga Uranium Gas Hills (Peach); Cameco 1.0 to 5.7 0.8 to 2.7 0.5 to 6.0 0.3 to 2.89 Lost Creek; Ur-Energy 0.27 to 2.78 0.13 to 1.3 Hydro-Engineering concluded that the hydraulic conductivity at the Gas Hills Project is comparable to hydraulic conductivity values at other ISR mining operations and planned mining operations in Wyoming proximal to the Gas Hills Project. Thus, the permeability of the mineralized Wind River formation confined aquifer at Gas Hills is suitable for ISR uranium mining. The favorable report on permeability coupled with the favorable piezometric surface conditions confirms that these two important hydrologic parameters are suitable for ISR uranium mining. The Company will continue to evaluate future ISR development options at the Gas Hills Project. 13 AZARGA URANIUM CORP. Management’s Discussion and Analysis For the year ended December 31, 2019 The Centennial Project (100% interest) – Colorado, USA The Company’s 100% owned Centennial Project is located in the western part of Weld County in north-eastern Colorado. Through property purchase and lease agreements, the Centennial Project is comprised of approximately 1,365 acres of surface rights and 6,238 acres of net mineral rights. Historical exploration work included drilling, recovery tests, water well tests and environmental studies. At the request of the Colorado Division of Reclamation, Mining and Safety, the Company prepared and submitted an updated Site Characterization Plan in April 2009. All the required environmental surveys and studies have been completed and the draft reports have been received. The Company completed its application to the EPA for a Class I UIC Permit in November 2010. In December 2010, the EPA informed the Company that the application was deemed complete; however, the Company withdrew its application in the fourth quarter of 2018. The EPA will retain the application should the Company wish to resume the process. The majority of the major mine permit applications for the Centennial Project have not been prepared or submitted to date. In August 2010, a NI 43-101 compliant independent PEA (the “Centennial PEA”) was prepared by SRK Consulting (U.S.), Inc. and Lyntek Incorporated with an effective date of June 2, 2010. The Centennial PEA indicated that the Centennial Project can be developed using the ISR method and resulted in a pre-tax net present value of $51.8 million at a discount rate of 8% and an internal rate of return of 18%. The Centennial PEA assumed 8 3 uranium prices of $65/lb U and capital costs O of $71.1 million. The Centennial PEA included indicated uranium resources of 8 3 and inferred uranium resources of 2,325,514 pounds O 10,371,571 pounds at 0.09% U 8 3 at 0.09% U at a 0.20 GT cut-off and annual production of 700,000 lbs per annum, which O resulted in a 14-year mine life. 8 3 , cash operating costs of $34.95/lb U O Details of the assumptions and parameters used with respect to the Centennial PEA, including information on data verification, are set out in the Centennial PEA dated August 6, 2010, a copy of which is available under the Company’s profile on SEDAR at www.sedar.com. The Centennial PEA is preliminary in nature and includes inferred mineral resources that are considered too speculative geologically to have the economic considerations applied to them that would enable them to be categorized as mineral reserves. There is no certainty that the Centennial PEA will be realized. Mineral resources that are not mineral reserves do not have demonstrated economic viability. Subsequent to the Centennial PEA being completed, certain lease agreements with respect to the Centennial Project were not renewed and certain parcels of redundant land at the Centennial Project were sold; however, the impact to the Centennial PEA is immaterial. In 2006, the Company entered into an option agreement, as amended, to purchase uranium rights on certain areas of the Centennial Project for consideration of $1,895,000 plus contingent payments of $3,165,000. Pursuant to the agreement, the contingent 14 AZARGA URANIUM CORP. Management’s Discussion and Analysis For the year ended December 31, 2019 payments are payable upon receipt of regulatory permits and licenses allowing uranium production on the area of the Centennial Project pertaining to these uranium interests. Further, unless otherwise agreed, if the Company does not obtain such permits and licenses by September 27, 2019, the uranium rights, at the option of the seller, can be transferred back to the seller. To date, the Company has neither obtained the required regulatory permits and licenses nor has the Company been able to renegotiate the option agreement. However, the Company is attempting to renegotiate the option agreement and the seller has not exercised its option to have the uranium rights transferred back. As a result of the uncertainty surrounding this option agreement, which represents 5,760 of the 6,238 mineral acres at the Centennial Project, significant doubt over the future recoverability of the carrying value exists. Accordingly, during the year ended December 31, 2019, the Company recognized an impairment charge of $2,422,398 for the Centennial Project. Juniper Ridge Project (100% interest), Wyoming, USA The Company’s 100% owned Juniper Ridge Project is located in the southwest portion of Wyoming, approximately 10 miles west of the town of Baggs. The Juniper Ridge Project consists of approximately 640 surface acres and 3,240 net mineral acres of unpatented lode mining claims and a State of Wyoming mineral lease and is located within a brownfield site which has experienced extensive exploration, development, and mine production. In June 2017, a technical report was prepared by BRS Inc. and T.P. McNulty and Associates Inc. on the Juniper Ridge Project titled “Juniper Ridge Uranium Project, Amended and Restated 43-101 Mineral Resource and Preliminary Economic Assessment Technical Report” (the “Juniper Ridge PEA”) with an effective date of June 9, 2017. The Juniper 8 3 (5.1 O Ridge Project contains indicated uranium resources of 6.0 million pounds U 8 ) and inferred uranium resources of 0.2 million tons at an average grade of 0.058% U 8 3 ) at a 0.10 GT O million pounds U cut-off. 3 O 8 3 (0.1 million tons at an average grade of 0.085% U O The Juniper Ridge PEA resulted in a pre-tax net present value of $27.3 million at a discount rate of 8% and an internal rate of return of 26% compared to a post-tax net present value of $19.9 million at a discount rate of 8% and an internal rate of return of 22% based on open pit mining and heap leach extraction of uranium. The Juniper Ridge 8 3 PEA assumed uranium prices of $65/lb U , total direct operating costs of $39.77/lb O U 8 3 and capital expenditures of $36.7 million. O Details of the assumptions and parameters used with respect to the Juniper Ridge PEA, including quality estimates and information on data verification, are available under the SEDAR profile of URZ Energy at www.sedar.com. The Juniper Ridge PEA is preliminary in nature; it includes inferred mineral resources that are considered too speculative geologically to have the economic considerations applied to them that would enable them to be categorized as mineral reserves. There is no certainty that the Juniper Ridge PEA 15 AZARGA URANIUM CORP. Management’s Discussion and Analysis For the year ended December 31, 2019 will be realized. Mineral resources that are not mineral reserves do not have demonstrated economic viability. While local mineralization displays some of the characteristics of known uranium deposits in the Gas Hills uranium district and in the Powder River Basin of Wyoming, the mineralization at the Juniper Ridge Project is sandstone hosted. Data sources for the estimation of uranium mineral resources for the Juniper Ridge Project consist of 2,716 drill holes including radiometric equivalent data for 2,167 drill holes completed before 2011, Uranium Spectral Analysis Tool assay data for 400 drill holes completed during the 2011 drilling program, and radiometric equivalent and PFN assay data for 149 drill holes completed in 2012. The Company intends to continue to evaluate and review project geophysical logs and other data associated with the project to evaluate the possibility of future alternatives including updates to resource estimates and project economics. The Aladdin Project (100% interest) – Wyoming, USA The Aladdin Project is comprised of private leases that cover approximately 5,166 acres of surface rights and 4,618 acres of net mineral rights located in Wyoming along the Wyoming/South Dakota border on the northwestern flank of the Black Hills Uplift, within sandstones of the Lower Cretaceous-age Inyan Kara Group. The Aladdin Project is 80 miles northwest of the Dewey Burdock Project. Uranium resources at the Aladdin Project have developed within the same host rocks that contain the Dewey Burdock Project uranium resources. In June 2012, the Company completed a NI 43-101 compliant technical report for the Aladdin Project, with an effective date of June 21, 2012, describing the results of the Company’s confirmation drilling program and continued evaluation of the historic exploration drilling data from the Teton Exploration Company. The Aladdin Project 8 3 and inferred O contains indicated uranium resources of 1,038,023 pounds at 0.111% U 3 at a 0.20 GT cut-off. Mineral O uranium resources of 101,255 pounds at 0.119% U resources that are not mineral reserves do not have demonstrated economic viability. 8 In addition, using the same cut-off, the quantity of mineralization for the exploration target was determined to be 5.0 to 11.0 million pounds of uranium, averaging 0.11% - 8 3 0.12% U . In over 80% of the project area, the density of exploration drilling is light O and insufficient to calculate resources. In these lightly explored areas, there is sufficient drill hole control for subsurface geochemical mapping and thirteen mineralized trends were identified. This estimation used a range of i) mineralized trend lengths, ii) widths of mineralization and iii) grades of mineralization. The grade and quantity of this exploration target is conceptual in nature and there has been insufficient exploration work performed with respect to the exploration target to define a NI 43-101 compliant resource. It is uncertain whether further exploration of the exploration target will result in the delineation of a NI 43-101 compliant resource. 16 AZARGA URANIUM CORP. Management’s Discussion and Analysis For the year ended December 31, 2019 Details of the assumptions and parameters used with respect to the Aladdin NI 43-101 compliant technical report, including quality estimates and information on data verification, are available under the Company’s profile on SEDAR at www.sedar.com. Subsequent to the NI 43-101 compliant technical report being completed, certain lease agreements/claims were not renewed; however, the impact to the Aladdin NI 43-101 technical report is immaterial. The Company is currently evaluating the Aladdin Project in order to determine how to maximize the value that can be extracted from this project. Kyzyl Ompul Project (93.1% interest sold in October 2019) – Kyrgyz Republic In October 2019, the Company sold its 93.1% interest in UrAsia in Kyrgyzstan Limited Liability Company (“UrAsia”) to Central Asian Uranium Company Limited Liability Company (“Central”) for $232,750. In addition, UrAsia granted the Company a 1.862% NSR royalty on any future uranium production from the Kyzyl Ompul Project up to $4,655,000. UrAsia held a 100% interest in the Kyzyl Ompul Project. In April 2018, as amended, UrAsia entered into an earn-in agreement (the “Earn-in Agreement”) with Central pursuant to which Central had an option to earn a 100% interest in the Kyzyl Ompul Project in exchange for $5,850,000 in cash payments and a commitment to fund $1,500,000 of exploration and development expenditures through December 1, 2020. During the year ended December 31, 2019 and 2018, Central made cash payments of $130,000 and $290,000, respectively, to the Company under the Earn- in Agreement. In May 2019, the Kyrgyz Republic’s parliament voted to ban uranium exploration and mining in the country. The Kyzyl Ompul Project exploration license was subsequently suspended due to force majeure circumstances, among other reasons, resulting from the Kyrgyz Republic government’s actions. The Company determined that these events in the Kyrgyz Republic cast significant doubt over the future validity of the Company’s exploration license on the Kyzyl Ompul Project as well as on the future cash flows expected under the Earn-in Agreement. Accordingly, during the year ended December 31, 2019, the Company recognized an impairment charge of $4,140,444 for the Kyzyl Ompul Project. 17 AZARGA URANIUM CORP. Management’s Discussion and Analysis For the year ended December 31, 2019 QUALIFIED PERSON Disclosure of a scientific or technical nature in this MD&A has been reviewed and approved by John Mays, P.E., Chief Operating Officer and a “qualified person” as defined under NI 43-101. SELECTED ANNUAL INFORMATION Year Ended December 31, 2019 Year Ended December 31, 2018 Year Ended December 31, 2017 Statement of Loss: Net revenues Net loss Net loss per share, basic and diluted Financial Position: Total assets Non-current liabilities Dividends $Nil $7,737,996 $Nil $2,408,725 $Nil $5,280,632 $0.05 $0.02 $0.07 $41,850,626 $47,304,353 $33,695,520 $4,854,886 $3,769,217 $Nil $Nil $6,229,824 $Nil The net loss for the year ended December 31, 2019 included a $6.6 million impairment of exploration and evaluation assets related to the Centennial and Kyzyl Ompul projects. The net loss for the year ended December 31, 2017 included a $6.3 million impairment of exploration and evaluation assets related to Kyzyl Ompul project and an associated $2,236,000 deferred income tax recovery. 18 AZARGA URANIUM CORP. Management’s Discussion and Analysis For the year ended December 31, 2019 RESULTS OF OPERATIONS – YEAR ENDED DECEMBER 31, 2019 The consolidated net loss for the year ended December 31, 2019 was $8,289,158 compared to $2,408,725 for the year ended December 31, 2018. The significant changes between the current period and the comparative period are discussed below: Administrative expenses totaled $1,943,285 for the year ended December 31, 2019 compared to $2,040,580 for the year ended December 31, 2018. The decrease in administrative expenses primarily related to reduced corporate administration due to cost cutting measures. During the year ended December 31, 2019, the Company recognized an impairment charge of $2,422,398 for the Centennial Project. Finance costs totaled $9,734 for the year ended December 31, 2019 compared to $154,913 for the year ended December 31, 2018. Finance costs for 2019 related to interest expense on the Company’s operating lease obligations while the finance costs for 2018 related primarily to interest expense on the $1,776,000 shareholder loan which was settled in July 2018 through the issuance of common shares of the Company. The Company recognized an unrealized gain on warrant liabilities of $371,983 for the year ended December 31, 2019 compared to $51,789 for the year ended December 31, 2018. In October 2019, the Company sold its Kyzyl Ompul project located in Kyrgyzstan. The Company’s operations in Kyrgyzstan represented a separate geographical segment and accordingly the Company has presented these operations as discontinued operations for years ended December 31, 2019 and 2018. The net loss from discontinued operations for the year ended December 31, 2019 was $3,763,180 compared to $117,560 for the year ended December 31, 2018. The net loss from discontinued operations for the current year includes: • • • • an impairment charge of $4,140,444 for the Kyzyl Ompul Project; a reversal of deferred income tax liabilities of $999,597 on the impairment charge to the Kyzyl Ompul Project; a foreign exchange loss of $1,080,330; and a gain on sale of UrAsia of $499,173. 19 AZARGA URANIUM CORP. Management’s Discussion and Analysis For the year ended December 31, 2019 SUMMARY OF QUARTERLY RESULTS The following tables provide selected quarterly financial information for the most recent eight quarters. 3 Months Ended 3 Months Ended December 31, September 30, (1) 2019 2019 3 Months Ended June 30, (2) 2019 3 Months Ended March 31, 2019 Total revenues $ - $ - $ - $ - Net loss $ (170,830) $ (2,882,698) $ (4,492,364) $ (192,104) Net loss per share, basic and diluted $ (0.00) $ (0.01) $ (0.03) $ (0.00) 3 Months Ended 3 Months Ended December 31, September 30, 2018 2018 3 Months Ended June 30, 2018 3 Months Ended March 31, 2018 Total revenues $ - $ - $ - $ - Net loss $ (986,839) $ (557,452) $ (238,442) $ (625,992) Net loss per share, basic and diluted $ (0.01) $ (0.00) $ (0.00) $ (0.01) (1) The three months ended September 30, 2019 included an impairment charge of $2,422,398 for the Centennial Project. (2) The three months ended June 30, 2019 included an impairment charge of $4,140,444 for the Kyzyl Ompul Project. 20 AZARGA URANIUM CORP. Management’s Discussion and Analysis For the year ended December 31, 2019 FOURTH QUARTER 2019 The Company began the fourth quarter with a cash balance of $343,778. During the three months ended December 31, 2019, the Company expended $180,280 on operating activities, net of working capital changes, expended $167,245 on investing activities, and received $191,409 from financing activities, with a negative $3,215 effect of foreign exchange on cash to end the quarter and the year with $184,447 cash. LIQUIDITY AND CAPITAL RESOURCES The Company began the fiscal year with a cash balance of $352,001. During the year ended December 31, 2019, the Company expended $1,489,506 on operating activities, net of working capital changes, expended $1,115,148 on investing activities, and received $2,441,025 from financing activities, with a negative $3,925 effect of foreign exchange on cash to end at December 31, 2019 with a cash balance of $184,447. In March 2019, the Company closed a non-brokered private placement for gross proceeds of $2,266,169 (C$3,014,391) through the issuance of 13,106,046 units at a price of C$0.23 per unit. Each unit consists of one common share and one-half of one share purchase warrant. Each whole warrant entitles the holder thereof to purchase one common share at a price of C$0.31 per share until March 20, 2022. The Company paid cash finder’s fees of $5,696 and other share issue costs of $10,857. The Company’s capital risk management objectives have been established to safeguard the Company’s ability to continue as a going concern in order to support the Company’s permitting and exploration and development of its mineral properties and to maintain a flexible capital structure which optimizes the cost of capital at an acceptable risk. To facilitate the management of its capital requirements, the Company prepares annual expenditure budgets that are updated as necessary depending on various factors, including capital deployment, progress on permitting, results from the exploration and development of its properties and general industry conditions. The annual and updated budgets are approved by the Board of Directors. To date, the Company has not generated revenues from operations and is currently in the exploration and development stage. As at December 31, 2019, the Company had a working capital deficit of $630,518 and an accumulated deficit of $26,988,501 and will continue incurring losses for the foreseeable future. Additional funding will be required by the Company to complete its strategic objectives and continue as a going concern. There is no certainty that additional financing, at terms that are acceptable to the Company, will be available. Further, at present, the COVID-19 pandemic is negatively impacting financial markets globally and this may adversely affect the Company’s ability to raise capital for future operations and exploration and development of the Company’s mineral properties. The Company has successfully raised financing in the past and will continue to assess available alternatives; however, there is no assurance that the Company will be able to raise additional funds in the future. These material uncertainties cast significant doubt on the Company’s ability to continue as a going concern. 21 AZARGA URANIUM CORP. Management’s Discussion and Analysis For the year ended December 31, 2019 At the date of this MD&A, the Company has 10,454,490 exercisable share purchase warrants outstanding at exercise prices ranging from C$0.31 to C$0.36 and 11,795,000 exercisable stock options outstanding at exercise prices ranging from C$0.075 to C$0.36, that if exercised will raise additional capital for the Company. CONTRACTUAL OBLIGATIONS AND COMMITMENTS Within 1 year 2-4 years Over 4 years Total Annual license payments * Centennial option agreement ** Dewey Burdock option agreements $ 540,356 $ 390,097 $ 1,338,783 $ 2,269,236 - - 3,165,000 3,165,000 62,500 602,856 $ 255,000 645,097 $ 1,638,750 6,142,533 $ 1,956,250 7,390,486 $ * annual license payments include lease, mineral claim, and exploration license payments ** the contingent payments are payable upon receipt of regulatory permits and licenses allowing uranium production on the area of the Centennial Project pertaining to these uranium interests. Further, since the required licenses and permits were not received by September 27, 2019, the uranium rights, at the option of the seller, can be transferred back to the seller. The Company is attempting to renegotiate the Centennial Project option agreement. Certain of the Company’s commitments may provide the Company with the ability to avoid funding those commitments; however, the Company discloses the contractual maturities of the Company's commitments based on management's intent. 22 AZARGA URANIUM CORP. Management’s Discussion and Analysis For the year ended December 31, 2019 FINANCIAL INSTRUMENTS AND RISK MANAGEMENT Financial Instruments Financial instruments are classified into one of the following categories: fair value through profit or loss; fair value through other comprehensive income (loss); or, at amortized cost. The carrying values of the Company’s financial instruments are classified into the following categories: As at December 31, Financial assets Amortized cost Cash Restricted cash Reclamation bonds Financial liabilities Amortized cost 2019 2018 $ $ $ 184,447 22,716 - 207,163 As at December 31, $ 352,001 39,963 99,000 490,964 2019 2018 Trade and other payables Decommissioning liabilities Operating lease obligations Fair value through profit or loss $ 863,864 251,550 115,459 $ 1,452,085 223,442 - Warrant liabilities $ 265,029 1,495,902 $ 247,654 1,923,181 23 AZARGA URANIUM CORP. Management’s Discussion and Analysis For the year ended December 31, 2019 Fair value The fair value of financial assets and financial liabilities measured at amortized cost is determined in accordance with generally accepted pricing models based on discounted cash flow analysis or using prices from observable current market transactions. The Company considers that the carrying amount of all its financial assets and financial liabilities measured at amortized cost approximates their fair value. The Company’s financial instruments recorded at fair value require disclosure about how the fair value was determined based on significant levels of inputs described in the following hierarchy: • • • Level 1 fair value measurements are those derived from quoted prices in active markets for identical assets or liabilities. Level 2 fair value measurements are those derived from inputs other than quoted prices included within Level 1, that are observable either directly or indirectly. Level 3 fair value measurements are those derived from valuation techniques that include inputs that are not based on observable market data. The fair value of the Company’s warrant liabilities is recorded at fair value using Level 3 of the fair value hierarchy. The carrying value of the warrant liabilities is determined using the Black-Scholes option pricing model. The carrying values of cash and trade and other payables approximate their fair values because of the short-term nature of these financial instruments and are classified as financial assets and liabilities at amortized cost and are reported at amortized cost. The carrying values of restricted cash, reclamation bonds, decommissioning liabilities, and operating lease obligations approximate their fair values and are classified as financial assets and liabilities at amortized cost and are reported at amortized cost. Financial risk management objectives and policies The financial risk arising from the Company’s operations are market risk, credit risk, and liquidity risk. These risks arise from the normal course of operations and all transactions undertaken are to support the Company’s ability to continue as a going concern. The risks associated with these financial instruments and the policies on how to mitigate these risks are set out below. Management of the Company manages and monitors these exposures to ensure appropriate measures are implemented on a timely and effective manner. During the year ended December 31, 2019, there were no significant changes in the Company’s financial risk management objectives and policies. The Company’s risk exposure and the impact on the Company’s financial instruments are summarized below: 24 AZARGA URANIUM CORP. Management’s Discussion and Analysis For the year ended December 31, 2019 Market risk Market risk is the risk that the fair value of the future cash flows of a financial instrument will fluctuate due to changes in market factors. Market risk comprises three types of risks: currency risk, price risk and interest rate risk: Currency risk Currency risk is the risk that the fair values or future cash flows of the Company’s financial instruments will fluctuate because of changes in foreign currency exchange rates. The Company is exposed to currency risk through financial assets and liabilities denominated in currencies other than the United States Dollar. Management believes the currency risk related to currency conversions is minimal and therefore, does not hedge its currency risk. Price risk Price risk is the risk that the fair value of future cash flows of the Company’s financial instruments will fluctuate because of changes in market prices. The Company is exposed to the risk of fluctuations in prevailing market prices for its uranium products. However, as the Company is currently an exploration and development stage company, the risk is insignificant. Interest rate risk Interest rate risk is the risk that the fair values and future cash flows of the Company will fluctuate because of changes in market interest rates. The Company is exposed to interest rate risk to the extent that the cash maintained at the financial institutions is subject to a floating rate of interest. The interest rate risk on cash is not significant. Credit risk Credit risk is the risk of potential loss to the Company if the counterparty to a financial instrument fails to meet its contractual obligations. The Company is exposed to credit risk associated with its cash. The Company’s maximum exposure to credit risk is equal to the carrying amount of its cash. The Company’s credit risk on cash arises from default of the counterparty. The Company limits its exposure to counterparty credit risk on cash by only dealing with financial institutions with high credit ratings. 25 AZARGA URANIUM CORP. Management’s Discussion and Analysis For the year ended December 31, 2019 Liquidity risk Liquidity risk is the risk that the Company will not be able to settle or manage its obligations associated with financial liabilities. The Company’s approach to managing liquidity is to evaluate current and expected liquidity requirements under both normal and stressed conditions to ensure that it maintains sufficient reserves of cash, access to financing facilities or access to cash generating opportunities, such as the liquidation of non-core and redundant assets to meet expected expenditures. The Company prepares annual expenditure budgets that are updated as necessary depending on various factors, including capital deployment, progress on permitting, results from the exploration and development of its properties and general industry conditions. The annual and updated budgets are approved by the Board of Directors. The Company’s current and expected remaining contractual maturities for its financial liabilities with agreed repayment periods are presented below. The table includes the undiscounted cash flows of financial liabilities based on the earliest date on which the Company can be required to satisfy the liabilities. As at December 31, 2019 1-3 months Trade and other payables Operating lease obligations $ $ 728,864 15,573 744,437 1-5 years Total $ 70,000 124,526 194,526 $ $ 863,864 180,709 1,044,573 $ 3 months - 1 year $ 65,000 40,610 105,610 $ 26 AZARGA URANIUM CORP. Management’s Discussion and Analysis For the year ended December 31, 2019 RELATED PARTY TRANSACTIONS AND BALANCES Related party transactions During the year ended December 31, 2019, the Company recorded related party transactions with management including: • The issuance of 800,000 common shares to executive management of the Company to settle employee remuneration. During the year ended December 31, 2018, the Company recorded related party transactions with directors, management and shareholders including: • • • • • Interest accruing of $143,219 to certain shareholders of the Company on the Shareholders’ Loan; The issuance of 11,269,243 common shares valued at $2,201,024 in full and final settlement of the Shareholders’ Loan; The issuance of 186,512 common shares to a shareholder of the Company to settle of trade and other payables of $36,169; The issuance of 578,822 common shares to a director of the Company to settle trade and other payables of $187,500; and The issuance of 450,000 common shares to executive management of the Company to settle employee remuneration. Key management personnel compensation The remuneration of the Company’s directors and other key management personnel, who have the authority and responsibility for planning, directing and controlling the activities of the Company, consisted of the following: Year ended December 31, 2019 2018 Salaries and benefits * Consulting and professional fees Share-based compensation $ $ 837,365 161,881 207,595 1,206,841 841,476 139,926 200,791 1,182,193 $ $ * Salaries and benefits are included in administrative expenses and exploration and evaluation assets. 27 AZARGA URANIUM CORP. Management’s Discussion and Analysis For the year ended December 31, 2019 Related party liabilities As at December 31, 2019 2018 Trade and other payables - current Trade and other payables - non-current $ $ 276,042 70,000 346,042 176,422 150,000 326,422 $ $ Included in trade and other payables as at December 31, 2019 and 2018 is $346,042 and $326,422, respectively, owing to related parties of the Company, of which $170,000 and $230,000, respectively, is owed to a former director of the Company. On February 14, 2018, the Company entered into an amended severance agreement with this director to pay the remaining severance payments over 49 months, whereby the amount payable was increased to $370,000. During the year ended December 31, 2019 and 2018, the Company paid the former director $60,000 and $140,000, respectively, towards the outstanding balance. The Company has classified $100,000 as current and $70,000 as non-current as at December 31, 2019 and $80,000 as current and $150,000 as non- current as at December 31, 2018. In June 2018, the Company settled other deferred compensation of $187,500 with this same former director through the issuance of 578,822 common shares of the Company. OUTSTANDING SHARE DATA AS AT THE DATE OF THIS MD&A The Company has authorized the issuance of an unlimited number of common and preferred shares with no par value. As at December 31, 2019 and through the date of this MD&A, the following common shares, share purchase warrants and stock options are issued and outstanding: Balance, December 31, 2019 Issuance of shares for ESPP Issuance of shares for DSA Balance as at the date of this MD&A Common Shares 185,543,926 457,618 87,543 Share Purchase Warrants 10,454,490 - - Stock Options 14,622,500 - - 186,089,087 10,454,490 14,622,500 28 AZARGA URANIUM CORP. Management’s Discussion and Analysis For the year ended December 31, 2019 USE OF ACCOUNTING ESTIMATES, JUDGEMENTS AND ASSUMPTIONS Information about judgments and estimates in applying accounting policies that have the most significant effect on the amounts recognized in the consolidated financial statements are as follows: Liquidity and going concern assumption In the determination of the Company’s ability to meet its ongoing obligations and future contractual commitments management relies on the Company’s planning, budgeting and forecasting process to help determine the funds required to support the Company’s normal operations on an ongoing basis and its expansionary plans. The key inputs used by the Company in this process include forecasted capital deployment, progress on permitting, results from the exploration and development of its properties and general industry conditions. Changes in these inputs may alter the Company’s ability to meet its ongoing obligations and future contractual commitments and could result in adjustments to the amounts and classifications of assets and liabilities should the Company be unable to continue as a going concern. Indicators of impairment of exploration and evaluation assets In accordance with the Company’s accounting policy for its exploration and evaluation assets, expenditures on its uranium properties are capitalized. There is no certainty that the expenditures made by the Company in the exploration of its property interests will result in discoveries of commercial quantities of uranium. The Company applies judgment to determine whether indicators of impairment exist for these capitalized costs. Management uses several criteria in making this assessment, including the period for which the Company has the right to explore, expected renewals of exploration rights, whether substantive expenditures on further exploration and evaluation of its properties are budgeted, and evaluation of the results of exploration and evaluation activities up to the reporting date. Carrying value of exploration and evaluation assets If any indicators of impairment are noted then management reviews the carrying value of the Company’s exploration and evaluation assets to determine whether an impairment charge should be recorded on any of its projects. Management determines the recoverable amount of its individual exploration and evaluation assets using the higher of fair value less costs to sell or value-in-use. This determination and the individual assumptions require that management decide whether impairment should be recorded based on the best available information at each reporting period. Changes in these assumptions may alter the results of impairment testing, impairment charges recognized in profit or loss and the resulting carrying amounts of assets. 29 AZARGA URANIUM CORP. Management’s Discussion and Analysis For the year ended December 31, 2019 During the year ended December 31, 2019, the Company recorded an impairment charge of $4,140,444 on its Kyzyl Ompul project in Kyrgyzstan and an impairment charge of $2,422,398 on its Centennial project in Colorado. Capitalization of exploration and evaluation costs Management has determined that exploration and evaluation costs incurred or acquired during the year will have future economic benefits and are economically recoverable. In making this judgment, management has assessed various sources of information including, but not limited to, the geologic and metallurgic information, scoping studies, preliminary economic assessments, proximity of operating facilities, operating management expertise and existing permits. Determining if an acquisition is a business combination or an asset acquisition As required by IFRS 3 Business Combinations (“IFRS 3”), the Company is required to determine whether the acquisition of URZ Energy should be accounted for as a business combination or an asset acquisition. Under IFRS 3, the components of a business must include inputs, processes and outputs. Management has determined that URZ Energy did not include all the necessary components of a business. Accordingly, the acquisition of URZ Energy has been recorded as an acquisition of URZ’s net assets, consisting of URZ Energy’s exploration and evaluation assets and working capital. Identifying the acquirer in an acquisition As required by IFRS 3 and IFRS 10 Consolidated Financial Statements, the Company is required to determine whether it is the acquirer or acquiree in the URZ Energy acquisition. The acquirer is the entity that obtains control of the acquiree in the acquisition. If it is not clear which company is the acquirer, additional information must be considered, such as the combined entity’s relative voting rights, existence of a large minority voting interest, composition of the governing body and senior management, and the terms behind the exchange of equity interests. Management has determined that Azarga Uranium is the acquirer of URZ Energy. Determination of asset and liability fair values Business combinations and asset acquisitions require judgment and estimates to be made at the date of acquisition in relation to determining asset and liability fair values. The information necessary to measure the fair values as at the acquisition date of assets acquired and liabilities assumed requires management make certain judgments and estimates about future events, including but not limited to estimates of mineral resources acquired, exploration potential, future operating costs and capital expenditures, future metal prices, and long-term foreign exchange rates. 30 AZARGA URANIUM CORP. Management’s Discussion and Analysis For the year ended December 31, 2019 RECENT ACCOUNTING PRONOUNCEMENTS Adoption of new standards, interpretations and amendments The Company adopted the requirements of IFRS 16 – Leases (“IFRS 16”) as of January 1, 2019. IFRS 16 applies a control model to the identification of leases, distinguishing between a lease and a service contract on the basis of whether the customer controls the leased asset. For assets that meet the definition of a lease, IFRS 16 requires a single, on- balance sheet accounting model similar to finance lease accounting, with exceptions for short-term leases, leases of low value assets, and mineral exploration leases. Accordingly, IFRS 16 applies only to the Company’s office leases. The Company has applied the modified retrospective approach in adopting IFRS 16. On January 1, 2019 the Company recorded right-of-use assets totaling $152,214 with a corresponding entry to operating lease obligations. The Company calculated the present value of the minimum lease payments using an incremental borrowing rate of 7% and an exchange rate of $/C$ 1.3642. Thereafter, the right-of-use assets are depreciated on a straight-line basis over the term of the leases, which range from 2 to 5 years. Standards issued but not yet effective A number of new standards, amendments to standards and interpretations are not yet effective as of December 31, 2019 and have not been applied in preparing the Company’s consolidated financial statements. The standards are not expected to materially impact the Company’s financial position or results of operations. PROPOSED TRANSACTIONS As is typical of the mineral exploration and development industry, the Company is continually reviewing potential acquisition, investment and joint venture transactions and opportunities that could enhance shareholder value. There is currently no proposed asset or business acquisitions or dispositions, other than those discussed in this MD&A and those in the ordinary course, before the Board of Directors for consideration. While we remain focused on our plans to continue exploration and development on our material property, should we enter into agreements in the future on new properties, we may be required to make cash payments and complete work expenditure commitments under those agreements. 31 AZARGA URANIUM CORP. Management’s Discussion and Analysis For the year ended December 31, 2019 DISCLOSURE CONTROLS AND PROCEDURES Disclosure controls and procedures are designed to provide reasonable assurance that information required to be disclosed by the Company in its annual filings, interim filings or other reports filed or submitted by it under securities legislation is recorded, processed, summarized and reported within the time periods specified in the securities legislation and include controls and procedures designed to ensure that information required to be disclosed by the Company in its annual filings, interim filings or other reports filed or submitted under securities legislation is accumulated and communicated to the Company’s management, including its CEO and CFO, as appropriate to allow timely decisions regarding required disclosure. Management, including the CEO and CFO, has evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures. As of December 31, 2019, the CEO and CFO have each concluded that the Company’s disclosure controls and procedures, as required by the applicable rules of the Canadian Securities Administrators (or Canadian securities regulatory authorities), are effective to achieve the purpose for which they have been designed. It should be noted that while the Company’s CEO and CFO believe that the Company’s disclosure controls and processes will provide a reasonable level of assurance and that they are effective, they do not expect that the disclosure controls and processes will prevent all errors and frauds. A control system, no matter how well conceived or operated, can provide only reasonable, not absolute assurance that the objectives of the control system are met. INTERNAL CONTROLS OVER FINANCIAL REPORTING The Company’s management, with the participation of the Company’s CEO and CFO, are responsible for establishing and maintaining adequate internal control over financial reporting. The Company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with IFRS. Any system of internal control over financial reporting, no matter how well designed, has inherent limitations. As a result, even those systems determined to be effective can only provide reasonable assurance regarding the preparation of financial statements. Internal controls over financial reporting are designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements in accordance with IFRS. Management is also responsible for the design of the Company’s internal controls over financial reporting in order to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with IFRS. The Company’s internal controls over financial reporting include policies and procedures that: pertain to the maintenance of records that, in reasonable detail accurately and fairly 32 AZARGA URANIUM CORP. Management’s Discussion and Analysis For the year ended December 31, 2019 reflect the transactions and disposition of assets; provide reasonable assurance that transactions are recorded as necessary to permit preparation of the financial statements in accordance with IFRS and that receipts and expenditures are being made only in accordance with authorization of management and directors of the Company; and provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of assets that could have a material effect on the financial statements. Because of their inherent limitations, internal controls over financial reporting can provide only reasonable assurance and may not prevent or detect misstatements. Furthermore, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. The Company’s management, under the supervision of the CEO and the CFO, has evaluated the effectiveness of the Company’s internal controls over financial reporting using the framework and criteria as required by the applicable rules of the Canadian Securities Administrators (or Canadian securities regulatory authorities). Based on this evaluation, management has concluded that internal controls over financial reporting were effective as at December 31, 2019. There were no changes in the Company’s internal controls over financial reporting that occurred during the year ended December 31, 2019, that have materially affected, or are likely to materially affect, the Company’s internal control over financial reporting. DISCLAIMER FOR FORWARD-LOOKING STATEMENTS This MD&A may include or incorporate by reference certain statements or disclosures that constitute “forward-looking information” under applicable securities laws. All information, other than statements of historical fact, included or incorporated by reference in this MD&A that addresses activities, events or developments that the Company or its management expects or anticipates will or may occur in the future constitute forward-looking information. Forward-looking information is provided through statements that are not historical facts and are generally, but not always, identified by the words “expects”, “plans”, “anticipates”, “believes”, “intends”, “estimates”, “projects”, “potential” and similar expressions, or that events or conditions “will”, “would”, “may”, “could” or “should” occur or continue. These forward-looking statements are based on certain assumptions and analyses made by the Company and its management in light of its experience and its perception of historical trends, current conditions and expected future developments, as well as other factors it believes are appropriate in the circumstances. Although the Company believes such forward-looking information and the expectations expressed in them are based on reasonable assumptions, investors are cautioned that any such information and statements are not guarantees of future realities and actual realities 33 AZARGA URANIUM CORP. Management’s Discussion and Analysis For the year ended December 31, 2019 or developments may differ materially from those projected in forward-looking information and statements. Whether actual results will conform to the expectations of the Company is subject to a number of risks and uncertainties, including those risk factors listed under “Risk Factors” in the Company’s Annual Information Form and the documents incorporated herein by reference. In particular, if any of the risk factors materialize, the expectations, and the predictions based on them, of the Company may need to be re-evaluated. Consequently, all of the forward-looking information in this MD&A and the documents incorporated herein by reference is expressly qualified by these cautionary statements and other cautionary statements or factors contained herein or in documents incorporated by reference herein, and there can be no assurance that the actual results or developments anticipated by the Company will be realized or, even if substantially realized, that they will have the expected consequences for the Company. Forward-looking statements are based on the beliefs, estimates and opinions of the Company’s management on the date the statements are made. Unless otherwise required by law, the Company expressly disclaims any intention and assumes no obligation to update or revise any forward-looking statements in the event that management’s beliefs, estimates or opinions, or other factors, should change, whether as a result of new information, future events or otherwise, and the Company does not have any policies or procedures in place concerning the updating of forward-looking information other than those required under applicable securities laws. Accordingly, readers should not place undue reliance on forward-looking statements or forward-looking information. 34
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