**Exhibit 15.1**

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

**Tanzanian Royalty Exploration Corporation**

** **

**Consolidated Financial Statements**

** **

**For the years ended**

**August 31, 2018 and 2017**

** **

**(expressed in Canadian dollars)**

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**MANAGEMENT’S RESPONSIBILITY FOR FINANCIAL REPORTING**

 

 

The accompanying consolidated financial statements ofTanzanian Royalty Exploration Corporation were prepared by management in accordance with International Financial Reporting Standards,as issued by the International Accounting Standards Board. Management acknowledges responsibility for the preparation and presentationof the consolidated financial statements, including responsibility for significant accounting judgments and estimates and the choiceof accounting principles and methods that are appropriate to the Company’s circumstances. The significant accounting policiesof the Company are summarized in Note 3 to the consolidated financial statements.

 

Management has established processes, which are in placeto provide them with sufficient knowledge to support management representations that they have exercised reasonable diligence that(i) the consolidated financial statements do not contain any untrue statement of material fact or omit to state a material factrequired to be stated or that is necessary to make a statement not misleading in light of the circumstances under which it is made,as of the date of and for the year presented by the consolidated financial statements and (ii) the consolidated financial statementsfairly present in all material respects the financial condition and results of operations of the Company, as of the date of andfor the year presented by the consolidated financial statements.

 

The Board of Directors is responsible for ensuring thatmanagement fulfills its financial reporting responsibilities and for reviewing and approving the consolidated financial statementstogether with other financial information. An Audit Committee assists the Board of Directors in fulfilling this responsibility.The Audit Committee meets with management to review the internal controls over the financial reporting process. The Audit Committeemeets with management as well as with the independent auditors to review the consolidated financial statements and the auditors'report. The Audit Committee also reviews the Annual Report to ensure that the financial information reported therein is consistentwith the information presented in the consolidated financial statements. The Audit Committee reports its findings to the Boardof Directors for its consideration in approving the consolidated financial statements together with other financial informationof the Company for issuance to the shareholders.

 

Management recognizes its responsibility for conductingthe Company’s affairs in compliance with established financial standards, and applicable laws and regulations, and for maintainingproper standards of conduct for its activities.

 

 

| “Jeffrey R. Duval”                          |   | “Marco Guidi”                    |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|---------------------------------------------------------------------------------------------------------------------------------------------|
| Jeffrey R. Duval                                                                                                                                                                     |   | Marco Guidi                                                                                                                                 |
| Acting Chief Executive Officer                                                                                                                                                       |   | Chief Financial Officer                                                                                                                     |

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2

 

 

**REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

 

To the Shareholders and Directors of TanzanianRoyalty Exploration Corporation

 

***Opinion on the Consolidated Financial Statements***

 

We have audited the accompanying consolidated financial statementsof Tanzanian Royalty Exploration Corporation (the “Company”), which comprise theconsolidated statements of financial position as at August 31, 2018 and August 31, 2017, the consolidated statements of comprehensiveloss, changes in equity and cash flow for the years then ended, and the related notes, comprising a summary of significant accountingpolicies and other explanatory information (collectively referred to as the “consolidated financial statements”).

 

In our opinion, the consolidated financial statements present fairly,in all material respects, the financial position of the Company as at August 31, 2018 and August 31, 2017, and its financial performanceand its cash flows for the years then ended in accordance with International Financial Reporting Standards as issued by the InternationalAccounting Standards Board.

** **

***Material Uncertainty Related to Going Concern***

 

Without modifying our opinion, we draw attention to Note 1 to theconsolidated financial statements, which indicates that at August 31, 2018 the Company had a working capital deficiency of $12,010,685,had not yet achieved profitable operations and has accumulated losses of $103,263,959. As stated in Note 1 to the consolidatedfinancial statements, these events or conditions, along with other matters as set forth in Note 1, indicate that a material uncertaintyexists that casts substantial doubt on the Company’s ability to continue as a going concern.

** **

***Basis for Opinion***

 

**Management’s Responsibility for the Consolidated FinancialStatements**

 

Management is responsible for the preparation and fair presentationof these consolidated financial statements in accordance with International Financial Reporting Standards as issued by the InternationalAccounting Standards Board, and for such internal control as management determines is necessary to enable the preparation of consolidatedfinancial statements that are free from material misstatement, whether due to fraud or error.

 

**Auditors’ Responsibility**

 

Our responsibility is to express an opinion on these consolidatedfinancial statements based on our audits. We conducted our audits in accordance with Canadian generally accepted auditing standardsand the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”). Those standards requirethat we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are freefrom material misstatement, whether due to error or fraud. Those standards also require that we comply with ethical requirements,including independence. We are required to be independent with respect to the Company in accordance with the ethical requirementsthat are relevant to our audit of the consolidated financial statements in Canada, the U.S. federal securities laws and the applicablerules and regulations of the Securities and Exchange Commission and the PCAOB. We are a public accounting firm registered withthe PCAOB.

*(continued...)*

** **

3

 

 

 

 

An audit includes performing procedures to assess the risks of materialmisstatements of the consolidated financial statements, whether due to error or fraud, and performing procedures to respond tothose risks. Such procedures included obtaining and examining, on a test basis, audit evidence regarding the amounts and disclosuresin the consolidated financial statements. The procedures selected depend on our judgment, including the assessment of the risksof material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments,we consider internal control relevant to the Company’s preparation and fair presentation of the consolidated financial statementsin order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinionon the effectiveness of the Company’s internal control. The Company is not required to have, nor were we engaged toperform, an audit of its internal control over financial reporting. Accordingly, we express no such opinion.

 

An audit also includes evaluating the appropriateness of accountingpolicies and principles used and the reasonableness of accounting estimates made by management, as well as evaluating the overallpresentation of the consolidated financial statements.

 

We believe that the audit evidence we have obtained in our auditsis sufficient and appropriate to provide a reasonable basis for our audit opinion.

 

 

We have served as the Company’s auditor since 2016.

 

Vancouver, Canada

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November 29, 2018

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4

 

**MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING**

 

Management of the Company is responsible for establishingand maintaining adequate internal control over financial reporting for the Company as defined in Rule 13a-15(f) under the Securitiesand Exchange Act of 1934. Management of the Company is responsible for establishing and maintaining adequate internal control overfinancial reporting for the Company.  The Company’s management, including our Chief Executive Officer and Chief FinancialOfficer, conducted an evaluation of the effectiveness of our internal control over financial reporting as of August 31, 2018. In making this assessment, the Company’s management used the criteria established in Internal Control – IntegratedFramework, issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO 2013”).  TheCompany’s management has completed their review and testing of the Company’s internal control over financial reportingand concluded that they are appropriately designed and operating effectively as of August 31, 2018.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

5

 

**Tanzanian Royalty Exploration Corporation  Consolidated Statements of Financial Position**(Expressed in Canadian Dollars)

 

| As at                                                     |   | August 31, 2018 |                |   | August 31, 2017 |   |
|-----------------------------------------------------------|--------|-----------------|---------------------|--------|-----------------|--------|
|                                                      |   |            |                |   |            |   |
| Assets                                                    |   |            |                |   |            |   |   |   |
| Current Assets                                            |   |            |                |   |            |   |   |   |
| Cash *(Note 16)*                                          |   | $               | 426,062             |   |            | $      | 1,011,293 |   |
| Other receivables *(Note 12)*                             |   |            | 264,803             |   |            |   | 329,008 |   |
| Inventory *(Note 15)*                                     |   |            | 515,391             |   |            |   | 507,489 |   |
| Prepaid and other assets *(Note 13)*                      |   |            | 116,051             |   |            |   | 74,298 |   |
|                                                      |   |            | 1,322,307           |   |            |   | 1,922,088 |   |
| Property, plant and equipment (Note 5)                    |   |            | 1,999,979           |   |            |   | 2,510,697 |   |
| Mineral properties and deferred exploration (Note 4)      |   |            | 49,912,854          |   |            |   | 46,920,303 |   |
|                                                      |   | $               | 53,235,140          |   |            | $      | 51,353,088 |   |
|                                                      |   |            |                |   |            |   |   |   |
| Liabilities                                               |   |            |                |   |            |   |   |   |
| Current Liabilities                                       |   |            |                |   |            |   |   |   |
| Trade, other payables and accrued liabilities *(Note 14)* |   | $               | 5,767,402           |   |            | $      | 5,216,703 |   |
| Leases payable *(Note 5)*                                 |   |            | 67,819              |   |            |   | 56,631 |   |
| Convertible loan *(Note 23)*                              |   |            | 2,875,420           |   |            |   | 865,656 |   |
| Gold bullion loans *(Note 21)*                            |   |            | 4,622,351           |   |            |   | 2,335,474 |   |
|                                                      |   |            | 13,332,992          |   |            |   | 8,474,464 |   |
| Warrant liability (Note 6)                                |   |            | 4,850,000           |   |            |   | 4,850,000 |   |
| Gold bullion loans (Note 21)                              |   |            | —   |   |            |   | 1,059,524 |   |
| Asset Retirement Obligation (Note 19)                     |   |            | 726,143             |   |            |   | 715,057 |   |
|                                                      |   |            | 18,909,135          |   |            |   | 15,099,045 |   |
| Shareholders’ equity                                |   |            |                |   |            |   |   |   |
| **Share capital***(Note 6)*                               |   |            | 127,003,132         |   |            |   | 125,174,377 |   |
| **Share based payment reserve***(Note 8)*****             |   |            | 9,394,394           |   |            |   | 7,674,233 |   |
| **Warrants reserve***(Note 7)*****                        |   |            | 1,248,037           |   |            |   | 1,248,037 |   |
| Accumulated other comprehensive loss                      |   |            | (755,909            | )      |            |   | (2,176,352 | ) |
| Accumulated deficit                                       |   |            | (103,263,959        | )      |            |   | (96,566,577 | ) |
| Equity attributable to owners of the Company              |   |            | 33,625,695          |   |            |   | 35,353,718 |   |
| **Non-controlling interests***(Note 20, 4(a))*            |   |            | 700,310             |   |            |   | 900,325 |   |
| Total shareholders’ equity                          |   |            | 34,326,005          |   |            |   | 36,254,043 |   |
|                                                      |   | $               | 53,235,140          |   |            | $      | 51,353,088 |   |

 

Nature of operations and Going Concern (Note 1)

Segmented information (Note 17)

Commitments (Notes 4 and 18)

Events subsequent to the reporting period (Note 25)

 

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

 

6

**Tanzanian Royalty Exploration Corporation  Consolidated Statements of Comprehensive Loss**(Expressed in Canadian Dollars)

 

| Year ended August 31,                                                   |   | 2018   |                |   | 2017   |   |
|-------------------------------------------------------------------------|--------|--------|---------------------|--------|--------|--------|
| Administrative expenses                                                 |   |   |                |   |   |   |   |   |
| Depreciation (Note 5)                                                   |   | $      | 386,845             |   |   | $      | 421,983 |   |
| Consulting (Note 9)                                                     |   |   | 938,569             |   |   |   | 805,943 |   |
| Directors’ fees (Note 9)                                          |   |   | 111,625             |   |   |   | 186,826 |   |
| Office and general                                                      |   |   | 121,757             |   |   |   | 197,457 |   |
| Shareholder information                                                 |   |   | 343,658             |   |   |   | 476,285 |   |
| Professional fees (Note 9)                                              |   |   | 845,924             |   |   |   | 754,738 |   |
| Salaries and benefits (Note 6)                                          |   |   | 605,659             |   |   |   | 458,700 |   |
| Share based payments (Note 6)                                           |   |   | 1,598,883           |   |   |   | 1,772,663 |   |
| Travel and accommodation                                                |   |   | 24,335              |   |   |   | 31,267 |   |
|                                                                    |   |   | (4,977,255          | )      |   |   | (5,105,862 | ) |
| Other income (expenses)                                                 |   |   |                |   |   |   |   |   |
| Foreign exchange gain                                                   |   |   | 126,583             |   |   |   | 161,593 |   |
| Interest, net                                                           |   |   | (15,518             | )      |   |   | (22,528 | ) |
| Interest accretion (Notes 21 and 23)                                    |   |   | (819,060            | )      |   |   | (725,696 | ) |
| Accretion on asset retirement obligation (Note 19)                      |   |   | (11,086             | )      |   |   | (10,934 | ) |
| Finance costs (Note 22)                                                 |   |   | (549,213            | )      |   |   | (347,418 | ) |
| Exploration costs                                                       |   |   | (22,625             | )      |   |   | (53,194 | ) |
| Interest on leases (Note 5)                                             |   |   | (10,034             | )      |   |   | (24,362 | ) |
| Gain (loss) on disposal of property, plant and equipment                |   |   | (775                | )      |   |   | 2,030 |   |
| Loss on settlement of lawsuit                                           |   |   | (95,241             | )      |   |   | —   |   |
| Loss on shares issued for settlement of debt (Notes 6, 21 and 23)       |   |   | (522,226            | )      |   |   | (141,108 | ) |
| Write off of mineral properties and deferred exploration costs (Note 4) |   |   | —   |   |   |   | (124,717 | ) |
| Withholding tax costs                                                   |   |   | (947                | )      |   |   | (41,916 | ) |
| Net loss                                                                |   | $      | (6,897,397          | )      |   | $      | (6,434,112 | ) |
| Other comprehensive loss                                                |   |   |                |   |   |   |   |   |
| Foreign currency translation                                            |   |   | 1,420,443           |   |   |   | (2,176,352 | ) |
| Comprehensive loss                                                      |   | $      | (5,476,954          | )      |   | $      | (8,610,464 | ) |
|                                                                    |   |   |                |   |   |   |   |   |
|                                                                    |   |   |                |   |   |   |   |   |
| Parent                                                                  |   |   | (6,697,382          | )      |   |   | (5,965,758 | ) |
| Non-controlling interests                                               |   |   | (200,015            | )      |   |   | (468,354 | ) |
|                                                                    |   | $      | (6,897,397          | )      |   | $      | (6,434,112 | ) |
|                                                                    |   |   |                |   |   |   |   |   |
| Parent                                                                  |   |   | (6,116,153          | )      |   |   | (7,983,689 | ) |
| Non-controlling interests                                               |   |   | 639,199             |   |   |   | (626,775 | ) |
|                                                                    |   | $      | (5,476,954          | )      |   | $      | (8,610,464 | ) |
|                                                                    |   |   |                |   |   |   |   |   |
| Loss per share – basic and diluted attributable to Parent         |   | $      | (0.06               | )      |   | $      | (0.05 | ) |
| Weighted average # of shares outstanding – basic and diluted      |   |   | 122,905,190         |   |   |   | 117,699,647 |   |

 

****

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

 

7

**Tanzanian Royalty Exploration Corporation**

** **

**Consolidated Statements of Changes in Equity**

(Expressed in Canadian Dollars)

 

|                                                                                                 |   |             |        |   |     |   |                |                 |   |   |                |   |   |                                   |                |   |                |   |                |           |   |
|------------------------------------------------------------------------------------------------------|--------|------------------|-------------|--------|----------|--------|---------------------|----------------------|--------|--------|---------------------|--------|--------|----------------------------------------|---------------------|--------|---------------------|--------|---------------------|----------------|--------|
|                                                                                                 |   | Share Capital    |        |   | Reserves |   |                |                 |   |   |                |   |   |                                   |                |   |                |   |                |           |   |
|                                                                                                 |   | Number of Shares |        |   | Amount   |   |                | Share based payments |   |   | Warrants            |   |   | Accumulated other comprehensive income |                |   | Accumulated deficit |   |                | Owner's equity |   |   | Non-controlling interests |   |   | Total equity |   |
|                                                                                                 |   |             |        |   |     |   |                |                 |   |   |                |   |   |                                   |                |   |                |   |                |           |   |   |   |   |   |   |   |
| Balance at September 1, 2016                                                                         |   |             | 109,068,492 |   |     | $      | 122,380,723         |                 |   | $      | 1,066,863           |   |   | $                                      | 941,037             |   |                | $      | —   |           |   | $ | (90,600,819 | ) |   | $ | 33,787,804 |   |   | $ | 1,368,679 |   |   | $ | 35,156,483 |   |
| Issued for private placement, net of issuance costs                                                  |   |             | 7,197,543   |   |     |   | 5,589,501           |                 |   |   | —   |   |   |                                   | —   |   |                |   | —   |           |   |   | —   |   |   |   | 5,589,501 |   |   |   | —   |   |   |   | 5,589,501 |   |
| Warrants issued on private placement                                                                 |   |             |        |   |     |   | (6,592,000          | )                    |   |   | —   |   |   |                                   | —   |   |                |   | —   |           |   |   | —   |   |   |   | (6,592,000 | ) |   |   | —   |   |   |   | (6,592,000 | ) |
| Agent warrants issued on private placement                                                           |   |             |        |   |     |   | (92,000             | )                    |   |   | —   |   |   |                                   | 92,000              |   |                |   | —   |           |   |   | —   |   |   |   | —   |   |   |   | —   |   |   |   | —   |   |
| Issued pursuant to Restricted Share Unit ("RSU") Plan (Note 6)                                       |   |             | 695,991     |   |     |   | 1,040,990           |                 |   |   | (1,040,990          | )      |   |                                   | —   |   |                |   | —   |           |   |   | —   |   |   |   | —   |   |   |   | —   |   |   |   | —   |   |
| Shares issued for interest on gold loans and convertible loans (Notes 21 & 23)                   |   |             | 814,089     |   |     |   | 542,447             |                 |   |   | —   |   |   |                                   | —   |   |                |   | —   |           |   |   | —   |   |   |   | 542,447 |   |   |   | —   |   |   |   | 542,447 |   |
| Issued for settlement of leases (Note 5)                                                             |   |             | 458,329     |   |     |   | 288,747             |                 |   |   | —   |   |   |                                   | —   |   |                |   | —   |           |   |   | —   |   |   |   | 288,747 |   |   |   | —   |   |   |   | 288,747 |   |
| Issued for settlement of amounts due to related parties (Note 9)                                     |   |             | 187,321     |   |     |   | 131,998             |                 |   |   | —   |   |   |                                   | —   |   |                |   | —   |           |   |   | —   |   |   |   | 131,998 |   |   |   | —   |   |   |   | 131,998 |   |
| Issued for settlement of convertible loans (Note 23)                                                 |   |             | 83,333      |   |     |   | 49,166              |                 |   |   | —   |   |   |                                   | —   |   |                |   | —   |           |   |   | —   |   |   |   | 49,166 |   |   |   | —   |   |   |   | 49,166 |   |
| Shares issued as financing fee for convertible loans (Note 23)                                       |   |             | 132,577     |   |     |   | 92,805              |                 |   |   | —   |   |   |                                   | —   |   |                |   | —   |           |   |   | —   |   |   |   | 92,805 |   |   |   | —   |   |   |   | 92,805 |   |
| Exercise of warrants                                                                                 |   |             | 3,146,944   |   |     |   | 1,742,000           |                 |   |   | —   |   |   |                                   | —   |   |                |   | —   |           |   |   | —   |   |   |   | 1,742,000 |   |   |   | —   |   |   |   | 1,742,000 |   |
| Conversion component of convertible loans (Note 23)                                                  |   |             |        |   |     |   | —   |                 |   |   | 625,000             |   |   |                                   | —   |   |                |   | —   |           |   |   | —   |   |   |   | 625,000 |   |   |   | —   |   |   |   | 625,000 |   |
| Reversal of warrant liability upon change of functional currency to USD                              |   |             |        |   |     |   | —   |                 |   |   | —   |   |   |                                   | 215,000             |   |                |   | —   |           |   |   | —   |   |   |   | 215,000 |   |   |   | —   |   |   |   | 215,000 |   |
| Reversal of derivative in gold bullion loans upon change of functional currency to USD (Note 21)     |   |             |        |   |     |   | —   |                 |   |   | 5,051,000           |   |   |                                   | —   |   |                |   | —   |           |   |   | —   |   |   |   | 5,051,000 |   |   |   | —   |   |   |   | 5,051,000 |   |
| Reversal of derivative in gold convertible loans upon change of functional currency to USD (Note 23) |   |             |        |   |     |   | —   |                 |   |   | 108,000             |   |   |                                   | —   |   |                |   | —   |           |   |   | —   |   |   |   | 108,000 |   |   |   | —   |   |   |   | 108,000 |   |
| Share based compensation - RSU                                                                       |   |             |        |   |     |   | —   |                 |   |   | 262,929             |   |   |                                   | —   |   |                |   | —   |           |   |   | —   |   |   |   | 262,929 |   |   |   | —   |   |   |   | 262,929 |   |
| Share based compensation - Stock options                                                             |   |             |        |   |     |   | —   |                 |   |   | 1,725,000           |   |   |                                   | —   |   |                |   | —   |           |   |   | —   |   |   |   | 1,725,000 |   |   |   | —   |   |   |   | 1,725,000 |   |
| RSU shares forfeited (Note 6)                                                                        |   |             |        |   |     |   | —   |                 |   |   | (123,569            | )      |   |                                   | —   |   |                |   | —   |           |   |   | —   |   |   |   | (123,569 | ) |   |   | —   |   |   |   | (123,569 | ) |
| Exchange on translation of foreign subsidiaries                                                      |   |             |        |   |     |   | —   |                 |   |   | —   |   |   |                                   | —   |   |                |   | (2,176,352          | )              |   |   | —   |   |   |   | (2,176,352 | ) |   |   | —   |   |   |   | (2,176,352 | ) |
| Total comprehensive loss for the year                                                                |   |             |        |   |     |   | —   |                 |   |   | —   |   |   |                                   | —   |   |                |   | —   |           |   |   | (5,965,758 | ) |   |   | (5,965,758 | ) |   |   | (468,354 | ) |   |   | (6,434,112 | ) |
| Balance at August 31, 2017                                                                           |   |             | 121,784,619 |   |     | $      | 125,174,377         |                 |   | $      | 7,674,233           |   |   | $                                      | 1,248,037           |   |                | $      | (2,176,352          | )              |   | $ | (96,566,577 | ) |   | $ | 35,353,718 |   |   | $ | 900,325 |   |   | $ | 36,254,043 |   |
| Issued pursuant to RSU Plan (Note 6)                                                                 |   |             | 385,147     |   |     |   | 188,722             |                 |   |   | (188,722            | )      |   |                                   | —   |   |                |   | —   |           |   |   | —   |   |   |   | —   |   |   |   | —   |   |   |   | —   |   |
| Shares issued for interest on gold loans and convertible loans (Notes 21 & 23)                   |   |             | 1,172,128   |   |     |   | 612,900             |                 |   |   | —   |   |   |                                   | —   |   |                |   | —   |           |   |   | —   |   |   |   | 612,900 |   |   |   | —   |   |   |   | 612,900 |   |
| Shares issued as financing fee for convertible loans (Note 23)                                       |   |             | 466,504     |   |     |   | 234,752             |                 |   |   | —   |   |   |                                   | —   |   |                |   | —   |           |   |   | —   |   |   |   | 234,752 |   |   |   | —   |   |   |   | 234,752 |   |
| Issued for settlement of convertible loans (Note 23)                                                 |   |             | 1,354,405   |   |     |   | 792,381             |                 |   |   | —   |   |   |                                   | —   |   |                |   | —   |           |   |   | —   |   |   |   | 792,381 |   |   |   | —   |   |   |   | 792,381 |   |
| Conversion component of convertible loans (Note 23)                                                  |   |             |        |   |     |   | —   |                 |   |   | 310,000             |   |   |                                   | —   |   |                |   | —   |           |   |   | —   |   |   |   | 310,000 |   |   |   | —   |   |   |   | 310,000 |   |
| Share based compensation - Stock options                                                             |   |             |        |   |     |   | —   |                 |   |   | 1,614,000           |   |   |                                   | —   |   |                |   | —   |           |   |   | —   |   |   |   | 1,614,000 |   |   |   | —   |   |   |   | 1,614,000 |   |
| Share based compensation - RSU                                                                       |   |             |        |   |     |   | —   |                 |   |   | 49,981              |   |   |                                   | —   |   |                |   | —   |           |   |   | —   |   |   |   | 49,981 |   |   |   | —   |   |   |   | 49,981 |   |
| RSU shares forfeited (Note 6)                                                                        |   |             |        |   |     |   | —   |                 |   |   | (65,098             | )      |   |                                   | —   |   |                |   | —   |           |   |   | —   |   |   |   | (65,098 | ) |   |   | —   |   |   |   | (65,098 | ) |
| Exchange on translation of foreign subsidiaries                                                      |   |             |        |   |     |   | —   |                 |   |   | —   |   |   |                                   | —   |   |                |   | 1,420,443           |           |   |   | —   |   |   |   | 1,420,443 |   |   |   | —   |   |   |   | 1,420,443 |   |
| Total comprehensive loss for the year                                                                |   |             |        |   |     |   | —   |                 |   |   | —   |   |   |                                   | —   |   |                |   | —   |           |   |   | (6,697,382 | ) |   |   | (6,697,382 | ) |   |   | (200,015 | ) |   |   | (6,897,397 | ) |
| Balance at August 31, 2018                                                                           |   |             | 125,162,803 |   |     | $      | 127,003,132         |                 |   | $      | 9,394,394           |   |   | $                                      | 1,248,037           |   |                | $      | (755,909            | )              |   | $ | (103,263,959 | ) |   | $ | 33,625,695 |   |   | $ | 700,310 |   |   | $ | 34,326,005 |   |

 

 

 

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

 

8

**Tanzanian Royalty Exploration Corporation**

** **

**Consolidated Statements of Cash Flow**

****(Expressed in CanadianDollars)

 

| Year ended August 31,                                                     |   | 2018   |                |   | 2017   |   |
|---------------------------------------------------------------------------|--------|--------|---------------------|--------|--------|--------|
| Operating                                                                 |   |   |                |   |   |   |   |   |
| Net loss                                                                  |   | $      | (6,897,397          | )      |   | $      | (6,434,112 | ) |
| Adjustments to reconcile net loss to cash flow from operating activities: |   |   |                |   |   |   |   |   |
| Depreciation                                                              |   |   | 386,845             |   |   |   | 421,984 |   |
| Write-off of mineral properties and deferred exploration costs            |   |   | —   |   |   |   | 124,717 |   |
| Share based payments                                                      |   |   | 1,598,883           |   |   |   | 1,772,663 |   |
| Accretion on asset retirement obligation                                  |   |   | 11,086              |   |   |   | 10,934 |   |
| Interest accretion                                                        |   |   | 819,060             |   |   |   | 725,696 |   |
| Foreign exchange                                                          |   |   | (14,011             | )      |   |   | (384,216 | ) |
| Shares issued for payment of interest on bullion loans                    |   |   | 425,717             |   |   |   | 429,426 |   |
| Loss on shares issued for settlement of debt                              |   |   | 522,281             |   |   |   | 141,108 |   |
| Loss on settlement of lawsuit                                             |   |   | 95,241              |   |   |   | —   |   |
| Gain on sale of property, plant and equipment                             |   |   | —   |   |   |   | (2,030 | ) |
| Non cash directors’ fees                                            |   |   | —   |   |   |   | 75,200 |   |
| Net change in non-cash operating working capital items:                   |   |   |                |   |   |   |   |   |
| Other receivables                                                         |   |   | 64,205              |   |   |   | (74,619 | ) |
| Inventory                                                                 |   |   | (7,902              | )      |   |   | 32,119 |   |
| Prepaid expenses                                                          |   |   | (41,753             | )      |   |   | 79,111 |   |
| Trade, other payables and accrued liabilities                             |   |   | 686,545             |   |   |   | (1,201,470 | ) |
| Cash used in operating activities                                         |   |   | (2,351,200          | )      |   |   | (4,283,489 | ) |
| Investing                                                                 |   |   |                |   |   |   |   |   |
| Mineral properties and deferred exploration costs, net of recoveries      |   |   | (1,305,094          | )      |   |   | (1,568,614 | ) |
| Property, plant and equipment, net of proceeds from sale                  |   |   | (7,076              | )      |   |   | 13,803 |   |
| Cash used in investing activities                                         |   |   | (1,312,170          | )      |   |   | (1,554,811 | ) |
| Financing                                                                 |   |   |                |   |   |   |   |   |
| Proceeds - private placements                                             |   |   | —   |   |   |   | 5,589,501 |   |
| Repayment of loans from related parties                                   |   |   | —   |   |   |   | (32,686 | ) |
| Interest on leases                                                        |   |   | 11,188              |   |   |   | 25,872 |   |
| Proceeds from issuance of convertible loans                               |   |   | 1,754,291           |   |   |   | 1,181,993 |   |
| Proceeds from issuance of gold bullion loans                              |   |   | 1,312,660           |   |   |   | —   |   |
| Cash provided by financing activities                                     |   |   | 3,078,139           |   |   |   | 6,764,680 |   |
| Net increase (decrease) in cash                                           |   |   | (585,231            | )      |   |   | 926,380 |   |
| Cash, beginning of year                                                   |   |   | 1,011,293           |   |   |   | 84,913 |   |
| Cash, end of year                                                         |   | $      | 426,062             |   |   | $      | 1,011,293 |   |

 

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

 

9

| **Tanzanian Royalty Exploration Corporation**

** **

**Consolidated Statements of Cash Flow**

(Expressed in Canadian Dollars)

  |
|----------------------------------------------------------------------------------------------------------------------------------------------|

 

 

| Supplementary information:                             |   | 2018   |                |   | 2017   |   |
|--------------------------------------------------------|--------|--------|---------------------|--------|--------|--------|
| Non-cash transactions:                                 |   |   |                |   |   |   |   |   |
| Share based payments capitalized to mineral properties |   | $      | —   |   |   | $      | 16,497 |   |
| Shares issued pursuant to RSU plan                     |   |   | 188,722             |   |   |   | 1,040,990 |   |
| Shares issued for interest on gold loans               |   |   | 612,900             |   |   |   | 542,447 |   |
| Exercise of warrants – cashless exercise         |   |   | —   |   |   |   | 1,742,000 |   |
| Shares issued as financing fee for convertible loans   |   |   | 234,752             |   |   |   | 92,805 |   |

 

 

 

 

 

 

 

 

 

 

 

 

10

**Tanzanian Royalty Exploration Corporation**

**Notes to the Consolidated Financial Statements**

**For the Years Ended August 31, 2018 and 2017**

**(Expressed in Canadian dollars)**

| **** |
|------|

| **1.** |  | **Nature of Operations and Going Concern** |
|--------|--|--------------------------------------------|

 

The Company was originally incorporated under the corporatename “*424547 Alberta Ltd*.” in the Province of Alberta on July 5, 1990, under the *Business Corporations Act*(Alberta). The name was changed to “*Tan Range Exploration Corporation*” on August 13, 1991. The name of the Companywas again changed to *“Tanzanian Royalty Exploration Corporation” (“TREC” or the “Company”)*on February 28, 2006. The address of the Company’s registered office is 82 Richmond Street East, Suite 208, Toronto,Ontario, M5C 1P1, Canada. The Company’s principal business activity is in the exploration and development of mineral propertyinterests. The Company’s mineral properties are located in United Republic of Tanzania (“Tanzania”).

 

The Company is in the process of exploring and evaluatingits mineral properties. The business of exploring and mining for minerals involves a high degree of risk. The underlying valueof the mineral properties is dependent upon the existence and economic recovery of mineral resources and reserves, the abilityto raise long-term financing to complete the development of the properties, government policies and regulations, and upon futureprofitable production or, alternatively, upon the Company’s ability to dispose of its interest on an advantageous basis;all of which are uncertain.

 

The amounts shown as mineral properties and deferredexploration expenditures represent costs incurred to date, less amounts amortized and/or written off, and do not necessarily representpresent or future values. The underlying value of the mineral properties is entirely dependent on the existence of economicallyrecoverable reserves, securing and maintaining title and beneficial interest, the ability of the Company to obtain the necessaryfinancing to complete development, and future profitable production.

 

At August 31, 2018 the Company had a working capitaldeficiency of $12,010,685 (August 31, 2017 – $6,552,376 working capital deficiency), had not yet achieved profitable operations,has accumulated losses of $103,263,959 (August 31, 2017 – 96,566,577). The Company will require additional financing in orderto conduct its planned work programs on mineral properties, meet its ongoing levels of corporate overhead and discharge its futureliabilities as they come due.

 

The Company’s current funding sources and takinginto account the working capital position and capital requirements at August 31, 2018, indicate the existence of a material uncertaintythat raises substantial doubt about the Company’s ability to continue as a going concern and is dependent on the Companyraising additional debt or equity financing. The Company must obtain additional funding in order to continue development and constructionof the Buckreef Project. The Company is continuing to pursue additional financing to fund the construction of the Buckreef Projectand additional projects. Whilst the Company has been successful in obtaining financing in the past, there is no assurance thatsuch additional funding and/or project financing will be obtained or obtained on commercially favourable terms.

 

These consolidated financial statements do not give effectto any adjustment which would be necessary should the Company be unable to continue as a going concern and, therefore, be requiredto realize its assets and discharge its liabilities in other than the normal course of business and at amounts different from thosereflected in the consolidated financial statements.

 

11

**Tanzanian Royalty Exploration Corporation**

**Notes to the Consolidated Financial Statements**

**For the Years Ended August 31, 2018 and 2017**

**(Expressed in Canadian dollars)**

| **** |
|------|

| **2.** |  | **Basis of Preparation** |
|--------|--|--------------------------|

 

**2.1 Statement of compliance**

 

The Company’s consolidated financial statements,including comparatives, have been prepared in accordance with and using accounting policies in full compliance with the InternationalFinancial Reporting Standards (“IFRS”) and International Accounting Standards (“IAS”) issued by the InternationalAccounting Standards Board (“IASB”) and Interpretations of the International Financial Reporting Interpretations Committee(“IFRIC”), effective for the Company’s reporting for the year ended August 31, 2018.

** **

These consolidated financial statements were approvedand authorized by the Board of Directors of the Company on November 27, 2018.

** **

**2.2 Basis of presentation**

** **

The consolidated financial statements of the Companyas at and for the years ended August 31, 2018 and 2017 comprise of the Company and its subsidiaries (together referred to as the“Company” or “Group”).

 

The consolidated financial statements have been preparedon the historical cost basis except for certain financial instruments, which are measured at fair value, as explained in the accountingpolicies set out in note 3.

 

**2.3****Adoption of new and revised standards and interpretations**

 

***New standardsand interpretations to be adopted in future***

 

At the date of authorization of these Financial Statements,the IASB and IFRIC has issued the following new and revised standards and interpretations which are not yet effective for the relevantreporting periods and which the Company has not early adopted these standards, amendments and interpretations.

 
| • |  | IFRS 9 *Financial Instruments.* IFRS 9 covers the classification and measurement,impairment and hedge accounting of financial assets and financial liabilities and the effective date is for annual periods onor after January 1, 2018, with earlier adoption permitted. The Company is assessing the impact of adopting IFRS 9 but does notexpect it will have a significant impact on its consolidated financial statements. Amendments to IFRS 9 also provide relief fromthe requirement to restate comparative financial statements for the effect of applying IFRS 9. Instead, additional transitiondisclosures will be required to help investors understand the effect that the initial application of IFRS 9 has on the classificationand measurement of financial instruments. |
|---------|--|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 
| • |  | IFRS 15 *Revenue from Contracts with Customers*. In May 2014, the IASB issuedIFRS 15, Revenue from Contracts with Customers. IFRS 15 specifies how and when to recognize revenue as well as requires entitiesto provide users of financial statements with more informative, relevant disclosures. The standard supersedes IAS 18, Revenue,IAS 11, Construction Contracts, and a number of revenue-related interpretations. Application of the standard is mandatory forall IFRS reporters and it applies to nearly all contracts with customers: the main exceptions are leases, financial instrumentsand insurance contracts. IFRS 15 applies to the financial statements for the annual periods beginning on or after January 1, 2018,with early adoption permitted. The Company intends to adopt IFRS 15 in its consolidated financial statements for the annual periodbeginning on January 1, 2018 and expects no impact on its consolidated financial statements. |
|---------|--|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

12

**Tanzanian Royalty Exploration Corporation**

**Notes to the Consolidated Financial Statements**

**For the Years Ended August 31, 2018 and 2017**

**(Expressed in Canadian dollars)**

| **2.** |  | **Basis of Preparation (continued)** |
|--------|--|--------------------------------------|

 

**2.3****Adoption of new and revised standards and interpretations (continued)**

 

***New standardsand interpretations to be adopted in future (continued)***

 
| • |  | IFRS 16 - In 2016, the IASB issued IFRS 16, Leases (“IFRS 16”), replacingIAS 17, Leases and related interpretations. The standard introduces a single on-balance sheet recognition and measurement modelfor lessees, eliminating the distinction between operating and finance leases. Lessors continue to classify leases as financeand operating leases. IFRS 16 becomes effective for annual periods beginning on or after January 1, 2019, and is to be appliedretrospectively. Early adoption is permitted if IFRS 15, has been adopted. The Company is assessing the impact of the implementationof IFRS 16 on its consolidated financial statements, but does not anticipate that the impact will be significant. |
|---------|--|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

| **3.** |  | **Summary of Significant Accounting Policies** |
|--------|--|------------------------------------------------|

*** ***

**3.1 Basis of consolidation**

 

The consolidated financial statements include the financialstatements of the Company and its controlled subsidiaries: Tanzania American International Development Corporation 2000 Limited(“Tanzam”), Tancan Mining Co. Limited (“Tancan”), Buckreef Gold Company Ltd. (“Buckreef”),and Northwestern Base Metals Company Limited (“NWBM”). Control is achieved when the Company has the power to governthe financial and operating policies of an entity so as to obtain benefits from its activities.

 

Subsidiaries are consolidated from the date of acquisition,being the date on which the Company obtains control, and continued to be consolidated until the date when such control ceases.The financial statements of the subsidiaries are prepared for the same reporting period as the parent company, using consistentaccounting policies.

 

The consolidated financial statements of the Companyset out the assets, liabilities, expenses, and cash flows of the Company and its subsidiaries, namely:

 

|     |   |                                |   | Ownership interest as at August 31, |
|----------|--------|-------------------------------------|--------|-------------------------------------|
|     |   | Country of  incorporation |   | 2018                                |   | 2017 |
| Tanzam   |   | Tanzania                            |   | 100%                                |   | 100% |
| Tancan   |   | Tanzania                            |   | 100%                                |   | 100% |
| Buckreef |   | Tanzania                            |   | 55%                                 |   | 55% |
| NWBM     |   | Tanzania                            |   | 75%                                 |   | 75% |

 

All inter-company transactions, balances, incomeand expenses are eliminated in full on consolidation.

 

Non-controlling interests in the net assets of consolidatedsubsidiaries are identified separately from the Company’s equity therein. Total comprehensive income within a subsidiaryis attributed to the non-controlling interest even if it results in a negative balance.

 

13

**Tanzanian Royalty Exploration Corporation**

**Notes to the Consolidated Financial Statements**

**For the Years Ended August 31, 2018 and 2017**

**(Expressed in Canadian dollars)**

| **3.** |  | **Summary of Significant Accounting Policies****(continued)** |
|--------|--|---------------------------------------------------------------|

 

**3.2 Mineral properties and deferred exploration**

** **

All direct costs related to the acquisition and explorationand development of specific properties are capitalized as incurred. Any cost incurred prior to obtaining the legal right to explorea mineral property are expensed as incurred. Field overhead costs directly related to exploration are capitalized and allocatedto mineral properties explored. All other overhead and administration costs are expensed as incurred. If a property is abandoned,sold or impaired, an appropriate charge will be made to the statement of comprehensive loss at the date of such impairment. Discretionaryoption payments arising on the acquisition of mining properties are only recognized when paid. Amounts received from other partiesto earn an interest in the Company's mining properties are applied as a reduction of the mining property and deferred explorationand development costs until all capitalized costs are recovered at which time additional reimbursements are recorded in the statementof comprehensive loss, except for administrative reimbursements which are credited to operations.

Consequential revenue from the sale of metals, extractedduring the Company's test mining activities, is recognized on the date the mineral concentrate level is agreed upon by the Companyand its customer, as this coincides with the transfer of title, the risk of ownership, the determination of the amount due underthe terms of settlement contracts the Company has with its customer, and collection is reasonably assured. Revenues from mineralproperties earned prior to the commercial production stage are deducted from capitalized costs.

 

The Company reviews the carrying value of a mineral propertywhen events or changes in circumstances indicate that the carrying value may not be recoverable. If the carrying value exceedsthe fair value, the property will be written down to fair value with a provision charged against operations in the year of impairment.An impairment is also recorded when management determines that it will discontinue exploration or development on a mineral propertyor when exploration rights or permits expire.

 

Ownership in mineral properties involvescertain risks due to the difficulties in determining the validity of certain claims as well as the potential for problems arisingfrom the frequently ambiguous conveyance history characteristic of many mineral interests. The Company has investigated the ownershipof its mineral properties and, to the best of its knowledge, ownership of its interests are in good standing.

 

Once an economically viable reserve has been determinedfor a property and a decision has been made to proceed with development has been approved, acquisition, exploration and developmentcosts previously capitalized to the mineral property are first tested for impairment and then classified as property, plant andequipment under construction. These costs will be amortized against the income generated from the mineral property.

 

14

**Tanzanian Royalty Exploration Corporation**

**Notes to the Consolidated Financial Statements**

**For the Years Ended August 31, 2018 and 2017**

**(Expressed in Canadian dollars)**

| **3.** |  | **Summary of Significant Accounting Policies****(continued)** |
|--------|--|---------------------------------------------------------------|

** **

**3.3****Property, plant and equipment**

** **

Property, plant and equipment (“PPE”) arestated at cost less accumulated depreciation and accumulated impairment losses. The cost of an item of PPE consists of the purchaseprice, any costs directly attributable to bringing the asset to the location and condition necessary for its intended use and aninitial estimate of the costs of dismantling and removing the item and restoring the site on which it is located.

 

Depreciation is provided at the following rates calculatedto write off the cost of PPE, less their estimated residual value, using the declining balance method:

|                                        |   |   |
|---------------------------------------------|--------|--------|
|                                        |   | Rate   |
|                                        |   |   |
| Machinery and equipment                     |   | 20%    | to | 30% |
| Automotive                                  |   |   | 30% |   |
| Computer equipment                          |   |   | 30% |   |
| Drilling equipment and automotive equipment |   |   | 6.67% |   |
| Leasehold improvements                      |   |   | 20% |   |
| Heap leach pads                             |   |   | 20% |   |

 

An item of PPE is derecognized upon disposal, when heldfor sale or when no future economic benefits are expected to arise from the continued use of the asset. Any gain or loss arisingon disposal of the asset, determined as the difference between the net disposal proceeds and the carrying amount of the asset,is recognized in the statement of comprehensive loss.

 

Assets under construction are capitalized asconstruction-in-progress. The cost of construction-in-progress comprises of its purchase price and any costs directlyattributable to bringing it into working condition for its intended use. Such cost includes the cost of replacing partof the plant and equipment and borrowing costs for long-term construction projects if the recognition criteria are met.Construction-in-progress assets are not depreciated until it is completed and available for use.

 

The Company conducts an annual assessment of the residualbalances, useful lives and depreciation methods being used for PPE and any changes arising from the assessment are applied by theCompany prospectively.

 

Where an item of plant and equipment comprises majorcomponents with different useful lives, the components are accounted for as separate items of plant and equipment. Expendituresincurred to replace a component of an item of property, plant and equipment that is accounted for separately, the major inspectionand overhaul expenditures of replacement of such a component are capitalized.

** **

**3.4 Decommissioning, restoration and similarliabilities (“Asset retirement obligation” or “ARO”)**

 

The Company recognizes liabilities for statutory, contractual,constructive or legal obligations, including those associated with the reclamation of mineral properties and PPE, when those obligationsresult from the acquisition, construction, development or normal operation of the Company’s assets. Initially, a liabilityfor an asset retirement obligation is recognized at its fair value in the period in which it is incurred. Upon initial recognitionof the liability, the corresponding asset retirement obligation is added to the carrying amount of the related asset and the costis amortized as an expense over the economic life of the asset using the declining balance method. Following the initial recognitionof the asset retirement obligation, the carrying amount of the liability is increased for the passage of time and adjusted forchanges to the current market-based discount rate, and adjusted for changes to the amount or timing of the underlying cash flowsneeded to settle the obligation.

 

15

**Tanzanian Royalty Exploration Corporation**

**Notes to the Consolidated Financial Statements**

**For the Years Ended August 31, 2018 and 2017**

**(Expressed in Canadian dollars)**

| **3.** |  | **Summary of Significant Accounting Policies****(continued)** |
|--------|--|---------------------------------------------------------------|

 

**3.5 Share based payments**

*** ***

***Share based payment transactions***

Employees (including directors and senior executives)of the Company receive a portion of their remuneration in the form of share based payment transactions, whereby employees renderservices as consideration for equity instruments (“equity-settled transactions”).

 

In situations where equity instruments are issued andsome or all of the goods or services received by the entity as consideration cannot be specifically identified, they are measuredat fair value of the share-based payment.

** **

***Equity settled transactions***

The costs of equity settled transactions with employeesare measured by reference to the fair value at the date on which they are granted.

 

The costs of equity-settled transactions are recognized,together with a corresponding increase in equity, over the period in which the performance and/or service conditions are fulfilled,ending on the date on which the relevant employees become fully entitled to the award (“the vesting date”). The cumulativeexpense which is recognized for equity-settled transactions at each reporting date until the vesting date reflects the Company’sbest estimate of the number of equity instruments that will ultimately vest. The profit or loss for a period represents the movementin cumulative expense recognized as at the beginning and end of that period and the corresponding amount is represented in sharebased payment reserve.

 

No expense is recognized for awards that do not ultimatelyvest, except for awards where vesting is conditional upon a market condition, which are treated as vesting irrespective of whetheror not the market condition is satisfied provided that all other performance and/or service conditions are satisfied.

 

Where the terms of an equity-settled award are modified,the minimum expense recognized is the expense as if the terms had not been modified. An additional expense is recognized for anymodification which increases the total fair value of the share-based payment arrangement, or is otherwise beneficial to the employeeas measured at the date of modification.

 

The effect of outstanding options is consideredin the computation of earnings per share, if dilutive.

** **

16

**Tanzanian Royalty Exploration Corporation**

**Notes to the Consolidated Financial Statements**

**For the Years Ended August 31, 2018 and 2017**

**(Expressed in Canadian dollars)**

****
| **3.** |  | **Summary of Significant Accounting Policies****(continued)** |
|--------|--|---------------------------------------------------------------|

** **

**3.6 Taxation**

 

Income tax expense represents the sum of tax currently payable anddeferred tax.

*** ***

***Current income tax***

Current income tax assets and liabilities for the currentand prior periods are measured at the amount expected to be recovered from or paid to the taxation authorities. The tax rates andtax laws used to compute the amount are those that are enacted or substantively enacted by the date of the statement of financialposition.

*** ***

***Deferred income tax***

Deferred income tax is provided using the liability methodon temporary differences at the date of the statement of financial position between the tax bases of assets and liabilities andtheir carrying amounts for financial reporting purposes.

 

Deferred income tax liabilities are recognizedfor all taxable temporary differences, except:

 
| • |  | where the deferred income tax liability arises from the initial recognition of goodwillor of an asset or liability in a transaction that is not a business combination and, at the time of the transaction, affects neitherthe accounting profit nor taxable profit or loss; and |
|---------|--|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 
| • |  | in respect of taxable temporary differences associated with investments in subsidiaries,associates and interests in joint ventures, where the timing of the reversal of the temporary differences can be controlled andit is probable that the temporary differences will not reverse in the foreseeable future. |
|---------|--|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

Deferred income tax assets are recognized for all deductibletemporary differences, carry forward of unused tax credits and unused tax losses, to the extent that it is probable that taxableprofit will be available against which the deductible temporary differences and the carry forward of unused tax credits and unusedtax losses can be utilized except:

 
| • |  | where the deferred income tax asset relating to the deductible temporary differencearises from the initial recognition of an asset or liability in a transaction that is not a business combination and, at the timeof 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 interests in joint ventures, deferred income tax assets are recognized only to the extent that it is probable thatthe temporary differences will reverse in the foreseeable future and taxable profit will be available against which the temporarydifferences can be utilized. |
|---------|--|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

The carrying amount of deferred income tax assets isreviewed at the date of the statement of financial position and reduced to the extent that it is no longer probable that sufficienttaxable profit will be available to allow all or part of the deferred income tax asset to be utilized. Unrecognized deferred incometax assets are reassessed at the date of the statement of financial position and are recognized to the extent that it has becomeprobable that future taxable profit will allow the deferred tax asset to be recovered.

 

Deferred income tax assets and liabilities are measuredat 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 enacted or substantively enacted at the date of the statement of financial position.

 

17

**Tanzanian Royalty Exploration Corporation**

**Notes to the Consolidated Financial Statements**

**For the Years Ended August 31, 2018 and 2017**

**(Expressed in Canadian dollars)**

|  | **3.** | **Summary of Significant Accounting Policies****(continued)** |
|--|--------|---------------------------------------------------------------|

 

Deferred income tax relating to items recognized directlyin equity is recognized in equity.

 

Deferred income tax assets and liabilities are offsetif, and only if, a legally enforceable right exists to set off current tax assets against current tax liabilities and the deferredtax assets and liabilities relate to income taxes levied by the same taxation authority on either the same taxable entity or differenttaxable entities which intend to either settle current tax liabilities and assets on a net basis, or to realize the assets andsettle the liabilities simultaneously, in each future period in which significant amounts of deferred tax assets or liabilitiesare expected to be settled or recovered.

** **

**Sales tax**

** **

Expenses and assets are recognized net of theamount of sales tax, except:

 
| • |  | when the sales tax incurred on a purchase of assets or services is not recoverablefrom the taxation authority, in which case the sales tax is recognised as part of the cost of acquisition of the asset or as partof the expense item, as applicable; or |
|---------|--|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 
| • |  | when receivables and payables are stated with the amount of sales tax included. |
|---------|--|---------------------------------------------------------------------------------|

 

The net amount of sales tax recoverable from, or payableto, the taxation authority is included as part of receivables or payables in the statement of financial position.

** **

**3.7 Loss per share**

** **

The basic loss per share is computed by dividing thenet loss by the weighted average number of common shares outstanding during the period. The diluted loss per share reflects thepotential dilution of common share equivalents, such as outstanding restricted stock units, share purchase warrants, and stockoptions, in the weighted average number of common shares outstanding during the year, if dilutive.

** **

**3.8 Financial assets**

** **

All financial assets are initially recorded at fair valueand designated upon inception into one of the following four categories: held-to-maturity, available-for-sale, loans-and-receivablesor at fair value through profit or loss (“FVTPL”). The Company initially recognizes loans and receivables on the datethey are originated. All other financial assets are recognized on the trade date at which the Company becomes party to the contractualprovisions of the instruments.

 

Subsequent to initial recognition, financial assets classifiedas FVTPL are measured at fair value with unrealized gains and losses recognized through earnings. The Company’s other financialassets are classified as FVTPL.

 

Financial assets classified as loans-and-receivablesand held-to-maturity are measured at amortized cost. The Company’s cash and cash equivalents and trade and other receivablesare classified as loans-and-receivables.

 

Subsequent to initial recognition, financial assets classifiedas available-for-sale are measured at fair value with unrealized gains and losses recognized in other comprehensive income (loss)except for losses in value that are considered other than temporary. During the periods presented, the Company has not classifiedany financial assets as available-for-sale.

 

18

**Tanzanian Royalty Exploration Corporation**

**Notes to the Consolidated Financial Statements**

**For the Years Ended August 31, 2018 and 2017**

**(Expressed in Canadian dollars)**

| **3.** |  | **Summary of Significant Accounting Policies****(continued)** |
|--------|--|---------------------------------------------------------------|

 

Transactions costs associated with FVTPL financial assetsare expensed as incurred, while transaction costs associated with all other financial assets are included in the initial carryingamount of the asset.

 

The Company derecognizes a financial asset when the contractualrights to the cash flows from the asset expire, or it transfers the rights to receive the contractual cash flows on the financialasset in a transaction in which substantially all the risks and rewards of ownership of such a financial asset are transferred.

 

**3.9 Financial liabilities**

** **

All financial liabilities are initially recorded at fairvalue and designated upon inception as FVTPL or other financial liabilities on the trade date at which the Company becomes a partyto the contractual provisions of the instrument.

 

Financial liabilities classified as other-financial-liabilitiesare initially recognized at fair value less directly attributable transaction costs and subsequently measured at amortized costusing the effective interest method. The effective interest rate discounts estimated future cash payments through the expectedlife of the financial liability, or, where appropriate, a shorter period. The Company’s trade and other payables and convertibledebt are classified as other financial liabilities.

 

Financial liabilities classified as FVTPL include financialliabilities held for trading and financial liabilities designated upon initial recognition as FVTPL. Derivatives, including separatedembedded derivatives are also classified as FVTPL unless they are designated as effective hedging instruments. Fair value changeson financial liabilities classified as FVTPL are recognized through the statement of comprehensive loss. As of August 31, 2018and 2017, the Company’s warrant liability and the derivative in gold bullion loans have been classified as FVTPL.

 

The Company derecognizes a financial liability when itscontractual obligations are discharged or cancelled.

 

**3.10 Impairment of financial assets**

 

The Company assesses at the date of the statement offinancial position whether a financial asset is impaired.

*** ***

***Assets carried at amortized cost***

If there is objective evidence that an impairment losson an asset has been incurred, the loss is measured as the difference between the carrying amount and the present value of estimatedfuture cash flows discounted at the asset’s original effective interest rate. The carrying amount of the asset is then reducedby the impairment. The loss is recorded to profit or loss.

 

If, in a subsequent period, the cumulative impairmentloss decreases and such a decrease can be related objectively to an event occurring after the impairment is recognized, the previouslyrecognized impairment loss is reversed to the extent that the carrying value of the asset does not exceed what the amortized costwould have been had the impairment not been recognized. Any subsequent reversal of an impairment loss is recognized in profit orloss.

 

19

**Tanzanian Royalty Exploration Corporation**

**Notes to the Consolidated Financial Statements**

**For the Years Ended August 31, 2018 and 2017**

**(Expressed in Canadian dollars)**

| **3.** |  | **Summary of Significant Accounting Policies****(continued)** |
|--------|--|---------------------------------------------------------------|

 

In relation to trade receivables, a provision for impairmentis made when there is objective evidence (such as the probability of insolvency or significant financial difficulties of the debtor)that the Company will not be able to collect all of the amounts due under the original terms of an invoice. The receivable is reducedthrough use of an allowance account. Impaired receivables are written off against the allowance account when they are assessedas uncollectible.

*** ***

***Available-for-sale***

If an available-for-sale asset is impaired, an amountcomprising the difference between its cost and fair value, less any impairment loss previously recognized in profit or loss, istransferred from equity to profit or loss. Reversals of available-for-sale assets are not recognized in profit or loss.

** **

**3.11 Impairment of non-financial assets**

** **

At the date of the statement of financial position, theCompany reviews the carrying amounts of its tangible and intangible assets to determine whether there is an indication that thoseassets may be impaired. If any, the recoverable amount of the asset is estimated in order to determine the extent of the impairment.Where it is not possible to estimate the recoverable amount of an individual asset, the Company estimates the recoverable amountof the cash-generating unit to which the asset belongs.

 

The recoverable amount is the higher of fair value lesscosts to sell and value in use. In assessing value in use, the estimated future cash flows are discounted to their present valueusing a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to theasset.

 

If the recoverable amount of the asset (or cash-generatingunit) is estimated to be less than its carrying amount, the carrying amount is reduced to its recoverable amount. An impairmentloss is recognized immediately in the statement of comprehensive loss.

 

Where an impairment loss subsequently reverses, the carryingamount of the asset (cash-generating unit) is increased to the revised estimate of its recoverable amount, but so that the increasedcarrying amount does not exceed the carrying amount that would have been determined had no impairment loss been recognized forthe asset (or cash-generating unit) in prior years.

** **

**3.12 Cash and cash equivalents**

** **

Cash and cash equivalents in the statement of financialposition comprise cash at banks and on hand, and short term deposits with an original maturity of three months or less, which arereadily convertible into a known amount of cash.

** **

**3.13 Related party transactions**

** **

Parties are considered to be related if one party hasthe ability, directly or indirectly, to control the other party or exercise significant influence over the other party in makingfinancial and operating decisions. Parties are considered to be related if they are subject to common control or are controlledby parties that have significant influence over the entity. Related parties may be individuals or corporate entities. A transactionis considered to be a related party transaction when there is a transfer of resources or obligations between related parties. Relatedparty transactions that are in the normal course of business and have commercial substance are measured at the exchange amount,being the amount agreed by the parties to the transaction.

 

20

**Tanzanian Royalty Exploration Corporation**

**Notes to the Consolidated Financial Statements**

**For the Years Ended August 31, 2018 and 2017**

**(Expressed in Canadian dollars)**

| **3.** |  | **Summary of Significant Accounting Policies****(continued)** |
|--------|--|---------------------------------------------------------------|

** **

**3.14 Foreign currency transactions**

 

*Functional and presentation currency*

 

Items included in the financial statements of each ofthe Company’s entities are measured using the currency of the primary economic environment in which the entity operates (“thefunctional currency”). The functional currency of the Company and each of its subsidiaries is the US dollar. The presentationcurrency of the Company is the Canadian dollar.

 

*Transactions and balances*

 

Foreign currency transactions are recorded at the rateof exchange existing on the transaction date. Foreign currency monetary assets and liabilities are translated at the rate of exchangeat the reporting date. Differences arising on settlement or translation of monetary items are recognised in profit or loss.

 

Non-monetary items measured at historical cost continuedto be carried at the exchange rates at the dates of the transactions. Non-monetary items measured at fair value are translatedusing the exchange rates at the date when the fair value is determined. The gain or loss arising on translation of is treated inline with the recognition of the gain or loss on the change in fair value of such an item.

 

*Group companies*

 

The results and financial position of all the consolidatedentities that have a functional currency different from the Company’s presentation currency are translated in to the presentationcurrency as follows:

 
|  | · | assets and liabilities for each statement of financial position presented are translated at theexchange rate on the date of the statement of financial position, |
|--|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|  | · | income and expenses for each statement of comprehensive loss are translated at the average exchangerate in effect during the reporting period; and |
|--|--------|----------------------------------------------------------------------------------------------------------------------------------------------------|
|  | · | all resulting exchange differences are recognized in accumulated other comprehensive income. |
|--|--------|----------------------------------------------------------------------------------------------|

 

**3.15 Significant accounting judgments andestimates**

** **

The preparation of these consolidated financial statementsrequires management to make judgements and estimates and form assumptions that affect the reported amounts of assets and liabilitiesat the date of the financial statements and reported amounts of revenues and expenses during the reporting period. On an ongoingbasis, management evaluates its judgements and estimates in relation to assets, liabilities, revenue and expenses. Management useshistorical experience and various other factors it believes to be reasonable under the given circumstances as the basis for itsjudgements and estimates. Actual outcomes may differ from these estimates under different assumptions and conditions. The mostsignificant estimates relate to the appropriate depreciation rate for property, plant and equipment, the valuation of warrant liability,the recoverability of other receivables, the valuation of deferred income tax amounts, the impairment on mineral properties anddeferred exploration and property, plant and equipment and the calculation of share-based payments. The most significant judgementsrelate to the recognition of deferred tax assets and liabilities and asset retirement obligations, the determination of the economicviability of a project or mineral property and the determination of functional currencies.

 

21

**Tanzanian Royalty Exploration Corporation**

**Notes to the Consolidated Financial Statements**

**For the Years Ended August 31, 2018 and 2017**

**(Expressed in Canadian dollars)**

| **3.** |  | **Summary of Significant Accounting Policies****(continued)** |
|--------|--|---------------------------------------------------------------|

*** ***

**3.16 Inventory**

** **

Stockpiled ore and consumables are measured at the lowerof cost or net realizable value. Net realizable value is the estimated future sales price of a product the Company expects to realizewhen the product is processed and sold, less estimated costs to complete production and bring the product to sale. Where the timevalue of money is material, these future prices and costs to complete are discounted. Any provision for obsolescence is determinedby reference to specific products. A regular review is undertaken to determine the extent of any provision for obsolescence.

 

**3.17 Borrowing costs**

** **

Borrowing costs directly attributable to the acquisition,construction or production of an asset that necessarily takes a substantial period of time to get ready for its intended use orsale are capitalized as part of the cost of the asset. All other borrowing costs are expensed in the period in which they occur.Borrowing costs consist of interest and other costs that an entity incurs in connection with the borrowing of funds.

 

|  | **** |
|--|------|

| **4.** | **Mineral Properties and Deferred Exploration** |
|--------|-------------------------------------------------|

 

The Company explores or acquires gold or other preciousmetal concessions through its own efforts or through the efforts of its subsidiaries. All of the Company’s concessions arelocated in Tanzania.

 

The Company’s mineral interests in Tanzania areinitially held under prospecting licenses granted pursuant to the Mining Act, 2010 (Tanzania) for a period of up to four years,and are renewable two times for a period of up to two years each. Annual rental fees for prospecting licenses are based on thetotal area of the license measured in square kilometres, multiplied by US$100/sq.km for the initial period, US$150/sq.km for thefirst renewal and US$200/sq.km for the second renewal. With each renewal at least 50% of the licensed area, if greater than 20square kilometres, must be relinquished and if the Company wishes to keep the relinquished one-half portion, it must file a newapplication for the relinquished portion. There is also an initial one-time “preparation fee” of US$500 per license.Upon renewal, there is a renewal fee of US$300 per license.

 

Section 30 of the Mining Act states that the amount thatis to be spent on prospecting operations is to be prescribed by Regulation.

 

| Period                   | Minimum expenditure (US$)  |
|--------------------------|----------------------------|
| Initial period (4 years) | $500 per sq km for annum   |
| First renewal (3 years)  | $1,000 per sq km for annum |
| Second renewal (2 years) | $2,000 per sq km for annum |

 

Certain of the Company’s prospecting licenses arecurrently being renewed.

 

The Company assessed the carrying value of mineral propertiesand deferred exploration costs as at August 31, 2018 and recorded a write-down of $nil during the year ended August 31, 2018 (2017- $124,717).

 

22

**Tanzanian Royalty Exploration Corporation**

**Notes to the Consolidated Financial Statements**

**For the Years Ended August 31, 2018 and 2017**

**(Expressed in Canadian dollars)**

| **4.** |  | **Mineral Properties and Deferred Exploration (continued)** |
|--------|--|-------------------------------------------------------------|

** **

The continuity of expenditureson mineral properties is as follows:

** **

|                                            |   |          |                |   |        |   |                |          |   |   |                |   |   |   |                |
|-------------------------------------------------|--------|---------------|---------------------|--------|-------------|--------|---------------------|---------------|--------|--------|---------------------|--------|--------|--------|---------------------|
|                                            |   | Buckreef

(a) |                |   | Kigosi

(b) |   |                | Itetemia

(c) |   |   | Luhala

(d)         |   |   | Total  |                |
|                                            |   |          |                |   |        |   |                |          |   |   |                |   |   |   |                |
| Balance, September 1, 2016                      |   | $             | 24,034,731          |   |        | $      | 12,454,254          |          |   | $      | 5,962,715           |   |   | $      | 3,351,158           |   |   | $ | 45,802,858 |   |
| Exploration expenditures:                       |   |          |                |   |        |   |                |          |   |   |                |   |   |   |                |   |   |   |   |   |
| Camp, field supplies and travel                 |   |          | 187,940             |   |        |   | 19,565              |          |   |   | —   |   |   |   | —   |   |   |   | 207,505 |   |
| License fees and exploration and field overhead |   |          | 2,527,005           |   |        |   | 67,942              |          |   |   | 17,738              |   |   |   | 5,988               |   |   |   | 2,618,673 |   |
| Geological consulting and field wages           |   |          | 206,722             |   |        |   | —   |          |   |   | —   |   |   |   | —   |   |   |   | 206,722 |   |
| Geophysical and geochemical                     |   |          | —   |   |        |   | —   |          |   |   | —   |   |   |   | —   |   |   |   | —   |   |
| Property acquisition costs                      |   |          | 168,284             |   |        |   | —   |          |   |   | —   |   |   |   | —   |   |   |   | 168,284 |   |
| Trenching and drilling                          |   |          | —   |   |        |   | —   |          |   |   | —   |   |   |   | —   |   |   |   | —   |   |
| Recoveries                                      |   |          | (25,408             | )      |        |   | —   |          |   |   | —   |   |   |   | —   |   |   |   | (25,408 | ) |
| Foreign exchange translation                    |   |          | (1,037,832          | )      |        |   | (513,491            | )             |   |   | (244,842            | )      |   |   | (137,449            | ) |   |   | (1,933,614 | ) |
|                                            |   |          | 2,026,711           |   |        |   | (425,984            | )             |   |   | (227,104            | )      |   |   | (131,461            | ) |   |   | 1,242,162 |   |
|                                            |   |          | 26,061,442          |   |        |   | 12,028,270          |          |   |   | 5,735,611           |   |   |   | 3,219,697           |   |   |   | 47,045,020 |   |
| Write-offs                                      |   |          | —   |   |        |   | (124,717            | )             |   |   | —   |   |   |   | —   |   |   |   | (124,717 | ) |
| Balance, August 31, 2017                        |   | $             | 26,061,442          |   |        | $      | 11,903,553          |          |   | $      | 5,735,611           |   |   | $      | 3,219,697           |   |   | $ | 46,920,303 |   |
| Exploration expenditures:                       |   |          |                |   |        |   |                |          |   |   |                |   |   |   |                |   |   |   |   |   |
| Camp, field supplies and travel                 |   |          | 237,264             |   |        |   | 39,462              |          |   |   | 4,494               |   |   |   | —   |   |   |   | 281,220 |   |
| License fees and exploration and field overhead |   |          | 687,004             |   |        |   | 115,597             |          |   |   | —   |   |   |   | —   |   |   |   | 802,601 |   |
| Geological consulting and field wages           |   |          | 191,327             |   |        |   | —   |          |   |   | —   |   |   |   | —   |   |   |   | 191,327 |   |
| Geophysical and geochemical                     |   |          | —   |   |        |   | —   |          |   |   | —   |   |   |   | —   |   |   |   | —   |   |
| Property acquisition costs                      |   |          | —   |   |        |   | —   |          |   |   | —   |   |   |   | —   |   |   |   | —   |   |
| Trenching and drilling                          |   |          | 14,080              |   |        |   | —   |          |   |   | —   |   |   |   | —   |   |   |   | 14,080 |   |
| Recoveries                                      |   |          | —   |   |        |   | —   |          |   |   | —   |   |   |   | —   |   |   |   | —   |   |
| Foreign exchange translation                    |   |          | 946,218             |   |        |   | 432,029             |          |   |   | 208,156             |   |   |   | 116,920             |   |   |   | 1,703,323 |   |
|                                            |   |          | 2,075,893           |   |        |   | 587,088             |          |   |   | 212,650             |   |   |   | 116,920             |   |   |   | 2,992,551 |   |
|                                            |   |          | 28,137,335          |   |        |   | 12,490,641          |          |   |   | 5,948,261           |   |   |   | 3,336,617           |   |   |   | 49,912,854 |   |
| Write-offs                                      |   |          | —   |   |        |   | —   |          |   |   | —   |   |   |   | —   |   |   |   | —   |   |
| Balance, August 31, 2018                        |   | $             | 28,137,335          |   |        | $      | 12,490,641          |          |   | $      | 5,948,261           |   |   | $      | 3,336,617           |   |   | $ | 49,912,854 |   |

 

 

 

** **

** **

23

**Tanzanian Royalty Exploration Corporation**

**Notes to the Consolidated Financial Statements**

**For the Years Ended August 31, 2018 and 2017**

**(Expressed in Canadian dollars)**

****
| **4.** |  | **Mineral Properties and Deferred Exploration (continued)** |
|--------|--|-------------------------------------------------------------|

** **

**(a) Buckreef Gold Project:**

 

On December 21, 2010, the Company announced it was the successfulbidder for the Buckreef Gold Mine Re-development Project in northern Tanzania (the “Buckreef Project”). Pursuant tothe agreement dated December 16, 2010, the Company paid US$3,000,000 to the State Mining Company (“Stamico”). On October25, 2011, a Definitive Joint Venture Agreement was entered into with Stamico for the development of the Buckreef Gold Project.Through its wholly-owned subsidiary, Tanzam, the Company holds a 55% interest in the joint venture company, Buckreef Gold CompanyLimited, with Stamico holding the remaining 45%.

** **

TheCompany has 100% control over all aspects of the joint venture. In accordance with the joint venture agreement, the Company hasto arrange financing, incur expenditures, make all decisions and operate the mine in the future. The Company’s obligationsand commitments include completing a preliminary economic assessment, feasibility study and mine development. Stamico’s involvementis to contribute the licences and rights to the property and receive a 45% interest in Buckreef Project. 

 

The joint venture agreement contains anobligation clause regarding the commissioning date for the plant. The clause becomes effective only in the event the property isnot brought into production before a specified future date which was originally estimated to be in December 2015. The Company shallbe entitled to extend the date for one additional year:  

    
| i) |  | for the extension year, on payment to Stamico of US$500,000; |
|----|--|--------------------------------------------------------------|
| ii) |  | for the second extension year, on payment to Stamico of US$625,000; and |
|-----|--|-------------------------------------------------------------------------|
| iii) |  | for each subsequent extension year, on payment to Stamico of US$750,000. |
|------|--|--------------------------------------------------------------------------|

 

The Company has received a request letter from Stamico regardingthe status of the penalty payment and has responded that no penalty is due at this time. The Company has received a subsequentletter from Stamico regarding request for payment. It remains the Company’s position that no penalty is due at this time,but the Company and Stamico have been engaged in settlement discussions to resolve this issue, and a payment of $172,330 has beenmade in connection with the settlement discussions to be applied towards the amount owing with the remainder to be paid out ofproceeds of production.

 

TheCompany has recognized a non-controlling interest (NCI) in respect of Stamico’s 45% interest in the consolidated financialstatements based on the initial payment by the Company to Stamico and will be adjusted based on annual exploration and relatedexpenditures. Stamico has a free carried interest and does not contribute to exploration expenses.

 

Thereis a supervisory board made up of 4 directors of Tanzam and 3 directors of Stamico, whom are updated with periodic reports andreview major decisions. Amounts paid to Stamico and subsequent expenditures on the property are capitalized to mineral propertiesor inventory for costs directly related to the extraction and processing of ore and reported under Buckreef Gold Company Limited.

** **

24

**Tanzanian Royalty Exploration Corporation**

**Notes to the Consolidated Financial Statements**

**For the Years Ended August 31, 2018 and 2017**

**(Expressed in Canadian dollars)**

****
| **4.** |  | **Mineral Properties and Deferred Exploration (continued)** |
|--------|--|-------------------------------------------------------------|

 

**(b) Kigosi:**

 

The Kigosi Project is principally located within the Kigosi GameReserve controlled area. Through prospecting and mining option agreements, the Company has options to acquire interests in severalKigosi prospecting licenses (the “Kigosi Mining License”). The Company has an agreement with Stamico providing Stamicoa 15% carried interest in the Kigosi Project.

 

The Kigosi Mining License was granted by the Ministry of Energyand Minerals of Tanzania to Tanzam, (wholly owned subsidiary of Tanzanian Royalty). The official signing ceremony of the KigosiMining License was held in October 2013 and was attended by the Company and Ministry for Energy and Minerals representatives. Thearea remains subject to a Game Reserve Declaration Order. Upon repeal or amendment of that order by degazzeting the respectivelicense by the Tanzanian government, the Company will be legally entitled to exercise its rights under the Mineral Rights and MiningLicence.

 

During the year ended August 31, 2018, the Company decided to abandoncertain licenses within the Kigosi project as they come up for renewal, which had a carrying value of $nil., as such, a write offof $nil was taken for these licenses related to the property (year ended August 31, 2017 - $124,717).

 

**(c) Itetemia Project:**

 

Through prospecting and mining option agreements, the Company hasoptions to acquire interests in several ltetemia property prospecting licenses. The licenses are held by the Company; through theCompany's subsidiaries, Tancan or Tanzam. In the case of one prospecting license, Tancan acquired its interest pursuant to theStamico Venture Agreement dated July 12, 1994, as amended June 18, 2001, July 2005, and October 13, 2008.

 

Stamico retains a 2% royalty interest as well as a right to earnback an additional 20% interest in the prospecting license by meeting 20% of the costs required to place the property into production.The Company retains the right to purchase one-half of Stamico's 2% royalty interest in exchange for US$1,000,000.

 

The Company is required to pay Stamico an annual option fee of US$25,000per annum until commercial production.

 

During the year ended August 31, 2018, the Company did not abandonany prospecting licenses in the area and no write off was recorded (year ended August 31, 2017 - $nil).

 

**(d) Luhala Project:**

** **

The Company has selected a consultant to prepare the resource reportfor the Luhala Project in anticipation of filing for a Mining License for development of the site. Once funds are available thecontract to engage the consultant to carry out the development work will be initiated.

** **

During the year ended August 31, 2018, the Company did not abandonany licenses in the area and no write off was taken in this area (year ended August 31, 2017 - $nil).

 

25

**Tanzanian Royalty Exploration Corporation**

**Notes to the Consolidated Financial Statements**

**For the Years Ended August 31, 2018 and 2017**

**(Expressed in Canadian dollars)**

| **5.** |  | **Property, plant and equipment** |
|--------|--|-----------------------------------|

|                     |   | Drilling equipment |                |   | Automotive |   |                | Computer Equipment |   |   | Machinery and equipment |   |   | Leasehold improvements |                |   | Heap leach  pads |   |                | Construction- in-progress * |   |   | Total               |   |
|--------------------------|--------|--------------------|---------------------|--------|------------|--------|---------------------|--------------------|--------|--------|-------------------------|--------|--------|------------------------|---------------------|--------|----------------------------|--------|---------------------|-----------------------------|--------|--------|---------------------|--------|
| Cost                     |   |               |                |   |       |   |                |               |   |   |                    |   |   |                   |                |   |                       |   |                |                        |   |   |                |   |   |   |   |   |   |   |   |   |
| As at September 1, 2016  |   | $                  | 464,487             |   |       | $      | 191,368             |               |   | $      | 99,636                  |   |   | $                      | 1,705,959           |   |                       | $      | 100,328             |                        |   | $      | 1,496,078           |   |   | $ | 1,379,012 |   |   | $ | 5,436,868 |   |
| Disposals                |   |               | —   |   |       |   | (47,967             | )                  |   |   | (32,462                 | )      |   |                   | (81,990             | )      |                       |   | —   |                        |   |   | —   |   |   |   | —   |   |   |   | (162,419 | ) |
| Foreign exchange         |   |               | (19,662             | )      |       |   | (7,943              | )                  |   |   | (4,079                  | )      |   |                   | (71,028             | )      |                       |   | (4,215              | )                           |   |   | (64,262             | )      |   |   | (62,155 | ) |   |   | (233,344 | ) |
| As at August 31, 2017    |   | $                  | 444,825             |   |       | $      | 135,458             |               |   | $      | 63,095                  |   |   | $                      | 1,552,941           |   |                       | $      | 96,113              |                        |   | $      | 1,431,816           |   |   | $ | 1,316,857 |   |   | $ | 5,041,105 |   |
| Additions                |   |               | —   |   |       |   | —   |               |   |   | 3,731                   |   |   |                   | —   |   |                       |   | —   |                        |   |   | —   |   |   |   | 3,345 |   |   |   | 7,076 |   |
| Disposals                |   |               | (462,455            | )      |       |   | (125,595            | )                  |   |   | (3,484                  | )      |   |                   | (310,725            | )      |                       |   | —   |                        |   |   | —   |   |   |   | —   |   |   |   | (902,259 | ) |
| Foreign exchange         |   |               | 17,630              |   |       |   | 4,920               |               |   |   | 2,628                   |   |   |                   | 58,505              |   |                       |   | 3,719               |                        |   |   | 59,035              |   |   |   | 61,767 |   |   |   | 208,204 |   |
| As at August 31, 2018    |   | $                  | —   |   |       | $      | 14,783              |               |   | $      | 65,970                  |   |   | $                      | 1,300,721           |   |                       | $      | 99,832              |                        |   | $      | 1,490,851           |   |   | $ | 1,381,969 |   |   | $ | 4,354,126 |   |
|                     |   |               |                |   |       |   |                |               |   |   |                    |   |   |                   |                |   |                       |   |                |                        |   |   |                |   |   |   |   |   |   |   |   |   |
| Accumulated depreciation |   |               |                |   |       |   |                |               |   |   |                    |   |   |                   |                |   |                       |   |                |                        |   |   |                |   |   |   |   |   |   |   |   |   |
| As at September 1, 2016  |   | $                  | 288,172             |   |       | $      | 167,827             |               |   | $      | 93,205                  |   |   | $                      | 1,317,633           |   |                       | $      | 66,481              |                        |   | $      | 453,182             |   |   | $ | —   |   |   | $ | 2,386,500 |   |
| Depreciation expense     |   |               | 11,754              |   |       |   | 3,062               |               |   |   | 8,728                   |   |   |                   | 87,072              |   |                       |   | 7,036               |                        |   |   | 304,331             |   |   |   | —   |   |   |   | 421,983 |   |
| Disposals                |   |               | —   |   |       |   | (35,233             | )                  |   |   | (49,672                 | )      |   |                   | (65,741             | )      |                       |   | —   |                        |   |   | —   |   |   |   | —   |   |   |   | (150,646 | ) |
| Foreign exchange         |   |               | (12,626             | )      |       |   | (7,087              | )                  |   |   | (8,431                  | )      |   |                   | (60,080             | )      |                       |   | (3,217              | )                           |   |   | (35,988             | )      |   |   | —   |   |   |   | (127,429 | ) |
| As at August 31, 2017    |   | $                  | 287,300             |   |       | $      | 128,569             |               |   | $      | 43,830                  |   |   | $                      | 1,278,884           |   |                       | $      | 70,300              |                        |   | $      | 721,525             |   |   | $ | —   |   |   | $ | 2,530,408 |   |
| Depreciation expense     |   |               | 10,502              |   |       |   | 54                  |               |   |   | 5,757                   |   |   |                   | 60,573              |   |                       |   | 5,629               |                        |   |   | 304,330             |   |   |   | —   |   |   |   | 386,845 |   |
| Disposals                |   |               | (308,660            | )      |       |   | (118,667            | )                  |   |   | (2,710                  | )      |   |                   | (245,340            | )      |                       |   | —   |                        |   |   | —   |   |   |   | —   |   |   |   | (675,377 | ) |
| Foreign exchange         |   |               | 10,858              |   |       |   | 4,596               |               |   |   | 2,034                   |   |   |                   | 49,114              |   |                       |   | 2,830               |                        |   |   | 42,839              |   |   |   | —   |   |   |   | 112,271 |   |
| As at August 31, 2018    |   | $                  | —   |   |       | $      | 14,552              |               |   | $      | 48,911                  |   |   | $                      | 1,143,231           |   |                       | $      | 78,759              |                        |   | $      | 1,068,694           |   |   | $ | —   |   |   | $ | 2,354,147 |   |
|                     |   |               |                |   |       |   |                |               |   |   |                    |   |   |                   |                |   |                       |   |                |                        |   |   |                |   |   |   |   |   |   |   |   |   |
| Net book value           |   |               |                |   |       |   |                |               |   |   |                    |   |   |                   |                |   |                       |   |                |                        |   |   |                |   |   |   |   |   |   |   |   |   |
| As at August 31, 2016    |   | $                  | 176,315             |   |       | $      | 23,541              |               |   | $      | 6,431                   |   |   | $                      | 388,326             |   |                       | $      | 33,847              |                        |   | $      | 1,042,896           |   |   | $ | 1,379,012 |   |   | $ | 3,050,368 |   |
| As at August 31, 2017    |   | $                  | 157,525             |   |       | $      | 6,889               |               |   | $      | 19,265                  |   |   | $                      | 274,057             |   |                       | $      | 25,813              |                        |   | $      | 710,291             |   |   | $ | 1,316,857 |   |   | $ | 2,510,697 |   |
| As at August 31, 2018    |   | $                  | —   |   |       | $      | 231                 |               |   | $      | 17,059                  |   |   | $                      | 157,490             |   |                       | $      | 21,073              |                        |   | $      | 422,157             |   |   | $ | 1,381,969 |   |   | $ | 1,999,979 |   |

 

* Construction in progress represents construction of the Company’s processingplant.

 

26

**Tanzanian Royalty Exploration Corporation**

**Notes to the Consolidated Financial Statements**

**For the Years Ended August 31, 2018 and 2017**

**(Expressed in Canadian dollars)**

| **5.** |  | **Property, plant and equipment (continued)** |
|--------|--|-----------------------------------------------|

 

**Sale-leaseback transaction:**

During the year ended August 31, 2015, the Company sold automotiveand mining equipment for proceeds of $577,505 to various officers and directors. Pursuant to the agreements, the Company enteredinto 1-year lease agreements on the automotive and mining equipment with effective dates in May 2015. Per the terms of the leases,the Company agrees to purchase back the automotive and mining equipment at the end of the lease periods for a lump sum paymentof USD$74,848. The Company has classified and is accounting for the leases as finance leases. The initial base payments vary betweenthe agreements and range between $3,500 and $8,000 payable monthly. The effective interest rate on the finance lease obligationsoutstanding is between 20% and 30%. The gain on sale of $250,108 was deferred and is being recognized on a straight-line basisover the lease term as a reduction in amortization expense. The total deferred gain has been presented as a reduction of the financeasset. Under the lease, the Company is responsible for the costs of utilities, insurance, taxes and maintenance expenses.

 

**Settlement through shares:**

On December 1, 2016, the Company entered into settlement agreementswhereby a total of $343,623 in principal and accrued interest was settled through the issuance of 458,329 shares issued atan average price of $0.63 per share for total issued value of $288,747, resulting in a gain on settlement of debt of $54,876 forthe year ended August 31, 2017.

 

**Outstanding balance:**

As at August 31, 2018, the remaining balance outstanding under financelease obligations after the settlements described above is $67,819 (August 31, 2017 - $56,631) and is repayable within 1 year,as such, the finance lease obligation is classified as a current liability.

 

Interest expense for the year ended August 31, 2018 related to theleases amounted to $10,034 (2017 - $24,362), and is recorded in the statement of comprehensive loss.

 

27

**Tanzanian Royalty Exploration Corporation**

**Notes to the Consolidated Financial Statements**

**For the Years Ended August 31, 2018 and 2017**

**(Expressed in Canadian dollars)**

| **** |
|------|

| **6.** |  | **Capital Stock** |
|--------|--|-------------------|

 

***Share Capital***

The Company’s Restated Articles of Incorporation authorizethe Company to issue an unlimited number of common shares. On December 8, 2014, the Board resolved that the Company authorize forissuance up to a maximum of 155,000,000 common shares, subject to further resolutions of the Company’s board of directors.

 

|                                                                    |   | Number |                |   | Amount ($) |   |
|-------------------------------------------------------------------------|--------|--------|---------------------|--------|------------|--------|
| Balance at September 1, 2016                                            |   |   | 109,068,492         |   |       | $      | 122,380,723 |   |
| Issued for private placements, net of share issue costs                 |   |   | 7,197,543           |   |       |   | 5,589,501 |   |
| Warrants issued on private placement                                    |   |   | —   |   |       |   | (6,592,000 | ) |
| Agent warrants issued on private placement                              |   |   | —   |   |       |   | (92,000 | ) |
| Issued pursuant to Restricted Share Unit Plan                           |   |   | 695,991             |   |       |   | 1,040,990 |   |
| Shares issued for interest on gold loans                                |   |   | 814,089             |   |       |   | 542,447 |   |
| Finders fees on convertible loans                                       |   |   | 132,577             |   |       |   | 92,805 |   |
| Shares issued for settlement of leases (Note 5)                         |   |   | 458,329             |   |       |   | 288,747 |   |
| Shares issued for settlement of amounts due to related parties (Note 9) |   |   | 187,321             |   |       |   | 131,998 |   |
| Shares issued for settlement of convertible loans (Note 23)             |   |   | 83,333              |   |       |   | 49,166 |   |
| Exercise of warrants                                                    |   |   | 3,146,944           |   |       |   | 1,742,000 |   |
| Balance at August 31, 2017                                              |   |   | 121,784,619         |   |       | $      | 125,174,377 |   |
| Issued pursuant to Restricted Share Unit Plan                           |   |   | 385,147             |   |       |   | 188,722 |   |
| Shares issued for interest on gold and convertible loans                |   |   | 1,172,128           |   |       |   | 612,900 |   |
| Finders fees on convertible and gold bullion loans                      |   |   | 466,504             |   |       |   | 234,752 |   |
| Shares issued for settlement of convertible loans (Note 21 and 23)      |   |   | 1,354,405           |   |       |   | 792,381 |   |
| Balance at August 31, 2018                                              |   |   | 125,162,803         |   |       | $      | 127,003,132 |   |

** **

**Activity during the yearended August 31, 2018:**

** **

During the year ended August 31, 2018, 385,147 shares were issuedpursuant to the Company’s Restricted Share Unit Plan at an average price of $0.49 for total issued value $188,722.

** **

During the year ended August 31, 2018, 1,172,128 shares were issuedat an average price of $0.52 per share for total issued value of $612,900for payment of interest of $425,717, resulting in a loss of $187,183, in connection with the gold loans and convertible loans (seeNotes 21 and 23 for details).

 

During the year ended August 31, 2018,the Company issued 466,504 common shares at a price of $0.50 per share for total issued value of $234,752 for payment of findersfees in connection with the convertible loans (see Note 23 for details).

 

28

**Tanzanian Royalty Exploration Corporation**

**Notes to the Consolidated Financial Statements**

**For the Years Ended August 31, 2018 and 2017**

**(Expressed in Canadian dollars)**

| **6.** |  | **Capital Stock (continued)** |
|--------|--|-------------------------------|

** **

**Activity during the yearended August 31, 2017:**

** **

On September 1, 2016, the Company closed the first tranche of aUS$5 million private placement of securities with Crede CG III, Ltd.

 

In the initial round of financing, the Company privately placed1,840,400 shares of its common stock and warrants for US$1.25 million. The common stock issued in the first tranche of the financing,which closed on September 1, 2016, was priced at US$0.6792 per share. The investor also received five-year warrants to purchase1,840,400 shares of common stock with an exercise price of US$0.8291 per share. If the market price of the shares was lower thanthe exercise price the warrants allow the holder to exercise the warrants into a variable number of common shares of the Companydetermined based on a fixed monetary value and the Company’s share price for no consideration. As the number of shares wasvariable, the warrants were recognized as a derivative liability with a fair value of $1,742,000 which was determined based onthe fixed monetary value. In addition, the Company paid an 8% agent fee on gross proceeds and a 5% finders’ fee on grossproceeds and issued to the agents 73,616 agent warrants, each exercisable to acquire one common share at a price of US$0.8718 fora period of five years.

On September 26, 2016, the Company closed the second tranche of the $5 million private placement of securities with Crede CG III,Ltd.

 

In the second round of the financing, the Company privately placedconvertible notes and warrants for US$3.75 million. The convertible notes were issued in the principal amount of US$3.75 million,carried a coupon of 2.0% and matured on September 26, 2046. The Company immediately exercised its right to cause the conversionof the convertible notes, resulting in the cancellation of the notes and the issuance of 5,357,143 shares of common stock to theinvestor. The investor also received five-year warrants to purchase 4,017,857 shares of common stock at an exercise price of US$1.10per share. If the market price of the share is lower than the exercise price the warrants allow the holder to exercise into a variablenumber of common shares of the Company determined based on a fixed monetary value and the Company’s share price for no consideration.As the number of shares was variable, the warrants were recognized as a derivative liability with a fair value of $4,850,000 whichwas determined based on the fixed monetary value. In addition, the Company paid an 8% agent fee on gross proceeds and the Companyissued to the agents 214,285 agent warrants, each exercisable to acquire one common share at a price of US$0.9515 for a periodof five years.

 

During the year ended August 31, 2017, 695,991 shares were issuedpursuant to the Company’s Restricted Share Unit Plan at an average price of $1.50 for total issued value of $1,040,990.

 

During the year ended August 31, 2017, 814,089 shares were issuedat an average price of $0.67 per share for total issued value of $542,447for payment of interest in connection with the gold loans and convertible loans (see Notes 21 and 23 for details).

 

On April 27,2017, the Company issued 132,577 common shares at a price of $0.70 per share for total issued value of $92,805 for payment of findersfees in connection with the gold bullion loan (see Note 21 for details).

 

29

**Tanzanian Royalty Exploration Corporation**

**Notes to the Consolidated Financial Statements**

**For the Years Ended August 31, 2018 and 2017**

**(Expressed in Canadian dollars)**

| **6.** |  | **Capital Stock (continued)** |
|--------|--|-------------------------------|

 

**Warrant issuances:**

** **

**Activity during the yearended August 31, 2018:**

 

There were no warrant issuances during the year ended August 31,2018.

 

**Activity during the yearended August 31, 2017:**

 

On September 1, 2016 the Company issued 1,840,400 share purchasewarrants in connection with the first tranche of its private placement financing as described above. Each warrant entitles theholder to acquire a common share at a price of US$0.8291. These warrants expire on September 1, 2021.

 

Each warrant is convertible into a variable number of common sharesequal in value to a fixed monetary amount for $Nil consideration if the Company’s share price is below exercise price. Asthe number of shares to be received on exercise is variable, the warrants are initially recognized as derivative liabilities atfair value. Subsequent changes in fair value to the date of exercise are recognized in the loss for the year.

 

The warrants had a fair value of $1,742,000 on issuance, which wasdetermined based on the fixed monetary amount.

 

The Company also issued 73,616 agent warrants in connection withthe first tranche of its private placement financing. Each agent warrant entitles the holder to acquire a common share at a priceof US$0.8718. These warrants expire on September 1, 2021.

 

The warrants had a fair value of $22,000 on issuance, which wasestimated using the Black-Scholes option pricing model and recorded as a transaction cost. The following assumptions were used:

 

| Risk-free interest rate    |   | 0.91% |   | Expected volatility |   | 82%     |
|----------------------------|--------|-------|--------|---------------------|--------|---------|
| Dividend yield   |   | nil   |   | Expected life       |   | 5 years |

 

On September 26, 2016 the Company issued 4,017,857 share purchasewarrants in connection with the second tranche of its private placement financing as described above. Each warrant entitles theholder to acquire a common share at a price of US$1.10. These warrants expire on September 26, 2021.

 

Each warrant is convertible into a variable number of common sharesequal in value to a fixed monetary amount for $Nil consideration if the Company’s share price is below exercise price. Asthe number of shares to be received on exercise is variable, the warrants are initially recognized as derivative liabilities atfair value. Subsequent changes in fair value to the date of exercise are recognized in the loss for the year.

 

The warrants had a fair value of $4,850,000 on issuance, which wasdetermined based on the fixed monetary amount.

** **

The Company also issued 214,285 agent warrants in connection withthe second tranche of its private placement financing. Each agent warrant entitles the holder to acquire a common share at a priceof US$0.9515. These warrants expire on September 26, 2021.

 

The warrants had a fair value of $70,000 on issuance, which wasestimated using the Black-Scholes option pricing model and recorded as a transaction cost. The following assumptions were used:

 

| Risk-free interest rate    |   | 0.87% |   | Expected volatility |   | 84%     |
|----------------------------|--------|-------|--------|---------------------|--------|---------|
| Dividend yield   |   | nil   |   | Expected life       |   | 5 years |

** **

30

**Tanzanian Royalty Exploration Corporation**

**Notes to the Consolidated Financial Statements**

**For the Years Ended August 31, 2018 and 2017**

**(Expressed in Canadian dollars)**

****
| **6.** |  | **Capital Stock (continued)** |
|--------|--|-------------------------------|

** **

**Warrants and Compensation Options outstanding:**

** **

At August 31, 2018, the following warrants and compensationoptions were outstanding:

|                                                            |   |                          |   |           |   |               |
|-----------------------------------------------------------------|--------|-------------------------------|--------|----------------|--------|--------------------|
|                                                            |   | Number of  Warrants |   | Exercise price |   | Expiry date        |
| Private placement financing agent warrants - September 26, 2016 |   | 214,285                       |   | USD$0.9515     |   | September 26, 2021 |
| Private placement financing - September 26, 2016                |   | 4,017,857                     |   | USD$1.10       |   | September 26, 2021 |
| Private placement financing agent warrants - September 1, 2016  |   | 73,616                        |   | USD$0.8718     |   | September 1, 2021  |
| Convertible senior note financing - December 9, 2014            |   | 257,143                       |   | USD$0.98       |   | December 9, 2019   |
|                                                            |   |                          |   |           |   |               |
| Balance, August 31,2018                                         |   | 4,562,901                     |   | -              |   | -                  |

** **

Warrant transactions are summarized as follows:

|                                         |   |               |       |   |                            |   |
|----------------------------------------------|--------|--------------------|------------|--------|---------------------------------|--------|
|                                         |   | Number of Warrants |       |   | Weighted Average Exercise Price |   |
| Balance, August 31, 2016                     |   |               | 657,143    |   |                            | $      | 1.29 |   |
| Warrants granted                             |   |               | 5,858,257  |   |                            |   | 1.37 |   |
| Agent warrants granted                       |   |               | 287,901    |   |                            |   | 1.25 |   |
| Expired warrants                             |   |               | (400,000   | )      |                            |   | (1.30 | ) |
| Warrants exercised                           |   |               | (1,840,400 | )      |                            |   | (1.12 | ) |
| Balance, August 31, 2017 and August 31, 2018 |   |               | 4,562,901  |   |                            | $      | 1.36 |   |

** **

The outstanding warrants have weighted average price of US$1.08and weighted average remaining contractual life of 2.97 years.

 

31

**Tanzanian Royalty Exploration Corporation**

**Notes to the Consolidated Financial Statements**

**For the Years Ended August 31, 2018 and 2017**

**(Expressed in Canadian dollars)**

| **6.** |  | **Capital Stock (continued)** |
|--------|--|-------------------------------|

 

**Warrant liability:**

 

Foreign currency denominated warrants (not including compensationwarrants), are considered a derivative as they are not indexed solely to the entity’s own stock.

 

Prior to September 1, 2016 warrant liability consists of warrantsthat were originally issued in private placements with exercise prices denominated in a currency other than the Company’sfunctional currency, which at that time was the Canadian dollar. During the period that the Canadian dollar was the Company’sfunctional currency, warrants that were exercisable in US dollars was classified as derivative liabilities. Upon the change infunctional currency to the US dollar on September 1, 2016, these derivative liabilities were no longer classified as derivativesand an amount of $215,000 was reclassified to reserve for warrants.

 

The warrant liability at August 31, 2018 relates to the 4,017,857warrants that which were issued as part of the September 26, 2016 private placement and are exercisable at the option of the holderinto common shares that have a current market value of approximately $4,850,000, for no consideration. This cashless exercise rightis only in effect if the current market price is less than the exercise price of US$1.10.

 

The table below shows the activity for warrant liability for theyear ended August 31, 2018 and year ended August 31, 2017:

|                                              |   |            |                |   |            |   |
|---------------------------------------------------|--------|-----------------|---------------------|--------|-----------------|--------|
| Year ended                                        |   | August 31, 2018 |                |   | August 31, 2017 |   |
| Balance at beginning of year                      |   | $               | 4,850,000           |   |            | $      | 215,000 |   |
| Warrants issued                                   |   |            | —   |   |            |   | 6,592,000 |   |
| Warrants exercised                                |   |            | —   |   |            |   | (1,742,000 | ) |
| Reclassification on change of functional currency |   |            | —   |   |            |   | (215,000 | ) |
| Balance at end of year                            |   | $               | 4,850,000           |   |            | $      | 4,850,000 |   |

** **

** **

32

**Tanzanian Royalty Exploration Corporation**

**Notes to the Consolidated Financial Statements**

**For the Years Ended August 31, 2018 and 2017**

**(Expressed in Canadian dollars)**

****
| **6.** |  | **Capital Stock (continued)** |
|--------|--|-------------------------------|

** **

**Restricted share units:**

The Restricted Stock Unit Plan (the “RSU Plan”) is intendedto enhance the Company’s and its affiliates’ abilities to attract and retain highly qualified officers, directors,key employees and other persons, and to motivate such officers, directors, key employees and other persons to serve the Companyand its affiliates and to expend maximum effort to improve the business results and earnings of the Company, by providing to suchpersons an opportunity to acquire or increase a direct proprietary interest in the operations and future success of the Company.To this end, the RSU Plan provides for the grant of restricted stock units (RSUs). Each RSU represents an entitlement to one commonshare of the Company, upon vesting. As of November 29, 2016, the Board resolved to amend the suspension to 800,000 of the 2,500,000common shares previously authorized for issuance under the RSU Plan, such that a maximum of 2,500,000 shares shall be authorizedfor issuance under the RSU Plan, until such suspension may be lifted or further amended. RSU awards may, but need not, be subjectto performance incentives to reward attainment of annual or long-term performance goals in accordance with the terms of the RSUPlan. Any such performance goals are specified in the award agreement.

 

The Board of Directors implemented the RSU Plan under which officers,directors, employees and others are compensated for their services to the Company. Annual compensation for outside directors is$68,750 per year, plus $6,875 per year for serving on Committees, plus $3,437 per year for serving as Chair of a Committee. OnApril 11, 2012, the board approved that at the election of each individual director, up to one half of the annual compensationmay be received in cash, paid quarterly. The remainder of the director’s annual compensation (at least one half, and up to100%) will be awarded as RSUs in accordance with the terms of the RSU Plan and shall vest within a minimum of one (1) year anda maximum of three (3) years, at the election of the director, subject to the conditions of the RSU Plan with respect to earliervesting. In 2012, the outside directors had the option to elect to receive 100% of their compensation in RSUs. If 100% compensationin RSUs is elected, the compensation on which the number of RSUs granted in excess of the required one half shall be increasedby 20%.

 

The Company uses the fair value method to recognize the obligationand compensation expense associated with the RSU’s. The fair value of RSU’s issued is determined on the grant datebased on the market price of the common shares on the grant date multiplied by the number of RSUs granted. The fair value is expensedover the vesting term. Upon redemption of the RSU the carrying amount is recorded as an increase in common share capital and areduction in the share based payment reserve.

 

The Company has a RSU Plan which allows the Company to issue RSU’swhich are redeemable for the issue of common shares at prevailing market prices on the date of the RSU grant. The aggregate numberof RSU’s outstanding is limited to a maximum of ten percent of the outstanding common shares. The Company has granted RSU’sto officers and key employees.

 

Of the 2,500,000 shares authorized for issuance under the RSU Plan,2,500,000 (August 31, 2017 - 2,114,853) shares have been issued as at August 31, 2018.

 

Total share-based payment expense related to the issue of RSUs was$49,981 for the year ended August 31, 2018 (2017 - $262,931). The amount capitalized to mineral properties for the year ended August31, 2018 was $nil (2017 - $16,497). The amount charged to directors fees for the year ended August 31, 2018 was $nil (2017 - $75,200).During the year ended August 31, 2018, RSUs were forfeited resulting in $65,098 (2017 - $123,571) in a reduction in share-basedcompensation expense related to the reversal of the expense related to forfeited RSUs.

 

33

**Tanzanian Royalty Exploration Corporation**

**Notes to the Consolidated Financial Statements**

**For the Years Ended August 31, 2018 and 2017**

**(Expressed in Canadian dollars)**

| **6.** |  | **Capital Stock (continued)** |
|--------|--|-------------------------------|

 

The following table summarizes changes in the number of RSUs outstanding:

 

|                       |   | Number of RSU’s |                |   | Weighted average fair value at issue date |   |
|----------------------------|--------|-----------------------|---------------------|--------|-------------------------------------------|--------|
| Balance, August 31, 2016   |   |                  | 1,275,591           |   |                                      | $      | 1.18 |   |
| Redeemed for common shares |   |                  | (695,991            | )      |                                      | $      | 1.50 |   |
| Forfeited/cancelled        |   |                  | (59,600             | )      |                                      | $      | 2.22 |   |
| Balance, August 31, 2017   |   |                  | 520,000             |   |                                      | $      | 0.49 |   |
| Redeemed for common shares |   |                  | (385,147            | )      |                                      | $      | 0.49 |   |
| Forfeited/cancelled        |   |                  | (134,853            | )      |                                      | $      | 0.49 |   |
| Balance, August 31, 2018   |   |                  | —   |   |                                      | $      | —   |   |

** **

**Stock options:**

** **

The Company has a stock option plan (the “Plan”) underwhich the Company may grant options to directors, officers, employees and consultants. The maximum number of common shares reservedfor issue under the Plan at any point in time may not exceed 10% of the number of shares issued and outstanding. The purpose ofthe Plan is to attract, retain and motivate directors, officers, employees, and certain third party service providers by providingthem with the opportunity to acquire a proprietary interest in the Company and benefit from its growth. Options granted under thePlan are non-assignable and vest over various terms up to 24 months from the date of grant. As at August 31, 2018, the Companyhad 5,084,280 (August 31, 2017 – 3,557,077) options available for issuance under the Plan.

 

The continuity of outstanding stock options for the years endedAugust 31, 2018 and 2017 is as follows:

 

|                            |   | Number of stock options |                |   | Weighted average exercise price per share $ |   |
|---------------------------------|--------|-------------------------|---------------------|--------|---------------------------------------------|--------|
| Balance – August 31, 2016 |   |                    | —   |   |                                        |   | —   |   |
| Granted (i)                     |   |                    | 3,750,000           |   |                                        |   | 0.71 |   |
| Balance – August 31, 2017 |   |                    | 3,750,000           |   |                                        |   | 0.71 |   |
| Cancelled (i)                   |   |                    | (3,750,000          | )      |                                        |   | (0.71 | ) |
| Re-issued (i)                   |   |                    | 3,750,000           |   |                                        |   | 0.40 |   |
| Granted (ii)                    |   |                    | 3,682,000           |   |                                        |   | 0.43 |   |
| Balance – August 31, 2018 |   |                    | 7,432,000           |   |                                        |   | 0.41 |   |

 
|  | (i) | On November 28, 2016, the Company granted 3,750,000 stock options to directors, officers and employeesof the Company. The options are exercisable at CAD$0.71 per share expiring on November 28, 2025. The resulting fair value of $2,133,000was estimated using the Black-Scholes option pricing model with the following assumptions: expected dividend yield of 0%; expectedvolatility of 84%; a risk-free interest rate of 0.95% and an expected average life of 9 years. Volatility and expected life werebased on historical experience. The options are subject to a vesting period whereby 1/3 of the options vest immediately, 1/3 veston September 1, 2017 with the remaining 1/3 vesting on September 1, 2018. |
|--|-----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

Share based payments based on the portion vested duringthe year ended August 31, 2018 amounted to $408,000 (2017 - $1,725,000).

 

34

**Tanzanian Royalty Exploration Corporation**

**Notes to the Consolidated Financial Statements**

**For the Years Ended August 31, 2018 and 2017**

**(Expressed in Canadian dollars)**

| **6.** |  | **Capital Stock (continued)** |
|--------|--|-------------------------------|

 

**Cancellation and re-issue of options:**

On October 11, 2017, the Company cancelledthe options originally issued on November 28, 2016 and re-issued the same number of options at an exercise price of CAD$0.40 pershare, with 1/3 of the options vesting immediately, 1/3 vesting on October 11, 2018 with the remaining 1/3 vesting on October11, 2019. The options expire on October 11, 2026.

 

The new options issued were accounted for as modificationsin accordance with IFRS 2, wherethe incremental value was recorded as additional cost measured by the difference between the fair value of the cancelled optionscalculated on the modification date and the value of thereissued options at the modification date.   The modification resulted in an increased value of $240,000. The amountis recognized over the vesting period of the reissued option.   Any remaining cost for the unvested cancelled optionsis recognized over the new vesting period.

 

Share based payments based on the portion vested duringthe year ended August 31, 2018 amounted to $240,000 (2017 - $nil).

** **
|  | (ii) | On September 29, 2017, the Company granted 3,582,000 stock options to directors, officers and employeesof the Company. The options are exercisable at CAD$0.43 per share expiring on September 29, 2026. The resulting fair value of $1,183,000was estimated using the Black-Scholes option pricing model with the following assumptions: expected dividend yield of 0%; expectedvolatility of 76%; a risk-free interest rate of 1.98% and an expected average life of 9 years. Volatility and expected life werebased on historical experience. The options are subject to a vesting period whereby 1/3 of the options vest immediately, 1/3 veston September 29, 2018 with the remaining 1/3 vesting on September 29, 2019. |
|--|------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

Share based payments based on the portion vested duringthe year ended August 31, 2018 amounted to $939,000 (2017 - $nil).

** **
|  | (iii) | On January 2, 2018, the Company granted 100,000 stock options to a consultant of the Company. Theoptions are exercisable at CAD$0.35 per share expiring on January 2, 2028. The resulting fair value of $31,000 was estimated usingthe Black-Scholes option pricing model with the following assumptions: expected dividend yield of 0%; expected volatility of 96%;a risk-free interest rate of 2.08% and an expected average life of 10 years. Volatility and expected life were based on historicalexperience. The options are subject to a vesting period whereby 1/4 of the options vest every three months through to January 2,2019. |
|--|-------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

Share based payments based on the portion vested duringthe year ended August 31, 2018 amounted to $27,000 (2017 - $nil).

** **

Options to purchase common shares carry exerciseprices and terms to maturity as follows:

 

|                   |   |              |   |        |   | Remaining          |
|------------------------|--------|-------------------|--------|-------------|--------|--------------------|
| **Exercise price (1)** |   | Number of options |   | Expiry      |   | contractual        |
| Outstanding $          |   | Outstanding       |   | Exercisable |   | date               |   | **life (years) (1)** |
| CAD0.35                |   | 100,000           |   | -           |   | January 2, 2028    |   | 9.34 |
| CAD0.40                |   | 3,750,000         |   | 1,250,000   |   | September 29, 2026 |   | 8.08 |
| CAD0.43                |   | 3,582,000         |   | 1,194,000   |   | October 11, 2026   |   | 8.12 |
| CAD0.41                |   | 7,432,000         |   | 2,444,000   |   |               |   | 8.11 |

 
|  | (1) | Total represents weighted average. |
|--|-----|------------------------------------|

|  |
|--|

 

35

**Tanzanian Royalty Exploration Corporation**

**Notes to the Consolidated Financial Statements**

**For the Years Ended August 31, 2018 and 2017**

**(Expressed in Canadian dollars)**

| **** |
|------|

| **7.** |  | **Reserve for warrants** |
|--------|--|--------------------------|

** **

| Year ended                                                                         |   | August 31, 2018 |                |   | August 31,

2017 |   |
|------------------------------------------------------------------------------------|--------|-----------------|---------------------|--------|------------------|--------|
| Balance at beginning of year                                                       |   | $               | 1,248,037           |   |             | $      | 941,037 |   |
| Agent warrants issued on private placement                                         |   |            | —   |   |             |   | 92,000 |   |
| Reversal of warrant liability upon change of functional currency  to USD |   |            | —   |   |             |   | 215,000 |   |
| Balance at end of year                                                             |   | $               | 1,248,037           |   |             | $      | 1,248,037 |   |

** **

****

| **** |
|------|

| **8.** |  | **Reserve for share based payments** |
|--------|--|--------------------------------------|

** **

| Year ended                                                                                    |   | August 31, 2018 |                |   | August 31,

2017 |   |
|-----------------------------------------------------------------------------------------------|--------|-----------------|---------------------|--------|------------------|--------|
| Balance at beginning of year                                                                  |   | $               | 7,674,233           |   |             | $      | 1,066,863 |   |
| Shares issued pursuant to RSU plan                                                            |   |            | (188,722            | )      |             |   | (1,040,990 | ) |
| Share based compensation – RSUs                                                         |   |            | 49,981              |   |             |   | 262,931 |   |
| Share based compensation – Stock options                                                |   |            | 1,614,000           |   |             |   | 1,725,000 |   |
| RSU forfeited                                                                                 |   |            | (65,098             | )      |             |   | (123,571 | ) |
| Reversal of derivative in gold bullion loan upon change of functional currency to USD         |   |            | —   |   |             |   | 5,051,000 |   |
| Reversal of derivative in gold    convertible loans upon change of functional currency to USD |   |            | —   |   |             |   | 108,000 |   |
| Conversion component of convertible loans                                                     |   |            | 310,000             |   |             |   | 625,000 |   |
| Balance at end of year                                                                        |   | $               | 9,394,394           |   |             | $      | 7,674,233 |   |

** **

****

| **** |
|------|

| **9.** |  | **Related party transactions and key management compensation** |
|--------|--|----------------------------------------------------------------|

 

Related parties include the Board of Directors and officers, closefamily members and enterprises that are controlled by these individuals as well as certain consultants performing similar functions.

 

(a) Tanzanian Royalty Exploration Corporation entered into thefollowing transactions with related parties:

 

| Year ended August 31, |   | Notes |   | 2018     |   | 2017 |    |
|-----------------------|--------|-------|--------|----------|--------|------|---------|
| Legal services        |   | (i)   |   | $Nil     |   | $    | 82,455  |   |
| Consulting            |   | (ii)  |   | $215,108 |   | $    | 203,274 |   |
| Consulting            |   | (iii) |   | $Nil     |   | $    | 172,330 |   |

** **

(i) The Company engages a legal firm for professional services inwhich one of the Company’s directors is a partner. During the year ended August 31, 2018, the legal expense charged by thefirm was $nil (2017 - $82,455). As at August 31, 2018, $335,940 remains payable (August 31, 2017 - $370,940).

 

(ii) During the year ended August 31, 2018, $215,108 (2017 - $203,274)was paid for heap leach construction consulting and website/data back-up services to companies controlled by individuals associatedwith the former CEO and current director.

 

(iii) During the year ended August 31, 2018, $nil (2017 - $172,330)was paid for grade control drilling, license fees and other consulting services to Stamico, the Company’s joint venture partneron the Buckreef Gold Project.

 

36

**Tanzanian Royalty Exploration Corporation**

**Notes to the Consolidated Financial Statements**

**For the Years Ended August 31, 2018 and 2017**

**(Expressed in Canadian dollars)**

| **9.** |  | **Related party transactions and key management compensation (continued)** |
|--------|--|----------------------------------------------------------------------------|

 

As at August 31, 2018, the Company has a receivable of $40,086 (August31, 2017 - $37,247) from an organization associated with the Company’s President and former CEO and current director andfrom current officers and directors.

 

During the year ended August 31, 2015, the Company sold automotiveand mining equipment in the amount of $243,805 to directors of the Company and $333,700 to the Company’s former CEO and currentdirector for total proceeds of $577,505 as described in Note 5. Pursuant to the agreements, the Company entered into 1-year leaseagreements on the automotive and mining equipment with effective dates in May 2015. Per the terms of the leases, the Company agreesto purchase back the automotive and mining equipment at the end of the lease periods for a lump sum payment of USD$74,848. Theinitial base payments vary between the agreements and range between $3,500 and $8,000 payable monthly. The effective interest rateon the capital lease obligation outstanding is between 20% and 30%.

 

On December 1, 2016, the Company entered into settlement agreementswhereby a total of $343,623 in principal and accrued interest arising from the lease agreements was settled through the issuanceof 458,329 shares issued at an average price of $0.63 per share for totalissued value of $288,747, resulting in a gain on settlement of debt of $54,876 for the year ended August 31, 2017.

 

As at August 31, 2018, the remaining balance outstanding under financelease obligations after the settlements described above is $67,819 (August 31, 2017 - $56,631) and is repayable within 1 year,as such, the finance lease obligation is classified as a current liability.

 

(b) Remuneration of Directors and key management personnel (beingthe Company’s Chief Executive Officer, Chief Financial Officer and Chief Operating Officer) of the Company was as follows:

 

| Year ended August 31, |   | 2018                                |    |   | 2017                               |   |
|-----------------------|--------|-------------------------------------|---------|--------|------------------------------------|--------|
|                  |   | **Fees, salaries and benefits (1)** |    |   | Share based payments (2), (3), (4) |   |   | Fees, salaries and benefits (1) |   |   | Share based payments (2), (3) |   |
| Management            |   | $                                   | 636,744 |   |                               | $      | 773,348 |   |   | $ | 525,102 |   |   | $ | 1,175,439 |   |
| Directors             |   |                                | 111,625 |   |                               |   | 414,000 |   |   |   | 111,625 |   |   |   | 673,200 |   |
| Total                 |   | $                                   | 748,369 |   |                               | $      | 1,187,348 |   |   | $ | 636,727 |   |   | $ | 1,848,639 |   |

 
| (1) |  | Salaries and benefits include director fees. The board of directors do not have employmentor service contracts with the Company. Directors are entitled to director fees and RSU’s for their services and officersare entitled to cash remuneration and RSU’s for their services. |
|-----|--|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (2) |  | Compensation shares may carry restrictive legends. |
|-----|--|----------------------------------------------------|
| (3) |  | All RSU share based compensation is based on the accounting expense recorded in theyear. |
|-----|--|------------------------------------------------------------------------------------------|
| (4) |  | All stock option share based compensation is based on the accounting expense recordedin the year. |
|-----|--|---------------------------------------------------------------------------------------------------|

 

As at August 31, 2018, included in trade and other payables is $863,000(August 31, 2017 - $638,000) due to these key management personnel with no specific terms of repayment.

 

The Company’s former CEO and current director provided variousloans to the Company totaling $133,632. On December 1, 2016, the Company entered into settlement agreements whereby the remainingbalance of $136,519 was settled through the issuance of 187,321 shares issued atan average price of $0.705 per share for total issued value of $131,998, resulting in a gain on settlement of debt of $4,521 forthe year ended August 31, 2017. As at August 31, 2018 $nil (August 31, 2017 - $nil) is outstanding. The balance is payableon demand, interest free, and unsecured.

 

37

**Tanzanian Royalty Exploration Corporation**

**Notes to the Consolidated Financial Statements**

**For the Years Ended August 31, 2018 and 2017**

**(Expressed in Canadian dollars)**

| **10.** |  | **Management of Capital** |
|---------|--|---------------------------|

 

The Company's objective when managing capital is to obtain adequatelevels of funding to support its exploration activities, to obtain corporate and administrative functions necessary to supportorganizational functioning, to obtain sufficient funding to further the identification and development of precious metals deposits,and to develop and construct low cost heap leach gold production mines.

 

The Company manages its capital structure and makes adjustmentsto it, based on the funds available to the Company, in order to support the acquisition, exploration and development of mineralproperties. The Board of Directors does not establish quantitative return on capital criteria for management, but rather relieson the expertise of the Company's management to sustain future development of the business. The Company defines capital to includeits shareholders’ equity. In order to carry out the planned exploration and pay for administrative costs, the Company willspend its existing working capital and raise additional amounts as needed. The Company will continue to assess new properties andseek to acquire an interest in additional properties if it feels there is sufficient geologic or economic potential and if it hasadequate financial resources to do so. Management reviews its capital management approach on an ongoing basis and believes thatthis approach, given the relative size of the Company, is reasonable. There were no changes in the Company's approach to capitalmanagement during the year ended August 31, 2018. The Company is not subject to externally imposed capital requirements.

 

The Company considers its capital to be shareholders’ equity,which is comprised of share capital, reserves, and deficit, which as at August 31, 2018 totaled $33,625,695 (August 31, 2017 -$35,353,718).

 

The Company raises capital, as necessary, to meet its needs andtake advantage of perceived opportunities and, therefore, does not have a numeric target for its capital structure. Funds are primarilysecured through equity capital raised by way of private placements, however, debt and other financing alternatives may be utilizedas well. There can be no assurance that the Company will be able to continue raising equity capital in this manner.

 

Management reviews its capital management approach on an ongoingbasis and believes that this approach, given the relative size of the Company, is reasonable.

 

The Company invests all capital that is surplus to its immediateoperational needs in short term, liquid and highly rated financial instruments, such as cash, and short term guarantee deposits,all held with major Canadian financial institutions and Canadian treasury deposits.

 

| **** |
|------|

| **11.** |  | **Financial Instruments** |
|---------|--|---------------------------|

 

***Fair Value of Financial Instruments***

The Company designated warrant and derivative liabilities as FVTPL.Fair value of the warrant liabilities and gold bullion loan derivatives are categorized as Level 3 measurement as these are calculatedbased on unobservable market inputs. A 10% movement in volatility in the financial instruments that were classified as Level 3measurement will have an impact of approximately $nil on the consolidated statements of comprehensive loss as these amounts havebeen reclassified during the period on change of functional currency. Trade and Other Receivables and cash are classified as loansand receivables, which are measured at amortized cost. Trade and other payables, leases payable, convertible loans and gold bullionloans are classified as other financial liabilities, which are measured at amortized cost. Fair value of trade and other payablesand convertible loans are determined from transaction values that are not based on observable market data.

 

The carrying value of the Company’s cash, other receivables,trade and other payables approximate their fair value due to the relatively short term nature of these instruments.

 

38

**Tanzanian Royalty Exploration Corporation**

**Notes to the Consolidated Financial Statements**

**For the Years Ended August 31, 2018 and 2017**

**(Expressed in Canadian dollars)**

| **11.** |  | **Financial Instruments (continued)** |
|---------|--|---------------------------------------|

 

Fair value estimates are made at a specific point in time, basedon relevant market information and information about financial instruments. These estimates are subject to and involve uncertaintiesand matters of significant judgment, therefore cannot be determined with precision. Changes in assumptions could significantlyaffect the estimates.****

 

A summary of the Company's risk exposures as they relate to financialinstruments are reflected below:

*** ***

***Credit Risk***

Credit risk is the risk of an unexpected loss if a thirdparty to a financial instrument fails to meet its contractual obligations. The Company is subject to credit risk on the cash balancesat the bank and accounts and other receivables and the carrying value of those accounts represent the Company’s maximum exposureto credit risk. The Company’s cash and short-term bank investments are with Schedule 1 banks or equivalents. The other receivablesconsist of amounts due from related parties. The Company has not recorded an impairment or allowance for credit risk as at August 31,2018, or August 31, 2017.

*** ***

***Interest Rate Risk***

Interest rate risk is the risk that the fair value orfuture cash flows of a financial instrument will fluctuate because of changes in market interest rate. The Company’s bankaccounts earn interest income at variable rates. The bullion loan carries a fixed rate of interest. The Company’s futureinterest income is exposed to changes in short-term rates. As at August 31, 2018, a 1% increase/decrease in interest rateswould decrease/increase net loss for the period by approximately $4,000 (2017 - $10,000).

 

***Liquidity Risk***

The Company’s approach to managing liquidity riskis to ensure that it will have sufficient liquidity to meet liabilities when due. As at August 31, 2018, the Company had currentassets of $1,322,307 (August 31, 2017 - $1,922,088) and current liabilities of $13,332,992 (August 31, 2017 - $8,474,464). Allof the Company’s trade payables and receivables have contractual maturities of less than 90 days and are subject to normaltrade terms. Current working capital deficiency of the Company is $12,010,685 (August 31, 2017 - $6,552,376 working capital deficiency).The Company will require additional financing in order to conduct its planned work programs on mineral properties and the developmentand construction of the Buckreef Project, meet its ongoing levels of corporate overhead and discharge its liabilities as they comedue.

 

***Foreign Currency Risk***

The Company is exposed to the financial risk relatedto the fluctuation of foreign exchange rates. The Company has offices in Canada, USA, and Tanzania, but holds cash mainly in Canadianand United States currencies. A significant change in the currency exchange rates between the Canadian dollar relative to US dollarand Tanzanian shillings could have an effect on the Company’s results of operations, financial position, or cash flows. AtAugust 31, 2018, the Company had no hedging agreements in place with respect to foreign exchange rates. As a majority of thetransactions of the Company are denominated in US and Tanzanian Shilling currencies, a 10% movement in the foreign exchange ratewill have an impact of approximate $995,000 on the statements of comprehensive loss.

 

39

**Tanzanian Royalty Exploration Corporation**

**Notes to the Consolidated Financial Statements**

**For the Years Ended August 31, 2018 and 2017**

**(Expressed in Canadian dollars)**

| **** |
|------|

| **12.** |  | **Other receivables** |
|---------|--|-----------------------|

 

The Company’s other receivables arise from two main sources:receivables due from related parties and harmonized services tax (“HST”) and value added tax (“VAT”) receivablefrom government taxation authorities. These are broken down as follows:

|                            |   |            |    |   |            |   |
|---------------------------------|--------|-----------------|---------|--------|-----------------|--------|
|                            |   | August 31, 2018 |    |   | August 31, 2017 |   |
|                            |   |            |    |   |            |   |
| Receivable from related parties |   | $               | 40,086  |   |            | $      | 43,497 |   |
| HST and VAT receivable          |   |            | 171,837 |   |            |   | 169,533 |   |
| Other                           |   |            | 52,880  |   |            |   | 115,978 |   |
| Other Receivables               |   | $               | 264,803 |   |            | $      | 329,008 |   |

 

Below is an aged analysis of the Company’s other receivables:

|                    |   |            |    |   |            |   |
|-------------------------|--------|-----------------|---------|--------|-----------------|--------|
|                    |   | August 31, 2018 |    |   | August 31, 2017 |   |
|                    |   |            |    |   |            |   |
| Less than 1 month       |   | $               | 4,390   |   |            | $      | 50,715 |   |
| 1 to 3 months           |   |            | 47,036  |   |            |   | 11,870 |   |
| Over 3 months           |   |            | 213,377 |   |            |   | 266,423 |   |
| Total Other Receivables |   | $               | 264,803 |   |            | $      | 329,008 |   |

 

At August 31, 2018, the Company anticipates full recovery ofthese amounts and therefore no impairment has been recorded against these receivables. The credit risk on the receivables has beenfurther discussed in Note 11.

 

The Company holds no collateral for any receivable amounts outstandingas at August 31, 2018.

** **

****

| **13.** |  | **Prepaid and other assets** |
|---------|--|------------------------------|

|                   |   |            |    |   |            |   |
|------------------------|--------|-----------------|---------|--------|-----------------|--------|
|                   |   | August 31, 2018 |    |   | August 31, 2017 |   |
|                   |   |            |    |   |            |   |
| Insurance              |   | $               | 17,820  |   |            | $      | 17,820 |   |
| Listing fees           |   |            | 30,368  |   |            |   | 29,627 |   |
| Other                  |   |            | 67,863  |   |            |   | 26,851 |   |
| Total Prepaid Expenses |   | $               | 116,051 |   |            | $      | 74,298 |   |

** **

****

| **14.** |  | **Trade, other payables and accrued liabilities** |
|---------|--|---------------------------------------------------|

** **

Trade and other payables of the Company are principally comprisedof amounts outstanding for trade purchases relating to exploration activities and payroll liabilities. The usual credit periodtaken for trade purchases is between 30 to 90 days.

 

The following is an aged analysis of the trade, other payablesand accrued liabilities:

|                                                |   |            |      |   |            |   |
|-----------------------------------------------------|--------|-----------------|-----------|--------|-----------------|--------|
|                                                |   | August 31, 2018 |      |   | August 31, 2017 |   |
|                                                |   |            |      |   |            |   |
| Less than 1 month                                   |   | $               | 704,776   |   |            | $      | 159,944 |   |
| 1 to 3 months                                       |   |            | 210,648   |   |            |   | 411,543 |   |
| Over 3 months                                       |   |            | 4,851,978 |   |            |   | 4,645,216 |   |
| Total Trade, Other Payables and Accrued Liabilities |   | $               | 5,767,402 |   |            | $      | 5,216,703 |   |

 

40

**Tanzanian Royalty Exploration Corporation**

**Notes to the Consolidated Financial Statements**

**For the Years Ended August 31, 2018 and 2017**

**(Expressed in Canadian dollars)**

| **15.** |  | **Inventory** |
|---------|--|---------------|

** **

Inventory consists of stockpiled ore and supplies consumed duringthe course of exploration development and operations. Cost represents the delivered price of the item. The following is a breakdownof items in inventory:

|                                |   |            |    |   |            |   |
|-------------------------------------|--------|-----------------|---------|--------|-----------------|--------|
|                                |   | August 31, 2018 |    |   | August 31, 2017 |   |
|                                |   |            |    |   |            |   |
| Stockpiled ore and work in progress |   | $               | 511,050 |   |            | $      | 503,187 |   |
| Supplies                            |   |            | 4,341   |   |            |   | 4,302 |   |
| Total Inventory                     |   | $               | 515,391 |   |            | $      | 507,489 |   |

** **

****

| **16.** |  | **Cash** |
|---------|--|----------|

 

As at August 31, 2018, cash total $426,062 (August 31, 2017- $1,011,293), consisting of cash on deposit with banks in general minimum interest bearing accounts.

** **

****

| **** |
|------|

| **17.** |  | **Segmented information** |
|---------|--|---------------------------|

 

**Operating Segments**

** **

At August 31, 2018 the Company’s operations compriseof a single reporting operating segment engaged in mineral exploration in Tanzania. The Company’s corporate division onlyearns interest revenue that is considered incidental to the activities of the Company and therefore does not meet the definitionof an operating segment as defined in IFRS 8 *‘Operating Segments’*. As the operations comprise a single reportingsegment, amounts disclosed in the consolidated financial statements also represent operating segment amounts.

 

An operating segment is defined as a component of the Company:

 

• that engages in business activities fromwhich it may earn revenues and incur expenses;

 

• whose operating results are reviewed regularlyby the entity’s chief operating decision maker; and

 

• for which discrete financialinformation is available.

** **

**Geographic Segments**

 

The Company is in the business of mineral exploration and productionin the country of Tanzania. Information concerning the Company’s geographic locations is as follows:

|                |   | As at August 31, 2018 |       |   | As at August 31, 2017 |   |
|---------------------|--------|-----------------------|------------|--------|-----------------------|--------|
| Identifiable assets |   |                  |       |   |                  |   |   |   |
| Canada              |   | $                     | 373,960    |   |                  | $      | 1,184,932 |   |
| Tanzania            |   |                  | 52,861,180 |   |                  |   | 50,168,156 |   |
|                |   | $                     | 53,235,140 |   |                  | $      | 51,353,088 |   |
| Non-current assets  |   |                  |       |   |                  |   |   |   |
| Canada              |   | $                     | 9,757      |   |                  | $      | 10,064 |   |
| Tanzania            |   |                  | 51,903,076 |   |                  |   | 49,410,936 |   |
|                |   | $                     | 51,912,833 |   |                  | $      | 49,421,000 |   |

** **

****

41

**Tanzanian Royalty Exploration Corporation**

**Notes to the Consolidated Financial Statements**

**For the Years Ended August 31, 2018 and 2017**

**(Expressed in Canadian dollars)**

****

| **** |
|------|

| **18.** |  | **Commitments** |
|---------|--|-----------------|

** **

In order to maintain the existing site of mining and explorationlicenses, the Company is required to pay annual license fees. The Company has not paid certain of its annual license fees sinceOctober 2014 with exception of Buckreef mining licenses. As at August 31, 2018 an accrual of $260,000 (August 31, 2017 - $817,000)has been recorded relating to unpaid license fees. Note that these licenses remain in good standing until a letter of demand isreceived from Ministry of Energy and Minerals requesting payment of any unpaid license fees plus 50% penalty, and the Company failsto respond within 30 days. The Company has not received a letter of demand. The potential penalty relating to unpaid license feesis approximately $125,000 (August 31, 2017 - $404,000). The Company has recorded an accrual for all valid and active mining licenses.

 

|  | **19.** | **Asset Retirement Obligation** |
|--|---------|---------------------------------|

 

The Company's asset retirement obligation relates to the cost ofremoving and restoring of the Buckreef Project in Tanzania. Significant reclamation and closure activities include land rehabilitation,demolition of buildings and mine facilities, ongoing care and maintenance and other costs. This estimate depends on the developmentof environmentally acceptable mine closure plan.

 

A reconciliation for asset retirement obligations is as follows:

 

|                       |   | August 31, 2018 |    |   | August 31, 2017 |   |
|----------------------------|--------|-----------------|---------|--------|-----------------|--------|
| Balance, beginning of year |   | $               | 715,057 |   |            | $      | 704,123 |   |
| Accretion expense          |   |            | 11,086  |   |            |   | 10,934 |   |
| Balance, end of the year   |   | $               | 726,143 |   |            | $      | 715,057 |   |

** **

The mine closure provision liability is based upon the followingestimates and assumptions:

 
|  | a) | Total undiscounted amount of future retirement costs was estimated to be US$522,000. |
|--|----|--------------------------------------------------------------------------------------|
|  | b) | Risk-free rate at 1.58%. |
|--|----|--------------------------|
|  | c) | Expected timing of cash outflows required to settle the obligation is for the full amount to bepaid in 2025. |
|--|----|--------------------------------------------------------------------------------------------------------------|
|  | d) | Inflation over the period from is estimated to be 1.5% per annum. |
|--|----|-------------------------------------------------------------------|

 

 

42

**Tanzanian Royalty Exploration Corporation**

**Notes to the Consolidated Financial Statements**

**For the Years Ended August 31, 2018 and 2017**

**(Expressed in Canadian dollars)**

| **20.** |  | **Non-Controlling Interest** |
|---------|--|------------------------------|

** **

The changes to the non-controlling interest for the years ended August 31, 2018 and 2017are as follows:

 

| Year ended                                                                             |   | August 31, 2018 |     |   | August 31,

2017 |   |
|----------------------------------------------------------------------------------------|--------|-----------------|----------|--------|------------------|--------|
| Balance at beginning of year                                                           |   | $               | 900,325  |   |             | $      | 1,368,679 |   |
| Non-controlling interest’s 45% share of Buckreef’s comprehensive loss      |   |            | (202,547 | )      |             |   | (458,573 | ) |
| Non-controlling interest’s 25% share of NWBM’s comprehensive income (loss) |   |            | 2,532    |   |             |   | (9,781 | ) |
| Balance at end of year                                                                 |   | $               | 700,310  |   |             | $      | 900,325 |   |

 

The following is summarized financial information for Buckreef:

 

|                           |   | August 31, 2018 |        |   | August 31,

2017 |   |
|--------------------------------|--------|-----------------|-------------|--------|------------------|--------|
| Current assets                 |   | $               | 673,074     |   |             | $      | 687,195 |   |
| Long term assets               |   |            | 19,773,205  |   |             |   | 20,651,428 |   |
| Current liabilities            |   |            | (22,183     | )      |             |   | (17,390 | ) |
| Asset retirement obligation    |   |            | (726,143    | )      |             |   | (715,057 | ) |
| Advances from parent           |   |            | (22,374,445 | )      |             |   | (21,653,034 | ) |
|                           |   |            |        |   |             |   |   |   |
| Net income (loss) for the year |   | $               | (451,057    | )      |             | $      | (1,345,872 | ) |

 

The following is summarized financial information for NWBM:

 

|                           |   | August 31, 2018 |                |   | August 31,

2017 |   |
|--------------------------------|--------|-----------------|---------------------|--------|------------------|--------|
| Current assets                 |   | $               | —   |   |             | $      | —   |   |
| Long term assets               |   |            | —   |   |             |   | —   |   |
| Current liabilities            |   |            | —   |   |             |   | (7,462 | ) |
| Advances from parent           |   |            | (1,502,491          | )      |             |   | (1,499,448 | ) |
|                           |   |            |                |   |             |   |   |   |
| Net income (loss) for the year |   | $               | 10,164              |   |             | $      | (51,668 | ) |

 

43

**Tanzanian Royalty Exploration Corporation**

**Notes to the Consolidated Financial Statements**

**For the Years Ended August 31, 2018 and 2017**

**(Expressed in Canadian dollars)**

| **21.** |  | **Gold Bullion Loans** |
|---------|--|------------------------|

** **

**Activity during the year ended August 31, 2018:**

** **

During the year ended August 31, 2018, the Company closed $1,310,660(US $1,027,727) in gold loans.

 

Under the terms of the loan agreements, the bullion loans are fora period of one year, are subject to renewal, and carry an 8% interest rate payable quarterly. At the sole discretion of the Lender,the bullion loans may be repaid in cash or common shares of the Company or gold in specified form at the option of the lender.If the bullion loans are paid back by bullion, the valuation date for such bullion will be the date of the loan agreements. Thebullion loans may be converted into common shares of the Company at the sole discretion of the lenders at an exercise price ofUS$0.267 - $0.3446 per share. Interest is payable quarterly, either in cash or in shares at the option of the lender at a priceof US$0.267 - $0.3446 per share. There is no prepayment penalty.

 

On June 8, 2018, the Company repriced the exercise price to convertthe loans and interest into common shares at a price of US$0.26.

 

On August 27, 2018, the Company settled $324,475 (US$250,000) ofprincipal amount of outstanding loans through the issuance of 961,538 shares with a value of $605,769 resulting on a loss on settlementof $281,294.

 

**Activity during the year ended August 31, 2017:**

** **

There were no new gold loan issuances during the year ended August31, 2017.

 

The Company entered into extension agreements in regards to US$1,530,000in gold loans closed on June 22, 2015, extending the term by one year to June 22, 2018, but modifying no other terms of the 2015loans.

** **

**Outstanding balance:**

** **

The balance of the gold bullion loans is as follows:

 

|                                            |   | August 31, 2018 |                |   | August 31, 2017 |   |
|-------------------------------------------------|--------|-----------------|---------------------|--------|-----------------|--------|
| Balance at beginning of year                    |   | $               | 3,394,998           |   |            | $      | 3,121,831 |   |
| Loans received                                  |   |            | 1,310,660           |   |            |   | —   |   |
| Less: repayment of loans converted to shares    |   |            | (324,475            | )      |            |   | —   |   |
| Less: conversion component of convertible loans |   |            | (151,000            | )      |            |   | —   |   |
| Interest accrued                                |   |            | 337,012             |   |            |   | 293,278 |   |
| Issuance of shares for interest payment         |   |            | (236,369            | )      |            |   | (328,033 | ) |
| Interest accretion                              |   |            | 272,991             |   |            |   | 449,460 |   |
| Foreign exchange translation adjustment         |   |            | 18,534              |   |            |   | (141,538 | ) |
| Balance at end of year                          |   | $               | 4,622,351           |   |            | $      | 3,394,998 |   |
|                                            |   |            |                |   |            |   |   |   |
| Classification:                                 |   |            |                |   |            |   |   |   |
| Short term portion of gold loan                 |   | $               | 4,622,351           |   |            | $      | 2,335,474 |   |
| Long term portion of gold loan                  |   |            | —   |   |            |   | 1,059,524 |   |
| Balance at end of year                          |   | $               | 4,622,351           |   |            | $      | 3,394,998 |   |

 

Interest expense related to the gold bullion loan amounted to $337,012(2017 - $293,278), for the year ended August 31, 2018 and is recorded as finance charge in the statements of comprehensive loss.Accretion expense during the year ended August 31, 2018 totaled $272,991 (2017 - $449,460).

 

44

**Tanzanian Royalty Exploration Corporation**

**Notes to the Consolidated Financial Statements**

**For the Years Ended August 31, 2018 and 2017**

**(Expressed in Canadian dollars)**

| **21.** |  | **Gold Bullion Loans (continued)** |
|---------|--|------------------------------------|

** **

**Derivative in gold bullion loans:**

 

Prior to September 1, 2016, the derivative in gold bullion loansconsisted of conversion options issued on gold bullion loans which had exercise prices denominated in a currency other than theCompany’s functional currency, which at that time was the Canadian dollar. During the period that the Canadian dollar wasthe Company’s functional currency, derivatives in gold bullion loans that were exercisable in U.S. dollars were classifiedas derivative liabilities. Upon the change in functional currency to the U.S. dollar, these derivative liabilities were no longerclassified as derivatives and an amount of $5,051,000 was reclassified to for share based payments reserve.

 

| **22.** |  | **Finance costs** |
|---------|--|-------------------|

 

Finance costs comprises of the following:

|                                     |   | Year ended

August 31, 2018 |    |   | Year ended

August 31, 2017 |   |
|------------------------------------------|--------|-----------------------------|---------|--------|-----------------------------|--------|
|                                     |   |                        |    |   |                        |   |
| Interest on Gold Bullion Loans (Note 21) |   | $                           | 337,012 |   |                        | $      | 293,278 |   |
| Interest on Convertible Loans (Note 23)  |   |                        | 212,201 |   |                        |   | 54,140 |   |
|                                     |   | $                           | 549,213 |   |                        | $      | 347,418 |   |

** **

****

| **** |
|------|

| **23.** |  | **Convertible loans** |
|---------|--|-----------------------|

 

**Activity during the year ended August 31, 2018:**

During the year ended August 31 2018, the Company received loansin the amount of $1,754,291 (US$1,389,710) with a one year term with a right to extend by 1 additional year by mutual consent,carrying an 8% interest rate payable quarterly. The convertible loans may be repaid in cash or common shares of the Company atthe option of the lender. The convertible loan may be converted into common shares of the Company at the sole discretion of thelender at an exercise price of US$0.274 - US$0.3469 per share. Interest is payable quarterly, either in cash or in shares at theoption of the lender at a price of US$0.274 - US$0.3469 per share.

** **

In connection with the gold loans described in note 21 and the convertibleloans, the Company paid a finder’s fee via the issuance of an aggregate of 466,504 common shares with a value of $234,752.The finders fee was allocated proportionally between the gold loans and convertible loans, the portion allocated to the convertibleloans amounted to $135,000.

 

On August 27, 2018, the Company settled $131,028 (US$100,776) ofprincipal amount of outstanding loans through the issuance of 392,867 shares with a value of $184,832 resulting on a loss on settlementof $53,804.

 

**Activity during the year ended August 31, 2017:**

During the year ended August 31, 2017, the Company received loansin the amount of $1,181,993 (US$884,078) with a one year term with a right to extend by 1 additional year by mutual consent, carryingan 8% interest rate payable quarterly. The convertible loans may be repaid in cash or common shares of the Company at the optionof the lender. The convertible loans may be converted into common shares of the Company at the sole discretion of the lender atan exercise price of US$0.36 – US$0.38 per share. Interest is payable quarterly, either in cash or in shares at the optionof the lender at a price of US$0.34 – US$0.36 per share.

 

In connection with the loans, the Company paid a finder’sfee via the issuance of an aggregate of 132,577 common shares with a value of $92,805.

** **

45

**Tanzanian Royalty Exploration Corporation**

**Notes to the Consolidated Financial Statements**

**For the Years Ended August 31, 2018 and 2017**

**(Expressed in Canadian dollars)**

****
| **23.** |  | **Convertible loans (continued)** |
|---------|--|-----------------------------------|

 

On July 19, 2017, the Company settled $63,075 (US$50,000) of principalamount of outstanding loans through the issuance of 83,333 shares with a value of $49,166 resulting on a gain on settlement of$13,909.

 

The balance of the convertible loans is as follows:

 

|                                            |   | August 31, 2018 |      |   | August 31,

2017 |   |
|-------------------------------------------------|--------|-----------------|-----------|--------|------------------|--------|
| Balance at beginning of year                    |   | $               | 865,656   |   |             | $      | 245,497 |   |
| Proceeds from convertible loans                 |   |            | 1,754,291 |   |             |   | 1,181,993 |   |
| Conversion of convertible loan to shares        |   |            | (131,028  | )      |             |   | (63,075 | ) |
| Less: conversion component of convertible loans |   |            | (159,000  | )      |             |   | (625,000 | ) |
| Less: finders fee                               |   |            | (135,000  | )      |             |   | (92,805 | ) |
| Interest accrued                                |   |            | 56,714    |   |             |   | 24,878 |   |
| Interest accretion                              |   |            | 549,069   |   |             |   | 276,236 |   |
| Foreign exchange                                |   |            | 74,718    |   |             |   | (82,068 | ) |
| Balance at end of year                          |   | $               | 2,875,420 |   |             | $      | 865,656 |   |

 

Interest accretion expense related to these loans during the yearended August 31, 2018 totaled $549,069 (2017 - $276,236).

 

**Derivative in convertible loan:**

Prior to September 1, 2016 the derivative in convertible loans consistedof conversion options issued on convertible loans which had exercise prices denominated in a currency other than the Company’sfunctional currency, which at that time was the Canadian dollar. During the period that the Canadian dollar was the Company’sfunctional currency, derivatives in convertible loans that were exercisable in U.S. dollars were classified as derivative liabilities.Upon the change in functional currency to the U.S. dollar, these derivative liabilities were no longer classified as derivativesand an amount of $108,000 was reclassified to share based payments reserve.

 

| **** |
|------|

| **24.** |  | **Taxes** |
|---------|--|-----------|

** **

The Company’s provision for income taxes differs from theamount computed by applying the combined federal and provincial income tax rates to income (loss) before income taxes as a resultof the following:

|                                                                                            |   |   |                |   |   |   |
|-------------------------------------------------------------------------------------------------|--------|--------|---------------------|--------|--------|--------|
|                                                                                            |   | 2018   |                |   | 2017   |   |
| Combined basic Canadian federal and provincial statutory    income tax rates including surtaxes |   |   | 26.50               | %      |   |   | 26.50 | % |
|                                                                                            |   |   |                |   |   |   |   |   |
| Statutory income tax rates applied to accounting income                                         |   | $      | (1,828,000          | )      |   | $      | (3,387,000 | ) |
|                                                                                            |   |   |                |   |   |   |   |   |
| Increase (decrease) in provision for income taxes:                                              |   |   |                |   |   |   |   |   |
| Foreign tax rates different from statutory rate                                                 |   |   | (57,000             | )      |   |   | (152,000 | ) |
| Permanent differences and other items                                                           |   |   | 583,000             |   |   |   | 2,010,000 |   |
| Benefit of tax losses not recognized                                                            |   |   | 1,302,000           |   |   |   | 1,529,000 |   |
| Provision for income taxes                                                                      |   | $      | —   |   |   | $      | —   |   |

** **

46

**Tanzanian Royalty Exploration Corporation**

**Notes to the Consolidated Financial Statements**

**For the Years Ended August 31, 2018 and 2017**

**(Expressed in Canadian dollars)**

| **24.** |  | **Taxes (continued)** |
|---------|--|-----------------------|

** **

The enacted tax rates in Canada of 26.50% (26.25%- 2017) and Tanzania of 30% (2017 - 30%) where the Company operates are applied in the tax provision calculation. The combinedCanadian federal and provincial statutory rate has increased from the prior period due to a scheduled enacted rate increase.

** **

**The following table reflects the Company’s deferred incometax assets (liabilities):**

 

The tax effects of significant temporary differences which wouldcomprise deferred income tax assets and liabilities at August 31, 2018 and 2017 are as follows:

** **

| Deferred Income Tax Liabilities                                |   | Mineral properties |        |   | Debt issuance cost |   |     | Total  |   |
|----------------------------------------------------------------|--------|--------------------|-------------|--------|--------------------|--------|----------|--------|--------|
|                                                           |   |               |        |   |               |   |     |   |   |
| At August 31, 2016                                             |   | $                  | (10,314,000 | )      |               | $      | (72,000  | )      |   | $ | (10,386,000 | ) |
| Charged to the consolidated statement of    comprehensive loss |   |               | (508,000    | )      |               |   | (54,000  | )      |   |   | (562,000 | ) |
| At August 31, 2017                                             |   | $                  | (10,822,000 | )      |               | $      | (126,000 | )      |   | $ | (10,948,000 | ) |
| Charged to the consolidated statement of    comprehensive loss |   |               | (293,000    | )      |               |   | (128,000 | )      |   |   | (421,000 | ) |
| At August 31, 2018                                             |   | $                  | (11,115,000 | )      |               | $      | (254,000 | )      |   | $ | (11,369,000 | ) |

** **

** **

| Deferred Income Tax Assets                                             |   | Non-capital losses |                |   | Non-capital losses |   |                | Total  |   |
|------------------------------------------------------------------------|--------|--------------------|---------------------|--------|--------------------|--------|---------------------|--------|--------|
|                                                                   |   |               |                |   |               |   |                |   |   |
| At August 31, 2016                                                     |   | $                  | 10,314,000          |   |               | $      | 72,000              |   |   | $ | 10,386,000 |   |
| Charged  to the consolidated statement of comprehensive loss |   |               | 508,000             |   |               |   | 54,000              |   |   |   | 562,000 |   |
| At August 31, 2017                                                     |   | $                  | 10,822,000          |   |               | $      | 126,000             |   |   | $ | 10,948,000 |   |
| Charged  to the consolidated statement of comprehensive loss |   |               | 293,000             |   |               |   | 128,000             |   |   |   | 421,000 |   |
| At August 31, 2018                                                     |   | $                  | 11,115,000          |   |               | $      | 254,000             |   |   | $ | 11,369,000 |   |
|                                                                   |   |               |                |   |               |   |                |   |   |   |   |   |
| Net deferred tax assets (liabilities)                                  |   | $                  | —   |   |               | $      | —   |   |   | $ | —   |   |

 

The following temporary differences have not been recognized inthe Company’s consolidated financial statements:

|                          |   |            |       |   |            |   |
|-------------------------------|--------|-----------------|------------|--------|-----------------|--------|
|                          |   | August 31, 2018 |       |   | August 31, 2017 |   |
|                          |   |            |       |   |            |   |
| Non capital losses            |   | $               | 44,742,000 |   |            | $      | 38,767,000 |   |
| Property, plant and equipment |   |            | 207,000    |   |            |   | 207,000 |   |
| Capital losses                |   |            | 127,000    |   |            |   | 127,000 |   |
|                          |   | $               | 45,076,000 |   |            | $      | 39,101,000 |   |

 

At August 31, 2018, the Company has Tanzanian non-capital lossesof $17,544,000 (2017 - $15,480,000), that have not been recognized and may be carried forward and applied against Tanzania taxableincome of future years. The non-capital loss may be carried forward without limitation.

 

47

**Tanzanian Royalty Exploration Corporation**

**Notes to the Consolidated Financial Statements**

**For the Years Ended August 31, 2018 and 2017**

**(Expressed in Canadian dollars)**

| **24.** |  | **Taxes (continued)** |
|---------|--|-----------------------|

 

At August 31, 2018, the Company has non-capital losses of $27,198,000(2017 - $23,766,000), that have not been recognized and may be carried forward and applied against Canadian taxable income of futureyears. The non-capital losses have expiry dates as follows:

** **

|   |   |   |       |   |
|--------|--------|--------|------------|--------|
| 2026   |   | $      | 1,711,000  |   |
| 2027   |   |   | 1,388,000  |   |
| 2028   |   |   | 1,333,000  |   |
| 2029   |   |   | 1,587,000  |   |
| 2030   |   |   | 1,427,000  |   |
| 2031   |   |   | 2,378,000  |   |
| 2032   |   |   | 2,496,000  |   |
| 2033   |   |   | 2,352,000  |   |
| 2034   |   |   | 2,195,000  |   |
| 2035   |   |   | 1,983,000  |   |
| 2036   |   |   | 2,050,000  |   |
| 2037   |   |   | 2,866,000  |   |
| 2038   |   |   | 3,432,000  |   |
|   |   | $      | 27,198,000 |   |

** **

At August 31, 2018, $nil (2017 - $nil)was recognized as a deferred tax liability for taxes that would be payable as the Company’s subsidiaries have a deficit.

 

****

**25. Events subsequent to the reporting period**

 

Subsequent to August 31, 2018, the Company received loans in theamount of US$1,230,799 in cash and gold bullion loans maturing in 1 year with a right to extend by 1 additional year by mutualconsent, carrying an 8% interest rate payable quarterly. The convertible loans may be repaid in cash or common shares of the Companyat the option of the lender. The convertible loan may be converted into common shares of the Company at the sole discretion ofthe lender at an exercise price of US$0.27-$0.34 per share. Interest is payable quarterly, either in cash or in shares at the optionof the lender at a price of US$0.27-$0.34 per share.

** **

****

 

 

 

 

 

 

48