Cautionary Statement Regarding Forward-Looking Statements

Certain statements contained in this Annual Report on Form 10-K constitute "forward-looking statements". These statements, identified by words such as "plan," "anticipate," "believe," "estimate," "should," "expect" and similar expressions include our expectations and objectives regarding our future financial position, operating results and business strategy. These statements reflect the current views of management with respect to future events and are subject to risks, uncertainties and other factors that may cause our actual results, performance or achievements, or industry results, to be materially different from those described in the forward-looking statements. Such risks and uncertainties include those set forth under this caption "Management's Discussion and Analysis" and elsewhere in this Form 10-K. We do not intend to update the forward-looking information to reflect actual results or changes in the factors affecting such forward-looking information. We advise you to carefully review the reports and documents we file from time to time with the United States Securities and Exchange Commission (the "SEC").

Cautionary Statement of No Auditor Review

The consolidated financial statements included in this Annual Report on Form 10-K have not been audited by the Company's independent auditor and, therefore, do not comply with the requirements specified in Rule 8-02 of Regulation S-X and guidance to Form 10-K. In the opinion of management, all adjustments considered necessary for a fair presentation of the results of operations and financial position have been included and all such adjustments are of a normal recurring nature.





General

The inclusion of supplementary analytical and related information herein may require us to make estimates and assumptions to enable us to fairly present, in all material respects, our analysis of trends and expectations with respect to our results of operations and financial position taken as a whole. Actual results may vary from the estimates and assumptions we make.

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Results of Operation



                                                      Years Ended         Percentage
                                              December 31,  December 31,  Increase /
                                                  2019          2018      (Decrease)

Operating expenses                            $    (56,767) $    (27,483)     106.6%
Change in fair value of derivative
liabilities                                         391,919     (127,950)     406.3%
Interest expense                                (1,684,919)   (1,457,758)      15.6%
Gain on divestiture of subsidiary                         -        11,871   (100.0)%
Stock-based compensation                                  -      (32,684)   (100.0)%
Net loss                                      $ (1,349,767) $ (1,634,004)    (17.4)%




Revenues

We did not generate any revenue during the years ended December 31, 2019 and 2018. Due to significant shortage of financial resources, we do not expect to have significant operating revenue in the foreseeable future.





Operating Expenses

During the year ended December 31, 2019, our operating expenses totaled $56,767, an increase of $29,284, or 106.6%, as compared to $27,483 we incurred during the year ended December 31, 2018. The largest expense items during the year ended December 31, 2019 included professional fees of $34,598 (2018 - $28,531), which were mainly associated with maintenance of our patents and patent applications, filing and regulatory fees of $8,017 (2018 - $10,325), and realized loss on foreign exchange, which amounted to $9,248 (2018 - gain of $15,151).





Other Items

During the year ended December 31, 2019, we recorded $391,919 gain on cumulative change in the fair value of the derivative liabilities associated with the warrants we issued to KFBV pursuant to the KF Loans and the conversion feature available under the Third KF Loan Agreement (2018 - $127,950 loss). The cumulative change in fair value of the derivative liabilities consisted of $96,159 gain (2018 - $29,386) we recorded on the fair values of the derivative liabilities associated with the warrants, and $295,760 gain (2018 - $157,336 loss) we recorded on fair value of the derivative liability associated with the conversion feature available under the Third KF Loan Agreement.

During the year ended December 31, 2019, we recorded $1,559,247 (2018 - $1,343,305) in interest on KF Loans. Further $125,672 (2018 - $114,453) in interest expense was associated with interest accrued on the notes payable we issued to Mr. Norling, KFBV, and to other third-party lenders.

During the year ended December 31, 2018, we recorded $32,684 in stock-based compensation in respect of options to acquire shares of our common stock granted to our chairman of the board of directors, and recognized $11,871 gain on divestiture of our subsidiary incorporated in Sweden. We did not have similar transactions during the year ended December 31, 2019.

Liquidity and Capital Resources





Working Capital



Working capital          December 31, 2019     December 31, 2018

Current assets           $           13,605    $           14,865
Current liabilities              18,112,016            16,763,509
Working capital deficit  $     (18,098,411)    $     (16,748,644)

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As of December 31, 2019, we had a cash balance of $1,838, a working capital deficit of $18,098,411, of which $31,918 was attributed to the fair value of the derivate liability associated with the warrants we issued to KF Business Ventures LP. as partial consideration for the KF Loans, and $1,829,750 was attributed to the conversion feature included in the Third KF Loan Agreement. During the year ended December 31, 2019, we used $27,855 to support our operating activities which we funded with $28,725 we received from KFBV in advances due on demand and accumulating interest at 10% per year.

As of December 31, 2019, we owed a total of $11,621,004 (2018 - $10,061,757) to KFBV under the terms of the First KF Loan, the Second KF Loan and the Third KF Loan, consisting of (i) $5,900,000 (2018 - $5,900,000) in principal amount of all advances made to that date, (ii) $1,343,113 (2018 - $1,343,113) in accrued interest thereon calculated using the stated interest rate of 10% per annum compounded monthly until January 15, 2017, when all KF Loans became due and payable, (iii) $4,015,735 (2018 - $2,456,488) in accrued interest at a default rate of interest, which was calculated on $7,243,113 owed and payable on January 15, 2017, and (iv) $362,156 (2018 - $362,156) in financing costs associated with penalty we accrued on an unpaid balance.

During the year ended December 31, 2019, we did not generate sufficient cash flows from our operating activities to satisfy our cash requirements. Our only significant source of financing during the year ended December 31, 2019, came from KFBV advances. The amount of cash that we have generated from our operations to date is significantly less than our current debt obligations, including our debt obligations under the KF Loans, which became due and payable on January 15, 2017, and as of the date of the filing of this Form 10-K are in default.

There is no assurance that we will be able to generate sufficient cash from our operations to repay the amounts owing under the KF Loans when due, or to service our other debt obligations. If we are unable to generate sufficient cash flow from our operations to repay the amounts owing when due, we may be required to raise additional financing, or re-negotiate the terms of our debt obligations. Our ability to raise financing from other sources is restricted under the terms of the KF Loan Agreements. Under the terms of those agreements, we may not incur additional debt financing (other than trade payables incurred in the ordinary course of business), sell any material assets, sell any of our equity securities as part of any transaction that would result in a change in control, or engage in any corporate reorganization while any amounts remain outstanding under those agreements without KFBV's prior written consent.

Although Mr. Kopple, the Chairman of our Board of Directors, is the principal of KFBV, there is no assurance that we will be able to obtain additional financing from KFBV, re-negotiate the terms of the KF Loans, or obtain KFBV's consent to other financing alternatives, if needed.





Cash Flows



                                                  Years Ended December 31,
                                                     2019            2018

Cash flows used in operating activities $ (27,855) $ (39,608) Cash flows provided by financing activities

             28,725        36,170
Cash flows provided by investing activities                  -           557

Net increase (decrease) in cash during the year $ 870 $ (2,881)

Net Cash Used in Operating Activities

Net cash used in operating activities during the year ended December 31, 2019, was $27,855. This cash was used to cover our cash operating expenses of $47,791 and was offset by $2,130 decrease in our prepaid expenses, $13,501 increase in our accounts payable, and $3,407 and $898 increases in accrued liabilities and amounts due to related parties, respectively.

Net cash used in operating activities during the year ended December 31, 2018, was $39,608. This cash was primarily used to cover our cash operating expenses of $31,386, to increase our prepaid expenses by $10,857, to decrease our wages payable by $15,114. These uses of cash were offset by increase in our accounts payable of $13,360, by an increase in amounts due to related parties of $3,020, and by an increase in the accrued liabilities of $1,369.

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Non-cash Items

During the years ended December 31, 2019 and 2018, our net loss was further increased by the following expenses that did not have any impact on cash used in operations:

·$1,684,918 (2018 - $1,457,758) in interest we accrued on our notes and advances payable, of which $1,559,247 (2018 - $1,343,304) were associated with interest we accrued on the balances payable on the KF Loans which became due and payable on January 15, 2017;

·$391,919 gain (2018 - $127,950 loss) we recorded on revaluation of the derivative liabilities associated with the warrants we issued to KFBV as consideration for the KF Loans and conversion feature included in the Third KF Loan Agreement, as, pursuant to the guidance provided by ASC 815, we must revalue derivative liability at each reporting period based on the value of the underlying variable on the reporting date.

·$8,977 loss (2018 - $15,774 gain) we recorded on changes associated with foreign exchange fluctuations.

In addition to the expenses noted above, during the year ended December 31, 2018, we recorded $32,684 in stock-based compensation associated with an option to acquire shares of our common stock which we granted to the chairman of our board of directors under the 2014 Plan. We did not have any expenses associated with stock-based compensation during the year ended December 31, 2019.

Net Cash Provided by Financing Activities

During the year ended December 31, 2019, KFBV advanced to us $28,725 (2018 - $36,170) for working capital. These advances accumulate interest at 10% per annum and are payable on demand.

As of December 31, 2019, we owed a total of $11,621,004 under KF Loans, consisting of (i) $5,900,000 in principal amount of all advances made to that date, (ii) $1,343,113 in accrued interest thereon calculated using the stated interest rate of 10% per annum, (iii) $4,015,735 in accrued interest at a default rate of interest, and (iv) $362,156 in financing costs associated with late payment fee we accrued on an unpaid balance. The KF Loans became due and payable on January 15, 2017, and at December 31, 2019 were in default; however, we have not been served with a default notice by KFBV.

Net Cash Provided by Investing Activities

During the year ended December 31, 2018, we divested our Subsidiary in Sweden for a total cash proceeds of $557 (SEK5,000). We did not engage in any investing activities during the year ended December 31, 2019.





Going Concern

The notes to our financial statements at December 31, 2019, disclose our uncertain ability to continue as a going concern. As of the date of this Annual Report on Form 10-K we have accumulated a deficit of $81,580,105, and we are not generating revenue from our emission abatement technologies, therefore additional financing will be required to fund and support our operations.

In February of 2017, majority of our top management resigned from their positions with the Company. Resignations of Mr. Aasen and Mr. Norling have left the Company without technical expertise required for the Company to continue development and marketing of our emission technologies, creating an uncertainty as to our ability to finalize our current projects to install a land-based DSOX Fuel Purification System for LMS, and to install a DSOX System on board of a vessel operated by DCL. These contracts were placed on hold until such time that our technology can be proven through testing. In April 2017 we commissioned Norling Inc. to perform the required tests, which were completed in late June 2017, however, did not yield satisfactory results required to secure a potential contract on installation.

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The results of the tests confirmed that more research and further improvements to our emission abatement systems will be required in order to achieve industry-specific requirements. Should we decide to continue our operations and further development of our DSOX and NJORD Systems, we will be required to retain several engineers with relevant experience in the emission abatement technologies to work on the above projects. In order to be able to retain new staff or consultants we will be required to raise additional debt or equity financing, which may become challenging based on the current debt covenants under our existing KFBV Loan Agreements, and our share structure.

The financial statements do not include any adjustments that might result from the outcome of these uncertainties.

Off-Balance Sheet Arrangements





None.



Critical Accounting Policies

An appreciation of our critical accounting policies is necessary to understand our financial results. These policies may require management to make difficult and subjective judgments regarding uncertainties, and as a result, such estimates may significantly impact our financial results. The precision of these estimates and the likelihood of future changes depend on a number of underlying variables and a range of possible outcomes. We have applied our critical accounting policies and estimation methods consistently.





Principles of Consolidation

The unaudited interim consolidated financial statements include the accounts of Triton Emission Solutions Inc. and our wholly-owned subsidiary, Ecolutions, Inc. On consolidation, we eliminate all significant intercompany balances and transactions.





Revenue Recognition



Consulting revenue

Revenue is realized when the service has been provided and the income is determinable and collectability is reasonably assured.

Revenue from the Installation and Servicing of the Fuel Purification Systems

We recognize the revenue using the completed contract method whereby revenue is only recognized when all the following conditions have been met: pervasive evidence of an agreement exists, when delivery of the product has occurred and title has transferred or services have been provided, and when collectability is reasonably assured.

Deposits received prior to the delivery of goods and services are recorded as unearned revenue.





Foreign Exchange Risk

We are subject to foreign exchange risk on some purchases which are denominated in Canadian dollars. Foreign currency risk arises from the fluctuation of foreign exchange rates and the degree of volatility of these rates relative to the U.S. dollar. Foreign exchange rate fluctuations may adversely impact our results of operations as exchange rate fluctuations on transactions denominated in currencies other than our functional currency result in gains and losses that are reflected in our Statement of Operations. To the extent the U.S. dollar weakens against foreign currencies, the translation of these foreign currency-denominated transactions will result in increased net revenue. Conversely, our net revenue will decrease when the U.S. dollar strengthens against foreign currencies. We do not believe that we have any material risk due to foreign currency exchange.

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Stock Options and other Share-based Compensation

For equity awards, such as stock options, total compensation cost is based on the grant date fair value and for liability awards, such as stock appreciation rights, total compensation cost is based on the settlement value. We recognize the stock-based compensation expense for all awards over the service period required to earn the award, which is the shorter of the vesting period or the time period an employee becomes eligible to retain the award at retirement.

Fair Value of Financial Instruments

Our financial instruments include cash, accounts receivable, loan receivable, accounts payable, notes and advances payable, amounts due to related parties, long-term loan and derivative liability. The fair values of these financial instruments approximate their carrying values due to their short maturities.

Concentration of Credit Risk

Financial instruments that potentially subject us to significant concentrations of credit risk consist principally of cash.

At December 31, 2019, we had $1,838 in cash on deposit with a large chartered Canadian bank. As part of our cash management process, we perform periodic evaluations of the relative credit standing of these financial institutions. We have not experienced any losses in cash balances and do not believe we are exposed to any significant credit risk on our cash.

Recent Accounting Standards and Pronouncements

Recent accounting pronouncements issued by the Financial Accounting Standards Board or other authoritative standards groups with future effective dates are either not applicable or are not expected to be significant to our financial statements.

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