Exhibit 4.8

 

Ayr Strategies Inc.

(formerly, Cannabis Strategies Acquisition Corp.)

 

Form 51-102F4

Business Acquisition Report

 

Item 1Identity of Company

 

1.1Name and Address of Company

 

Ayr Strategies Inc. (“Ayr” or the “Corporation”)

c/o 590 Madison Avenue, 26th Floor

New York, New York

10022

 

1.2Executive Officer

 

Jonathan Sandelman

Chief Executive Officer, Chairman, Director and Corporate Secretary

Ayr Strategies Inc.

 

Chief Executive Officer, Mercer Park CB, L.P.

590 Madison Avenue, 26th Floor, New York, New York, 10022

(212) 299-7666 or jsandelman@mercerparklp.com

 

Item 2Details of Acquisition

 

2.1Nature of Businesses Acquired

 

On May 24, 2019, the Corporation completed its qualifying transaction under Part X of the Neo Exchange Inc. Listing Manual (the “Qualifying Transaction”) in respect of its concurrent acquisitions of five target businesses. The Corporation, through its wholly-owned subsidiary CSAC Acquisition Inc. (“CSAC AcquisitionCo”), acquired the businesses of Washoe Wellness, LLC (“Washoe”), The Canopy NV, LLC (“Canopy”), Sira Naturals, Inc. (“Sira”), LivFree Wellness, LLC (“LivFree”) and CannaPunch of Nevada LLC (“CannaPunch” and together with Washoe, Canopy, Sira and LivFree, the “Acquired Businesses”). The Acquired Businesses operate in the cultivation, manufacture, branding and/or retail, as applicable, of cannabis products in the Corporation’s anchor states of Massachusetts and Nevada.

 

2.2Acquisition Date

 

May 24, 2019 (the “Closing Date”).

 

2.3Consideration

 

Each of the acquisitions is subject to specific terms relating to the satisfaction of the purchase price by the Corporation and its wholly-owned subsidiary, CSAC Acquisition Inc. (“CSAC AcquisitionCo”), and incorporates payments in cash, shares and debt as well as certain contingent consideration.

 

 

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Sira Acquisition

 

The different components of the consideration paid (in U.S. dollars) to acquire Sira in connection with the Qualifying Transaction (the “Sira Purchase Price”) are summarized as follows:

 

i. $15.0 million of the Sira Purchase Price was paid in the form of cash consideration;

 

ii. $5.0 million of the Sira Purchase Price was paid in the form of a promissory note payable;

 

iii. $30.0 million of the Sira Purchase Price was paid in the form of 1,885,606 non-voting exchangeable common shares of CSAC AcquisitionCo (“Exchangeable Shares”) that are exchangeable on a one-for-one basis into an equal number of subordinate voting shares of the Corporation (“Subordinate Voting Shares”); and

 

iv. the definitive agreement in respect of the Sira acquisition (the “Sira Agreement”) contained an earn-out provision that may entitle the sellers thereof to earn additional consideration in the amount of up to $27,500,000 if certain milestones are achieved in respect of Sira’s planned cultivation facility in Milford, MA.

 

Additionally, CSAC AcquisitionCo must pay an amount equal to the fair market value of Sira’s inventory above a target level set at $800,000 (the “Inventory Payment”), pursuant to a formula specified in the Sira Agreement. One-third of this Inventory Payment, in the amount of $2,500,000, was paid by CSAC AcquisitionCo on the Closing Date and the remaining two-thirds will be paid within 120 days following the Closing Date.

 

Canopy Acquisition

 

The different components of the consideration paid (in U.S. dollars) to acquire Canopy in connection with the Qualifying Transaction (the “Canopy Purchase Price”) are summarized as follows:

 

i. $7.0 million of the Canopy Purchase Price was paid in the form of cash consideration;

 

ii. $4.50 million of the Canopy purchase price was paid in the form of a promissory note payable;

 

iii. $5.50 million of the Canopy Purchase Price was paid in the form of 250,000 Exchangeable Shares;

 

iv. an additional 15,360 Exchangeable Shares were issued to Canopy pursuant to certain make-whole provisions (the “Canopy Make-Whole Provisions”) in the definitive agreement in respect of the Canopy acquisition (the “Canopy Agreement”); and

 

v. pursuant to the terms of the Canopy Agreement, CSAC AcquisitionCo assumed Canopy loans outstanding with total principal value of approximately $400,000.

 

Additional Exchangeable Shares are also issuable to the Canopy sellers under the Canopy Make-Whole Provisions based on a formula specified therein relating to the market price of the Subordinate Voting Shares on certain specified dates.

 

Washoe Acquisition

 

The different components of the consideration paid (in U.S. dollars) to acquire Washoe in connection with the Qualifying Transaction (the “Washoe Purchase Price”) are summarized as follows:

 

i. $16.670 million of the Washoe Purchase Price was paid in the form of cash consideration;

 

 

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ii. $5.640 million of the Washoe Purchase Price was paid in the form of a promissory note payable;

 

iii. $5.640 million of the Washoe Purchase Price was paid in the form of 256,364 Exchangeable Shares; and

 

iv. pursuant to the terms of the definitive agreement in respect of the Washoe acquisition (the “Washoe Agreement”), CSAC AcquisitionCo assumed Washoe loans outstanding with total principal value of approximately $9,100,000 and issued 13,636 Exchangeable Shares to a Washoe lender.

 

In addition, (i) CSAC AcquisitionCo agreed to fund a bonus plan in the amount of $5,000,000 that would be payable over two years following the Closing Date to various employees and consultants of Washoe, and (ii) additional Exchangeable Shares are issuable to the Washoe sellers under certain make-whole provisions of the Washoe Agreement based on a formula specified therein relating to the market price of the Subordinate Voting Shares on certain specified dates.

 

LivFree Acquisition

 

The different components of the consideration paid (in U.S. dollars) to acquire LivFree in connection with the Qualifying Transaction (the “LivFree Purchase Price”) are summarized as follows:

 

i. $29.50 million of the LivFree Purchase Price was paid in the form of cash consideration;

 

ii. $20.0 million of the LivFree Purchase Price was paid in the form of a promissory note payable;

 

iii. $70 million of the LivFree Purchase Price was paid in the form of 4,342,432 Exchangeable Shares; and

 

iv. pursuant to an amendment to the definitive agreement in respect of the LivFree Acquisition, such amendment dated as of the Closing Date, CSAC AcquisitionCo issued an additional 321,750 Exchange Shares to the LivFree sellers.

 

CannaPunch Acquisition

 

The different components of the consideration paid (in U.S. dollars) to acquire CannaPunch in connection with the Qualifying Transaction (the “CannaPunch Purchase Price”) are summarized as follows:

 

i. $0.750 million of the CannaPunch Purchase Price was paid in the form of cash consideration;

 

ii. $2.0 million of the CannaPunch Purchase Price was paid in the form of a promissory note payable;

 

iii. $14.0 million of the CannaPunch Purchase Price was paid in the form of 866,668 Exchangeable Shares; and

 

iv. pursuant to an amendment to the definitive agreement in respect of the CannaPunch acquisition, such amendment dated June 7, 2019, CSAC AcquisitionCo issued an additional 32,071 Exchangeable Shares to the CannaPunch sellers.

 

 

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2.4Effect on Financial Position

 

The expected effect of the acquisitions of the Acquired Businesses on the assets and operations of the Corporation are set out in detail in the Pro Forma Financial Statements (as defined below) attached hereto as Schedule “K”.

 

The Corporation presently has no plans or proposals that would constitute a material change in the business or affairs of the Corporation which may have a significant effect on the results of operations and financial position of the Corporation.

 

2.5Prior Valuations

 

Not applicable.

 

2.6Parties to Transaction

 

Prior to the closing of the Qualifying Transaction, Mark Smith, a director of the Corporation, held 50% of the issued and outstanding shares of CannaPunch.

 

2.7Date of Report

 

August 7, 2019.

 

Item 3Financial Statements and Other Information

 

The following financial statements and related notes thereto are attached to this business acquisition report as Schedules “A”, “B”, “C”, “D”, “E”, “F”, “G”, “H”, “I”, “J” and “K”, respectively, and form part of this business acquisition report:

 

Audited consolidated annual financial statements of Sira and related notes thereto as of and for the years ended December 31, 2018 and 2017 (the “Sira Annual Financial Statements”);

 

Audited consolidated annual financial statements of Canopy and related notes thereto as of and for the years ended December 31, 2018 and 2017 (the “Canopy Annual Financial Statements”);

 

Audited consolidated annual financial statements of Washoe and related notes thereto as of and for the years ended December 31, 2018 and 2017 (the “Washoe Annual Financial Statements”);

 

Audited consolidated annual financial statements of LivFree and related notes thereto as of and for the years ended December 31, 2018 and 2017 (the “LivFree Annual Financial Statements”);

 

Audited consolidated annual financial statements of CannaPunch and related notes thereto as of and for the year ended December 31, 2018 and for the period from March 30, 2017 (inception date) to December 31, 2017 (the “CannaPunch Annual Financial Statements”);

 

Unaudited condensed consolidated interim financial statements of Sira and related notes thereto as of and for the three months ended March 31, 2019 and March 31, 2018 (the “Sira Interim Financial Statements”);

 

Unaudited condensed consolidated interim financial statements of Canopy and related notes thereto as of and for the three months ended March 31, 2019 and March 31, 2018 (the “Canopy Interim Financial Statements”);

 

 

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Unaudited condensed consolidated interim financial statements of Washoe and related notes thereto as of and for the three months ended March 31, 2019 and March 31, 2018 (the “Washoe Interim Financial Statements”);

 

Unaudited condensed consolidated interim financial statements of LivFree and related notes thereto as of and for the three months ended March 31, 2019 and March 31, 2018 (the “LivFree Interim Financial Statements”);

 

Unaudited condensed consolidated interim financial statements of CannaPunch and related notes thereto as of and for the three months ended March 31, 2019 and March 31, 2018 (the “CannaPunch Interim Financial Statements”); and

 

A (i) pro forma statement of financial position of Ayr as at March 31, 2019 and related notes thereto, (ii) pro forma income statement of Ayr as of and for the 12 months ended December 31, 2018 and related notes thereto, and (iii) pro forma income statement of Ayr as of and for the three months ended March 31, 2019 and related notes thereto (together, the “Pro Forma Financial Statements”).

 

 

 

 

SCHEDULE “A”

SIRA ANNUAL FINANCIAL STATEMENTS

 

(see attached)

 

 

 

 

     
   
   
   
   
   
   
   
   
   
   
   
 

 

SIRA NATURALS, INC.

 

Financial Statements

 

As of and for the Years Ended
December 31,2018 and 2017

 

(EXPRESSED IN UNITED STATES DOLLARS)

 

 

   
 

 

 

   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
     

 

 

 

 

SIRA NATURALS, INC.

Financial Statements
December 31, 2018 and 2017

 

Table of Contents

 

  Page
   
Management’s Responsibility for Financial Reporting 1
   
Independent Auditor’s Report 2-3
   
Financial Statements  
   
Statements of Financial Position 4
   
Statements of Operations 5
   
Statements of Changes in Shareholders’ Deficit 6
   
Statements of Cash Flows 7
   
Notes to the Financial Statements 8-27

 

 

 

 

MANAGEMENT’S RESPONSIBILITY FOR
FINANCIAL REPORTING

 

Management’s Responsibility

 

To the Members of Sira Naturals, Inc.

 

The accompanying financial statements and other financial information in this report were prepared by management of Sira Naturals, Inc. (“the Company”), reviewed by the Audit Committee and approved by the Board of Directors.

 

Management is responsible for the financial statements and believes that they fairly present the Company’s financial condition and results of operations in conformity with International Financial Reporting Standards. Management has included in the Company’s financial statements amounts based on estimates and judgments that it believes are reasonable, under the circumstances.

 

To discharge its responsibilities for financial reporting and safeguarding of assets, management believes that it has established appropriate systems of internal accounting control which provide reasonable assurance that the financial records are reliable and form a proper basis for the timely and accurate preparation of financial statements. Consistent with the concept of reasonable assurance, the Company recognizes that the relative cost of maintaining these controls should not exceed their expected benefits. Management further assures the quality of the financial records through careful selection and training of personnel and through the adoption and communication of financial and other relevant policies.

 

These financial statements have been audited by the Company’s auditors, Macias Gini & O’Connell LLP, and their report is presented herein.

 

August 2, 2019

 

“Lou Karger” (’Signed’)   “Neil Sullivan” (Signed)
Treasurer   Controller

 

1 

 

 

 

Independent Auditor’s Report

 

To the Members of Sira Naturals, Inc.:

 

Opinion

 

We have audited the financial statements of Sira Naturals, Inc. (“Sira” or the “Company”), which comprise the statements of financial position as at December 31, 2018 and 2017, and the statements of operations, changes in shareholders’ deficit and cash flows for the years then ended, and notes to the financial statements, including a summary of significant accounting policies.

 

In our opinion, the accompanying financial statements present fairly, in all material respects, the financial position of the Company as at December 31, 2018 and 2017, and its financial performance and its cash flows for the years then ended in accordance with International Financial Reporting Standards.

 

Basis for Opinion

 

We conducted our audits in accordance with Canadian generally accepted auditing standards. Our responsibilities under those standards are further described in the Auditor’s Responsibilities for the Audit of the Financial Statements section of our report. We are independent of the Company in accordance with the ethical requirements that are relevant to our audits of the financial statements in Canada, and we have fulfilled our other ethical responsibilities in accordance with these requirements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.

 

Emphasis of Matter

 

Without qualifying our opinion, we draw attention to Note 1 of the financial statements which describe matters and conditions that indicate the existence of material uncertainties that may cast significant doubt about the Company’s ability to continue as a going concern.

 

Responsibilities of Management for the Financial Statements

 

Management is responsible for the preparation and fair presentation of the financial statements in accordance with International Financial Reporting Standards and for such internal control as management detennines is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error.

 

In preparing the financial statements, management is responsible for assessing the Company’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless management either intends to liquidate the Company or to cease operations, or has no realistic alternative but to do so.

 

Macias Gini & O’Connell LLP    
12264 El Camino Real, Suite 402    
San Diego, CA 92130   www.mgocpa.com

 

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Auditor’s Responsibilities for the Audit of the Financial Statements

 

Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with Canadian generally accepted auditing standards will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these financial statements.

 

As part of an audit in accordance with Canadian generally accepted auditing standards, we exercise professional judgment and maintain professional skepticism throughout the audit. We also:

 

Identify and assess the risks of material misstatement of the financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion.

 

The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control.

 

Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control.

 

Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by management.

 

Conclude on the appropriateness of management’s use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the entity’s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor’s report to the related disclosures in the financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor’s report. However, future events or conditions may cause the Company to cease to continue as a going concern.

 

Evaluate the overall presentation, structure and content of the financial statements, including the disclosures, and whether the financial statements represent the underlying transactions and events in a manner that achieves fair presentation.

 

We communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audits and significant audit findings, including any significant deficiencies in internal control that we identify during our audits.

 

 

San Diego, California 

August 2, 2019

 

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SIRA NATURALS, INC. 

Statements of Financial Position 

At December 31, 2018 and 2017

   2018   2017 
  $   $ 
ASSETS        
Current        
Cash and cash equivalents   2,607,676    201,697 
Inventory (Note 5]   6,197,598    11,579,070 
Biological assets [Note 6]   1,733,316    1,081,141 
Prepaid expenses and other assets   120,163    41,808 
    10,658,753    12,903,716 
Property, plant and equipment [Note 7]   7,629,881    8,203,108 
Deferred tax assets [Note 8]   -    420,205 
Other long term assets   480,401    280,401 
Total assets   18,769,035    21,807,430 
           
LIABILITIES          
Current          
Trade payables   1,557,153    1,117,295 
Accrued liabilities   1,192,208    811,300 
Income tax payable   3,997,954    523,238 
Debts payable - current portion [Note 9]   7,572    17,383 
    6,754,887    2,469,216 
Deferred tax liability [Note 8]   1,242,460    - 
Accrued interest payable [Note 9]   6,963,253    4,862,566 
Debts payable - Non-current portion [Note 9]   14,965,045    15,363,015 
Total liabilities   29,925,645    22,694,797 
           
SHAREHOLDERS’ DEFICIT          
Accumulated deficit   (11,156,610)   (887,367)
Total shareholders’ deficit   (11,156,610)   (887,367)
Total liabilities and shareholders’ deficit   18,769,035    21,807,430 

 

Nature of operations [Note 1] 

Commitments and contingencies [Note 13] 

Subsequent events [Note 16]

 

Approved and authorized on behalf of the Board of Directors on August 2, 2019

 

“Lou Karger” (Signed)   “Neil Sullivan” (Signed)
Treasurer   Controller

 

The accompanying notes are an integral part of these financial statements.

 

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SIRA NATURALS, INC. 

Statements of Operations 

For the Years Ended December 31, 2018 and 2017

   2018   2017 
   $   $ 
Revenues, net of discounts   16,398,127    6,293,763 
           
Cost of goods sold before biological asset adjustment   3,823,025    4,906,883 
           
Gross profit before biological asset adjustment   12,575,102    1,386,880 
           
Realized fair value adjustments on inventory sold during the year [Note 6]   (18,470,531)   (10,274,274)
Unrealized change in fair value of biological assets [Note 6]   11,287,162    12,015,641 
           
Gross profit   5,391,733    3,128,247 
           
Expenses          
           
General and administrative [Note 12]   6,988,439    3,134,182 
           
Sales and marketing   323,495    303,852 
           
Depreciation [Note 7]   150,089    58,404 
           
Management Fee [Note 10]   342,472    - 
           
Total expenses   7,804,495    3,496,438 
           
Loss from operations   (2,412,762)   (368,191)
           
Other expense (income)          
Interest expense   2,738,950    2,526,809 
Rental income and others   (19,850)   (3,321)
Other expense (income)   2,719,100    2,523,488 
           
Loss before provision for income taxes   (5,131,862)   (2,891,679)
           
Provision for income taxes [Note 8]   5,137,381    680,384 
           
Net loss   (10,269,243)   (3,572,063)

 

The accompanying notes are an integral part of these financial statements.

 

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SIRA NATURALS, INC. 

Statements of Changes in Shareholders’ Deficit 

For the Years Ended December 31, 2018 and 2017

   Retained Earnings
(Accumulated
deficit)
$
 
Balance as at December 31, 2016   2,684,696 
      
Net loss   (3,572,063)
      
Balance as at December 31, 2017   (887,367)
      
Net loss   (10,269,243)
      
Balance as at December 31, 2018   (11,156,610)

 

The accompanying notes are in integral part of these financial statements.

 

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SIRA NATURALS, INC.

Statements of Cash Flows

For the Years Ended December 31, 2018 and 2017

   2018   2017 
    $    $ 
Operating activities          
Net loss   (10,269,243)   (3,572,063)
           
Adjustments for items not affecting cash:          
Depreciation   965,936    843,159 
Fair value changes in biological assets included in cost of sales   (18,470,531)   (10,274,274)
Unrealized gain on biological asset transformation   11,287,162    12,015,641 
Changes in working capital items:          
Inventory   5,381,472    (11,220,921)
Biological assets   6,531,194    6,866,670 
Prepaid expenses and other assets   (278,355)   (241,482)
Deferred taxes   1,662,665    157,602 
Trade payables   439,858    553,950 
Accrued liabilities   2,481,595    2,955,135 
Income tax payable   3,474,716    522,326 
Cash provided by (used in) operating activities   3,206,469    (1,394,257)
           
Investing activities          
Purchase of property, plant and equipment   (392,709)   (1,714,196)
Cash used in investing activities   (392,709)   (1,714,196)
           
Financing activities          
Proceeds from issuance of debt   -    3,282,774 
Repayment of debts   (407,781)   - 
Cash (used in) provided by financing activities   (407,781)   3,282,774 
           
Net increase in cash   2,405,979    174,321 
Cash, beginning of year   201,697    27,376 
Cash, end of year   2,607,676    201,697 
           
Supplemental cash flow information          
Interest paid   638,263    1,414 

 

The accompanying notes are an integral part of these financial statements.

 

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SIRA NATURALS, INC.
Notes to the Financial Statements
For the Years Ended December 31, 2018 and 2017

 

 

1.NATURE OF OPERATIONS

 

Sira Naturals, Inc. (“Sira” or the “Company”) was incorporated as a not-for-profit Corporation on June 18, 2013 in the Commonwealth of Massachusetts, United States of America (“USA”). The Company changes its name from time to time and its latest name change was from Sage Naturals, Inc. to Sira Naturals, Inc., effective November 27, 2017. The Company’s registered address is 300 Trade Center, Suite 7700, Woburn, MA 01801.

 

On January 23, 2018, the Company converted its status from a not-for-profit Corporation into a for-profit Corporation. The Company applied the status change into a for-profit corporation to the financial statement’s presentation and the accompanying notes retrospectively for all the periods presented consistently.

 

The Company’s principal activities are the growing, processing and distribution of cannabis as regulated under the laws applicable in the USA.

 

Going Concern

 

These financial statements have been prepared on a going concern basis in accordance with IFRS. The going concern basis of presentation assumes that the Company will continue in operation for the foreseeable future and be able to realize its assets and discharge its liabilities and commitments in the normal course of business. As at December 31, 2018, the Company has incurred an accumulated deficit of $11,156,610. For the years ended December 31, 2018 and 2017, the Company has losses of $10,269,243 and $3,572,063, respectively. Historically, the Company has used debt and equity financing from both related and unrelated sources to supplement its operations. The Company anticipates additional debt and/or equity financing in order to fully develop its business.

 

Although the Company has been successful in raising funds to date, there can be no assurance that adequate or sufficient funding will be available in the future or available under terms acceptable to the Company, or that the Company will be able to generate sufficient returns from operations.

 

The ability of the Company to continue as a going concern and to realize the carrying value of its assets and discharge its liabilities and commitments when due is dependent on the Company generating revenue and debt and/or equity financing sufficient to fund its cash flow needs.

 

These circumstances indicate the existence of material uncertainty that casts significant doubt on the ability of the Company to meet its business plan and its obligations as they come due, and accordingly the appropriateness of the use of the accounting principles applicable to a going concern.

 

These financial statements do not reflect adjustments that would be necessary if the going concern assumption were not appropriate. If the going concern basis were not appropriate for these financial statements, then adjustments would be necessary in the carrying value of the assets and liabilities, the reported revenue and expenses and the classifications used in the statement of financial position. Such differences in amounts could be material.

 

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SIRA NATURALS, INC.
Notes to the Financial Statements
For the Years Ended December 31, 2018 and 2017

 

 

2.BASIS OF PRESENTATION

 

2.1 Statement of Compliance

 

These financial statements have been prepared in accordance with International Financial Reporting Standards (“IFRS”) issued by the International Accounting Standards Board (“IASB”) and Interpretations of the International Financial Reporting Interpretations Committee (“IFRIC”).

 

These financial statements were approved and authorized for issue by the Board of Directors of the Company on August 2, 2019.

 

2.2 Basis of Presentation

 

These financial statements have been prepared on the historical cost basis except for certain financial instruments, which are measured at fair value, as explained in the accounting policies set out in Note 3. The financial statements are presented in US dollars which is the presentation and functional currency of the Company.

 

3.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

3.1 Revenues

 

IFRS 15 specifies how and when revenues should be recognized based on a five-step model, which is applied to all contracts with customers. The Company has applied IFRS 15 retrospectively and determined that there is no change to the comparative periods or transitional adjustments required as a result of the adoption of this standard. The Company’s accounting policy for revenue recognition under IFRS 15 is to follow a five-step model to determine the amount and timing of revenue to be recognized:

 

Identifying the contract with a customer

Identifying the performance obligations within the contract
Determining the transaction price
Allocating the transaction price to the performance obligations
Recognizing revenue when/as performance obligation(s) are satisfied.

 

Revenue from growing, processing and distribution of cannabis is recognized when the Company transfers control of the good to the customer. In some cases, judgement is required in determining whether the customer is a business or the end consumer. This evaluation was made on the basis of whether the business obtains control of the product before transferring to the end consumer. Control of the product transfers at a point in time either upon shipment to or receipt by the customer, depending on the contractual terms.

 

The Company recognizes revenue in an amount that reflects the consideration that the Company expects to receive taking into account any variation that may result from rights of return.

 

The pattern and timing of revenue recognition under the new standard is consistent with prior year practice. There were no adjustments recognized on the adoption of IFRS 15 in the year ended December 31, 2018.

 

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SIRA NATURALS, INC.
Notes to the Financial Statements
For the Years Ended December 31, 2018 and 2017

 

 

3.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

3.2 Property, Plant and Equipment (“PPE”)

 

Property, plant and equipment are stated at cost less accumulated depreciation and accumulated impairment losses. The cost of an item of PPE consists of the purchase price, any costs directly attributable to bringing the asset to the location and condition necessary for its intended use and an initial estimate of the costs of dismantling and removing the item and restoring the site on which it is located.

 

Depreciation is provided at rates calculated to write off the cost of PPE, less their estimated residual value, using the straight-line method over the following expected useful lives:

 

Buildings and leasehold improvements - the shorter of the useful life or life of the lease

Furniture and fixtures – 5 years
Office equipment – 3 years
Machinery and equipment – 5 to 15 years
Auto and Trucks – 5 years

 

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

 

Assets in process are transferred to the appropriate asset class when available for use and depreciation of the assets commences at that point of time.

 

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

 

Where an item of property, plant and equipment comprises major components with different useful lives, the components are accounted for as separate items of property, plant and equipment. Expenditures incurred to replace a component of an item of property, plant and equipment that is accounted for separately, including major inspection and overhaul expenditures are capitalized.

 

3.3 Taxation

 

As the Company operates in the cannabis industry, it is subject to the limits of IRC Section 280E under which the Company is only allowed to deduct expenses directly related to sales of product. This results in permanent differences between ordinary and necessary business expenses deemed non-allowable under IRC Section 280E.

 

Income tax expense consists of current and deferred tax expense. Current and deferred tax are recognized in the statements of operations.

 

Current tax is recognized and measured at the amount expected to be recovered from or payable to the taxation authorities based on the income tax rates enacted or substantively enacted at the end of the reporting period and includes any adjustment to taxes payable in respect of previous years.

 

 10

 

 

SIRA NATURALS, INC.
Notes to the Financial Statements
For the Years Ended December 31, 2018 and 2017

 

 

3.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

3.3 Taxation (Continued)

 

Deferred tax is recognized on any temporary differences between the carrying amounts of assets and liabilities in the financial statements and the corresponding tax bases used in the computation of taxable earnings. Deferred tax assets and liabilities are measured at the tax rates that are expected to apply in the period when the asset is realized and the liability is settled. The effect of a change in the enacted or substantively enacted tax rates is recognized in net earnings and income or in equity depending on the item to which the adjustment relates.

 

Deferred tax assets are recognized to the extent future recovery is probable. At each reporting period end, deferred tax assets are reduced to the extent that it is no longer probable that sufficient taxable earnings will be available to allow all or part of the asset to be recovered.

 

Provisions for taxes are made using the best estimate of the amount expected to be paid based on a qualitative assessment of all relevant factors. The Company reviews the adequacy of these provisions at the end of the reporting period. However, it is possible that at some future date an additional liability could result from audits by taxing authorities. Where the final outcome of these tax-related matters is different from the amounts that were initially recorded, such differences will affect the tax provisions in the period in which such determination is made.

 

3.4 Financial Instruments

 

Recognition and Initial Measurement

 

Financial assets and financial liabilities, including derivatives, are recognized in the statements of financial position when the Company becomes a party to the contractual provisions of a financial instrument or non-financial derivative contract. All financial instruments are measured at fair value on initial recognition. Transaction costs that are directly attributable to the acquisition or issuance of financial assets and financial liabilities, other than financial assets and financial liabilities classified as FVTPL, are added to or deducted from the fair value on initial recognition. Transaction costs directly attributable to the acquisition of financial assets or financial liabilities classified as FVTPL are recognized immediately in net loss.

 

Classification and Subsequent Measurement

 

The Company classifies financial assets, at the time of initial recognition, according to the Company’s business model for managing the financial assets and the contractual terms of the cash flows. Financial assets are classified in the following measurement categories:

 

a) amortized cost (“AC”); 

b) fair value through profit or loss (“FVTPL”); and 

c) fair value through other comprehensive income (“FVTOCI”).

 

Financial assets are subsequently measured at amortized cost if both the following conditions are met and they are not designated as FVTPL: a) the financial asset is held within a business model whose objective is to hold financial assets to collect contractual cash flows; and b) the contractual terms of the financial asset give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding.

 

 11

 

 

SIRA NATURALS, INC.
Notes to the Financial Statements
For the Years Ended December 31, 2018 and 2017

 

 

3.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

3.4 Financial Instruments (Continued)

 

These assets are subsequently measured at amortized cost using the effective interest rate method, less any impairment, with gains and losses recognized in net income in the period that the asset is derecognized or impaired. All financial assets not classified as amortized cost as described above are measured at FVTPL or FVTOCI depending on the business model and cash flow characteristics. The Company has no financial assets measured at FVTOCI.

 

Financial liabilities are subsequently measured at amortized cost using the effective interest rate method with gains and losses recognized in net income in the period that the liability is derecognized, except for financial liabilities classified as FVTPL.

 

Financial instruments are classified into one of the following categories: FVTPL; financial assets at amortized cost, financial liabilities at amortized cost, and financial assets at FVTOCI.

 

Impairment of Financial Instruments

 

For accounts receivable, the Company applies the simplified approach to providing for expected credit losses prescribed by IFRS 9, which requires the use of the lifetime expected loss provision for all accounts receivable, trade based on the Company’s historical default rates over the expected life of the accounts receivable, trade and is adjusted for forward-looking estimates. The methodologies and assumptions, including any forecasts of future economic conditions, are reviewed regularly.

 

All individually significant loan receivables are assessed for impairment. All individually significant loans receivable found not to be specifically impaired are then collectively assessed for impairment. Loans receivables not individually significant are collectively assessed for impairment by grouping together loans receivable with similar risk characteristics.

 

Derecognition

 

The Company derecognizes financial assets only when the contractual rights to cash flows from the financial assets expire, or when it transfers the financial assets and substantially all of the associated risks and rewards of ownership to another entity. Gains and losses on derecognition are recognized in the statements of operations.

 

The Company derecognizes financial liabilities only when its obligations under the financial liabilities are discharged, cancelled or expired. Generally, the difference between the carrying amount of the financial liability derecognized and the consideration paid and payable, including any non-cash assets transferred or liabilities assumed, is recognized in the statements of operations.

 

3.5 Impairment of Non-Financial Assets

 

At each date of the statements of financial position, the Company reviews the carrying amounts of its tangible assets to determine whether there is an indication that those assets have suffered an impairment loss. If any such indication exists, or when annual impairment testing for an asset is required, the recoverable amount of the asset is estimated in order to determine the extent of the impairment loss (if any). Where it is not possible to estimate the recoverable amount of an individual asset, the Company estimates the recoverable amount of the cash generating unit to which the assets belong.

 

 12

 

 

SIRA NATURALS, INC.
Notes to the Financial Statements
For the Years Ended December 31, 2018 and 2017

 

 

3.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

3.5 Impairment of Non-Financial Assets (Continued)

 

The recoverable amount is the higher of fair value less costs to sell and value in use. In assessing the value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. In determining fair value less costs of disposal, recent market transactions are taken into account. If no such transactions can be identified, an appropriate valuation model is used. These calculations are corroborated by valuation multiples, quoted share prices for publicly traded companies or other available fair value indicators.

 

If the recoverable amount of an asset (or cash generating unit) is estimated to be less than it’s carrying amount, the carrying amount of the asset (or cash generating unit) is reduced to its recoverable amount. An impairment loss is recognized immediately in the statements of operations, unless the relevant asset is carried at a revalued amount, in which case the impairment loss is treated as a revaluation decrease.

 

Where an impairment loss subsequently reverses, the carrying amount of the asset (cash generating unit) is increased to the revised estimate of its recoverable amount, but so that the increased carrying amount does not exceed the carrying amount that would have been determined had no impairment loss been recognized for the asset (or cash generating unit) in prior years. A previously recognised impairment loss is reversed only if there has been a change in the assumptions used to determine the asset’s recoverable amount since the last impairment loss was recognised.

 

3.6 Biological Assets

 

The Company measures biological assets consisting of cannabis plants at fair value less costs to sell up to the point of harvest, which becomes the basis for the cost of internally produced work in process and finished goods inventories after harvest. Unrealized gains or losses arising from changes in fair value less cost to sell during the year are included in the results of operations of the related year.

 

3.7 Inventory

 

Inventories of finished goods, work-in-process and raw materials are initially valued at cost and subsequently at the lower of cost and net realizable value. Inventories of harvested cannabis are transferred from biological assets at their fair value at the point of harvest, which becomes the initial deemed cost. Any subsequent post-harvest costs, including direct costs attributable to processing and related overheads, are capitalized to inventory to the extent that cost is less than net realizable value. Net realizable value is the estimated selling price in the ordinary course of business, less the estimated costs to sell. The Company reviews inventories for obsolete, redundant and slow-moving goods and any such inventories identified are written down to net realizable value. At December 31, 2018 and 2017, there were no reserves for inventories required.

 

3.8 Cash and Cash Equivalents

 

The Company considers all investments with original maturities of three months or less, that are highly liquid and readily convertible into cash, to be cash equivalents.

 

 13

 

 

SIRA NATURALS, INC.
Notes to the Financial Statements
For the Years Ended December 31, 2018 and 2017

 

 

3.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

3.9 Provisions

 

Provisions are recognized when the Company has a present obligation (legal or constructive) that has arisen as a result of a past event and it is probable that a future outflow of resources will be required to settle the obligation, provided that a reliable estimate can be made of the amount of the obligation.

 

Provisions are measured at the present value of the expenditures expected to be required to settle the obligation using a pre-tax rate that reflects current market assessments of the time value of money and the risk specific to the obligation. The increase in the provision due to passage of time is recognized as interest expense.

 

3.10 Significant Accounting Judgments and Estimates

 

The application of the Company’s accounting policies requires management to use estimates and judgments that can have significant effect on the revenues, expenses, other income (loss), assets and liabilities recognized and disclosures made in the financial statements.

 

Management’s best estimates concerning the future are based on the facts and circumstances available at the time estimates are made. Management uses historical experience, general economic conditions and assumptions regarding probable future outcomes as the basis for determining estimates. Estimates and their underlying assumptions are reviewed periodically and the effects of any changes are recognized immediately. Actual results could differ from the estimates used.

 

Management’s budget and strategic plans are fundamental information used as a basis for estimates necessary to prepare financial information. Management tracks performance as compared to the budget and significant variances in actual performance are a key trigger to assess whether certain estimates used in the preparation of financial information must be revised.

 

The following areas require management’s critical estimates and judgments:

 

(a) Biological assets and inventory

 

In calculating the value of the inventory, management is required to make a number of estimates, including estimating the stage of growth of the cannabis up to the point of harvest, harvesting costs, selling costs, average or expected selling prices and list prices, expected yields for the cannabis plants, and oil conversion factors. In calculating final inventory values, management compares the inventory costs to estimated net realizable value.

 

(b) Estimated useful lives and depreciation of property, plant and equipment

 

Depreciation of property, plant and equipment is dependent upon estimates of useful lives, which are determined through the exercise of judgement. The assessment of any impairment of these assets is dependent upon estimates of recoverable amounts that take into account factors such as economic and market conditions and the useful lives of assets.

 

 14

 

 

SIRA NATURALS, INC.
Notes to the Financial Statements
For the Years Ended December 31, 2018 and 2017

 

 

3.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

3.10 Significant Accounting Judgments and Estimates (Continued)

 

(c) Deferred taxes and income tax expense

 

Income taxes and tax exposures recognized in the financial statements reflect management’s best estimate based on facts known at the reporting date. When the Company anticipates a future income tax payment based on its estimates, it recognizes a liability. The difference between the expected amount and the final tax outcome has an impact on current and deferred taxes when the Company becomes aware of this difference. In addition, when the Company incurs losses for income tax purposes, it assesses the probability of taxable income being available in the future based on its budgeted forecasts. These forecasts are adjusted to take into account certain non-taxable income and expenses and specific rules on the use of unused credits and tax losses. When the forecasts indicate that sufficient future taxable income will be available to deduct the temporary differences; a deferred tax asset is recognized for all deductible temporary differences.

 

3.11 Leases

 

The determination of whether an arrangement is (or contains) a lease is based on the substance of the arrangement at the inception of the lease. The arrangement is, or contains, a lease if fulfilment of the arrangement is dependent on the use of a specific asset or assets and the arrangement conveys a right to use the asset or assets, even if that right is not explicitly specified in an arrangement.

 

A lease is classified at the inception date as a finance lease or an operating lease. A lease that transfers substantially all the risks and rewards incidental to ownership to the Company is classified as a finance lease. An operating lease is a lease other than a finance lease. Operating lease payments are recognised as an operating expense in the statements of operations on a straight-line basis over the lease term.

 

3.12 Borrowing Costs

 

Borrowing costs directly attributable to the acquisition or construction of a qualifying asset are capitalized. Qualifying assets are those that require a minimum of three months to prepare for their intended use.

 

4.CHANGES IN ACCOUNTING STANDARDS

 

Adoption of New Accounting Pronouncements

 

IFRS 9 - Financial Instruments

 

In August 2014, the IASB issued the final version of IFRS 9 – Financial Instruments (“IFRS 9”), which brings together the classification and measurement, impairment, and hedge-accounting phases of the LASB’s project to replace IAS 39 – Financial Instruments: Recognition and Measurement (“IAS 39”).

 

Classification and Measurement – Financial assets are classified and measured based on the business model under which they are managed and the contractual cash flow characteristics of the financial assets. Financial liabilities are classified in a similar manner as under IAS 39, except that financial liabilities measured at fair value will have fair value changes resulting from changes in the entity’s own credit risk recognized in Other Comprehensive Income (“OCI”) instead of Net Income, unless this would create an accounting mismatch.

 

 15

 

 

SIRA NATURALS, INC.
Notes to the Financial Statements
For the Years Ended December 31, 2018 and 2017

 

 

4.CHANGES IN ACCOUNTING STANDARDS (Continued)

 

Adoption of New Accounting Pronouncements (Continued)

 

IFRS 9 contains three principal classification categories for financial assets: measured at amortized cost (“AC”), fair value through other comprehensive income (“FVTOCI”) and FVTPL. The standard eliminates the previous IAS 39 categories of held to maturity, loans and receivables, and available for sale.

 

Impairment – The measurement of impairment of financial assets is based on an expected credit loss model. It is no longer necessary for a triggering event to have occurred before credit losses are recognized. IFRS 9 also includes new disclosure requirements about expected credit losses and credit risk.

 

Hedge Accounting – The new general hedge accounting model more closely aligns hedge accounting with risk management activities undertaken by entities when hedging their financial and non-financial risk exposures. It will provide more opportunities to apply hedge accounting to reflect actual risk management activities.

 

The Company adopted IFRS 9 effective from January 1, 2018. The adoption did not result in any material change.

 

IFRS 15: Revenue from Contracts with Customers:

 

IFRS 15 supersedes IAS 11 Construction Contracts, IAS 18 Revenue and related Interpretations and it applies to all revenue arising from contracts with customers, unless those contracts are in the scope of other standards. The new standard establishes a five-step model to account for revenue arising from contracts with customers. Under IFRS 15, revenue is recognised at an amount that reflects the consideration to which an entity expects to be entitled in exchange for transferring goods or services to a customer. The standard requires entities to exercise judgement, taking into consideration all of the relevant facts and circumstances when applying each step of the model to contracts with their customers. The standard also specifies the accounting for the incremental costs of obtaining a contract and the costs directly related to fulfilling a contract. The Company has adopted IFRS 15 from incorporation date.

 

IFRS 7. Financial Instruments: Disclosure

 

IFRS 7, Financial Instruments: Disclosure, was amended to require additional disclosures on transition from IAS 39 to IFRS 9. IFRS 7 is effective on adoption of IFRS 9, which is effective for annual periods commencing on or after January 1, 2018.

 

IAS 16 and IAS 41. Bearer Plants

 

The Company has implemented amendments to IAS 16 and IAS 41, which became effective for annual periods beginning on January 1, 2016. These amendments are summarized below.

 

Bearer plants are accounted for as property, plant and equipment and measured at initial recognition at cost or revaluation basis.

 

Bearer plants are defined as a living plant that are used in the production or supply of agricultural produce. Such plants are expected to bear produce for more than one period, and has a remote likelihood of being sold as agricultural produce, except for incidental scrap sales.

 

Bearer plants remain within the scope of IAS 41.

 

The amendments described above are consistent with the Company’s accounting practices.

 

 16

 

 

SIRA NATURALS, INC.
Notes to the Financial Statements
For the Years Ended December 31, 2018 and 2017

 

 

4.CHANGES IN ACCOUNTING STANDARDS (Continued)

 

Changes in Accounting Standards not yet Effective

 

IFRS 16 – Leases

 

In January 2016, the IASB issued IFRS 16 – Leases (“IFRS 16”), which replaces IAS 17 – Leases, and its associated interpretative guidance. IFRS 16 applies a control model to the identification of leases, distinguishing between a lease and a service contract on the basis of whether the customer controls the asset being leased. For those assets determined to meet the definition of a lease, IFRS 16 introduces significant changes to the accounting by lessees, introducing a single, on-balance sheet accounting model that is similar to current finance lease accounting, with limited exceptions for short-term leases or leases of low value assets. Lessor accounting remains similar to current accounting practice. The standard is effective for annual periods beginning on or after January 1, 2019, with early application permitted for entities that apply IFRS 15. The Company is currently evaluating the impact the final standard is expected to have on its consolidated financial statements and plans to adopt the requirements in 2019.

 

5.INVENTORY

 

The Company’s inventory includes the following:

 

   2018   2017
   Capitalized
cost
   Fair value
adjustment
   Carrying
value
   Capitalized
cost
   Fair value
adjustment
   Carrying
value
 
   $   $   $   $   $   $ 
Raw Material                              
Accessories   152,976    -    152,976    -    -    - 
                               
Harvested cannabis                              
Work in process   602,966    3,230,842    3,833,808    2,914,481    3,386,673    6301,154 
Finished goods   10,760    60,507    71,267    14,590    16,954    31,544 
    613,726    3,291,349    3,905,075    2,929,071    3,403,627    6332,698 
Cannabis Oils                              
Work in process   252,963    1,773,790    2,026,753    2,274,051    2,642,482    4,916,533 
Finished goods   14,078    98,716    112,794    152,561    177,278    329,839 
    267,041    1,872,506    2,139,547    2,426,612    2,819,760    5346372 
                               
    1,033,743    5,163,855    6,197,598    5355,683    6323387    11,579,070 

 

Inventories expensed as cost of goods sold during the years ended December 31, 2018 and 2017, were $909,645 and $156,708, respectively.

 

 17

 

 

SIRA NATURALS, INC.
Notes to the Financial Statements
For the Years Ended December 31, 2018 and 2017

 

 

6.BIOLOGICAL ASSETS

 

The continuity of biological assets was as follows:

 

   2018   2017 
    $    $ 
Balance, beginning of year   1,081,141    9,689,178 
Changes in fair value less costs to sell due to biological transformation   11,287,162    12,015,641 
Transferred to inventory upon harvest   (10,634,987)   (20,623,678)
Balance, at end   1,733,316    1,081,141 

 

As of December 31, 2018, and 2017, the weighted average fair value less cost to complete and cost to sell were $5.24 and $6.71 per gram, respectively.

 

The fair value of biological assets is categorized within Level 3 on the fair value hierarchy. The inputs and assumptions used in determining the fair value of biological assets include:

 

(a) Selling price per gram;   Level 3 input  
(b) Attrition rate;   Level 3 input  
(c) Average yield per plant;   Level 3 input  
(d) Standard cost per gram to compete production   Level 3 input  
(e) Cumulative stage of completion in production process   Level 3 input  

 

Significant unobservable assumptions used in the valuation of biological assets, including the sensitivities on changes in these assumptions and their effect on the fair value of biological assets, are as follows:

 

Significant inputs or as Range of inputs  Sensitivity  Effect on fair value 
      2018   2017 
          $    $ 
Selling price per gram*  $6.61 to $7.62  Increase or decrease of $1 per gram   378,621    161,173 
Average yield per plant  150 to 162 grams  Increase or decrease by 5 grams per plant   9,771    41,032 

 

*Selling price per gram is based on average selling prices for the period.

 

These inputs are level 3 on the fair value hierarchy and are subject to volatility and several uncontrollable factors, which could significantly affect the fair value of biological assets in future periods.

 

As of December 31, 2018, and 2017, the biological assets were on average 60% and 83% complete, respectively. During the years ended December 31, 2018 and 2017, the Company’s biological assets produced 2,323,076 and 161,173 grams of dried cannabis, respectively.

 

 18

 

 

SIRA NATURALS, INC.
Notes to the Financial Statements
For the Years Ended December 31, 2018 and 2017

 

 

7.PROPERTY, PLANT AND EQUIPMENT

 

   Buildings &
leasehold
improvements
   Furniture and
fixtures
   Office
equipment
   Machinery &
equipment
   Auto &
trucks
   Total 
    $    $    $    $    $    $ 
Cost                              
As at December 31, 2016   6,637,105    477,026    57,337    386,186    29,393    7,587,347 
Additions   1,463,396    144,014    -    106,786    -    1,714,196 
As at December 31, 2017   8,100,501    621,040    57,537    492,972    29,393    9,301,443 
Additions   189,747    118,750    9,154    54,558    20,300    392,709 
As at December 31, 2018   8,290,248    739,790    66,691    547,530    49,393    9,694,152 
                               
Depreciation                              
As at December 31, 2016   249,792    -    233    5,151    -    255,176 
Depreciation   793,729    19,511    700    23,830    5,389    843,159 
As at December 31, 2017   1,043,521    19,511    933    28,981    5,389    1,098,335 
Depreciation   701,387    162,378    16,358    79,393    6,220    965,936 
As at December 31, 2018   1,744,908    181,889    17,291    108,574    11,609    2,064,271 
                               
Net book value                              
As at December 31, 2017   7,056,980    601,529    56,604    463,991    24,004    8,303,108 
As at December 31, 2018   6,545,340    557,901    49,400    438,956   38,384    7,629,881 

 

As at December 31, 2018 and 2017, buildings and leasehold improvements include borrowing costs of $7,032 and $478,767, capitalized in connection with loan used for the construction of buildings.

 

Depreciation expense for the years ended December 31, 2018 and 2017, of $815,847 and $784,755, respectively, is included in cost of goods sold.

 

8.INCOME TAXES

 

Income tax expense attributable to income from continuing operations consists of the following:

 

   2018   2017 
   $   $ 
Current          
Federal   2,627,367    415,331 
State   847,349    107,451 
    3,474,716    522,782 
Deferred          
Federal   1,223,583    170,506 
State   439,082    (12,904)
    1,662,665    157,602 
Income tax expense   5,137,381    680,384 

 

 19

 

 

SIRA NATURALS, INC.
Notes to the Financial Statements
For the Years Ended December 31, 2018 and 2017

 

 

8.INCOME TAXES (Continued)

 

The Company’s effective tax rate differs from the US federal statutory rate as follows:

 

   2018   2017 
   $   $ 
Tax at Federal statutory rate   (1,077,691)   (983,326)
State, net of Federal benefit   1,286,431    94,548 
Change in biological value   1,341,057    (592,065)
Prior year tax expense   1,361,227    - 
Disallowed 280E expenses   2,226,358    1,977,220 
Impact of Federal rate change   -    184,007 
Income tax expense   5,137,381    680,384 
           
Net deferred tax assets are as follows:          
           
    2018    2017 
    $    $ 
Deferred tax asset - Non-current          
Property, plant and equipment   100,250    29,230 
Start up costs   616,881    390,975 
    717,131    420,205 
Deferred tax liabilities - Non-current          
Biological asset fair value   (1,959,591)   - 
Net deferred tax assets (liabilities)   (1,242,460)   420,205 

 

As at December 31, 2018 and 2017, the Company has approximately $nil and $nil, of federal and state net operating loss carry forwards. For tax reporting purposes, federal and state operating loss carry forwards are available to offset future taxable income. Such carry forwards expire beginning in 2027 for both federal and state tax purposes.

 

Based on available evidence during the year December 31, 2018, the Company determined it was more likely than not that the net deferred tax assets will be utilized.

 

The Company is subject to U.S. federal and Massachusetts income taxes. Tax regulations within each jurisdiction are subject to the interpretation of the related tax laws and regulations and require significant judgment to apply. The Company was incorporated in 2013 and is subject to U.S. federal, state and local tax examinations by tax authorities for all prior years. All of the Company’s tax returns remain subject to examination, and accordingly, net operating loss carry forward attributes may still be adjusted upon examination by federal or state taxing authorities. The Company is not under examination in any jurisdiction.

 

 20

 

 

SIRA NATURALS, INC.
Notes to the Financial Statements
For the Years Ended December 31, 2018 and 2017

 

 

8.INCOME TAXES (Continued)

 

As the Company operates in the cannabis industry, it is subject to the limits of the U.S. Internal Revenue Code Section 280E under which the Company is only allowed to deduct expenses related to sales of product. This results in permanent differences between ordinary and necessary business expenses deemed non-allowable under US IRC Section 280E.

 

On December 22, 2017, the Tax Cuts and Jobs Act (H.R. 1) (the “Tax Act”) was signed into law. The Tax Act contains significant changes to corporate taxation, including; (i) the reduction of the corporate income tax rate from a maximum rate of 35% to 21%, (ii) the acceleration of expensing for certain business assets, (iii) the one-time transition tax related to the transition of U.S. international tax from a worldwide tax system to a territorial tax system, (iv) the repeal of the domestic production deduction, (v) additional limitations on the deductibility of interest expense, (vi) expanded limitations on executive compensation, (vii) acceleration of tax revenue recognition, (viii) capitalization of research and development expenditures and (ix) creation of new minimum taxes such as the base erosion anti-abuse tax (“BEAT”) and Global Intangible Low Taxed Income (“GILTI”) tax.

 

After the enactment of the Tax Act, the Securities and Exchange Commission (“SEC”) staff issued Staff Accounting Bulletin No. 118 (“SAB 118”) to address the application of U.S. GAAP in situations when an entity does not have the necessary information available, prepared or analyzed (including computations) in reasonable details to complete the accounting for certain income tax effects of the Act. The Company has made adjustments to reduce its deferred tax assets and liabilities as of December 31, 2018, based on the reduction of the U.S. federal corporate rate from 34% to 21% and assessed the reliability of its deferred tax assets based on its understanding of the provisions of the new law. As of December 31, 2018, the Company completed its assessment of the impact of the Tax Act and determined no additional adjustments are required.

 

The Company has considered required policy elections with respect to its treatment of potential base erosion anti-abuse tax (“BEAT”) and Global Intangible Low Taxed Income (“GILTI”). Companies can either account for taxes on BEAT and GILTI as incurred or recognize deferred taxes when basis differences exist that are expected to affect the amount of the BEAT and GILTI inclusion upon reversal. The Company has considered the provisions of the Act associated with BEAT and GILTI and noted that these are not applicable as of December 31, 2018. The Company expects to account for any taxes on BEAT and GILTI as incurred if applicable.

 

9.DEBTS PAYABLE

 

The details of debts payable were as follows:

 

   2018   2017 
    $    $ 
Promissory notes to a related party (a)   14,958,333    15,358,333 
Loan payable to a third party (b)   14,284    22,065 
Total debts payable   14,972,617    15,380,398 
Less: Current portion   (7,572)   (17,383)
Debts payable - Non-current portion   14,965,045    15,363,015 

 

 21

 

 

SIRA NATURALS, INC.
Notes to the Financial Statements
For the Years Ended December 31, 2018 and 2017

 

 

9.DEBTS PAYABLE (Continued)

 

As at December 31, 2018, the maturity profile of the principal amounts of debts are as follows:

 

Year ending December 31   $ 
2019    7,572 
2020    2,465,045 
2021    - 
2022    - 
2023    - 
2024 and thereafter    12,500,000 
     14,972,617 

 

(a)Promissory Notes Payable to a Related Party

 

The outstanding balances at respective year ends represent long term debts obtained from 2013 to 2018 in the form of promissory notes. These notes carry interest rate of 18% per annum to be paid monthly.

 

Promissory notes amounting to $12,500,000 (2017: $12,500,000) are to be repaid along with any unpaid accrued interest by April 2025. As of December 31, 2018, there was unpaid accrued interest of $6,277,500.

 

Promissory notes amounting to $2,458,333 (2017: $2,458,333) are to be repaid on maturity date of June 2020. Monthly interest payments to commence from March 2019. As of December 31, 2018 there was unpaid accrued interest of $147,900.

 

(b)Loan Payable to a Third Party

 

Effective November 10, 2016, the Company obtained a loan of $29,393 for a term of four years from a third party for the purchase of a vehicle. This loan carries interest at 5.49% per annum. The principal and interest are payable monthly until November 10, 2020.

 

10.RELATED PARTY TRANSACTIONS AND BALANCES

 

Related parties are defined as management and members of the Company and/or members of their immediate family and/or other companies and/or entities in which a member or senior officer is a principal owner or senior executive.

 

Included in expenses for the year ended December 31, 2018 is a management fee of $342,472 charged by a related Corporation (December 31, 2017 - $nil) under a management agreement. The management fee was paid monthly and varied based on actual costs incurred by the related corporation when providing the Company administrative, support, and management services. The management agreement was a month-to-month arrangement. As of December 31, 2018, there was unpaid services of $193,600 included in trade payables.

 

The Company paid $291,500 to related party for unpaid accrued interest from prior periods during 2018.

 

The Company owes $538,625 in accrued interest to a related party as of December 31, 2018.

 

No compensation was paid to the key management for the years ended December 31, 2018 and 2017.

 

 22

 

 

SIRA NATURALS, INC.
Notes to the Financial Statements
For the Years Ended December 31, 2018 and 2017

 

 

11.CAPITAL MANAGEMENT

 

The Company manages its capital structure and makes adjustments to it, based on the funds available to the Company, in order to support business development. The Directors do not establish quantitative return on capital criteria for management, but rather relies on the expertise of the Company’s management to sustain future development of the business. In order to carry out the planned business development and pay for administrative costs, the Company will spend its existing working capital and raise additional amounts as needed. There were no changes in the Company’s approach to capital management during the year ended December 31, 2018. The Company is not subject to externally imposed capital requirements.

 

The Company raises capital, as necessary, to meet its needs and take advantage of perceived opportunities and, therefore, does not have a numeric target for its capital structure. Funds are primarily secured through loans from third parties and promissory notes. There can be no assurance that the Company will be able to continue raising capital in this manner. Management reviews its capital management approach on an ongoing basis and believes that this approach, given the relative size of the Company, is reasonable.

 

The Company invests all capital that is surplus to its immediate operational needs in short-term, liquid and highly rated financial instruments.

 

12.GENERAL AND ADMINISTRATIVE

 

General and administrative expenses were comprised of:

 

   2018   2017 
    $    $ 
Salaries and benefits   2,670,613    1,143,480 
Rent [Note 13]   585,239    366,883 
Taxes and licenses   125,816    17,793 
Bank Service charges   208,273    109,962 
Professional and consulting fees   984,140    644,112 
Insurance   270,697    73,722 
Office expenses   295,853    125,123 
Community agreements   577,085    - 
Security   557,262    - 
Computer expenses   114,237    - 
Utilities   121,667    160,386 
Others   477,557    492,721 
    6,988,439    3,134,182 

 

 23

 

 

SIRA NATURALS, INC.
Notes to the Financial Statements
For the Years Ended December 31, 2018 and 2017

 

 

13.COMMITMENTS AND CONTINGENCIES

 

Operating Leases

 

The Company conducts operations in facilities leased from various third parties. The Company also leases certain equipment. The leases expire through 2025 and contain certain renewal provisions. Future minimum lease payments under non-cancelable operating leases having an initial or remaining term of more than one year are as follows:

 

Year ending December 31   $ 
2019    764,938 
2020    770,551 
2021    751,052 
2022    522,740 
2023 and thereafter    946,960 
     3,756,241 

 

Total rent expensed for the years ended December 31, 2018 and 2017 were $936,042 and $720,598, respectively. For the years ended December 31, 2018 and 2017, rent included in general and administrative expenses in Note 12 were $585,239 and $366,883, respectively.

 

Contingencies

 

The Company’s operations are subject to a variety of local and state regulation. Failure to comply with one or more of those regulations could result in fines, restrictions on its operations, or losses of permits and/or licenses that could result in the Company ceasing operations. While management of the Company believes that the Company is in compliance with applicable local and state regulation at December 31, 2018, cannabis regulations continue to evolve and are subject to differing interpretations. As a result, the Company may be subject to regulatory fines, penalties, or restrictions in the future.

 

Claims and Litigation

 

From time to time, the Company may be involved in litigation relating to claims arising out of operations in the normal course of business. At December 31, 2018, there were no pending or threatened lawsuits that could reasonably be expected to have a material effect on the results of the Company’s operations. There are also no proceedings in which any of the Company’s directors, officers or affiliates is an adverse party or has a material interest adverse to the Company’s interest.

 

 24

 

 

SIRA NATURALS, INC.
Notes to the Financial Statements
For the Years Ended December 31, 2018 and 2017

 

 

14.FINANCIAL RISK FACTORS

 

The Company’s financial instruments mainly comprise of cash and cash equivalents, trade payables, accrued liabilities and debts payable.

 

(a) Fair Value

 

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The fair value measurement is based on the presumption that the transaction to sell the asset or transfer the liability takes place either in the principal market for the asset or liability or in the absence of a principal market, in the most advantageous market for the asset or liability. The principal or the most advantageous market must be accessible by the Company.

 

The fair value of an asset or a liability is measured using the assumptions that market participants would use when pricing the asset or liability, assuming that market participants act in their economic best interest. A fair value measurement of a non-financial asset takes into account a market participant’s ability to generate economic benefits from the asset’s highest and best use or by selling it to another market participant that would utilise the asset in its highest and best use.

 

The Company uses valuation techniques that are appropriate in the circumstances and for which sufficient data are unobservable inputs.

 

All assets and liabilities for which fair value is measured or disclosed in the financial statements are categorised within the fair value hierarchy. This is described, as follows, based on the lowest level input that is significant to the fair value measurement as a whole:

 

• Level 1 inputs are quoted prices in active markets for identical assets or liabilities at the measurement date.

 

• Level 2 inputs are observable inputs other than quoted prices included within Level 1, such as quoted prices for similar assets or liabilities in active markets, quoted prices for identical assets or liabilities in markets that are not active, or other inputs that are observable directly or indirectly.

 

• Level 3 inputs are unobservable inputs for the asset or liability that reflect the reporting entity’s own assumptions and are not based on observable market data.

 

The classification of financial instruments at their carrying and fair values is as follows:

 

    Carrying values              Fair values 
Financial assets   FVTPL    FVTOCI    AC    Total    Total 
    $    $    $    $    $ 
December 31, 2018                         
Cash and cash equivalents   2,607,676    -    -    2,607,676    2,607,676 
                          
December 31, 2017                         
Cash and cash equivalents   201,697    -    -    201,697    201,697 

 

 25

 

 

SIRA NATURALS, INC.
Notes to the Financial Statements
For the Years Ended December 31, 2018 and 2017

 

 

14.FINANCIAL RISK FACTORS (Continued)

 

(a) Fair Value (Continued)

 

    Carrying values              Fair values 
Financial liabilities   FVTPL    AC    Total    Total 
    $    $    $    $ 
December 31, 2018                    
Trade payables   -    1,557,153    1,557,153    1,557,153 
Accrued liabilities   -    1,192,208    1,192,208    1,192,208 
Debts payable   -    14,972,617    14,972,617    14,972,617 
    -    17,721,978    17,721,978    17,721,978 
    $    $    $    $ 
December 31, 2017                    
Trade payables   -    1,117,295    1,117,295    1,117,395 
Accrued liabilities   -    811,300    811,300    811,300 
Debts payable   -    15,380398    15,380,398    15,380,398 
    -    17,308,993    17,308,993    17,308,993 

 

The Company’s financial instruments as at December 31, 2018 and 2017, classified as “Level 1 - quoted prices in active markets” is cash and cash equivalents. The Company has determined that there have been no transfers between levels in the hierarchy by re-assessing categorization at the reporting date.

 

The Company is exposed to credit risk, liquidity risk and interest rate risk. The Company’s management oversees the management of these risks. The Company’s management is supported by the Members that advises on financial risks and the appropriate financial risk governance framework for the Company. The Company’s financial risk activities are governed by appropriate policies and procedures and that financial risks are identified, measured and managed in accordance with company policies and company risk appetite.

 

(b) Credit Risk

 

Credit risk is the risk of unexpected loss if a customer or third party to a financial instrument fails to meet its contractual obligations. Financial instruments which potentially subject the Company to concentrations of credit risk consist of cash and cash equivalents. The cash and cash equivalents consist mainly of checking and operating accounts, cash and security deposits. The Company has deposited the cash equivalents with a major highly reputable US bank. As at December 31, 2018 and 2017, the maximum amount exposed to credit risks was $2,607,676 and $201,697, respectively.

 

(c) Liquidity Risk

 

Liquidity risk is the risk that the Company is unable to generate or obtain sufficient cash or its equivalents in a cost-effective manner to fund its obligations as they come due. The Company’s approach to managing liquidity risk is to ensure that it will have sufficient liquidity to meet liabilities when due. The Company manages liquidity risk through obtaining financing from its members and third parties. As at December 31, 2018, all trade payables and accrued liabilities are due within a year, whereas, long term debts over a period of over a longer period of time.

 

 26

 

 

SIRA NATURALS, INC.
Notes to the Financial Statements
For the Years Ended December 31, 2018 and 2017

 

 

14.FINANCIAL RISK FACTORS (Continued)

 

(d) Interest Rate Risk

 

Interest rate risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market interest rates. The Company is exposed to interest rate risk on its long-term debts.

 

15.SEGMENTED INFORMATION

 

Operating and Geographical Segments

 

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

 

that engages in business activities from which it may earn revenues and incur expenses;

whose operating results are reviewed regularly by the entity’s chief operating decision maker; and;

for which discrete financial information is available.

 

At December 31, 2018 and 2017, the Company’s operations comprise a single reporting operating and geographical segment engaged in the growing, processing and distribution of cannabis.

 

16.SUBSEQUENT EVENTS

 

The Company’s management has evaluated subsequent events up to August 2, 2019, the date the financial statements were issued, and determined the following event:

 

On May 24, 2019 – Ayr Strategies Inc. (“AYR”), formerly CSAC, closed its previously announced Qualifying Transaction. Through the qualifying transaction, AYR has created a vertically integrated Multi-State Operator in the U.S. cannabis sector, with an initial anchor portfolio in the Eastern and Western United States.

 

 27

 

 

SCHEDULE “B” 

CANOPY ANNUAL FINANCIAL STATEMENTS

 

(see attached)

 

 

 

 

       
   
   
   
   
   
   
   
   
   
   
   
   
   
   
       
       
       
    THE CANOPY NV, LLC  
       
    Consolidated Financial Statements  
       
    As of and for the Years Ended  
    December 31, 2018 and 2017  
       
    (EXPRESSED IN UNITED STATES DOLLARS)  
       
       
       
   
   
   
   
   
   
   
   
   
   
   
   
   
       
   
   
   
   
   
   
   
   

 

 

 

 

THE CANOPY NV, LLC
Consolidated Financial Statements
December 31, 2018 and 2017

 

Table of Contents

 

    Page
     
Management’s Responsibility for Financial Reporting   1
     
Independent Auditor’s Report   2-3
     
Financial Statements    
     
Consolidated Statements of Financial Position   4
     
Consolidated Statements of Operations   5
     
Consolidated Statements of Changes in Members’ Equity   6
     
Consolidated Statements of Cash Flows   7
     
Notes to the Consolidated Financial Statements   8-21

 

 

 

 

MANAGEMENT’S RESPONSIBILITY FOR
FINANCIAL REPORTING

 

Management’s Responsibility

 

To the Members of The Canopy NV, LLC:

 

The accompanying consolidated financial statements and other financial information in this report were prepared by management of The Canopy NV, LLC (“the Company”), reviewed by the Audit Committee and approved by the Board of Directors.

 

Management is responsible for the consolidated financial statements and believes that they fairly present the Company’s consolidated financial condition and results of operations in conformity with International Financial Reporting Standards. Management has included in the Company’s consolidated financial statements amounts based on estimates and judgments that it believes are reasonable, under the circumstances.

 

To discharge its responsibilities for financial reporting and safeguarding of assets, management believes that it has established appropriate systems of internal accounting control which provide reasonable assurance that the financial records are reliable and form a proper basis for the timely and accurate preparation of consolidated financial statements. Consistent with the concept of reasonable assurance, the Company recognizes that the relative cost of maintaining these controls should not exceed their expected benefits. Management further assures the quality of the financial records through careful selection and training of personnel and through the adoption and communication of financial and other relevant policies.

 

These consolidated financial statements have been audited by the Company’s auditors, Macias Gini & O’Connell LLP, and their report is presented herein.

 

August 2, 2019

 

“Mark Pitchford” (Signed)   “Lilian Yohn” (Signed)
Chief Executive Officer   Chief Financial Officer

 

1 

 

 

 

 

Independent Auditor’s Report

 

To the Members of the Canopy NV, LLC:

 

Opinion

 

We have audited the consolidated financial statements of Canopy NV, LLC (the “Company”), which comprise the consolidated statements of financial position as at December 31, 2018 and 2017, and the consolidated statements of operations, changes in members’ equity and cash flows for the years then ended, and the notes to the consolidated financial statements, including a summary of significant accounting policies.

 

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

 

Basis for Opinion

 

We conducted our audits in accordance with Canadian generally accepted auditing standards. Our responsibilities under those standards are further described in the Auditor’s Responsibilities for the Audit of the Consolidated Financial Statements section of our reports. We are independent of the Company in accordance with the ethical requirements that are relevant to our audits of the consolidated financial statements in Canada, and we have fulfilled our other ethical responsibilities in accordance with these requirements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.

 

Responsibilities of Management and Those Charged with Governance for the Financial Statements

 

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

 

In preparing the consolidated financial statements, management is responsible for assessing the Company’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless management either intends to liquidate the Company or to cease operations, or has no realistic alternative but to do so.

 

Auditor’s Responsibilities for the Consolidated Financial Statements

 

Our objectives are to obtain reasonable assurance about whether the consolidated financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with Canadian generally accepted auditing standards will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these consolidated financial statements.

 

Macias Gini & O’Connell LLP 

12264 El Camino Real, Suite 402 

San Diego, CA 92130

  www.mgocpa.com

 

2 

 

 

As part of an audit in accordance with Canadian generally accepted auditing standards, we exercise professional judgment and maintain professional skepticism throughout the audit. We also:

 

Identify and assess the risks of material misstatement of the consolidated financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control.

 

Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control.

 

Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by management.

 

Conclude on the appropriateness of management’s use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the entity’s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor’s report to the related disclosures in the consolidated financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor’s report. However, future events or conditions may cause the Company to cease to continue as a going concern.

 

Evaluate the overall presentation, structure and content of the consolidated financial statements, including the disclosures, and whether the financial statements represent the underlying transactions and events in a manner that achieves fair presentation.

 

We communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audits and significant audit findings, including any significant deficiencies in internal control that we identify during our audits.

 

 

San Diego, California

August 2, 2019

 

3 

 

 

THE CANOPY NV, LLC
Consolidated Statements of Financial Position
At December 31, 2018 and 2017

   2018
$
   2017
$
 
ASSETS          
Current          
Cash   172,576    821,928 
Inventory [Note 5]   1,310,676    466,648 
Advance to a related corporation [Note 9]   690,461    150,190 
Prepaid expenses and other assets   122,167    328,703 
    2,295,880    1,767,469 
Intangible assets [Note 6]   1,623,114    1,623,114 
Property, plant and equipment [Note 7]   1,235,993    253,097 
Total assets   5,154,987    3,643,680 
           
LIABILITIES          
Current          
Trade payables   -    130,127 
Accrued liabilities   268,156    233,426 
Debt payable - non-current portion [Note 12]   421,128    - 
Total liabilities   689,284    363,553 
           
MEMBERS’ EQUITY [Note 8]   4,465,703    3,280,127 
           
Total Liabilities and Members’ Equity   5,154,987    3,643,680 

 

Nature of operations [Note 1]
Commitments and contingencies [Note 13]
Subsequent events [Note 16]

 

Approved and authorized by the Board of Directors on August 2, 2019

 

“Mark Pitchford” (Signed)   “Lilian Yohn” (Signed)
Chief Executive Officer   Chief Financial Officer

 

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

 

4 

 

 

THE CANOPY NV, LLC
Consolidated Statements of Operations
For the Years Ended December 31, 2018 and 2017

   2018
$
   2017
$
 
Revenues, net of discounts   11,748,244    7,135,024 
           
Cost of goods sold [Note 5]   6,821,581    3,496,736 
           
Gross profit   4,926,663    3,638,288 
           
Expenses          
General and administrative [Note 11]   867,613    1,455,043 
           
Sales and marketing   310,863    190,850 
           
Depreciation [Note 7]   50,766    16,483 
           
Management fees [Note 9]   546,848    201,000 
           
Total expenses   1,776,090    1,863,376 
           
Net income   3,150,573    1,774,912 

 

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

 

5 

 

 

THE CANOPY NV, LLC
Consolidated Statements of Changes in Members’ Equity
For the Years Ended December 31, 2018 and 2017

   $ 
     
Balance as of December 31, 2016   1,746,661 
      
Contribution - cash [Note 8]   60,554 
      
Distributions   (302,000)
      
Net income   1,774,912 
      
Balance as at December 31, 2017   3,280,127 
      
Distributions   (1,964,997)
      
Net income   3,150,573 
      
Balance as at December 31, 2018   4,465,703 

 

The accompanying notes are in integral part of these consolidated financial statements.

 

6 

 

 

THE CANOPY NV, LLC
Consolidated Statements of Cash Flows
For the Years Ended December 31, 2018 and 2017

   2018
$
   2017
$
 
Operating activities          
Net income   3,150,573    1,774,912 
           
Adjustments for items not affecting cash:          
Depreciation   50,766    16,483 
Changes in working capital items:          
Inventory   (844,028)   (460,903)
Prepaid expenses and other assets   206,536    (320,350)
Trade payables   (130,127)   130,127
Advance to a related corporation   (540,271)   (150,190)
Accrued liabilities   34,730    233,426 
Cash provided by operating activities   1,928,179    1,223,505 
           
Investing activities          
Purchase of property, plant and equipment   (612,534)   (160,131)
Cash used in investing activities   (612,534)   (160,131)
           
Financing activities          
Contribution   -    60,554 
Distributions   (1,964,997)   (302,000)
Cash used in financing activities   (1,964,997)   (241,446)
           
Net (decrease) increase in cash   (649,352)   821,928 
Cash, beginning of year   821,928    - 
Cash, end of year   172,576    821,928 
           
Non-Cash Supplementary Information          
Debt acquired for construction   421,128    - 

 

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

 

7 

 

 

THE CANOPY NV, LLC
Notes to the Consolidated Financial Statements
For the Years Ended December 31, 2018 and 2017

 

 

1.NATURE OF OPERATIONS

 

The Canopy NV, LLC (“Canopy” or the “Company”) was incorporated as Domestic Limited Liability Company on April 1, 2016 in the State of Nevada, United States of America (“USA”). The Company’s head office is located at 1645 Crane Way, Sparks, Nevada 89431.

 

The Company’s management, operations, structure and other matters are governed through an Operating Agreement entered between the members and Managers of the Company on April 20, 2016. The Company’s principal activities, through its subsidiaries, are the distribution and sale of cannabis as regulated under the laws applicable in the USA.

 

2.BASIS OF PRESENTATION

 

2.1 Statement of Compliance

 

These consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (“IFRS”) issued by the International Accounting Standards Board (“IASB”) and Interpretations of the International Financial Reporting Interpretations Committee (“IFRIC”).

 

These consolidated financial statements were approved and authorized for issue by the Board of Directors of the Company on August 2, 2019.

 

2.2 Basis of Presentation

 

These consolidated financial statements have been prepared on the historical cost basis except for certain financial instruments, which are measured at fair value, as explained in the accounting policies set out in Note 3. The consolidated financial statements are presented in US dollars which is the presentation and functional currency of the Company and its subsidiaries.

 

3.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

3.1 Basis of Consolidation

 

The consolidated financial statements include the financial statements of the Company and its wholly owned subsidiaries - Kynd Strainz LLC (“Kynd”) and Lemon Aide LLC (“Lemon”), Limited Liabilities Companies, incorporated in the state of Nevada. The results of subsidiaries acquired or disposed of during the year are included in the consolidated statements of operations from the effective date of acquisition or up to the effective date of disposal, as appropriate. All inter-company transactions, balances, income and expenses are eliminated on consolidation. Lemon started operations in 2018.

 

The financial statements of the subsidiaries are prepared for the same reporting period as the Company, using consistent accounting policies.

 

8 

 

 

THE CANOPY NV, LLC
Notes to the Consolidated Financial Statements
For the Years Ended December 31, 2018 and 2017

 

 

3.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

3.2 Revenues

 

IFRS 15 specifies how and when revenues should be recognized based on a five-step model, which is applied to all contracts with customers. The Company has applied IFRS 15 retrospectively and determined that there is no change to the comparative periods or transitional adjustments required as a result of the adoption of this standard. The Company’s accounting policy for revenue recognition under IFRS 15 is to follow a five-step model to determine the amount and timing of revenue to be recognized:

 

Identifying the contract with a customer

Identifying the performance obligations within the contract

Determining the transaction price

Allocating the transaction price to the performance obligations

Recognizing revenue when/as performance obligation(s) are satisfied.

 

Revenue from distribution and sale of cannabis is recognized when the Company transfers control of the good to the customer. In some cases, judgement is required in determining whether the customer is a business or the end consumer. This evaluation was made on the basis of whether the business obtains control of the product before transferring to the end consumer. Control of the product transfers at a point in time either upon shipment to or receipt by the customer, depending on the contractual terms.

 

The Company recognizes revenue in an amount that reflects the consideration that the Company expects to receive taking into account any variation that may result from rights of return.

 

The pattern and timing of revenue recognition under the new standard is consistent with prior year practice. There were no adjustments recognized on the adoption of IFRS 15 in the year ended December 31, 2018.

 

3.3 Property, Plant and Equipment (“PPE”)

 

Property, plant and equipment are stated at cost less accumulated depreciation and accumulated impairment losses. The cost of an item of PPE consists of the purchase price, any costs directly attributable to bringing the asset to the location and condition necessary for its intended use and an initial estimate of the costs of dismantling and removing the item and restoring the site on which it is located.

 

Depreciation is provided at rates calculated to write off the cost of PPE, less their estimated residual value, using the straight-line method over the following expected useful lives:

 

Leasehold improvements – the shorter of the useful life or life of the lease

Furniture and fixtures – 5 to 7 years

Office equipment – 5 years

Vehicles – 7 years

 

An item of PPE is derecognized upon disposal, when held for sale or when no future economic benefits are expected to arise from the continued use of the asset. Any gain or loss arising on disposal of the asset, determined as the difference between the net disposal proceeds and the carrying amount of the asset, is recognized in the consolidated statements of operations.

 

Assets in process are transferred to the appropriate asset class when available for use and depreciation of the assets commences at that point of time.

 

9 

 

 

THE CANOPY NV, LLC
Notes to the Consolidated Financial Statements
For the Years Ended December 31, 2018 and 2017

 

 

3.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

3.3 Property, Plant and Equipment (“PPE”) (Continued)

 

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

 

Where an item of property, plant and equipment comprises major components with different useful lives, the components are accounted for as separate items of property, plant and equipment. Expenditures incurred to replace a component of an item of property, plant and equipment that is accounted for separately, including major inspection and overhaul expenditures are capitalized.

 

3.4 Taxation

 

The Company and its subsidiaries are considered Limited Liability Companies for income tax purposes, for the years ended December 31, 2018 and 2017. Therefore, the Company’s taxable income is allocated to the members for inclusion on their respective income tax returns.

 

As the Company operates in the cannabis industry, it is subject to the limits of IRC Section 280E under which the Company is only allowed to deduct expenses directly related to sales of product. This results in permanent differences between ordinary and necessary business expenses deemed non-allowable under IRC Section 280E.

 

3.5 Intangible Assets

 

Intangible assets are recorded at cost, less accumulated amortization and impairment losses, if any. Intangible assets acquired in a business combination are measured at fair value at the acquisition date. Amortization is recorded on a straight-line basis over their estimated useful lives, which do not exceed the contractual period, if any. Intangible assets, which include medical cannabis licenses, have indefinite useful lives and are not subject to amortization. Such assets are tested annually for impairment, or more frequently, if events or changes in circumstances indicate that they might be impaired. The estimated useful lives, residual values, and amortization methods are reviewed at each year-end, and any changes in estimates are accounted for prospectively. For the years ended December 31, 2018 and 2017, the Company did not recognize any impairment losses.

 

3.6 Financial Instruments

 

Recognition and Initial Measurement

 

Financial assets and financial liabilities, including derivatives, are recognized in the consolidated statements of financial position when the Company becomes a party to the contractual provisions of a financial instrument or non-financial derivative contract. All financial instruments are measured at fair value on initial recognition. Transaction costs that are directly attributable to the acquisition or issuance of financial assets and financial liabilities, other than financial assets and financial liabilities classified as FVTPL, are added to or deducted from the fair value on initial recognition. Transaction costs directly attributable to the acquisition of financial assets or financial liabilities classified as FVTPL are recognized immediately in net loss.

 

10 

 

 

THE CANOPY NV, LLC
Notes to the Consolidated Financial Statements
For the Years Ended December 31, 2018 and 2017

 

 

3.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

3.6 Financial Instruments (Continued)

 

Classification and Subsequent Measurement

 

The Company classifies financial assets, at the time of initial recognition, according to the Company’s business model for managing the financial assets and the contractual terms of the cash flows. Financial assets are classified in the following measurement categories:

 

a) amortized cost (“AC”); 

b) fair value through profit or loss (“FVTPL”); and 

c) fair value through other comprehensive income (“FVTOCI”).

 

Financial assets are subsequently measured at amortized cost if both the following conditions are met and they are not designated as FVTPL: a) the financial asset is held within a business model whose objective is to hold financial assets to collect contractual cash flows; and b) the contractual tenns of the financial asset give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding.

 

These assets are subsequently measured at amortized cost using the effective interest rate method, less any impairment, with gains and losses recognized in net income in the period that the asset is derecognized or impaired. All financial assets not classified as amortized cost as described above are measured at FVTPL or FVTOCI depending on the business model and cash flow characteristics. The Company has no financial assets measured at FVTOCI.

 

Financial liabilities are subsequently measured at amortized cost using the effective interest rate method with gains and losses recognized in net income in the period that the liability is derecognized, except for financial liabilities classified as FVTPL.

 

Financial instruments are classified into one of the following categories: FVTPL; financial assets at amortized cost, financial liabilities at amortized cost, and financial assets at FVTOCI.

 

Impairment of Financial Instruments

 

For accounts receivable, the Company applies the simplified approach to providing for expected credit losses prescribed by IFRS 9, which requires the use of the lifetime expected loss provision for all accounts receivable, trade based on the Company’s historical default rates over the expected life of the accounts receivable, trade and is adjusted for forward-looking estimates. The methodologies and assumptions, including any forecasts of future economic conditions, are reviewed regularly.

 

All individually significant loan receivables are assessed for impairment. All individually significant loans receivable found not to be specifically impaired are then collectively assessed for impairment. Loans receivables not individually significant are collectively assessed for impairment by grouping together loans receivable with similar risk characteristics.

 

11 

 

 

THE CANOPY NV, LLC
Notes to the Consolidated Financial Statements
For the Years Ended December 31, 2018 and 2017

 

 

3.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

3.6 Financial Instruments (Continued)

 

Derecognition

 

The Company derecognizes financial assets only when the contractual rights to cash flows from the financial assets expire, or when it transfers the financial assets and substantially all of the associated risks and rewards of ownership to another entity. Gains and losses on derecognition are recognized in the consolidated statements of operations.

 

The Company derecognizes financial liabilities only when its obligations under the financial liabilities are discharged, cancelled or expired. Generally, the difference between the carrying amount of the financial liability derecognized and the consideration paid and payable, including any non-cash assets transferred or liabilities assumed, is recognized in the consolidated statements of operations.

 

3.7 Impairment of Non-Financial Assets

 

At each date of the statements of financial position, the Company reviews the carrying amounts of its long lived assets to detennine whether there is an indication that those assets have suffered an impairment loss. If any such indication exists, or when annual impairment testing for an asset is required, the recoverable amount of the asset is estimated in order to detennine the extent of the impainnent loss (if any). Where it is not possible to estimate the recoverable amount of an individual asset, the Company estimates the recoverable amount of the cash generating unit to which the assets belong.

 

The recoverable amount is the higher of fair value less costs to sell and value in use. In assessing the value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. In determining fair value less costs of disposal, recent market transactions are taken into account. If no such transactions can be identified, an appropriate valuation model is used. These calculations are corroborated by valuation multiples, quoted share prices for publicly traded companies or other available fair value indicators.

 

If the recoverable amount of an asset (or cash generating unit) is estimated to be less than its carrying amount, the carrying amount of the asset (or cash generating unit) is reduced to its recoverable amount. An impainnent loss is recognized immediately in the consolidated statements of operations, unless the relevant asset is carried at a revalued amount, in which case the impainnent loss is treated as a revaluation decrease.

 

Where an impainnent loss subsequently reverses, the carrying amount of the asset (cash generating unit) is increased to the revised estimate of its recoverable amount, but so that the increased carrying amount does not exceed the carrying amount that would have been determined had no impairment loss been recognized for the asset (or cash generating unit) in prior years. A previously recognised impairment loss is reversed only if there has been a change in the assumptions used to determine the asset’s recoverable amount since the last impairment loss was recognised.

 

12 

 

 

THE CANOPY NV, LLC
Notes to the Consolidated Financial Statements
For the Years Ended December 31, 2018 and 2017

 

 

3.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

3.8 Inventory

 

Inventories of purchased finished goods are initially at cost and subsequently at the lower of cost and net realizable value. Net realizable value is determined as the estimated selling price in the ordinary course of business less the estimated costs of completion and the estimated costs necessary to make the sale. Cost is detennined using the specific identification basis. Products for resale and supplies and consumables are valued at lower of cost and net realizable value. The company reviews inventory for obsolete, redundant and slow-moving goods and any such inventory are written-down to the net realizable value. At December 31, 2018 and 2017, there were no reserves for inventories required.

 

3.9 Cash and Cash Equivalents

 

The Company considers all investments with original maturities of three months or less, that are highly liquid and readily convertible into cash, to be cash equivalents.

 

3.10 Provisions

 

Provisions are recognized when the Company has a present obligation (legal or constructive) that has arisen as a result of a past event and it is probable that a future outflow of resources will be required to settle the obligation, provided that a reliable estimate can be made of the amount of the obligation.

 

Provisions are measured at the present value of the expenditures expected to be required to settle the obligation using a pre-tax rate that reflects current market assessments of the time value of money and the risk specific to the obligation. The increase in the provision due to passage of time is recognized as interest expense.

 

3.11 Significant Accounting Judgments and Estimates

 

The application of the Company’s accounting policies requires management to use estimates and judgments that can have significant effect on the revenues, expenses, assets and liabilities recognized and disclosures made in the consolidated financial statements.

 

Management’s best estimates concerning the future are based on the facts and circumstances available at the time estimates are made. Management uses historical experience, general economic conditions and assumptions regarding probable future outcomes as the basis for determining estimates. Estimates and their underlying assumptions are reviewed periodically and the effects of any changes are recognized immediately. Actual results could differ from the estimates used.

 

Management’s budget and strategic plans are fundamental information used as a basis for estimates necessary to prepare financial information. Management tracks performance as compared to the budget and significant variances in actual performance are a key trigger to assess whether certain estimates used in the preparation of financial information must be revised.

 

13 

 

 

THE CANOPY NV, LLC
Notes to the Consolidated Financial Statements
For the Years Ended December 31, 2018 and 2017

 

 

3.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

3.11 Significant Accounting Judgments and Estimates (Continued)

 

The following areas require management’s critical estimates and judgments:

 

(a) Estimated useful lives and depreciation of property, plant and equipment

 

Depreciation and depreciation of property, plant and equipment are dependent upon estimates of useful lives, which are determined through the exercise of judgements. The assessment of any impairment of these assets is dependent upon estimates of recoverable amounts that take into account factors such as economic and market conditions and the useful lives of assets.

 

(b) Valuation, estimated life and impairment of intangible assets

 

Management used significant judgment in valuing the fair value of dispensary licenses and other intangible assets, estimating the useful lives and impairment. Intangible assets that have indefinite useful lives are not subject to amortization and are tested annually for impairment, or more frequently if events or changes in circumstances indicate that they might be impaired.

 

3.12 Leases

 

The determination of whether an arrangement is (or contains) a lease is based on the substance of the arrangement at the inception of the lease. The arrangement is, or contains, a lease if fulfilment of the arrangement is dependent on the use of a specific asset or assets and the arrangement conveys a right to use the asset or assets, even if that right is not explicitly specified in an arrangement.

 

A lease is classified at the inception date as a finance lease or an operating lease. A lease that transfers substantially all the risks and rewards incidental to ownership to the Company is classified as a finance lease. An operating lease is a lease other than a finance lease. Operating lease payments are recognised as an operating expense in the consolidated statements of operations on a straight-line basis over the lease tenn.

 

4.CHANGES IN ACCOUNTING STANDARDS

 

Adoption of New Accounting Pronouncements

 

IFRS 9 - Financial Instruments

 

In July 2014, the IASB issued the final version of IFRS 9 – Financial Instruments (“IFRS 9”), which brings together the classification and measurement, impairment, and hedge-accounting phases of the IASB’s project to replace IAS 39 – Financial Instruments: Recognition and Measurement (“IAS 39”).

 

Classification and Measurement – Financial assets are classified and measured based on the business model under which they are managed and the contractual cash flow characteristics of the financial assets. Financial liabilities are classified in a similar manner as under IAS 39, except that financial liabilities measured at fair value will have fair value changes resulting from changes in the entity’s own credit risk recognized in Other Comprehensive Income (“OCI”) instead of Net Income, unless this would create an accounting mismatch.

 

14 

 

 

THE CANOPY NV, LLC
Notes to the Consolidated Financial Statements
For the Years Ended December 31, 2018 and 2017

 

 

4.CHANGES IN ACCOUNTING STANDARDS (Continued)

 

Adoption of New Accounting Pronouncements (Continued)

 

IFRS 9 - Financial Instruments (Continued)

 

IFRS 9 contains three principal classification categories for financial assets: measured at amortized cost (“AC”), fair value through other comprehensive income (“FVTOCI”) and FVTPL. The standard eliminates the previous IAS 39 categories of held to maturity, loans and receivables, and available for sale.

 

Impairment – The measurement of impairment of financial assets is based on an expected credit loss model. It is no longer necessary for a triggering event to have occurred before credit losses are recognized. IFRS 9 also includes new disclosure requirements about expected credit losses and credit risk.

 

Hedge Accounting – The new general hedge accounting model more closely aligns hedge accounting with risk management activities undertaken by entities when hedging their financial and non-financial risk exposures. It will provide more opportunities to apply hedge accounting to reflect actual risk management activities.

 

The Company adopted IFRS 9 effective from January 1, 2018. The adoption did not result in any material change.

 

IFRS 15: Revenue from Contracts with Customers:

 

IFRS 15 supersedes IAS 11 Construction Contracts, IAS 18 Revenue and related Interpretations and it applies to all revenue arising from contracts with customers, unless those contracts are in the scope of other standards. The new standard establishes a five-step model to account for revenue arising from contracts with customers. Under IFRS 15, revenue is recognised at an amount that reflects the consideration to which an entity expects to be entitled in exchange for transferring goods or services to a customer. The standard requires entities to exercise judgement, taking into consideration all of the relevant facts and circumstances when applying each step of the model to contracts with their customers. The standard also specifies the accounting for the incremental costs of obtaining a contract and the costs directly related to fulfilling a contract. The Company has adopted IFRS 15 from incorporation date.

 

IFRS 7. Financial Instruments: Disclosure

 

IFRS 7, Financial Instruments: Disclosure, was amended to require additional disclosures on transition from IAS 39 to IFRS 9. IFRS 7 is effective on adoption of IFRS 9, which is effective for annual periods commencing on or after January 1, 2018. The adoption did not result in any material change.

 

Changes in Accounting Standards not yet Effective

 

IFRS 16 – Leases

 

In January 2016, the IASB issued IFRS 16 - Leases (“IFRS 16”), which replaces IAS 17 - Leases, and its associated interpretative guidance. IFRS 16 applies a control model to the identification of leases, distinguishing between a lease and a service contract on the basis of whether the customer controls the asset being leased. For those assets determined to meet the definition of a lease, IFRS 16 introduces significant changes to the accounting by lessees, introducing a single, on-balance sheet accounting model that is similar to current finance lease accounting, with limited exceptions for short-term leases or leases of low value assets. Lessor accounting remains similar to current accounting practice. The standard is effective for annual periods beginning on or after January 1,2019, with early application permitted for entities that apply IFRS 15. The Company is currently evaluating the impact the final standard is expected to have on its consolidated financial statements and plans to adopt the requirements in 2019.

 

15 

 

 

THE CANOPY NV, LLC 

Notes to the Consolidated Financial Statements 

For the Years Ended December 31, 2018 and 2017

 

 

5.INVENTORY

 

Inventory is comprised of finished goods.

 

Inventories expensed as cost of goods sold during the years ended December 31, 2018 and 2017, was $5,842,151 and $3,492,227, respectively.

 

6.INTANGIBLE ASSETS

 

Intangible assets represent dispensary licenses obtained by the two subsidiaries, as of December 31, 2018, and 2017. Intangible assets of $1,623,114 included $1,500,000 contribution from a member as explained in Note 8 to the consolidated financial statements.

 

7.PROPERTY, PLANT AND EQUIPMENT

 

   Leasehold
improvements
   Furniture &
Fixtures
   Office
Equipment
   Vehicle   Assets in
process
   Total 
    $    $    $    $    $    $ 
Cost                              
As at December 31, 2016   -    -    -    -    109,449    109,449 
Additions   32,184    76,059    17,904    -    33,984    160,131 
Transfers   68,008    41,441    -    -    (109,449)   - 
As at December 31, 2017   100,192    117,500    17,904    -    33,984   269,580 
Additions   917,677    50,140    59,540    6,305    -    1,033,662 
Transfers   33,984    -    -       (33,984)   - 
As at December 31, 2018   1,051,853    167,640    77,444    6,305    -    1,303,242 
                               
Depreciation                              
As at December 31, 2016   -    -    -    -    -    - 
Depreciation   2,117    11,915    2,451    -    -    16,483 
As at December 31, 2017   2,117    11,915    2,451    -    -    16,483 
Depreciation   20,871    21,564    7,655    676    -    50,766 
As at December 31, 2018   22,988    33,479    10,106    676    -    67,249 
                               
Net book value                              
As at December 31, 2018   1,028,865    134,161    67,338    5,629    -    1,235,993 
As at December 31, 2017   98,075    105,585    15,453    -    33,984    253,097 

 

Depreciation expense for the years ended December 31, 2018 and 2017, of $50,766 and $0, respectively, is included in cost of goods sold.

 

8.MEMBERS’ EQUITY

 

During the years ended December 31, 2018 and 2017, a member made a cash contribution of $nil and $60,554, respectively, to the Company.

 

 16

 

 

THE CANOPY NV, LLC 

Notes to the Consolidated Financial Statements 

For the Years Ended December 31, 2018 and 2017

 

 

9.RELATED PARTY TRANSACTIONS AND BALANCES

 

Related parties are defined as management and members of the Company and/or members of their immediate family and/or other companies and/or entities in which a member or senior officer is a principal owner or senior executive.

 

Other than disclosed elsewhere in the consolidated financial statements, related party transactions and balances are as follows:

 

The Company purchases a substantial portion of its inventory from a related corporation. These purchases are made at arms-length rates, in line with rates charged to third party customers of the related corporation.

 

Included in expenses for the years ended December 31, 2018 and 2017, are management fees of $546,848 and $201,000, respectively. The management fee started on January 1, 2017 and was paid monthly. The monthly fee varied based on an allocation of the related corporation’s expenses and was a month-to-month arrangement.

 

Advances to a related corporation of $690,461 and $ 150,190, respectively, were outstanding as at December 31, 2018 and 2017. These advances are unsecured, interest free, and repayable on demand.

 

No compensation was paid to key management for the years ended December 31, 2018 and 2017.

 

10.CAPITAL MANAGEMENT

 

The Company manages its capital structure and makes adjustments to it, based on the funds available to the Company, in order to support business development. The members do not establish quantitative return on capital criteria for management, but rather relies on the expertise of the Company’s management to sustain future development of the business. The Company defines capital to include its members’ equity. In order to carry out the planned business development and pay for administrative costs, the Company will spend its existing working capital and raise additional amounts as needed. Management reviews its capital management approach on an ongoing basis and believes that this approach, given the relative size of the Company, is reasonable. There were no changes in the Company’s approach to capital management during the year ended December 31, 2018. The Company is not subject to externally imposed capital requirements. As at December 31, 2018 and 2017, the capital of the Company was $4,465,703 and $3,280,127, respectively.

 

The Company raises capital, as necessary, to meet its needs and take advantage of perceived opportunities and, therefore, does not have a numeric target for its capital structure. Funds are primarily secured through cash injection by the members of the Company. 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 ongoing basis and believes that this approach, given the relative size of the Company, is reasonable.

 

The Company invests all capital that is surplus to its immediate operational needs in short-term, liquid and highly rated financial instruments.

 

 17

 

 

THE CANOPY NV, LLC 

Notes to the Consolidated Financial Statements 

For the Years Ended December 31, 2018 and 2017

 

 

11.GENERAL AND ADMINISTRATIVE

 

General and administrative expenses were comprised of:

   2018   2017 
    $    $ 
Salaries and benefits   81,977    916,098 
Rent [Note 12]   263,909    184,068 
Taxes and licenses   168,148    123,386 
Professional and consulting fees   17,496    52,552 
Insurance   106,062    46,275 
Office expenses   80,966    41,097 
Computer expenses   74,274    21,223 
Repairs and maintenance   21,859    14,832 
Utilities   14,620    10,860 
Allocation to cost of goods sold   38,302    44,652 
    867,613    1,455,043 

 

12.DEBTS PAYABLE

 

On October 1, 2018, the Company borrowed $421,128 in connection with the construction of a dispensary. The loan bears interest at a rate of 5% per annum and is due in 2020.

 

13.COMMITMENTS AND CONTINGENCIES

 

Operating Leases

 

The Company conducts operations in facilities leased from a related party. The leases expire through 2022 and contain certain renewal provisions. Rent expense under these leases for the years ended December 31, 2018 and 2017, totaled $263,909 and $184,068, respectively. Future minimum lease payments under non-cancelable operating leases having an initial or remaining term of more than one year are as follows:

 

Year ending December 31  $ 
2019   370,296 
2020   381,398 
2021   392,844 
2022   41,236 
    1,185,774 

 

 18

 

 

THE CANOPY NV, LLC 

Notes to the Consolidated Financial Statements 

For the Years Ended December 31, 2018 and 2017

 

 

13.COMMITMENTS AND CONTINGENCIES (Continued)

 

Contingencies

 

The Company’s operations are subject to a variety of local and state regulation. Failure to comply with one or more of those regulations could result in fines, restrictions on its operations, or losses of permits and/or licenses that could result in the Company ceasing operations. While management of the Company believes that the Company is in compliance with applicable local and state regulation at December 31, 2018, cannabis regulations continue to evolve and are subject to differing interpretations. As a result, the Company may be subject to regulatory fines, penalties, or restrictions in the future.

 

Claims and Litigation

 

From time to time, the Company may be involved in litigation relating to claims arising out of operations in the normal course of business. At December 31, 2018, there were no pending or threatened lawsuits that could reasonably be expected to have a material effect on the results of the Company’s operations. There are also no proceedings in which any of the Company’s directors, officers or affiliates is an adverse party or has a material interest adverse to the Company’s interest.

 

14.FINANCIAL RISK FACTORS

 

The Company’s financial instruments mainly comprise of cash, advance to a related corporation, trade payables, accrued liabilities and due to a related corporation

 

(a) Fair Value

 

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The fair value measurement is based on the presumption that the transaction to sell the asset or transfer the liability takes place either in the principal market for the asset or liability or in the absence of a principal market, in the most advantageous market for the asset or liability. The principal or the most advantageous market must be accessible by the Company.

 

The fair value of an asset or a liability is measured using the assumptions that market participants would use when pricing the asset or liability, assuming that market participants act in their economic best interest. A fair value measurement of a non-financial asset takes into account a market participant’s ability to generate economic benefits from the asset’s highest and best use or by selling it to another market participant that would utilise the asset in its highest and best use.

 

The Company uses valuation techniques that are appropriate in the circumstances and for which sufficient data are unobservable inputs.

 

All assets and liabilities for which fair value is measured or disclosed in the consolidated financial statements are categorised within the fair value hierarchy. This is described, as follows, based on the lowest level input that is significant to the fair value measurement as a whole:

 

• Level 1 inputs are quoted prices in active markets for identical assets or liabilities at the measurement date.

 

• Level 2 inputs are observable inputs other than quoted prices included within Level 1, such as quoted prices for similar assets or liabilities in active markets, quoted prices for identical assets or liabilities in markets that are not active, or other inputs that are observable directly or indirectly.

 

 19

 

 

THE CANOPY NV, LLC 

Notes to the Consolidated Financial Statements 

For the Years Ended December 31, 2018 and 2017

 

 

14.FINANCIAL RISK FACTORS (Continued)

 

(a) Fair Value (Continued)

 

• Level 3 inputs are unobservable inputs for the asset or liability that reflect the reporting entity’s own assumptions and are not based on observable market data.

 

The classification of financial instruments at their carrying and fair values is as follows:

 

    Carrying values             Fair values 
Financial assets   FVYPL    FVTOCI    AC    Total    Total 
    $    $    $    $    $ 
December 31, 2018                         
Cash   172,576    -    -    172,576    172,576 
Advance to a related corporation   -    -    690,461    690,461    690,461 
    172,576    -    690,461    863,037    863,037 
                          
December 31, 2017                         
Cash   821,928    -    -    821,928    821,928 
Advance to a related corporation   -    -    150,190    150,190    150,190 
    821,928    -    150,190    972,118    972,118 
                          
         Carrying values        Fair values 
Financial liabilities        FVTPL    AC    Total    Total 
         $    $    $    $ 
December 31, 2018                         
Accrued liabilities        -    268,156    268,156    268,156 
Debt payable        -    -    -    - 
         -    268,156    268,156    268,156 
                          
December 31, 2017                         
Trade payables        -    130,127    130,127    130,127 
Accrued liabilities        -    233,426    233,426    233,426 
         -    363,553    363,553    363,553 

 

The Company’s financial instruments as at December 31, 2018 and 2017, classified as “Level 1 - quoted prices in active markets” is cash. The Company has determined that there have been no transfers between levels in the hierarchy by re-assessing categorization at the reporting date.

 

The Company is exposed to credit risk and liquidity risk. The Company’s management oversees the management of these risks. The Company’s management is supported by the members that advises on financial risks and the appropriate financial risk governance framework for the Company. The Company’s financial risk activities are governed by appropriate policies and procedures and that financial risks are identified, measured and managed in accordance with group policies and group risk appetite.

 

 20

 

 

THE CANOPY NV, LLC 

Notes to the Consolidated Financial Statements 

For the Years Ended December 31, 2018 and 2017

 

 

14.FINANCIAL RISK FACTORS (Continued)

 

(b) Credit Risk

 

Credit risk is the risk of unexpected loss if a customer or third party to a financial instrument fails to meet its contractual obligations. Financial instruments which potentially subject the Company to concentrations of credit risk consist of cash and advance to a related corporation. As at December 31, 2018 and 2017, the maximum amount exposed to credit risks was $863,037 and $972,118, respectively.

 

(c) Liquidity Risk

 

Liquidity risk is the risk that the Company is unable to generate or obtain sufficient cash in a cost-effective manner to fund its obligations as they come due. The Company’s approach to managing liquidity risk is to ensure that it will have sufficient liquidity to meet liabilities when due. The Company manages liquidity risk through obtaining financing from its members. As at December 31, 2018, all trade payables, accrued liabilities and due to a related corporation are due within a year.

 

15.SEGMENTED INFORMATION

 

Operating and Geographical Segments

 

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

 

that engages in business activities from which it may earn revenues and incur expenses;

whose operating results are reviewed regularly by the entity’s chief operating decision maker; and;

for which discrete financial information is available.

 

At December 31, 2018 and 2017, the Company’s operations comprise a single reporting operating and geographical segment engaged in the distribution and sale of cannabis.

 

16.SUBSEQUENT EVENTS

 

The Company’s management has evaluated subsequent events up to August 2, 2019, the date the consolidated financial statements were issued, and determined the following event:

 

On May 24, 2019 – Ayr Strategies Inc. (“AYR”), formerly Cannabis Strategies Acquisition Corp., closed its previously announced Qualifying Transaction. Through the qualifying transaction, AYR has created a vertically integrated Multi-State Operator in the U.S. cannabis sector, with an initial anchor portfolio in the Eastern and Western United States.

 

 21

 

 

SCHEDULE “C” 

WASHOE ANNUAL FINANCIAL STATEMENTS

 

(see attached)

 

 

 

 

       
   
   
   
   
   
   
   
   
   
   
   
   
   
   
       
       
       
    WASHOE WELLNESS, LLC  
       
    Consolidated Financial Statements  
       
    As of and for the Years Ended  
    December 31, 2018 and 2017  
       
    (EXPRESSED IN UNITED STATES DOLLARS)  
       
       
       
   
   
   
   
   
   
   
   
   
   
   
   
   
     
   
   
   
   
   
   
   
   

 

 

 

 

WASHOE WELLNESS, LLC 

Consolidated Financial Statements 

December 31, 2018 and 2017

 

Table of Contents

 

    Page
     
Management’s Responsibility for Financial Reporting   1
     
Independent Auditor’s Report   2-3
     
Financial Statements    
     
Consolidated Statements of Financial Position   4
     
Consolidated Statements of Operations   5
     
Consolidated Statements of Changes in Members’ Equity   6
     
Consolidated Statements of Cash Flows   7
     
Notes to the Consolidated Financial Statements   8-27

 

 

 

 

MANAGEMENT’S RESPONSIBILITY FOR 

FINANCIAL REPORTING

 

Management’s Responsibility

 

To the Members of Washoe Wellness, LLC:

 

The accompanying consolidated financial statements and other financial information in this report were prepared by management of Washoe Wellness, LLC (“the Company”), reviewed by the Audit Committee and approved by the Board of Directors.

 

Management is responsible for the consolidated financial statements and believes that they fairly present the Company’s consolidated financial condition and results of operations in conformity with International Financial Reporting Standards. Management has included in the Company’s consolidated financial statements amounts based on estimates and judgments that it believes are reasonable, under the circumstances.

 

To discharge its responsibilities for financial reporting and safeguarding of assets, management believes that it has established appropriate systems of internal accounting control which provide reasonable assurance that the financial records are reliable and form a proper basis for the timely and accurate preparation of consolidated financial statements. Consistent with the concept of reasonable assurance, the Company recognizes that the relative cost of maintaining these controls should not exceed their expected benefits. Management further assures the quality of the financial records through careful selection and training of personnel and through the adoption and communication of financial and other relevant policies.

 

These consolidated financial statements have been audited by the Company’s auditors, Macias Gini & O’Connell LLP, and their report is presented herein.

 

August 2, 2019

 

“Mark Pitchford” (Signed)   “Lilian Yohn” (Signed)
Chief Executive Officer   Chief Financial Officer

 

1 

 

 

 

 

Independent Auditor’s Report

 

To the Members of the Washoe Wellness, LLC:

 

Opinion

 

We have audited the consolidated financial statements of Washoe Wellness, LLC (the “Company”), which comprise the consolidated statements of financial position as at December 31, 2018 and 2017, and the consolidated statements of operations, changes in members’ equity and cash flows for the years then ended, and the notes to the consolidated financial statements, including a summary of significant accounting policies.

 

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

 

Basis for Opinion

 

We conducted our audits in accordance with Canadian generally accepted auditing standards. Our responsibilities under those standards are further described in the Auditor’s Responsibilities for the Audit of the Consolidated Financial Statements section of our reports. We are independent of the Company in accordance with the ethical requirements that are relevant to our audits of the consolidated financial statements in Canada, and we have fulfilled our other ethical responsibilities in accordance with these requirements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.

 

Responsibilities of Management and Those Charged with Governance for the Consolidated Financial Statements

 

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

 

In preparing the consolidated financial statements, management is responsible for assessing the Company’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless management either intends to liquidate the Company or to cease operations, or has no realistic alternative but to do so.

 

Auditor’s Responsibilities for the Consolidated Financial Statements

 

Our objectives are to obtain reasonable assurance about whether the consolidated financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with Canadian generally accepted auditing standards will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these consolidated financial statements.

 

Macias Gini & O’Connell LLP    
12264 El Camino Real, Suite 402   www.mgocpa.com
San Diego, CA 92130    

 

2 

 

 

As part of an audit in accordance with Canadian generally accepted auditing standards, we exercise professional judgment and maintain professional skepticism throughout the audit. We also:

 

Identify and assess the risks of material misstatement of the consolidated financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control.

 

Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control.

 

Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by management.

 

Conclude on the appropriateness of management’s use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the entity’s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor’s report to the related disclosures in the consolidated financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor’s report. However, future events or conditions may cause the Company to cease to continue as a going concern.

 

Evaluate the overall presentation, structure and content of the consolidated financial statements, including the disclosures, and whether the financial statements represent the underlying transactions and events in a manner that achieves fair presentation.

 

We communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audits and significant audit findings, including any significant deficiencies in internal control that we identify during our audit.

 

 

San Diego, California 

August 2, 2019

 

3 

 

 

WASHOE WELLNESS, LLC 

Consolidated Statements of Financial Position

At December 31, 2018 and 2017

 

  

2018

$

  

2017

$

 
ASSETS          
Current          
Cash   345,987    1,435,345 
Accounts receivable, no allowance   350,974    130,890 
Inventory [Note 5]   2,035,578    1,144,188 
Biological assets [Note 6]   1,244,313    1,232,350 
Loans receivable [Note 7]   -    240,000 
Other receivables   11,532    - 
Prepaid expenses and other assets   211,923    749,466 
    4,200,307    4,932,239 
Intangible assets [Note 8]   80,894    46,018 
Property, plant and equipment [Note 9]   8,846,196    5,783,992 
Investment in associate [Note 10]   1,664,347    1,200,651 
Total assets   14,791,744    11,962,900 
           
LIABILITIES          
Current          
Trade payables   861,240    213,856 
Accrued liabilities   107,472    92,368 
Advance from a related corporation [Note 13]   690,461    150,190 
Debts payable - current portion [Note 11]   -    70,156 
    1,659,173    526,570 
Debts payable - Non-current portion [Note 11]   9,182,006    8,991,936 
Total liabilities   10,841,179    9,518,506 
           
MEMBERS’ EQUITY [Note 12]   3,950,565    2,444,394 
           
Total liabilities and members’ equity   14,791,744    11,962,900 

 

Nature of operations [Note 1] 

Commitments and contingencies [Note 16] 

Subsequent events [Note 19]

 

Approved and authorized by the Board of Directors on August 2, 2019

 

“Mark Pitchford” (Signed)   “Lilian Yohn” (Signed)
Chief Executive Officer   Chief Financial Officer

 

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

 

4 

 

 

WASHOE WELLNESS, LLC 

Consolidated Statements of Operations

For the Years Ended December 31, 2018 and 2017

 

  

2018

$

  

2017

$

 
Revenues, net of discounts   7,017,779    6,054,620 
           
Cost of goods sold before biological assets adjustment   4,636,341    3,281,125 
           
Gross profit before biological assets adjustment   2,381,438    2,773,495 
           
Fair value changes in biological assets included in cost of goods sold   (4,005,602)   (1,061,462)
Unrealized gain on biological assets transformation   5,086,289    1,167,367 
           
Gross profit   3,462,125    2,879,400 
           
Expenses          
General and administrative [Note 15]   825,863    842,739 
           
Sales and marketing   189,074    139,000 
           
Depreciation [Note 9]   51,831    262,491 
           
Management Fees [Note 13]   240,000    - 
           
Total expenses   1,306,768    1,244,230 
           
Income from operations   2,155,357    1,635,170 
           
Other (income) expense          
Share of income on investment in associate [Note 10]   (1,642,415)   (922,955)
Interest expense   343,344    470,564 
Interest income   (12,067)   (15,000)
Management fee income [Note 13]   (125,000)   (201,000)
Rental income and others   (91,368)   (35,344)
Total other (income)   (1,527,506)   (703,735)
           
Net income   3,682,863    2,338,905 

 

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

 

5 

 

 

WASHOE WELLNESS, LLC 

Consolidated Statements of Changes in Members’ Equity 

For the Years Ended December 31, 2018 and 2017

 

   $ 
Balance as at December 31, 2016   185,489 
      
Distributions   (80,000)
      
Net income   2,338,905 
      
Balance as at December 31, 2017   2,444,394 
      
Contributions   1,100,000 
      
Distributions   (3,276,692)
      
Net income   3,682,863 
      
Balance as at December 31, 2018   3,950,565 

 

The accompanying notes are in integral part of these consolidated financial statements.

 

6 

 

 

WASHOE WELLNESS, LLC 

Consolidated Statements of Cash Flows 

For the Years Ended December 31, 2018 and 2017

 

  

2018

$

  

2017

$

 
Operating activities          
Net income   3,682,863    2,338,905 
           
Adjustments for items not affecting cash:          
Depreciation   361,611    262,491 
Share of (income) on equity investments   (1,642,415)   (922,955)
Unrealized gain on biological asset transformation   4,005,602    1,167,367 
Fair value changes in biological assets included in cost of sales   (5,086,289)   (1,061,462)
Changes in working capital items:          
Accounts receivable   (220,084)   (63,785)
Inventory   (891,390)   584,239 
Biological assets   1,068,724    (295,214)
Prepaid expenses and other assets   537,543    (704,622)
Other receivables   (11,532)   - 
Trade payables   647,384    150,654 
Accrued liabilities   15,104    60,137 
Advance from a related corporation   540,271    150,190 
Cash provided by operating activities   3,007,392    1,665,945 
           
Investing activities          
Purchase of intangible assets   (34,876)   - 
Changes in investment in associate, net   1,178,719    (60,554)
Receipts (issuance) of loans receivable   240,000    (240,000)
Purchase of property, plant and equipment   (3,423,815)   (2,890,586)
Cash used in investing activities   (2,039,972)   (3,191,140)
           
Financing activities          
Proceeds from issuance of debts payable   190,000    2,981,103 
Repayments of debts payable   (70,086)   (73,938)
Contributions   1,100,000    - 
Distributions   (3,276,692)   (80,000)
Cash (used in) provided by financing activities   (2,056,778)   2,827,165 
           
Net (decrease) increase in cash   (1,089,358)   1,301,970 
Cash, beginning of year   1,435,345    133,375 
Cash, end of year   345,987    1,435,345 
           
Supplemental cash flow information          
Interest paid   455,590    319,963 

 

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

 

7 

 

 

WASHOE WELLNESS, LLC

Notes to the Consolidated Financial Statements

For the Years Ended December 31, 2018 and 2017

 

 

1.NATURE OF OPERATIONS

 

Washoe Wellness, LLC (“Washoe” or the “Company”) was incorporated as a Limited Liability Company on June 23, 2014 in the State of Nevada, United States of America (“USA”). The Company’s head office is located at 1645 Crane Way, Sparks, NV 89431.

 

The Company’s management, operations, structure and other matters are governed through an Operating Agreement entered between the Members and Managers of the Company on November 5, 2014. The Company’s principal activities, through its subsidiaries, are the growing, processing and distribution of cannabis as regulated under the laws applicable in the USA.

 

2.BASIS OF PRESENTATION

 

2.1 Statement of Compliance

 

These consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (“IFRS”) issued by the International Accounting Standards Board (“IASB”) and Interpretations of the International Financial Reporting Interpretations Committee (“IFRIC”). The consolidated financial statements of the Company as at and for the years ended December 31, 2018 and 2017, comprise of the Company, and its wholly owned subsidiaries.

 

These consolidated financial statements were approved and authorized for issue by the Board of Directors of the Company on August 2, 2019.

 

2.2 Basis of Presentation

 

These consolidated financial statements have been prepared on the historical cost basis except for certain financial instruments, which are measured at fair value, as explained in the accounting policies set out in Note 3. The consolidated financial statements are presented in US dollars which is the presentation and functional currency of the Company and its subsidiaries.

 

3.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

3.1 Basis of Consolidation

 

The consolidated financial statements include the financial statements of the Company and its wholly owned subsidiaries Tahoe-Reno Extractions, LLC (“TRE”), Tahoe-Reno Botanicals, LLC (“TRB”) and DWC Investments, LLC, Limited Liabilities Companies, and KLYMB Project Management, Inc., incorporated in the state of Nevada. The results of subsidiaries acquired or disposed of during the year are included in the consolidated statements of operations from the effective date of acquisition or up to the effective date of disposal, as appropriate. All inter-company transactions, balances, income and expenses are eliminated on consolidation.

 

The financial statements of the subsidiaries are prepared for the same reporting period as the Company, using consistent accounting policies.

 

8 

 

 

WASHOE WELLNESS, LLC

Notes to the Consolidated Financial Statements

For the Years Ended December 31, 2018 and 2017

 

 

3.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

3.2 Property, Plant and Equipment (“PPE”)

 

Property, plant and equipment are stated at cost less accumulated depreciation and accumulated impairment losses. The cost of an item of PPE consists of the purchase price, any costs directly attributable to bringing the asset to the location and condition necessary for its intended use and an initial estimate of the costs of dismantling and removing the item and restoring the site on which it is located.

 

Depreciation is provided at rates calculated to write off the cost of PPE, less their estimated residual value, using the straight-line method over the following expected useful lives:

 

  Land — Not depreciated
  Buildings and leasehold improvements - the shorter of the useful life or life of the lease
  Furniture and fixtures —5 to 7 years
  Office equipment —5 years
  Machinery and equipment — 5 years
  Auto and Trucks — 5 years

  

An item of PPE is derecognized upon disposal, when held for sale or when no future economic benefits are expected to arise from the continued use of the asset. Any gain or loss arising on disposal of the asset, determined as the difference between the net disposal proceeds and the carrying amount of the asset, is recognized in the consolidated statements of operations.

 

Assets under capital lease are amortized according to their asset category.

 

Assets in process are transferred to the appropriate asset class when available for use and depreciation of the assets commences at that point of time.

 

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

 

Where an item of property, plant and equipment comprises major components with different useful lives, the components are accounted for as separate items of property, plant and equipment. Expenditures incurred to replace a component of an item of property, plant and equipment that is accounted for separately, including major inspection and overhaul expenditures are capitalized.

 

3.3 Taxation

 

The Company and its subsidiaries are considered Limited Liability companies for income tax purposes, for the years ended December 31, 2018 and 2017. Therefore, the Company’s taxable income is allocated to the members for inclusion on their respective income tax returns.

 

As the Company operates in the cannabis industry, it is subject to the limits of IRC Section 280E under which the Company is only allowed to deduct expenses directly related to sales of product. This results in permanent differences between ordinary and necessary business expenses deemed non-allowable under IRC Section 280E.

 

9 

 

 

WASHOE WELLNESS, LLC

Notes to the Consolidated Financial Statements

For the Years Ended December 31, 2018 and 2017

 

 

3.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

3.4 Revenues

 

IFRS 15 specifies how and when revenues should be recognized based on a five-step model, which is applied to all contracts with customers. The Company has applied IFRS 15 retrospectively and determined that there is no change to the comparative periods or transitional adjustments required as a result of the adoption of this standard. The Company’s accounting policy for revenue recognition under IFRS 15 is to follow a five-step model to determine the amount and timing of revenue to be recognized:

 

  Identifying the contract with a customer
  Identifying the performance obligations within the contract
  Determining the transaction price
  Allocating the transaction price to the performance obligations
  Recognizing revenue when/as performance obligation(s) are satisfied.

 

Revenue from growing, processing and distribution of cannabis is recognized when the Company transfers control of the good to the customer. In some cases, judgement is required in determining whether the customer is a business or the end consumer. This evaluation was made on the basis of whether the business obtains control of the product before transferring to the end consumer. Control of the product transfers at a point in time either upon shipment to or receipt by the customer, depending on the contractual terms.

 

The Company recognizes revenue in an amount that reflects the consideration that the Company expects to receive taking into account any variation that may result from rights of return.

 

The pattern and timing of revenue recognition under the new standard is consistent with prior year practice. There were no adjustments recognized on the adoption of IFRS 15 in the year ended December 31, 2018.

 

3.5 Intangible Assets

 

Intangible assets are recorded at cost, less accumulated amortization and impairment losses, if any Amortization is recorded on a straight-line basis over their estimated useful lives, which do not exceed the contractual period, if any. Intangible assets, which include product rights, domain name and trademark, have indefinite useful lives and are not subject to amortization. Such assets are tested annually for impairment, or more frequently, if events or changes in circumstances indicate that they might be impaired. The estimated useful lives, residual values, and amortization methods are reviewed at each year-end, and any changes in estimates are accounted for prospectively. For the years ended December 31, 2018 and 2017, the Company did not recognize any impairment losses.

 

10 

 

 

WASHOE WELLNESS, LLC

Notes to the Consolidated Financial Statements

For the Years Ended December 31, 2018 and 2017

 

 

3.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

3.6 Financial Instruments

 

Recognition and Initial Measurement

 

Financial assets and financial liabilities, including derivatives, are recognized in the statements of financial position when the Company becomes a party to the contractual provisions of a financial instrument or non- financial derivative contract. All financial instruments are measured at fair value on initial recognition. Transaction costs that are directly attributable to the acquisition or issuance of financial assets and financial liabilities, other than financial assets and financial liabilities classified as FVTPL, are added to or deducted from the fair value on initial recognition. Transaction costs directly attributable to the acquisition of financial assets or financial liabilities classified as FVTPL are recognized immediately in net loss.

 

Classification and Subsequent Measurement

 

The Company classifies financial assets, at the time of initial recognition, according to the Company’s business model for managing the financial assets and the contractual terms of the cash flows. Financial assets are classified in the following measurement categories:

 

a) amortized cost (“AC”);

b) fair value through profit or loss (“FVTPL”); and

c) fair value through other comprehensive income (“FVTOCI”).

  

Financial assets are subsequently measured at amortized cost if both the following conditions are met and they are not designated as FVTPL: a) the financial asset is held within a business model whose objective is to hold financial assets to collect contractual cash flows; and b) the contractual terms of the financial asset give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding.

 

These assets are subsequently measured at amortized cost using the effective interest rate method, less any impairment, with gains and losses recognized in net income in the period that the asset is derecognized or impaired. All financial assets not classified as amortized cost as described above are measured at FVTPL or FVTOCI depending on the business model and cash flow characteristics. The Company has no financial assets measured at FVTOCI.

 

Financial liabilities are subsequently measured at amortized cost using the effective interest rate method with gains and losses recognized in net income in the period that the liability is derecognized, except for financial liabilities classified as FVTPL.

 

Financial instruments are classified into one of the following categories: FVTPL; financial assets at amortized cost, financial liabilities at amortized cost, and financial assets at FVTOCI.

 

Impairment of Financial Instruments

 

For accounts receivable, the Company applies the simplified approach to providing for expected credit losses prescribed by IFRS 9, which requires the use of the lifetime expected loss provision for all accounts receivable, based on the Company’s historical default rates over the expected life of the accounts receivable, trade and is adjusted for forward-looking estimates. The methodologies and assumptions, including any forecasts of future economic conditions, are reviewed regularly.

 

11 

 

 

WASHOE WELLNESS, LLC

Notes to the Consolidated Financial Statements

For the Years Ended December 31, 2018 and 2017

 

  

3.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

3.6 Financial Instruments (Continued)

 

All individually significant loan receivables are assessed for impairment. All individually significant loans receivable found not to be specifically impaired are then collectively assessed for impairment. Loans receivables not individually significant are collectively assessed for impairment by grouping together loans receivable with similar risk characteristics.

 

Derecognition

 

The Company derecognizes financial assets only when the contractual rights to cash flows from the financial assets expire, or when it transfers the financial assets and substantially all of the associated risks and rewards of ownership to another entity. Gains and losses on derecognition are recognized in the consolidated statements of operations.

 

The Company derecognizes financial liabilities only when its obligations under the financial liabilities are discharged, cancelled or expired. Generally, the difference between the carrying amount of the financial liability derecognized and the consideration paid and payable, including any non-cash assets transferred or liabilities assumed, is recognized in the consolidated statements of operations.

 

3.7 Impairment of Non-Financial Assets

 

At each date of the statements of financial position, the Company reviews the carrying amounts of its tangible assets to determine whether there is an indication that those assets have suffered an impairment loss. If any such indication exists, or when annual impairment testing for an asset is required, the recoverable amount of the asset is estimated in order to determine the extent of the impairment loss (if any). Where it is not possible to estimate the recoverable amount of an individual asset, the Company estimates the recoverable amount of the cash generating unit to which the assets belong.

 

The recoverable amount is the higher of fair value less costs to sell and value in use. In assessing the value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. In determining fair value less costs of disposal, recent market transactions are taken into account. If no such transactions can be identified, an appropriate valuation model is used. These calculations are corroborated by valuation multiples, quoted share prices for publicly traded companies or other available fair value indicators.

 

If the recoverable amount of an asset (or cash generating unit) is estimated to be less than it’s carrying amount, the carrying amount of the asset (or cash generating unit) is reduced to its recoverable amount. An impairment loss is recognized immediately in the consolidated statements of operations, unless the relevant asset is carried at a revalued amount, in which case the impairment loss is treated as a revaluation decrease.

 

Where an impairment loss subsequently reverses, the carrying amount of the asset (cash generating unit) is increased to the revised estimate of its recoverable amount, but so that the increased carrying amount does not exceed the carrying amount that would have been determined had no impairment loss been recognized for the asset (or cash generating unit) in prior years. A previously recognised impairment loss is reversed only if there has been a change in the assumptions used to determine the asset’s recoverable amount since the last impairment loss was recognised.

 

12 

 

 

WASHOE WELLNESS, LLC

Notes to the Consolidated Financial Statements

For the Years Ended December 31, 2018 and 2017

 

 

3.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

3.8 Biological Assets

 

The Company measures biological assets consisting of cannabis plants at fair value less costs to sell up to the point of harvest, which becomes the basis for the cost of internally produced work in process and finished goods inventories after harvest. Unrealized gains or losses arising from changes in fair value less cost to sell during the year are included in the results of operations of the related year.

 

3.9 Inventory

 

Inventories of finished goods, work-in-process and raw materials are initially valued at cost and subsequently at the lower of cost and net realizable value. Inventories of harvested cannabis are transferred from biological assets at their fair value at the point of harvest, which becomes the initial deemed cost. Any subsequent post-harvest costs, including direct costs attributable to processing and related overheads, are capitalized to inventory to the extent that cost is less than net realizable value. Net realizable value is the estimated selling price in the ordinary course of business, less the estimated costs to sell. The Company reviews inventories for obsolete, redundant and slow-moving goods and any such inventories identified are written down to net realizable value. At December 31, 2018 and 2017 there were no reserves for inventories required.

 

3.10 Cash

 

The Company considers all investments with original maturities of three months or less, that are highly liquid and readily convertible into cash, to be cash equivalents.

 

3.11 Provisions

 

Provisions are recognized when the Company has a present obligation (legal or constructive) that has arisen as a result of a past event and it is probable that a future outflow of resources will be required to settle the obligation, provided that a reliable estimate can be made of the amount of the obligation.

 

Provisions are measured at the present value of the expenditures expected to be required to settle the obligation using a pre-tax rate that reflects current market assessments of the time value of money and the risk specific to the obligation. The increase in the provision due to passage of time is recognized as interest expense.

 

3.12 Significant Accounting Judgments and Estimates

 

The application of the Company’s accounting policies requires management to use estimates and judgments that can have significant effect on the revenues, expenses, assets and liabilities recognized and disclosures made in the consolidated financial statements.

 

Management’s best estimates concerning the future are based on the facts and circumstances available at the time estimates are made. Management uses historical experience, general economic conditions and assumptions regarding probable future outcomes as the basis for determining estimates. Estimates and their underlying assumptions are reviewed periodically and the effects of any changes are recognized immediately. Actual results could differ from the estimates used. 

 

13 

 

 

WASHOE WELLNESS, LLC

Notes to the Consolidated Financial Statements

For the Years Ended December 31, 2018 and 2017

 

 

3.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

3.12 Significant Accounting Judgments and Estimates (Continued)

 

Management’s budget and strategic plans are fundamental information used as a basis for estimates necessary to prepare financial information. Management tracks performance as compared to the budget and significant variances in actual performance are a key trigger to assess whether certain estimates used in the preparation of financial information must be revised.

 

The following areas require management’s critical estimates and judgments:

 

(a) Biological assets and inventory

 

In calculating the value of the inventory, management is required to make a number of estimates, including estimating the stage of growth of the cannabis up to the point of harvest, harvesting costs, selling costs, average or expected selling prices and list prices, expected yields for the cannabis plants, and oil conversion factors. In calculating final inventory values, management compares the inventory costs to estimated net realizable value.

 

(b) Estimated useful lives and depreciation of property, plant and equipment

 

Depreciation and depreciation of property, plant and equipment are dependent upon estimates of useful lives, which are determined through the exercise of judgements. The assessment of any impairment of these assets is dependent upon estimates of recoverable amounts that lake into account factors such as economic and market conditions and the useful lives of assets.

 

(c) Valuation, estimated life and impairment of intangible assets

 

Management used significant judgment in valuing the fair value of intangible assets, estimating the useful lives and impairment. Intangible assets that have indefinite useful lives are not subject to amortization and are tested annually for impairment, or more frequently if events or changes in circumstances indicate that they might be impaired.

 

3.13 Leases

 

The determination of whether an arrangement is (or contains) a lease is based on the substance of the arrangement at the inception of the lease. The arrangement is, or contains, a lease if fulfilment of the arrangement is dependent on the use of a specific asset or assets and the arrangement conveys a right to use the asset or assets, even if that right is not explicitly specified in an arrangement.

 

A lease is classified at the inception date as a finance lease or an operating lease. A lease that transfers substantially all the risks and rewards incidental to ownership to the Company is classified as a finance lease. An operating lease is a lease other than a finance lease. Operating lease payments are recognised as an operating expense in the consolidated statements of operations on a straight-line basis over the lease term.

 

3.14 Borrowing Costs

 

Borrowing costs directly attributable to the acquisition or construction of a qualifying asset are capitalized. Qualifying assets are those that require a minimum of three months to prepare for their intended use. 

 

14 

 

  

WASHOE WELLNESS, LLC

Notes to the Consolidated Financial Statements

For the Years Ended December 31, 2018 and 2017

 

 

3.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

3.15 Investment in Associate

 

An associate is an entity over which the Company exercises significant influence. Significant influence is the power to participate in the financial and operating policy of the investee but without control or joint control over those policies. Interests in associates are accounted for using the equity method, and are initially recognized at cost. Subsequent to initial recognition, the carrying value of the Company’s interest in an associate is adjusted for the Company’s share of income and distributions of the investee. The carrying value of the Company’s investment in associate is assessed for impairment at each statement of financial position date. Significant influence is the power to participate in the financial and operating policy decisions of the investee without control or joint control over those decisions. Significant influence is presumed if the Company holds between 20% and 50% of the voting rights, unless evidence exists to the contrary. The Company has assessed that it has joint control over its investment in The Canopy NV LLC.

 

Joint control is the contractually agreed sharing of control of an arrangement, which exists only when decisions about the relevant activities require the unanimous consent of the parties sharing control. Investees in which the Company has joint control and rights to the net assets thereof, are defined as joint ventures.

 

Investees in which the Company has significant influence are accounted for using the equity method. The Company’s interest in an investee is initially recorded at cost and is subsequently adjusted for the Company’s share of changes in net assets of the investee, less any impairment in the value of individual investments, less any dividends paid. Where the Company transacts with an investee, unrealized profits and losses are eliminated to the extent of the Company’s interest in that investee.

 

4.CHANGES IN ACCOUNTING STANDARDS

 

Adoption of New Accounting Pronouncements

 

IFRS 9 - Financial Instruments

 

In July 2014, the IASB issued the final version of IFRS 9 — Financial Instruments (“IFRS 9”), which brings together the classification and measurement, impairment, and hedge-accounting phases of the IASB’s project to replace IAS 39 — Financial Instruments: Recognition and Measurement (“IAS 39”).

 

Classification and Measurement — Financial assets are classified and measured based on the business model under which they are managed and the contractual cash flow characteristics of the financial assets. Financial liabilities are classified in a similar manner as under IAS 39, except that financial liabilities measured at fair value will have fair value changes resulting from changes in the entity’s own credit risk recognized in Other Comprehensive Income (“OCI”) instead of Net Income, unless this would create an accounting mismatch.

 

IFRS 9 contains three principal classification categories for financial assets: measured at amortized cost (“AC”), fair value through other comprehensive income (“FVTOCI”) and FVTPL. The standard eliminates the previous IAS 39 categories of held to maturity, loans and receivables, and available for sale.

 

Impairment — The measurement of impairment of financial assets is based on an expected credit loss model. It is no longer necessary for a triggering event to have occurred before credit losses are recognized. IFRS 9 also includes new disclosure requirements about expected credit losses and credit risk. 

 

15 

 

 

WASHOE WELLNESS, LLC

Notes to the Consolidated Financial Statements

For the Years Ended December 31, 2018 and 2017

 

 

4.CHANGES IN ACCOUNTING STANDARDS (Continued)

 

Adoption of New Accounting Pronouncements (Continued)

 

IFRS 9 - Financial Instruments (Continued)

 

Hedge Accounting — The new general hedge accounting model more closely aligns hedge accounting with risk management activities undertaken by entities when hedging their financial and non-financial risk exposures. It will provide more opportunities to apply hedge accounting to reflect actual risk management activities.

 

The Company adopted IFRS 9 effective from January 1, 2018. The adoption did not result in any material change.

 

IFRS 15: Revenue from Contracts with Customers:

 

IFRS 15 supersedes IAS 11 Construction Contracts, IAS 18 Revenue and related Interpretations and it applies to all revenue arising from contracts with customers, unless those contracts are in the scope of other standards. The new standard establishes a five-step model to account for revenue arising from contracts with customers. Under IFRS 15, revenue is recognised at an amount that reflects the consideration to which an entity expects to be entitled in exchange for transferring goods or services to a customer. The standard requires entities to exercise judgement, taking into consideration all of the relevant facts and circumstances when applying each step of the model to contracts with their customers. The standard also specifies the accounting for the incremental costs of obtaining a contract and the costs directly related to fulfilling a contract. The Company has adopted IFRS 15 from incorporation date.

 

IFRS 7. Financial Instruments: Disclosure

 

IFRS 7, Financial Instruments: Disclosure, was amended to require additional disclosures on transition from IAS 39 to IFRS 9. IFRS 7 is effective on adoption of IFRS 9, which is effective for annual periods commencing on or after January 1, 2018.

 

IAS 16 and IAS 41, Bearer Plants

 

The Company has implemented amendments to IAS 16 and IAS 41, which became effective for annual periods beginning In January 1, 2016. These amendments are summarized below.

 

Bearer plants are accounted for as property, plant and equipment and measured at initial recognition at cost or revaluation basis.

 

Bearer plants are defined as a living plant that are used in the production or supply of agricultural produce. Such plants are expected to bear produce for more than one period, and has a remote likelihood of being sold as agricultural produce, except for incidental scrap sales.

 

Bearer plants remain within the scope of IAS 41.

 

The amendments described above are consistent with the Company’s accounting practices.

 

16 

 

 

WASHOE WELLNESS, LLC

Notes to the Consolidated Financial Statements

For the Years Ended December 31, 2018 and 2017

 

 

4.CHANGES IN ACCOUNTING STANDARDS (Continued)

 

Changes in Accounting Standards not yet Effective

 

IFRS 16 — Leases

 

In January 2016, the LASB issued IFRS 16 — Leases (“IFRS 16”), which replaces IAS 17 — Leases, and its associated interpretative guidance. IFRS 16 applies a control model to the identification of leases, distinguishing between a lease and a service contract on the basis of whether the customer controls the asset being leased. For those assets determined to meet the definition of a lease, IFRS 16 introduces significant changes to the accounting by lessees, introducing a single, on-balance sheet accounting model that is similar to current finance lease accounting, with limited exceptions for short-term leases or leases of low value assets. Lessor accounting remains similar to current accounting practice. The standard is effective for annual periods beginning on or after January 1, 2019, with early application permitted for entities that apply IFRS 15. The Company is currently evaluating the impact the final standard is expected to have on its consolidated financial statements and plans to adopt the requirements in 2019.

 

5.INVENTORY

 

The Company’s inventory includes the following:

 

      2018   2017
   

Capitalized

cost

 

Fair value

adjustment

  Carrying
value
 

Capitalized

cost

 

Fair value

adjustment

  Carrying
value
    $   $   $   $    
Harvested cannabis                                    
Work in process     51,922     -     51,922     145,283     45     145,328
Finished goods     268,340     (29,676 )    238,664     29,348     26,493     55,841
      320,262     (29,676 )    290,586     174,631     26,538     201,169
                                     
Production Assets                                    
Raw materials     130,409     31,713     162,122     168,328     65,352     233,680
Work in process     1,384,047     102,105     1,486,152     298,196     111,815     410,011
Finished goods     58,385     8,347     66,732     138,371     23,699     162,070
      1,572,841     142,165     1,715,006     604,895     200,866     805,761
                                     
Accessories and supplies     29,986     -     29,986     137,258     -     137,258
      1,923,089     112,489     2,035,578     916,784     227,404     1,144,188

 

Inventories expensed as cost of goods sold during the years ended December 31, 2018 and 2017, are $3,281,125 and $2,434,607, respectively. These exclude the fair market value changes of biological assets.

 

Non-cash expense relating to change in fair value of inventory sold recognized during the years ended December 31, 2018 and 2017, are $5,086,289 and $1,061,462, respectively.

 

17 

 

 

WASHOE WELLNESS, LLC

Notes to the Consolidated Financial Statements

For the Years Ended December 31, 2018 and 2017

 

 

6.BIOLOGICAL ASSETS

 

The continuity of biological assets was as follows: 

   2018   2017 
    $    $ 
Balance, at beginning of year   1,232,350    1,043,041 
Production costs   3,049,368    2,887,977 
Fair value change   968,197    1,167,367 
Transferred to inventory upon harvest   (4,005,602)   (3,866,035)
Balance, at end of year   1,244,313    1,232,350 

 

As of December 31, 2018 and 2017, the weighted average fair value less cost to complete and cost to sell was $3.39 and $2.4 per gram, respectively.

 

The fair value of biological assets is categorized within Level 3 on the fair value hierarchy. The inputs and assumptions used in determining the fair value of biological assets include:

 

(a) Selling price per gram; Level 3 input  
(b) Attrition rate; Level 3 input  
(c) Average yield per plant; Level 3 input  
(d) Standard cost per gram to compete production Level 3 input  
(e) Cumulative stage of completion in production process Level 3 input  

 

Significant unobservable assumptions used in the valuation of biological assets, including the sensitivities on changes in these assumptions and their effect on the fair value of biological assets, are as follows:

 

Significant inputs or as Range of inputs  Sensitivity  Effect on fair value 
         2018   2017 
          $    $ 
Selling price per gram*  $3.90 to $4.16  Increase or decrease of $1 per gram   366,308    514,055 
Average yield per plant  369 to 358 gram  Increase or decrease by 5 grams per plant   21,299    27,121 

 

*Selling price per gram is based on average selling prices for the period.

 

The Company’s estimates are, by their nature, subject to change and differences from the anticipated yield will be reflected in the gain or loss on biological assets in future periods.

 

As of December 31, 2018, and 2017, the biological assets were on average 51% and 43% complete, respectively. During the years ended December 31, 2018 and 2017, the Company’s biological assets produced 1,181,220 grams and 1,106,825 grams of dried cannabis, respectively.

 

18 

 

 

WASHOE WELLNESS, LLC

Notes to the Consolidated Financial Statements

For the Years Ended December 31, 2018 and 2017

 

 

7.LOANS RECEIVABLE

 

Loans receivable includes two loans provided by the Company to third parties, amounting to $200,000 and $40,000 in 2017. In August 2017, the Company made a short-term loan of $200,000 which carried an interest rate of 24% per annum, payable monthly and was secured by real estate. This loan was initially due in December 2017 but was subsequently amended to extend the maturity date to February 2018 in exchange for additional fees and penalties. The Company received $15,000 in interest payments for the year ended December 31, 2017.

 

In November 2017, the Company made a short-term loan of $40,000 to a vendor, which carried an interest rate of 2.5% and was due March 2018. The loan was secured by third party equipment. There are no principal amounts outstanding for both the loans as at December 31, 2018 (December 31, 2017: $200,000 and $40,000).

 

8.INTANGIBLE ASSETS

 

As at December 31, intangible assets having indefinite lives consisted of the following:

 

   2018   2017 
   $   $ 
Product rights   59,894    25,018 
Domain name   16,000    16,000 
Trademarks   5,000    5,000 
    80,894    46,018 

 

9.PROPERTY, PLANT AND EQUIPMENT

 

    Land  

Buildings &

leasehold

improvements

  

Furniture &

fixtures

  

Office

equipment

  

Machinery

&

equipment

   Auto &
trucks
   Total 
    $   $   $   $   $   $   $ 
Cost                             
As at December 31, 2016   600,000   2,504,052   9,855   62,315   784,917   10,435   3,971,574 
Additions       2,199,625   12,340   8,857   69,764   -   2,290,586 
As at December 31, 2017   600,000   4,703,677   22,195   71,172   854,681   10,435   6,262,160 
Additions   296,444   2,743,634   40,489   33,039   286,322   23,887   3,423,815 
As at December 31, 2018   896,444   7,447,311   62,684   104,211   1,141,003   34,322   9,685,975 
                              
Depreciation                            
As at December 31, 2016   -   58,738   1,291   14,634   140,666   348   215,677 
Depreciation   -   83,048   1,662   12,934   162,760   2,087   262,491 
As at December 31, 2017   -   141,786   2,953   27,568   303,426   2,435   478,168 
Depreciation   -   144,107   5,181   18,868   188.183   5,272   361,611 
As at December 31, 2018   -   285,893   8,134   46,436   491,609   7,707   839,779 
                              
Net book value                             
As at December 31, 2017   600,000   4,561,891   19,242   43,604   551,255   8,000   5,783,992 
As at December 31, 2018   896,444   7,161,418   54,550   57,775   649,394   26,615   8,846,196 

 

As at December 31, 2018, buildings and leasehold improvements include borrowing costs of $nil capitalized in connection with loan used for the construction of buildings (December 31, 2017: $204,660).

 

Depreciation expense for the years ended December 31, 2018 and 2017, of $51,831 and $262,491, respectively, is included in cost of goods sold.

 

19 

 

 

WASHOE WELLNESS, LLC

Notes to the Consolidated Financial Statements

For the Years Ended December 31, 2018 and 2017

 

 

10.INVESTMENT IN ASSOCIATE

 

The Company has a 52% participating interest in one of its related corporations. Management has concluded that the current participating interest does not provide control to the Company. Accordingly, the current investment has been accounted for as an investment in associate using the equity method as detailed below:

 

   2018   2017 
   $   $ 
Balance, at beginning of year   1,200,651    217,142 
Addition (deletions)   (1,178,719)   60,554 
Share of income   1,642,415    922,955 
Balance, at end of year   1,664,347    1,200,651 

 

The following table presents a summary of statements of financial position and statements of operations of the investee:

 

   2018   2017 
   $   $ 
Current assets   2,295,880    1,567,469 
Non-current assets   2,859,107    2,076,211 
Current liabilities   689,284    363,553 
Revenue   11,748,244    7,135,024 
Income   3,150,573    1,774,912 

 

11.DEBTS PAYABLE

 

The details of debts payable were as follows:

 

   2018   2017 
   $   $ 
Revolving line of credit promissory note (a)   6,561,749    6,561,818 
Loan payable to a third party (b) and (c)   2,620,257    2,500,274 
Total debts payable   9,182,006    9,062,092 
Less: Current portion   -    (70,156)
Debts payable - Non-current portion   9,182,006    8,991,936 

 

Total debt payable includes interest payable as of December 31, 2018 and 2017, of $961,818 and $961,818, respectively.

 

20 

 

 

WASHOE WELLNESS, LLC

Notes to the Consolidated Financial Statements

For the Years Ended December 31, 2018 and 2017

 

 

11.DEBTS PAYABLE (Continued)

 

As at December 31, 2018, the maturity profile of the principal amounts of debts outstanding are as follows:

 

Year ending December 31   $ 
2019   - 
2020   181,220 
2021   123,322 
2022   2,213,481 
2023   39,014 
Thereafter   6,624,969 
    9,182,006 

 

(a)Revolving Line of Credit Promissory Note

 

Debt under this arrangement represented financing obtained from a related corporation under an original Revolving Line of Credit Note dated November 5, 2014 of a maximum borrowing limit of $2,500,000, which was revised from time to time. Effective January 1, 2017, the Company entered into a Restated Revolving Line of Credit, which replaced the revolving line of credit note with a straight promissory note of $5,600,000 with maturity date extended indefinitely.

 

The promissory note carries an interest of 6% per annum to be paid monthly. If monthly payment of interest is not made timely, the interest for the period of the missed payment shall accrue at the default interest rate of 12%. The Company granted a 5% membership interest to the note holder due to the principal amount of note was not repaid by June 30, 2017 (First Repayment Date). Subsequently, a further 5% membership interest was granted to the note holder when the principal amount of the note was not repaid by December 31, 2017 (Second Repayment Date).

 

As at December 31, 2018, the entire principal amount remained outstanding. A 5% membership interest was granted to the note holder subsequent to the First Repayment Date, and a further 5% membership interest was granted to the note holder subsequent to the Second Repayment Date. In addition, as at that date, accrued interest, included in debts payable — non-current portion, the amount of $961,818 has remained unpaid (December 31, 2017: $961,818). The principal amounts outstanding as at December 31, 2018 and 2017, were $5,600,000 and $5,600,000, respectively.

 

(b)Loan Payable to a Third Party

 

Effective August 24, 2017, the Company obtained a loan of $2,525,000 for a term of five years from a third party. This loan carries interest at 5% per annum with a monthly blended payment of $16,664, started from October 1, 2017 with a final payment of $2,123,899 on September 1, 2022. The loan is secured by a deed of trust with assignment of rents on the Company’s land and buildings in favour of the lender. The principal amounts outstanding as at December 31, 2018 and 2017, were $2,430,187 and $2,500,274, respectively.

 

(c)Loan Payable to a Third Party

 

On July 23, 2018, the Company borrowed $190,000 in connection with the purchase of land. The loan bears interest at a rate of 6% per annum and is due in 2023. Monthly installments of principal and interest in an amount of $3,673 beginning on July 23, 2020. The loan is secured by a deed of trust. Should the Company prepay this loan by July 23, 2019, the principal amount will be reduced by $25,000.

 

The principal amounts outstanding as at December 31, 2018 and 2017, were $190,000 and $nil, respectively.

 

21 

 

 

WASHOE WELLNESS, LLC

Notes to the Consolidated Financial Statements

For the Years Ended December 31, 2018 and 2017

 

 

12.MEMBERS’ EQUITY

 

In a series of transaction in Q2 2018, the Company adjusted its capital structure. On May 31, 2018, the Company (i) added additional members, granting them membership interests in exchange for services provided on a historical and ongoing basis, (ii) created a revised membership class structure to reflect these new members and (iii) allowed an existing member to make an additional capital contribution to the Company. On Jun 4, 2018, the aforementioned member increased the amount of the additional capital contribution of $1,100,000.

 

13.RELATED PARTY TRANSACTIONS AND BALANCES

 

Related parties are defined as management and members of the Company and/or members of their immediate family and/or other companies and/or entities in which a member or senior officer is a principal owner or senior executive.

 

Other than disclosed elsewhere in the consolidated financial statements, related party transactions and balances are as follows:

 

Included in other income for the years ended December 31, 2018 and 2017, is management fees of $125,000 and $201,000, respectively, received from a related corporation. The management fee is paid monthly. The monthly fee varied based on an allocation of the Company’s expenses and was a month-to-month arrangement.

 

During the year ended December 31, 2018, sales of $5,016,480 made to a related corporation is included in revenues and purchases of $830,221 from a related corporation is included in cost of goods sold.

 

Advance from a related corporation of $690,461 and $150,190, respectively, was outstanding as at December 31, 2018 and 2017. The advance from a related corporation is unsecured, interest free and is repayable on demand.

 

During the years ended December 31, 2018 and 2017, management fees of $280,000 and $nil, respectively, were paid to a related party under consulting agreements. TRE and TRB each pay $20,000 per month ($40,000 per month in total) under these agreements, which were executed and were effective on June 1, 2018. These agreements have a three-year term and automatically renew every three years unless any party gives notice of their intent to terminate the agreement. Any party may also terminate the agreement at any time with 120 days notice.

 

The following outlines the compensation of the Company’s key management personnel:

 

   2018   2017 
   $   $ 
Salaries and benefits to key management personnel   127,124    179,754 

 

14.CAPITAL MANAGEMENT

 

The Company manages its capital structure and makes adjustments to it, based on the funds available to the Company, in order to support business development. The Members do not establish quantitative return on capital criteria for management, but rather relies on the expertise of the Company’s management to sustain future development of the business.

 

22 

 

  

WASHOE WELLNESS, LLC

Notes to the Consolidated Financial Statements

For the Years Ended December 31, 2018 and 2017

 

 

14.CAPITAL MANAGEMENT (Continued)

 

The Company defines capital to include its Members’ equity. In order to carry out the planned business development and pay for administrative costs, the Company will spend its existing working capital and raise additional amounts as needed. There were no changes in the Company’s approach to capital management during the year ended December 31, 2018. The Company is not subject to externally imposed capital requirements. As at December 31, 2018 and 2017, the capital of the Company was $3,950,565 and $2,444,394, respectively.

 

The Company raises capital, as necessary, to meet its needs and take advantage of perceived opportunities and, therefore, does not have a numeric target for its capital structure. Funds are primarily secured through cash injection by the Members of the Company. 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 ongoing basis and believes that this approach, given the relative size of the Company, is reasonable.

 

The Company invests all capital that is surplus to its immediate operational needs in short-term, liquid and highly rated financial instruments.

 

15.GENERAL AND ADMINISTRATIVE

 

General and administrative expenses were comprised of:

 

   2018   2017 
    $    $ 
Salaries and benefits   393,464    531,962 
Rent [Note 16]   7,872    10,284 
Taxes and licenses   5,766    38,698 
Professional and consulting fees   112,281    47,494 
Insurance   6,679    31,044 
Office expenses   37,699    30,638 
Computer expenses   69,605    50,495 
Shipping expenses   51,682    62,021 
Utilities   5,381    4,111 
Others   135,434    35,992 
    825,863    842,739 

 

23 

 

 

WASHOE WELLNESS, LLC

Notes to the Consolidated Financial Statements

For the Years Ended December 31, 2018 and 2017

 

 

16.COMMITMENTS AND CONTINGENCIES

 

Operating Leases

 

Effective March 1, 2017, the Company conducted operations in facilities leased from a related party. The leases expire through 2022 and contain certain renewal provisions. Future minimum lease payments under non-cancelable operating leases having an initial or remaining term of more than one year are as follows:

 

Year ending December 31   S 
2019    243,336 
2020    250,634 
2021    258,156 
2022    41,236 
     793,362 

 

Total rent expensed for the years ended December 31, 2018 and 2017, were $7,872 and $10,284, respectively.

 

Contingencies

 

The Company’s operations are subject to a variety of local and state regulation. Failure to comply with one or more of those regulations could result in fines, restrictions on its operations, or losses of permits and/or licenses that could result in the Company ceasing operations. While management of the Company believes that the Company is in compliance with applicable local and state regulation at December 31, 2018, cannabis regulations continue to evolve and are subject to differing interpretations. As a result, the Company may be subject to regulatory fines, penalties, or restrictions in the future.

 

Claims and Litigation

 

From time to time, the Company may be involved in litigation relating to claims arising out of operations in the normal course of business. At December 31, 2018, there were no pending or threatened lawsuits that could reasonably be expected to have a material effect on the results of the Company’s operations. There are also no proceedings in which any of the Company’s directors, officers or affiliates is an adverse party or has a material interest adverse to the Company’s interest.

 

17.FINANCIAL RISK FACTORS

 

The Company’s financial instruments mainly comprise of cash, accounts receivable, loans receivable, trade payables, accrued liabilities, advance from a related corporation and debts payable.

 

(a) Fair Value

 

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The fair value measurement is based on the presumption that the transaction to sell the asset or transfer the liability takes place either in the principal market for the asset or liability or in the absence of a principal market, in the most advantageous market for the asset or liability. The principal or the most advantageous market must be accessible by the Company.

 

24 

 

 

WASHOE WELLNESS, LLC

Notes to the Consolidated Financial Statements

For the Years Ended December 31, 2018 and 2017

 

 

17.FINANCIAL RISK FACTORS (Continued)

 

(a) Fair Value (Continued)

 

The fair value of an asset or a liability is measured using the assumptions that market participants would use when pricing the asset or liability, assuming that market participants act in their economic best interest. A fair value measurement of a non-financial asset takes into account a market participant’s ability to generate economic benefits from the asset’s highest and best use or by selling it to another market participant that would utilise the asset in its highest and best use.

 

The Company uses valuation techniques that are appropriate in the circumstances and for which sufficient data are unobservable inputs.

 

All assets and liabilities for which fair value is measured or disclosed in the consolidated financial statements are categorised within the fair value hierarchy. This is described, as follows, based on the lowest level input that is significant to the fair value measurement as a whole:

 

• Level 1 inputs are quoted prices in active markets for identical assets or liabilities at the measurement date.

 

• Level 2 inputs are observable inputs other than quoted prices included within Level 1, such as quoted prices for similar assets or liabilities in active markets, quoted prices for identical assets or liabilities in markets that are not active, or other inputs that are observable directly or indirectly.

 

• Level 3 inputs are unobservable inputs for the asset or liability that reflect the reporting entity’s own assumptions and are not based on observable market data.

 

25 

 

 

WASHOE WELLNESS, LLC

Notes to the Consolidated Financial Statements

For the Years Ended December 31, 2018 and 2017

 

 

17.FINANCIAL RISK FACTORS (Continued)

 

The classification of financial instruments at their carrying and fair values is as follows:

 

    Carrying values             Fair values 
Financial assets   FVTPL    FVTOCI    AC    Total    Total 
December 31, 2018   $    $    $    $    $ 
Cash   345,987    -    -    345,987    345,987 
Accounts receivable   -    -    350,974    350,974    350,974 
Other receivables   -    -    11,532    11,532    11,532 
    345,987    -    362,506    708,493    708,493 
                          
December 31, 2017        -                
Cash   1,435,345    -    -    1,435,345    1,435,345 
Accounts receivable   -    -    130,890    130,890    130,890 
Loans receivable   -    -    240,000    240,000    240,000 
    1,435,345    -    370,890    1,806,235    1,806,235 

  

    Carrying values         Fair values 
Financial liabilities   FVTPL    AC    Total    Total 
December 31, 2018   $    $    $    $ 
Trade payables   -    861,240    861,240    861,240 
Accrued liabilities   -    107,472    107,472    107,472 
Advance from a related corporation   -    690,461    690,461    690,461 
Debts payable   -    9,182,006    9,182,006    9,182,006 
         10,841,179    10,841,179    10,841,179 
December 31, 2017   $    $    $    $ 
Trade payables   -    213,856    213,856    213,856 
Accrued liabilities   -    92,368    92,368    92,368 
Advance from a related corporation   -    150,190    150,190    150,190 
Debts payable   -    9,062,092    9,062,092    9,062,092 
    -    9,518,506    9,518,506    9,518,506 

 

The Company’s financial instruments as at December 31, 2018 and 2017 classified as “Level 1 - quoted prices in active markets” is cash. The Company has determined that there have been no transfers between levels in the hierarchy by re-assessing categorization at the reporting date.

 

The Company is exposed to credit risk, liquidity risk and interest rate risk. The Company’s management oversees the management of these risks. The Company’s management is supported by the Members that advises on financial risks and the appropriate financial risk governance framework for the Company. The Company’s financial risk activities are governed by appropriate policies and procedures and that financial risks are identified, measured and managed in accordance with group policies and group risk appetite.

 

26 

 

 

WASHOE WELLNESS, LLC

Notes to the Consolidated Financial Statements

For the Years Ended December 31, 2018 and 2017

 

 

17.FINANCIAL RISK FACTORS (Continued)

 

(b) Credit Risk

 

Credit risk is the risk of unexpected loss if a customer or third party to a financial instrument fails to meet its contractual obligations. Financial instruments which potentially subject the Company to concentrations of credit risk consist of cash and accounts receivable. For its accounts receivable, the Company ensures to deal with creditworthy customers. As at December 31, 2018 and 2017, the maximum amount exposed to credit risks was $708,493 and $1,566,235 respectively.

 

During the years ended December 31, 2018 and 2017, revenue from one customer is approximately 69% and 43%, respectively, of total revenues and purchases of raw materials from two suppliers were approximately $nil% and 40%, respectively, of total purchases.

 

(c) Liquidity Risk

 

Liquidity risk is the risk that the Company is unable to generate or obtain sufficient cash in a cost-effective manner to fund its obligations as they come due. The Company’s approach to managing liquidity risk is to ensure that it will have sufficient liquidity to meet liabilities when due. The Company manages liquidity risk through obtaining financing from its members and third parties. As at December 31, 2018, all trade payables and accrued liabilities are due within a year, whereas, long term debts over a period of seven years.

 

(d) Interest Rate Risk

 

Interest rate risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market interest rates. The Company is exposed to interest rate risk on its long-term debts.

 

18.SEGMENTED INFORMATION

 

Operating and Geographical Segments

 

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

 

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

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

• for which discrete financial information is available.

 

At December 31, 2018 and 2017, the Company’s operations comprise a single reporting operation and geographical segment engaged in the growing, processing and distribution of cannabis.

 

19.SUBSEQUENT EVENTS

 

The Company’s management has evaluated subsequent events up to August 2, 2019, the date the consolidated financial statements were issued, and determined the following event:

 

On May 24, 2019 — Ayr Strategies Inc. (“AYR”), formerly Cannabis Strategies Acquisition Corp. closed its previously announced Qualifying Transaction. Through the qualifying transaction, AYR has created a vertically integrated Multi-State Operator in the U.S. cannabis sector, with an initial anchor portfolio in the Eastern and Western United States.

 

27 

 

 

SCHEDULE “D”

LIVFREE ANNUAL FINANCIAL STATEMENTS

 

(see attached)

 

 

       
   
   
   
   
   
   
   
   
   
   
   
   
   
   
       
       
       
    LIVFREE WELLNESS, LLC  
       
    Consolidated Financial Statements  
       
    As of and for the Years Ended  
    December 31, 2018 And 2017  
       
    (EXPRESSED IN UNITED STATES DOLLARS)  
       
       
       
   
   
   
   
   
   
   
   
   
   
   
   
   
       
   
   
   
   
   
   
   
   

 

 

 

LIVFREE WELLNESS, LLC

Consolidated Financial Statements

December 31, 2018 and 2017

 

Table of Contents

 

  Page
   
Management’s Responsibility for Financial Reporting 1
   
Independent Auditor’s Report 2-3
   
Financial Statements  
   
Consolidated Statements of Financial Position 4
   
Consolidated Statements of Operations 5
   
Consolidated Statements of Changes in Members’ Equity 6
   
Consolidated Statements of Cash Flows 7
   
Notes to the Consolidated Financial Statements 8-22

 

 

 

MANAGEMENT’S RESPONSIBILITY FOR

FINANCIAL REPORTING

 

Management’s Responsibility

 

To the Members of LivFree Wellness, LLC:

 

The accompanying consolidated financial statements and other financial information in this report were prepared by management of LivFree Wellness, LLC (“the Company”), reviewed by the Audit Committee and approved by the Board of Directors.

 

Management is responsible for the consolidated financial statements and believes that they fairly present the Company’s financial condition and results of operations in conformity with International Financial Reporting Standards. Management has included in the Company’s consolidated financial statements amounts based on estimates and judgments that it believes are reasonable, under the circumstances.

 

To discharge its responsibilities for financial reporting and safeguarding of assets, management believes that it has established appropriate systems of internal accounting control which provide reasonable assurance that the financial records are reliable and form a proper basis for the timely and accurate preparation of consolidated financial statements. Consistent with the concept of reasonable assurance, the Company recognizes that the relative cost of maintaining these controls should not exceed their expected benefits. Management further assures the quality of the financial records through careful selection and training of personnel and through the adoption and communication of financial and other relevant policies.

 

These consolidated financial statements have been audited by the Company’s auditors, Macias Gini & O’Connell LLP, and their report is presented herein.

 

August 2, 2019

 

“Steve Menzies” (Signed)   “Timothy Harris” (Signed)
Managing Member   Chief Financial Officer

 

1

 

 

 

Independent Auditor’s Report

 

To the Members of LivFree Wellness, LLC:

 

Opinion

 

We have audited the consolidated financial statements of LivFree Wellness, LLC (the “Company”), which comprises the consolidated statements of financial position as at December 31, 2018 and 2017, and the consolidated statements of operations, changes in members’ equity and cash flows for the years then ended, and notes to the consolidated financial statements, including a summary of significant accounting policies.

 

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

 

Basis for Opinion

 

We conducted our audits in accordance with Canadian generally accepted auditing standards. Our responsibilities under those standards are further described in the Auditor’s Responsibilities for the Audit of the Consolidated Financial Statements section of our report. We are independent of the Company in accordance with the ethical requirements that are relevant to our audits of the consolidated financial statements in Canada, and we have fulfilled our other ethical responsibilities in accordance with these requirements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.

 

Responsibilities of Management for the Consolidated Financial Statements

 

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

 

In preparing the consolidated financial statements, management is responsible for assessing the Company’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless management either intends to liquidate the Company or to cease operations, or has no realistic alternative but to do so.

 

Auditor’s Responsibilities for the Audit of the Consolidated Financial Statements

 

Our objectives are to obtain reasonable assurance about whether the consolidated financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with Canadian generally accepted auditing standards will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these consolidated financial statements.

 

Macias Gini & O’Connell LLP 

12264 El Camino Real, Suite 402 

San Diego, CA 92130

2

www.mgocpa.com

 

 

 

As part of an audit in accordance with Canadian generally accepted auditing standards, we exercise professional judgment and maintain professional skepticism throughout the audit. We also:

 

Identify and assess the risks of material misstatement of the consolidated financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion.

The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control.

Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control.
Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by management.
Conclude on the appropriateness of management’s use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the entity’s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor’s report to the related disclosures in the consolidated financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor’s report. However, future events or conditions may cause the Company to cease to continue as a going concern.
Evaluate the overall presentation, structure and content of the consolidated financial statements, including the disclosures, and whether the consolidated financial statements represent the underlying transactions and events in a manner that achieves fair presentation.

 

We communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audits and significant audit findings, including any significant deficiencies in internal control that we identify during our audits.

 

San Diego, California

August 2, 2019

 

3

 

 

LIVFREE WELLNESS, LLC
Consolidated Statements of Financial Position
At December 31, 2018 and 2017

 

   2018     2017  
   $   $ 
ASSETS          
Current          
Cash and cash equivalents   2,196,398    898,658 
Inventory [Note 5]   2,344,459    1,396,981 
Due from a related corporation   -    590,495 
Prepaid expenses and other assets   248,769    148,224 
    4,789,626    3,034,358 
Property, plant and equipment [Note 6]   1,625,978    1,390,530 
Investment in associate [Note 7]   3,354,501    1,586,966 
Total assets   9,770,105    6,011,854 
           
LIABILITIES          
Current          
Trade payables   1,150,649    133,849 
Accrued liabilities   984,367    558,305 
Distributions payables   280,000    1,980,000 
Debt payable - current portion [Note 8]   220,000    220,000 
    2,635,016    2,892,154 
Debt payable - Non-current portion [Note 81]   -    240,000 
Total liabilities   2,635,016    3,132,154 
           
MEMBERS’ EQUITY [Note 9]   7,135,089    2,879,700 
           
Total liabilities and members’ equity   9,770,105    6,011,854 

 

Nature of operations [Note 1]

Commitments and contingencies [Note 13]

Subsequent events [Note 16]

 

Approved and authorized by the Board of Directors on August 2, 2019

 

“Steve Menzies” (Signed)   “Timothy Harris” (Signed)
Managing Member   Chief Financial Officer

 

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

 

4

 

 

LIVFREE WELLNESS, LLC

Consolidated Statements of Operations

For the Years Ended December 31, 2018 and 2017

 

   2018   2017 
   $   $ 
           
Revenues, net of discounts   34,058,319    14,465,998 
           
Cost of goods sold   22,142,020    9,254,267 
           
Gross profit   11,916,299    5,211,731 
           
Expenses          
General and administrative [Note 12]   4,024,862    2,421,520 
           
Sales and marketing   512,282    299,681 
           
Depreciation [Note 6]   191,301    145,099 
           
Total expenses   4,728,445    2,866,300 
           
Income from operations   7,187,854    2,345,431 
           
Other (income) expense          
Share of income on investment in associate [Note 7]   (274,899)   (586,966)
Loss on disposal of property, plant and equipment   -    4,043 
Total other income   (274,899)   (582,923)
           
Net income   7,462,753    2,928,354 

 

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

 

5

 

 

LIVFREE WELLNESS, LLC

Consolidated Statements of Changes in Members’ Equity

For the Years Ended December 31, 2018 and 2017

 

   $ 
Balance as at December 31, 2016   1,143,139 
      
Contribution [Note 9]   788,207 
      
Distributions   (1,980,000)
      
Net income   2,928,354 
      
Balance as at December 31, 2017   2,879,700 
      
Contribution [Note 9]   92,636 
      
Distributions   (3,300,000)
      
Net income   7,462,753 
      
Balance as at December 31, 2018   7,135,089 

 

The accompanying notes are in integral part of these consolidated financial statements.

 

6

 

 

LIVFREE WELLNESS, LLC

Consolidated Statements of Cash Flows 

For the Years Ended December 31, 2018 and 2017

 

   2018   2017 
   $   $ 
Operating activities          
Net income   7,462,753    2,928,354 
           
Adjustments for items not affecting cash:          
Depreciation   191,301    145,099 
Share of income on equity investments   (274,899)   (586,966)
Loss on disposal of property, plant and equipment   -    4,043 
Bad Debt Expenses   297,192    - 
Changes in working capital items:          
Inventory   (947,478)   (1,198,265)
Due from (to) a related corporation   293,303    (563,518)
Prepaid expenses and other assets   (100,545)   (12,105)
Trade payables   1,016,800    133,849 
Accrued liabilities   426,062    434,737 
Cash provided by operating activities   8,364,489    1,285,228 
           
Investing activities          
Change in investment in associates, net   (1,492,636)   (1,000,000)
Purchase of property, plant and equipment   (426,749)   (248,481)
Cash used in investing activities   (1,919,385)   (1,248,481)
           
Financing activities          
Repayment of debt   (240,000)   - 
Payment on distributions payables   (1,980,000)   - 
Contribution   92,636    788,207 
Distributions   (3,020,000)   - 
Cash (used in) provided by financing activities   (5,147,364)   788,207 
           
Net increase in cash   1,297,740    824,954 
Cash, beginning of year   898,658    73,704 
Cash, end of year   2,196,398    898,658 
           
Non-Cash supplementary information          
Distributions payable   (280,000)   (1,980,000)

 

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

 

7

 

 

LIVFREE WELLNESS, LLC

Notes to the Consolidated Financial Statements

For the Years Ended December 31, 2018 and 2017

 

 

1.NATURE OF OPERATIONS

 

LivFree Wellness, LLC (“LivFree” or the “Company”) [formerly LivFree Wellness Reno LLC (“Reno”)] was incorporated as a Limited Liability Company on August 16, 2014 in the State of Nevada, United States of America (“USA”). The Company’s head office is located at 5347 S. Decatur Blvd, Las Vegas, NV 89118.

 

The Company’s principal activities are buying and selling of cannabis as regulated under the laws applicable in the USA.

 

2.BASIS OF PRESENTATION

 

2.1 Statement of Compliance

 

These consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (“IFRS”) issued by the International Accounting Standards Board (“IASB”) and Interpretations of the International Financial Reporting Interpretations Committee (“IFRIC”).

 

These consolidated financial statements were approved and authorized for issue by the Board of Directors of the Company on August 2, 2019.

 

2.2 Basis of Presentation

 

These consolidated financial statements have been prepared on the historical cost basis except for certain financial instruments, which are measured at fair value, as explained in the accounting policies set out in Note 3. The consolidated financial statements are presented in US dollars which is the presentation and functional currency of the Company.

 

3.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

3.1 Basis of Consolidation

 

The consolidated financial statements include the financial statements of the Company and its wholly owned subsidiaries Billco Holdings, LLC (“Billco”) and BP Solutions LLC (“BP”), Limited Liabilities Companies, incorporated in the state of Nevada. The results of subsidiaries acquired or disposed of during the year is included in the consolidated statements of operations from the effective date of acquisition or up to the effective date of disposal, as appropriate. All inter-company transactions, balances, income and expenses are eliminated on consolidation. The financial statements of the subsidiaries are prepared for the same reporting period as the Company, using consistent accounting policies.

 

8

 

 

LIVFREE WELLNESS, LLC

Notes to the Consolidated Financial Statements

For the Years Ended December 31, 2018 and 2017

 

 

3.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

3.2 Revenues

 

IFRS 15 specifies how and when revenues should be recognized based on a five-step model, which is applied to all contracts with customers. The Company has applied IFRS 15 retrospectively and determined that there is no change to the comparative periods or transitional adjustments required as a result of the adoption of this standard. The Company’s accounting policy for revenue recognition under IFRS 15 is to follow a five-step model to detennine the amount and timing of revenue to be recognized:

 

Identifying the contract with a customer
Identifying the performance obligations within the contract
Determining the transaction price
Allocating the transaction price to the performance obligations
Recognizing revenue when/as performance obligation(s) are satisfied.

 

Revenue from buying and selling of cannabis is recognized when the Company transfers control of the good to the customer. In some cases, judgement is required in determining whether the customer is a business or the end consumer. This evaluation was made on the basis of whether the business obtains control of the product before transferring to the end consumer. Control of the product transfers at a point in time either upon shipment to or receipt by the customer, depending on the contractual terms.

 

The Company recognizes revenue in an amount that reflects the consideration that the Company expects to receive taking into account any variation that may result from rights of return.

 

The pattern and timing of revenue recognition under the new standard is consistent with prior year practice.

 

There were no adjustments recognized on the adoption of IFRS 15 in the year ended December 31, 2018.

 

3.3 Property, Plant and Equipment (“PPE”)

 

Property, plant and equipment are stated at cost less accumulated depreciation and accumulated impairment losses. The cost of an item of PPE consists of the purchase price, any costs directly attributable to bringing the asset to the location and condition necessary for its intended use and an initial estimate of the costs of dismantling and removing the item and restoring the site on which it is located.

 

Depreciation is provided at rates calculated to write off the cost of PPE, less their estimated residual value, using the straight-line method over the following expected useful lives:

 

Leasehold improvements – the shorter of the useful life or life of the lease
Furniture and fixtures – 5-10 years
Office and equipment – 3-5 years

 

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

 

Assets in process are transferred to the appropriate asset class when available for use and depreciation of the assets commences at that point of time.

 

9

 

 

LIVFREE WELLNESS, LLC

Notes to the Consolidated Financial Statements

For the Years Ended December 31, 2018 and 2017

 

 

3.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

3.3 Property, plant and equipment (“PPE”) (Continued)

 

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

 

Where an item of property, plant and equipment comprises major components with different useful lives, the components are accounted for as separate items of property, plant and equipment. Expenditures incurred to replace a component of an item of property, plant and equipment that is accounted for separately, including major inspection and overhaul expenditures are capitalized.

 

3.4 Taxation

 

The Company is considered a Limited Liability Company for income tax purposes, for the years ended December 31, 2018 and 2017. Therefore, the Company’s taxable income is allocated to the members for inclusion on their respective income tax returns.

 

As the Company operates in the cannabis industry, it is subject to the limits of IRC Section 280E under which the Company is only allowed to deduct expenses directly related to sales of product. This results in pennanent differences between ordinary and necessary business expenses deemed non-allowable under IRC Section 280E.

 

3.5 Financial Instruments

 

Recognition and Initial Measurement

 

Financial assets and financial liabilities, including derivatives, are recognized in the consolidated statements of financial position when the Company becomes a party to the contractual provisions of a financial instrument or non-financial derivative contract. All financial instruments are measured at fair value on initial recognition. Transaction costs that are directly attributable to the acquisition or issuance of financial assets and financial liabilities, other than financial assets and financial liabilities classified as FVTPL, are added to or deducted from the fair value on initial recognition. Transaction costs directly attributable to the acquisition of financial assets or financial liabilities classified as FVTPL are recognized immediately in net loss.

 

Classification and Subsequent Measurement

 

The Company classifies financial assets, at the time of initial recognition, according to the Company’s business model for managing the financial assets and the contractual terms of the cash flows. Financial assets are classified in the following measurement categories:

 

a)amortized cost (“AC”);
b)fair value through profit or loss (“FVTPL”); and
c)fair value through other comprehensive income (“FVTOCI”).

 

Financial assets are subsequently measured at amortized cost if both the following conditions are met and they are not designated as FVTPL: a) the financial asset is held within a business model whose objective is to hold financial assets to collect contractual cash flows; and b) the contractual terms of the financial asset give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding.

 

10

 

 

LIVFREE WELLNESS, LLC

Notes to the Consolidated Financial Statements

For the Years Ended December 31, 2018 and 2017

 

 

3.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

3.5 Financial Instruments (Continued)

 

These assets are subsequently measured at amortized cost using the effective interest rate method, less any impairment, with gains and losses recognized in net income in the period that the asset is derecognized or impaired. All financial assets not classified as amortized cost as described above are measured at FVTPL or FVTOCI depending on the business model and cash flow characteristics. The Company has no financial assets measured at FVTOCI.

 

Financial liabilities are subsequently measured at amortized cost using the effective interest rate method with gains and losses recognized in net income in the period that the liability is derecognized, except for financial liabilities classified as FVTPL.

 

Financial instruments are classified into one of the following categories: FVTPL; financial assets at amortized cost, financial liabilities at amortized cost, and financial assets at FVTOCI.

 

Impairment of Financial Instruments

 

For accounts receivable, the Company applies the simplified approach to providing for expected credit losses prescribed by IFRS 9, which requires the use of the lifetime expected loss provision for all accounts receivable, trade based on the Company’s historical default rates over the expected life of the accounts receivable, trade and is adjusted for forward-looking estimates. The methodologies and assumptions, including any forecasts of future economic conditions, are reviewed regularly.

 

All individually significant loan receivables are assessed for impairment. All individually significant loans receivable found not to be specifically impaired are then collectively assessed for impairment. Loans receivables not individually significant are collectively assessed for impairment by grouping together loans receivable with similar risk characteristics.

 

Derecognition

 

The Company derecognizes financial assets only when the contractual rights to cash flows from the financial assets expire, or when it transfers the financial assets and substantially all of the associated risks and rewards of ownership to another entity. Gains and losses on derecognition are recognized in the consolidated statements of operations.

 

The Company derecognizes financial liabilities only when its obligations under the financial liabilities are discharged, cancelled or expired. Generally, the difference between the carrying amount of the financial liability derecognized and the consideration paid and payable, including any non-cash assets transferred or liabilities assumed, is recognized in the consolidated statements of operations.

 

11

 

 

LIVFREE WELLNESS, LLC 

Notes to the Consolidated Financial Statements 

For the Years Ended December 31, 2018 and 2017

 

 

3.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

3.6 Impairment of Non-Financial Assets

 

At each date of the consolidated statements of financial position, the Company reviews the carrying amounts of its long lived assets to determine whether there is an indication that those assets have suffered an impairment loss. If any such indication exists, or when annual impairment testing for an asset is required, the recoverable amount of the asset is estimated in order to determine the extent of the impairment loss (if any). Where it is not possible to estimate the recoverable amount of an individual asset, the Company estimates the recoverable amount of the cash generating unit to which the assets belong.

 

The recoverable amount is the higher of fair value less costs to sell and value in use. In assessing the value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. In detennining fair value less costs of disposal, recent market transactions are taken into account. If no such transactions can be identified, an appropriate valuation model is used. These calculations are corroborated by valuation multiples, quoted share prices for publicly traded companies or other available fair value indicators.

 

If the recoverable amount of an asset (or cash generating unit) is estimated to be less than its carrying amount, the carrying amount of the asset (or cash generating unit) is reduced to its recoverable amount. An impairment loss is recognized immediately in the consolidated statements of operations, unless the relevant asset is carried at a revalued amount, in which case the impairment loss is treated as a revaluation decrease.

 

Where an impairment loss subsequently reverses, the carrying amount of the asset (cash generating unit) is increased to the revised estimate of its recoverable amount, but so that the increased carrying amount does not exceed the carrying amount that would have been determined had no impairment loss been recognized for the asset (or cash generating unit) in prior years. A previously recognised impairment loss is reversed only if there has been a change in the assumptions used to detennine the asset’s recoverable amount since the last impairment loss was recognised.

 

3.7 Inventory

 

Inventories purchased from third parties represent finished goods that are valued at the lower of cost and net realizable value. Cost is determined using the weighted average costing method. Net realizable value is the estimated selling price in the ordinary course of business, less the estimated costs to sell. The Company reviews inventories for obsolete, redundant and slow-moving goods and any such inventories identified are written down to net realizable value. At December 31, 2018 and 2017, there were no reserves for inventories required.

 

3.8 Cash and Cash Equivalents

 

The Company considers all investments with original maturities of three months or less, that are highly liquid and readily convertible into cash, to be cash equivalents.

 

12

 

 

LIVFREE WELLNESS, LLC 

Notes to the Consolidated Financial Statements

For the Years Ended December 31, 2018 and 2017

 

 

3.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

3.9 Provisions

 

Provisions are recognized when the Company has a present obligation (legal or constructive) that has arisen as a result of a past event and it is probable that a future outflow of resources will be required to settle the obligation, provided that a reliable estimate can be made of the amount of the obligation.

 

Provisions are measured at the present value of the expenditures expected to be required to settle the obligation using a pre-tax rate that reflects current market assessments of the time value of money and the risk specific to the obligation. The increase in the provision due to passage of time is recognized as interest expense.

 

3.10 Significant Accounting Judgments and Estimates

 

The application of the Company’s accounting policies requires management to use estimates and judgments that can have significant effect on the revenues, expenses, income (loss), assets and liabilities recognized and disclosures made in the consolidated financial statements.

 

Management’s best estimates concerning the future are based on the facts and circumstances available at the time estimates are made. Management uses historical experience, general economic conditions and assumptions regarding probable future outcomes as the basis for determining estimates. Estimates and their underlying assumptions are reviewed periodically and the effects of any changes are recognized immediately. Actual results could differ from the estimates used.

 

Management’s budget and strategic plans are fundamental information used as a basis for estimates necessary to prepare financial information. Management tracks performance as compared to the budget and significant variances in actual performance are a key trigger to assess whether certain estimates used in the preparation of financial information must be revised.

 

The following areas require management’s critical estimates and judgments:

 

(a)       Estimated useful lives and depreciation of property, plant and equipment.

 

Depreciation and depreciation of property, plant and equipment are dependent upon estimates of useful lives, which are determined through the exercise of judgements. The assessment of any impairment of these assets is dependent upon estimates of recoverable amounts that take into account factors such as economic and market conditions and the useful lives of assets.

 

3.11 Leases

 

The determination of whether an arrangement is (or contains) a lease is based on the substance of the arrangement at the inception of the lease. The arrangement is, or contains, a lease if fulfilment of the arrangement is dependent on the use of a specific asset or assets and the arrangement conveys a right to use the asset or assets, even if that right is not explicitly specified in an arrangement.

 

A lease is classified at the inception date as a finance lease or an operating lease. A lease that transfers substantially all the risks and rewards incidental to ownership to the Company is classified as a finance lease. An operating lease is a lease other than a finance lease. Operating lease payments are recognised as an operating expense in the consolidated statements of operations on a straight-line basis over the lease term.

 

13

 

 

LIVFREE WELLNESS, LLC 

Notes to the Consolidated Financial Statements

For the Years Ended December 31, 2018 and 2017

 

 

3.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

3.12 Investment in Associates

 

An associate is an entity over which the Company exercises significant influence. Significant influence is the power to participate in the financial and operating policy of the investee but without control or joint control over those policies. Interests in associates are accounted for using the equity method, and are initially recognized at cost. Subsequent to initial recognition, the carrying value of the Company’s interest in an associate is adjusted for the Company’s share of income and distributions of the investee. The carrying value of associates is assessed for impairment at each statement of financial position date. Significant influence is the power to participate in the financial and operating policy decisions of the investee without control or joint control over those decisions. Significant influence is presumed if the Company holds between 20% and 50% of the voting rights, unless evidence exists to the contrary.

 

Joint control is the contractually agreed sharing of control of an arrangement, which exists only when decisions about the relevant activities require the unanimous consent of the parties sharing control. Investees in which the Company has joint control and rights to the net assets thereof, are defined as joint ventures. The Company has assessed that it has joint control over its investment in JDSS Investments LLC.

 

Investees in which the Company has significant influence are accounted for using the equity method. The Company’s interest in an investee is initially recorded at cost and is subsequently adjusted for the Company’s share of profit or income of the investee, less any impairment in the value of individual investments, less any dividends paid. Where the Company transacts with an investee, unrealized profits and losses are eliminated to the extent of the Company’s interest in that investee.

 

4.CHANGES IN ACCOUNTING STANDARDS

 

Adoption of New Accounting Pronouncements

 

IFRS 9 - Financial Instruments

 

In August 2014, the IASB issued the final version of IFRS 9 – Financial Instruments (“IFRS 9”), which brings together the classification and measurement, impairment, and hedge-accounting phases of the IASB’s project to replace IAS 39 – Financial Instruments: Recognition and Measurement (“IAS 39”).

 

Classification and Measurement Financial assets are classified and measured based on the business model under which they are managed and the contractual cash flow characteristics of the financial assets. Financial liabilities are classified in a similar manner as under IAS 39, except that financial liabilities measured at fair value will have fair value changes resulting from changes in the entity’s own credit risk recognized in Other Comprehensive Income (“OCI”) instead of Net Income, unless this would create an accounting mismatch.

 

IFRS 9 contains three principal classification categories for financial assets: measured at amortized cost (“AC”), fair value through other comprehensive income (“FVTOCI”) and FVTPL. The standard eliminates the previous IAS 39 categories of held to maturity, loans and receivables, and available for sale.

 

Impairment – The measurement of impairment of financial assets is based on an expected credit loss model. It is no longer necessary for a triggering event to have occurred before credit losses are recognized. IFRS 9 also includes new disclosure requirements about expected credit losses and credit risk.

 

14

 

 

LIVFREE WELLNESS, LLC

Notes to the Consolidated Financial Statements

For the Years Ended December 31, 2018 and 2017

 

 

4.CHANGES IN ACCOUNTING STANDARDS (Continued)

 

IFRS 9 - Financial Instruments (Continued)

 

Hedge Accounting – The new general hedge accounting model more closely aligns hedge accounting with risk management activities undertaken by entities when hedging their financial and non-financial risk exposures. It will provide more opportunities to apply hedge accounting to reflect actual risk management activities.

 

The Company adopted IFRS 9 effective from January 1, 2018. The adoption did not result in any material change.

 

IFRS 15: Revenue from Contracts with Customers:

 

IFRS 15 supersedes IAS 11 Construction Contracts, IAS 18 Revenue and related Interpretations and it applies to all revenue arising from contracts with customers, unless those contracts are in the scope of other standards. The new standard establishes a five-step model to account for revenue arising from contracts with customers. Under IFRS 15, revenue is recognised at an amount that reflects the consideration to which an entity expects to be entitled in exchange for transferring goods or services to a customer. The standard requires entities to exercise judgement, taking into consideration all of the relevant facts and circumstances when applying each step of the model to contracts with their customers. The standard also specifies the accounting for the incremental costs of obtaining a contract and the costs directly related to fulfilling a contract. The Company has adopted IFRS 15 from incorporation date.

 

IFRS 7. Financial Instruments: Disclosure

 

IFRS 7, Financial Instruments: Disclosure, was amended to require additional disclosures on transition from IAS 39 to IFRS 9. IFRS 7 is effective on adoption of IFRS 9, which is effective for annual periods commencing on or after January 1,2018. The adoption did not result in any material change.

 

Changes in Accounting Standards not yet Effective

 

IFRS 16 – Leases

 

In January 2016, the IASB issued IFRS 16 - Leases (“IFRS 16”), which replaces IAS 17 - Leases, and its associated interpretative guidance. IFRS 16 applies a control model to the identification of leases, distinguishing between a lease and a service contract on the basis of whether the customer controls the asset being leased. For those assets determined to meet the definition of a lease, IFRS 16 introduces significant changes to the accounting by lessees, introducing a single, on-balance sheet accounting model that is similar to current finance lease accounting, with limited exceptions for short-term leases or leases of low value assets. Lessor accounting remains similar to current accounting practice. The standard is effective for annual periods beginning on or after January 1, 2019, with early application permitted for entities that apply IFRS 15. The Company is currently evaluating the impact the final standard is expected to have on its consolidated financial statements and plans to adopt the requirements in 2019.

 

5.INVENTORY

 

Inventory is comprised of finished goods.

 

Inventories expensed as cost of goods sold during the years ended December 31, 2018 and 2017, was $18,422,993 and $7,335,444, respectively.

 

15

 

 

LIVFREE WELLNESS, LLC

Notes to the Consolidated Financial Statements

For the Years Ended December 31, 2018 and 2017

 

 

6.PROPERTY, PLANT AND EQUIPMENT

 

  

Leasehold

improvements

  

Furniture and

fixtures

  

Office &

Equipment

   Total 
   $   $   $   $ 
Cost                    
As at December 31, 2016   1,327,313    14,209    9,096    1,350,618 
Additions   187,446    15,052    45,983    248,481 
Disposals   -    -    (9,096)   (9,096)
As at December 31, 2017   1,514,759    29,261    45,983    1,590,003 
Additions   321,454    27,344    77,951    426,749 
As at December 31, 2018   1,836,213    56,605    123,934    2,016,752 
                     
Depreciation                    
As at December 31, 2016   56,746    408    2,274    59,428 
Depreciation   134,215    3,262    7,622    145,099 
Disposals   -    -    (5,054)   (5,054)
As at December 31, 2017   190,961    3,670    4,842    199,473 
Depreciation   161,854    7,093    22,354    191,301 
As at December 31, 2018   352,815    10,763    27,196    390,774 
                     
Net book value                    
As at December 31, 2017   1,323,798    25,591    41,141    1,390,530 
As at December 31, 2018   1,483,398    45,842    96,738    1,625,978 

 

Depreciation expense for the years ended December 31, 2018 and 2017, of $191,301 and $145,099, respectively, is included within operating expenses.

 

7.INVESTMENT IN ASSOCIATE

 

Pursuant to Membership Interest Purchase and Sale Agreement dated July 1, 2017, the Company acquired a 50% membership interest in JDSS Investments LLC. Per the purchase agreement section 2.0, the total purchase price was $2.4 million. Management has concluded that the current investment is to be accounted for as an investment in associate using the equity method as detailed below:

 

   2018   2017 
   $   $ 
Balance, at beginning of year   1,586,966    - 
Additions   1,492,636    1,000,000 
Share of income   274,899    586,966 
Balance, at end of year   3,354,501    1,586,966 

 

16 

 

 

LIVFREE WELLNESS, LLC

Notes to the Consolidated Financial Statements

For the Years Ended December 31, 2018 and 2017

 

 

7.INVESTMENT IN ASSOCIATE (Continued)

 

The following table presents a summary of the statements of financial position and statements of operations of the investee:

 

   2018   2017 
   $   $ 
Current assets   2,490,315    529,714 
Non-current assets   2,839,647    3,004,653 
Current liabilities   314,421    80,636 
Revenue   4,736,053    1,263,372 
Income   595,147    419,397 

 

8.DEBT PAYABLE

 

Effective December 12, 2014, the Company obtained a loan of $460,000 from a third party. The loan is unsecured, carries no interest, and there is no repayment term.

 

On January 16, 2018, the Company entered into Settlement Agreement (the “Agreement”) with the debt holder and one of its existing members for the repayment of debt in accordance with an agreed repayment schedule. The Company agreed to pay $20,000 within 30 days from the execution of this Agreement and the remaining balance to be paid in 22 equal monthly payments of $20,000. The current and non-current portion of the debt has been classified in accordance with the agreed repayment schedule. The Company has provided a loan to the owner amounting to $280,000. The loan is interest free and repayable on demand.

 

The details of debt payable were as follows:

 

   2018   2017 
   $   $ 
Debt payable to a third party   220,000    460,000 
Less: Current portion   (220,000)   (220,000)
Debt payable - Non-current portion   -    240,000 

 

9.MEMBERS’ EQUITY

 

During the years ended December 31, 2018 and 2017, contributions by the members of the Company amounted to $92,636 and $788,207, respectively.

 

During the years ended December 31, 2018 and 2017, distributions to the members of the Company amounted to $3,300,000 and $1,980,000, respectively.

 

As at December 31, 2018 and 2017, distribution payable balance was $280,000 and $1,980,000, respectively.

 

17 

 

 

LIVFREE WELLNESS, LLC

Notes to the Consolidated Financial Statements

For the Years Ended December 31, 2018 and 2017

 

 

10.RELATED PARTY TRANSACTIONS AND BALANCES

 

Related parties are defined as management and members of the Company and/or members of their immediate family and/or other companies and/or entities in which a member or senior officer is a principal owner or senior executive.

 

Other than disclosed elsewhere in the consolidated financial statements, related party transactions and balances are as follows:

 

Total rent expense for the years ended December 31, 2018 and 2017, includes rent charged from a related corporation amounting to $68,260 and $nil, respectively.

 

During the years ended December 31, 2018 and 2017, purchases of harvested cannabis totaling $440,310 and $474,440, respectively, from a related party is included in cost of goods sold.

 

No compensation was paid to key management for the years ended December 31, 2018 and 2017.

 

11.CAPITAL MANAGEMENT

 

The Company manages its capital structure and makes adjustments to it, based on the funds available to the Company, in order to support business development. The Members do not establish quantitative return on capital criteria for management, but rather relies on the expertise of the Company's management to sustain future development of the business. The Company defines capital to include its Members’ equity. In order to carry out the planned business development and pay for administrative costs, the Company will spend its existing working capital and raise additional amounts as needed. There were no changes in the Company's approach to capital management during the year ended December 31, 2018. The Company is not subject to externally imposed capital requirements. As at December 31, 2018 and 2017, the capital of the Company was $7,135,089 and $2,879,700, respectively.

 

The Company raises capital, as necessary, to meet its needs and take advantage of perceived opportunities and, therefore, does not have a numeric target for its capital structure. Funds are primarily secured through cash injection by the Members of the Company. 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 ongoing basis and believes that this approach, given the relative size of the Company, is reasonable.

 

The Company invests all capital that is surplus to its immediate operational needs in short-term, liquid and highly rated financial instruments.

 

18 

 

 

LIVFREE WELLNESS, LLC

Notes to the Consolidated Financial Statements

For the Years Ended December 31, 2018 and 2017

 

 

12. GENERAL AND ADMINISTRATIVE

 

General and administrative expenses were comprised of:        
   2018   2017 
   $   $ 
Salaries and benefits   1,738,572    1,283,492 
Rent [Notes 10 & 13]   430,168    252,285 
Taxes and licenses   45,457    21,681 
Professional and consulting fees   796,701    323,340 
Insurance   152,455    94,686 
Office expenses   184,780    187,764 
Travel   107,529    76,716 
Utilities   98,963    45,228 
Others   470,237    136,328 
    4,024,862    2,421,520 

 

13. COMMITMENTS AND CONTINGENCIES
   
Operating Leases

 

Pursuant to various lease agreements, the Company conducted operations in facilities leased from third parties and a related party. The leases expire through 2022 and contain certain renewal provisions. Future minimum lease payments under non-cancelable operating leases having an initial or remaining term of more than one year are as follows:

 

Year ending December 31   $ 
2019    483,094 
2020    501,595 
2021    463,664 
2022    348,649 
     1,797,002 

 

Total rent expensed for the years ended December 31, 2018 and 2017, were $430,168 and $252,285, respectively.

 

Contingencies

 

The Company's operations are subject to a variety of local and state regulations. Failure to comply with one or more of those regulations could result in fines, restrictions on its operations, or losses of permits and/or licenses that could result in the Company ceasing operations. While management of the Company believes that the Company is in compliance with applicable local and state regulation at December 31, 2018, cannabis regulations continue to evolve and are subject to differing interpretations. As a result, the Company may be subject to regulatory fines, penalties, or restrictions in the future.

  

19 

 

 

LIVFREE WELLNESS, LLC

Notes to the Consolidated Financial Statements

For the Years Ended December 31, 2018 and 2017

 

 

13.COMMITMENTS AND CONTINGENCIES (Continued)

 

Claims and Litigation

 

From time to time, the Company may be involved in litigation relating to claims arising out of operations in the normal course of business. At December 31, 2018, there were no pending or threatened lawsuits that could reasonably be expected to have a material effect on the results of the Company's operations. There are also no proceedings in which any of the Company's directors, officers or affiliates is an adverse party or has a material interest adverse to the Company's interest.

 

An affiliate of the Company engaged a contractor to determine if a site met the requirements for a new grow facility. Based on the survey done by the contractor, the Company proceeded with the purchase and incurred a loss when the site was subsequently determined not to be suitable. The Company filed a claim with the contractor’s insurer to recover its losses and commenced litigation when the insurer refused to pay any portion of the claim. In 2018, the Company’s legal counsel indicated they were not able to collect the $250,000 paid by the Company. As a result, the Company recognized $250,000 of bad debt expense.

 

14.FINANCIAL RISK FACTORS

 

The Company’s financial instruments mainly comprise of cash, amounts due from a related corporation, trade payables, accrued liabilities, distributions payable and debts payable.

 

(a) Fair Value

 

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The fair value measurement is based on the presumption that the transaction to sell the asset or transfer the liability takes place either in the principal market for the asset or liability or in the absence of a principal market, in the most advantageous market for the asset or liability. The principal or the most advantageous market must be accessible by the Company.

 

The fair value of an asset or a liability is measured using the assumptions that market participants would use when pricing the asset or liability, assuming that market participants act in their economic best interest. A fair value measurement of a non-financial asset takes into account a market participant's ability to generate economic benefits from the asset’s highest and best use or by selling it to another market participant that would utilise the asset in its highest and best use.

 

The Company uses valuation techniques that are appropriate in the circumstances and for which sufficient data are unobservable inputs.

 

All assets and liabilities for which fair value is measured or disclosed in the consolidated financial statements are categorised within the fair value hierarchy. This is described, as follows, based on the lowest level input that is significant to the fair value measurement as a whole:

 

•  Level 1 inputs are quoted prices in active markets for identical assets or liabilities at the measurement date.

 

•  Level 2 inputs are observable inputs other than quoted prices included within Level 1, such as quoted prices for similar assets or liabilities in active markets, quoted prices for identical assets or liabilities in markets that are not active, or other inputs that are observable directly or indirectly.

  

20 

 

 

LIVFREE WELLNESS, LLC

Notes to the Consolidated Financial Statements

For the Years Ended December 31, 2018 and 2017

 

 

14.FINANCIAL RISK FACTORS (Continued)

 

•  Level 3 inputs are unobservable inputs for the asset or liability that reflect the reporting entity’s own assumptions and are not based on observable market data.

 

The classification of financial instruments at their carrying and fair values is as follows:

 

    Carrying values              Fair values 
Financial assets   FVTPL    FVTOCI    AC    Total    Total 
December 31, 2018   $    $    $    $    $ 
Cash   2,196,398              2,196,398    2,196,398 
Due from a related corporation   -    -    -    -    - 
    2,196,398    -    -    2,196,398    2,196,398 
December 31, 2017                         
Cash   898,658    -    -    898,658    898,658 
Due from a related corporation   590,495    -    -    590,495    590,495 
    1,489,153    -    -    1,489,153    1,489,153 

 

    Carrying values         Fair values 
Financial liabilities   FVTPL    AC    Total    Total 
December 31, 2018   $    $    $    $ 
Trade payables   -    1,150,649    1,150,649    1,150,649 
Accrued liabilities   -    984,367    984,367    984,367 
Distributions payable   -    280,000    280,000    280,000 
Debt payable   -    220,000    220,000    220,000 
    -    2,635,016    2,635,016    2,635,016 
                     
December 31, 2017                    
Trade payables   -    133,849    133,849    133,849 
Accrued liabilities   -    558,305    558,305    558,305 
Distributions payable   -    1,980,000    1,980,000    1,980,000 
Debt payable   -    460,000    460,000    460,000 
    -    3,132,154    3,132,154    3,132,154 

 

The Company’s financial instruments as at December 31, 2018 and 2017, classified as “Level 1 - quoted prices in active markets” is cash. The Company has determined that there have been no transfers between levels in the hierarchy by re-assessing categorization at the reporting date.

 

The Company is exposed to credit risk and liquidity risk. The Company’s management oversees the management of these risks. The Company's management is supported by the Members that advises on financial risks and the appropriate financial risk governance framework for the Company. The Company’s financial risk activities are governed by appropriate policies and procedures and that financial risks are identified, measured and managed in accordance with Company’s policies and Company’s risk appetite.

 

21 

 

 

LIVFREE WELLNESS, LLC

Notes to the Consolidated Financial Statements

For the Years Ended December 31, 2018 and 2017

 

 

14.FINANCIAL RISK FACTORS (Continued)

 

(b) Credit Risk

 

Credit risk is the risk of unexpected loss if a customer or third party to a financial instrument fails to meet its contractual obligations. Financial instruments which potentially subject the Company to concentrations of credit risk consist of cash and due from a related corporation. As at December 31, 2018 and 2017, the maximum amount exposed to credit risks was $2,196,398 and $1,489,153, respectively.

 

(c) Liquidity Risk

 

Liquidity risk is the risk that the Company is unable to generate or obtain sufficient cash in a cost-effective manner to fund its obligations as they come due. The Company’s approach to managing liquidity risk is to ensure that it will have sufficient liquidity to meet liabilities when due. The Company manages liquidity risk through obtaining financing from its members and third parties. As at December 31, 2018 and 2017, all trade payables and accrued liabilities are due within a year, whereas, long term debt over a period of two years.

 

15.SEGMENTED INFORMATION

 

Operating and Geographical Segments

 

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

 

that engages in business activities from which it may earn revenues and incur expenses;

whose operating results are reviewed regularly by the entity’s chief operating decision maker; and;

for which discrete financial information is available.

 

At December 31, 2018 and 2017, the Company’s operations comprise a single reporting operating and geographical segment engaged in buying and selling of cannabis.

 

16.SUBSEQUENT EVENTS

 

The Company’s management has evaluated subsequent events up to August 2, 2019, the date the consolidated financial statements were issued, and determined the following event:

 

On May 24, 2019 – Ayr Strategies Inc. (“AYR”), formerly Cannabis Strategies Acquisition Corp. closed its previously announced Qualifying Transaction. Through the qualifying transaction, AYR has created a vertically integrated Multi-State Operator in the U.S. cannabis sector, with an initial anchor portfolio in the Eastern and Western United States.

 

22 

 

 

SCHEDULE “E”

CANNAPUNCH ANNUAL FINANCIAL STATEMENTS

 

(see attached)

 

 

 

 

     
   
   
   
   
   
   
   
   
   
   
   
 

 

CANNAPUNCH OF NEVADA, LLC 

 

Financial Statements

 

As of and for the Years Ended
December 31, 2018 and
As of and for the Period From 

March 30, 2017 (Inception Date) To
December 31, 2017

 

(EXPRESSED IN UNITED STATES DOLLARS)

 

   
 
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
     

 

 

 

CANNAPUNCH OF NEVADA, LLC

Financial Statements

December 31, 2018 and 2017

 

Table of Contents

 

  Page
   
Management's Responsibility for Financial Reporting 1
   
Independent Auditor's Report 2-3
   
Financial Statements  
   
Statements of Financial Position 4
   
Statements of Operations 5
   
Statements of Changes in Members’ Equity 6
   
Statements of Cash Flows 7
   
Notes to the Financial Statements 8-20

 

 

 

 

MANAGEMENT'S RESPONSIBILITY FOR

FINANCIAL REPORTING

 

Management's Responsibility

 

To the Members of CannaPunch of Nevada, LLC:

 

The accompanying financial statements and other financial information in this annual report were prepared by management of CannaPunch of Nevada, LLC ("the Company"), reviewed by the Audit Committee and approved by the Board of Directors.

 

Management is responsible for the financial statements and believes that they fairly present the Company's financial condition and results of operations in conformity with International Financial Reporting Standards. Management has included in the Company's financial statements amounts based on estimates and judgments that it believes are reasonable, under the circumstances.

 

To discharge its responsibilities for financial reporting and safeguarding of assets, management believes that it has established appropriate systems of internal accounting control which provide reasonable assurance that the financial records are reliable and form a proper basis for the timely and accurate preparation of financial statements. Consistent with the concept of reasonable assurance, the Company recognizes that the relative cost of maintaining these controls should not exceed their expected benefits. Management further assures the quality of the financial records through careful selection and training of personnel and through the adoption and communication of financial and other relevant policies.

 

These financial statements have been audited by the Company's auditors, Macias Gini & O'Connell LLP, and their report is presented herein.

 

August 2, 2019

 

“Mark Smith” (Signed)  

Chief Executive Officer

 

1 

 

 

 

 

Independent Auditor’s Report

 

To the Members of CannaPunch of Nevada, LLC:

 

Opinion

 

We have audited the financial statements of CannaPunch of Nevada, LLC (the “Company”), which comprises the statements of financial position as at December 31, 2018 and 2017, and the statements of operations, changes in members’ equity and cash flows for the year ended December 31, 2018 and for the period from March 30, 2017 (inception date) to December 31, 2017, and notes to the financial statements, including a summary of significant accounting policies.

 

In our opinion, the accompanying financial statements present fairly, in all material respects, the financial position of the Company as at December 31, 2018 and 2017, and its financial performance and its cash flows for the year ended December 31, 2018 and for the period from March 30, 2017 (inception date) to December 31, 2017 in accordance with International Financial Reporting Standards.

 

Basis for Opinion

 

We conducted our audits in accordance with Canadian generally accepted auditing standards. Our responsibilities under those standards are further described in the Auditor’s Responsibilities for the Audit of the Financial Statements section of our report. We are independent of the Company in accordance with the ethical requirements that are relevant to our audits of the financial statements in Canada, and we have fulfilled our other ethical responsibilities in accordance with these requirements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.

 

Responsibilities of Management for the Financial Statements

 

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

 

In preparing the financial statements, management is responsible for assessing the Company’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless management either intends to liquidate the Company or to cease operations, or has no realistic alternative but to do so.

 

Auditor’s Responsibilities for the Audit of the Financial Statements

 

Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor's report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with Canadian generally accepted auditing standards will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these financial statements.

 

Macias Gini & O’Connell LLP    
12264 El Camino Real, Suite 402    
San Diego, CA 92130   www.mgocpa.com

 

2 

 

 

As part of an audit in accordance with Canadian generally accepted auditing standards, we exercise professional judgment and maintain professional skepticism throughout the audit. We also:

 

Identify and assess the risks of material misstatement of the financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion.

The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control.

Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control.

Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by management.

Conclude on the appropriateness of management's use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the entity’s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor's report to the related disclosures in the financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor's report. However, future events or conditions may cause the Company to cease to continue as a going concern.

Evaluate the overall presentation, structure and content of the financial statements, including the disclosures, and whether the financial statements represent the underlying transactions and events in a manner that achieves fair presentation.

 

We communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audits and significant audit findings, including any significant deficiencies in internal control that we identify during our audits.

 

 

San Diego, California

August 2, 2019

 

3 

 

 

CANNAPUNCH OF NEVADA, LLC

Statements of Financial Position

At December 31, 2018 and 2017 

   2018   2017 
  $   $ 
ASSETS        
Current        
Cash   122,367    146,817 
Inventory [Note 5]   337,129    138,420 
Accounts receivable, trade, no allowance   374,649    81,483 
Prepaid expenses and other assets   -    22,645 
    834,145    389,365 
Machinery and equipment [Note 6]   22,154    21,601 
Total assets   856,299    410,966 
           
LIABILITIES          
Current          
Trade payables   174,902    26,752 
Accrued liabilities   58,956    94,330 
Advance from a member   1,402    - 
Total liabilities   235,260    121,082 
           
MEMBERS' EQUITY [Note 7]   621,039    289,884 
Total liabilities and members' equity   856,299    410,966 

 

Nature of operations [Note 1]

Commitments and contingencies [Note 12]

Subsequent events [Note 15]

 

Approved and authorized on behalf of the Board of Directors on August 2, 2019

 

“Mark Smith” (Signed)  
Chief Executive Officer  

 

The accompanying notes are an integral part of these financial statements.

 

4 

 

 

CANNAPUNCH OF NEVADA, LLC

Statements of Operations

For the Year Ended December 31, 2018 and for the Period

from March 30, 2017 to December 31, 2017 

   2018   2017 
   $   $ 
Revenues, net of discounts   6,658,021    2,668,521 
           
Cost of goods sold   2,961,681    1,330,007 
           
Gross profit   3,696,340    1,338,514 
           
Expenses          
General and administrative [Note 10]   924,650    277,982 
           
Sales and marketing   77,198    53,494 
           
Licensor profit share [Note 11]   1,123,212    423,501 
           
Total expenses   2,125,060    754,977 
           
Net income   1,571,280    583,537 

 

The accompanying notes are an integral part of these financial statements.

 

5 

 

 

CANNAPUNCH OF NEVADA, LLC

Statements of Changes in Members’ Equity

For the Year Ended December 31, 2018 and for the Period

from March 30, 2017 to December 31, 2017

    $ 
Contribution [Note 7]   58,135 
      
Distributions   (351,788)
      
Net income   583,537 
      
Balance as at December 31, 2017   289,884 
      
Distributions   (1,240,125)
      
Net income   1,571,280 
      
Balance as at December 31, 2018   621,039 

 

The accompanying notes are in integral part of these financial statements.

 

6 

 

 

CANNAPUNCH OF NEVADA, LLC

Statements of Cash Flows

For the Year Ended December 31, 2018 and for the Period

from March 30, 2017 to December 31, 2017

 

   2018   2017 
   $   $ 
Operating activities          
Net income   1,571,280    583,537 
           
Adjustments for items not affecting cash:          
Depredation   5,027    745 
Changes in working capital items:          
Inventory   (198,709)   (138,420)
Accounts receivable   (293,166)   (81,483)
Prepaid expenses and other assets   22,645    (22,645)
Trade payables   148,150    26,752 
Accrued liabilities   (35,374)   94,330 
Advance from a member   1,402    - 
Cash provided by operating activities   1,221,255    462,816 
           
Investing activities          
Purchase of machinery and equipment   (5,580)   (22,346)
Cash used in investing activities   (5,580)   (22,346)
           
Financing activities          
Contribution   -    58,135 
Distributions   (1,240,125)   (351,788)
Cash used in financing activities   (1,240,125)   (293,653)
           
Net (decrease) increase in cash   (24,450)   146,817 
Cash, beginning of the year/period   146,817    - 
Cash, end of year/period   122,367    146,817 

 

The accompanying notes are an integral part of these financial statements.

 

7 

 

 

CANNAPUNCH OF NEVADA, LLC

Notes to the Financial Statements

For the Year Ended December 31, 2018 and for the Period

from March 30, 2017 to December 31, 2017

 

 

1.NATURE OF OPERATIONS

 

CannaPunch of Nevada, LLC (“CannaPunch” or the “Company”) was incorporated as a Limited Liability Company on March 30, 2017 in the State of Nevada, United States of America (“USA”). The Company’s head office is located at 5425 Polaris Ave, Las Vegas, NV 89118.

 

The Company’s principal activities are the manufacture and distribution of cannabis infused products as regulated under the laws applicable in the USA.

 

2.BASIS OF PRESENTATION

 

2.1 Statement of Compliance

 

These financial statements have been prepared in accordance with International Financial Reporting Standards (“IFRS”) issued by the International Accounting Standards Board (“IASB”) and Interpretations of the International Financial Reporting Interpretations Committee (“IFRIC”).

 

These financial statements were approved and authorized for issue by the Board of Directors of the Company on August 2, 2019.

 

2.2 Basis of Presentation

 

These financial statements have been prepared on the historical cost basis except for certain financial instruments, which are measured at fair value, as explained in the accounting policies set out in Note 3. The financial statements are presented in US dollars which is the presentation and functional currency of the Company.

 

3.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

3.1 Revenue

 

IFRS 15 specifies how and when revenue should be recognized based on a five-step model, which is applied to all contracts with customers. The Company has applied IFRS 15 retrospectively and detennined that there is no change to the comparative periods or transitional adjustments required as a result of the adoption of this standard. The Company’s accounting policy for revenue recognition under IFRS 15 is to follow a five-step model to determine the amount and timing of revenue to be recognized:

 

Identifying the contract with a customer

Identifying the performance obligations within the contract

Determining the transaction price

Allocating the transaction price to the performance obligations

Recognizing revenue when/as performance obligation(s) are satisfied.

  

8 

 

 

CANNAPUNCH OF NEVADA, LLC

Notes to the Financial Statements

For the Year Ended December 31, 2018 and for the Period

from March 30, 2017 to December 31, 2017

 

 

3.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

3.1 Revenue (Continued)

 

Revenue from manufacturing and distribution of cannabis is recognized when the Company transfers control of the good to the customer. In some cases, judgement is required in detennining whether the customer is a business or the end consumer. This evaluation was made on the basis of whether the business obtains control of the product before transferring to the end consumer. Control of the product transfers at a point in time either upon shipment to or receipt by the customer, depending on the contractual terms. The Company recognizes revenue in an amount that reflects the consideration that the Company expects to receive taking into account any variation that may result from rights of return. The pattern and timing of revenue recognition under the new standard is consistent with prior year practice. There were no adjustments recognized on the adoption of IFRS 15 in the year ended December 31, 2018.

 

3.2 Machinery and Equipment (“M&E”)

 

Machinery and equipment are stated at cost less accumulated depreciation and accumulated impairment losses. The cost of an item of M&E consists of the purchase price, any costs directly attributable to bringing the asset to the location and condition necessary for its intended use and an initial estimate of the costs of dismantling and removing the item and restoring the site on which it is located.

 

Depreciation is provided at rates calculated to write off the cost of M&E, less their estimated residual value, using the straight-line method over the expected useful life of 5 years for M&E.

 

An item of M&E is derecognized upon disposal, when held for sale or when no future economic benefits are expected to arise from the continued use of the asset. Any gain or loss arising on disposal of the asset, detennined as the difference between the net disposal proceeds and the carrying amount of the asset, is recognized in the statement of income.

 

Assets in process are transferred to the appropriate asset class when available for use and depreciation of the assets commences at that point of time.

 

The Company conducts an annual assessment of the residual balances, useful lives and depreciation methods being used for M&E and any changes arising from the assessment are applied by the Company prospectively.

 

Where an item of machinery and equipment comprise of major components with different useful lives, the components are accounted for as separate items of machinery and equipment. Expenditures incurred to replace a component of an item of machinery and equipment that is accounted for separately, including major inspection and overhaul expenditures are capitalized.

 

3.3 Taxation

 

The Company is considered a Limited Liability Company for income tax purposes, for the year ended December 31, 2018 and for the period from Match 30, 2017 (Date of inception) to December 31, 2017. Therefore, the Company’s taxable income is allocated to the members for inclusion on their respective income tax returns.

  

9 

 

 

CANNAPUNCH OF NEVADA, LLC

Notes to the Financial Statements

For the Year Ended December 31, 2018 and for the Period

from March 30, 2017 to December 31, 2017

 

 

3.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

3.3 Taxation (Continued)

 

As the Company operates in the cannabis industry, it is subject to the limits of IRC Section 280E under which the Company is only allowed to deduct expenses directly related to sales of product. This results in permanent differences between ordinary and necessary business expenses deemed non-allowable under IRC Section 280E.

 

3.4 Financial Instruments

 

Recognition and Initial Measurement

 

Financial assets and financial liabilities, including derivatives, are recognized in the consolidated statements of financial position when the Company becomes a party to the contractual provisions of a financial instrument or non-fmancial derivative contract. All financial instruments are measured at fair value on initial recognition. Transaction costs that are directly attributable to the acquisition or issuance of financial assets and financial liabilities, other than financial assets and financial liabilities classified as FVTPL, are added to or deducted from the fair value on initial recognition. Transaction costs directly attributable to the acquisition of financial assets or financial liabilities classified as FVTPL are recognized immediately in net loss.

 

Classification and Subsequent Measurement

 

The Company classifies financial assets, at the time of initial recognition, according to the Company’s business model for managing the financial assets and the contractual terms of the cash flows. Financial assets are classified in the following measurement categories:

 

a)amortized cost (“AC”);

b)fair value through profit or loss (“FVTPL”); and

c)fair value through other comprehensive income (“FVTOCI”).

 

Financial assets are subsequently measured at amortized cost if both the following conditions are met and they are not designated as FVTPL: a) the financial asset is held within a business model whose objective is to hold financial assets to collect contractual cash flows; and b) the contractual terms of the financial asset give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding.

 

These assets are subsequently measured at amortized cost using the effective interest rate method, less any impairment, with gains and losses recognized in net income in the period that the asset is derecognized or impaired. All financial assets not classified as amortized cost as described above are measured at FVTPL or FVTOCI depending on the business model and cash flow characteristics. The Company has no financial assets measured at FVTOCI.

 

Financial liabilities are subsequently measured at amortized cost using the effective interest rate method with gains and losses recognized in net income in the period that the liability is derecognized, except for financial liabilities classified as FVTPL.

 

Financial instruments are classified into one of the following categories: FVTPL; financial assets at amortized cost, financial liabilities at amortized cost, and financial assets at FVTOCI.

 

10 

 

 

CANNAPUNCH OF NEVADA, LLC

Notes to the Financial Statements

For the Year Ended December 31, 2018 and for the Period

from March 30, 2017 to December 31, 2017

 

 

3.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

3.4 Financial Instruments (Continued)

 

Impairment of Financial Instruments

 

For accounts receivable, the Company applies the simplified approach to providing for expected credit losses prescribed by IFRS 9, which requires the use of the lifetime expected loss provision for all accounts receivable, trade based on the Company’s historical default rates over the expected life of the accounts receivable, trade and is adjusted for forward-looking estimates. The methodologies and assumptions, including any forecasts of future economic conditions, are reviewed regularly.

 

All individually significant loan receivables are assessed for impairment. All individually significant loans receivable found not to be specifically impaired are then collectively assessed for impairment. Loans receivables not individually significant are collectively assessed for impairment by grouping together loans receivable with similar risk characteristics.

 

Derecognition

 

The Company derecognizes financial assets only when the contractual rights to cash flows from the financial assets expire, or when it transfers the financial assets and substantially all of the associated risks and rewards of ownership to another entity. Gains and losses on derecognition are recognized in the statements of operations.

 

The Company derecognizes financial liabilities only when its obligations under the financial liabilities are discharged, cancelled or expired. Generally, the difference between the carrying amount of the financial liability derecognized and the consideration paid and payable, including any non-cash assets transferred or liabilities assumed, is recognized in the statements of operations.

 

3.5 Impairment of Non-Financial Assets

 

At each date of the statements of financial position, the Company reviews the carrying amounts of its long-lived assets to determine whether there is an indication that those assets have suffered an impairment loss. If any such indication exists, or when annual impainnent testing for an asset is required, the recoverable amount of the asset is estimated in order to determine the extent of the impairment loss (if any). Where it is not possible to estimate the recoverable amount of an individual asset, the Company estimates the recoverable amount of the cash generating unit to which the assets belong.

 

The recoverable amount is the higher of fair value less costs to sell and value in use. In assessing the value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. In determining fair value less costs of disposal, recent market transactions are taken into account. If no such transactions can be identified, an appropriate valuation model is used. These calculations are corroborated by valuation multiples, quoted share prices for publicly traded companies or other available fair value indicators.

  

11 

 

 

CANNAPUNCH OF NEVADA, LLC

Notes to the Financial Statements

For the Year Ended December 31, 2018 and for the Period

from March 30, 2017 to December 31, 2017

 

 

3.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

3.5 Impairment of Non-Financial Assets (Continued)

 

If the recoverable amount of an asset (or cash generating unit) is estimated to be less than its carrying amount, the carrying amount of the asset (or cash generating unit) is reduced to its recoverable amount. An impairment loss is recognized immediately in the statements of operations, unless the relevant asset is carried at a revalued amount, in which case the impairment loss is treated as a revaluation decrease.

 

Where an impairment loss subsequently reverses, the carrying amount of the asset (cash generating unit) is increased to the revised estimate of its recoverable amount, but so that the increased carrying amount does not exceed the carrying amount that would have been determined had no impairment loss been recognized for the asset (or cash generating unit) in prior years. A previously recognised impairment loss is reversed only if there has been a change in the assumptions used to detennine the asset’s recoverable amount since the last impairment loss was recognised.

 

3.6 Inventory

 

Inventories purchased from third parties comprise of raw materials and finished goods, and are valued at the lower of cost and net realizable value. Cost is determined using the weighted average costing method. Net realizable value is the estimated selling price in the ordinary course of business, less the estimated costs to sell. The Company reviews inventories for obsolete, redundant and slow-moving goods and any such inventories identified are written down to net realizable value. At December 31, 2018 and 2017, there were no reserves for inventories required.

 

3.7 Cash and Cash Equivalents

 

The Company considers all investments with original maturities of three months or less, that are highly liquid and readily convertible into cash, to be cash equivalents.

 

3.8 Provisions

 

Provisions are recognized when the Company has a present obligation (legal or constructive) that has arisen as a result of a past event and it is probable that a future outflow of resources will be required to settle the obligation, provided that a reliable estimate can be made of the amount of the obligation.

 

Provisions are measured at the present value of the expenditures expected to be required to settle the obligation using a pre-tax rate that reflects current market assessments of the time value of money and the risk specific to the obligation. The increase in the provision due to passage of time is recognized as interest expense.

 

3.9 Significant Accounting Judgments and Estimates

 

The application of the Company’s accounting policies requires management to use estimates and judgments that can have significant effect on the revenues, expenses, assets and liabilities recognized and disclosures made in the financial statements.

  

12 

 

 

CANNAPUNCH OF NEVADA, LLC

Notes to the Financial Statements

For the Year Ended December 31, 2018 and for the Period

from March 30, 2017 to December 31, 2017

 

 

3.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

3.9 Significant Accounting Judgments and Estimates (Continued)

 

Management’s best estimates concerning the future are based on the facts and circumstances available at the time estimates are made. Management uses historical experience, general economic conditions and assumptions regarding probable future outcomes as the basis for determining estimates. Estimates and their underlying assumptions are reviewed periodically and the effects of any changes are recognized immediately. Actual results could differ from the estimates used.

 

Management’s budget and strategic plans are fundamental infonnation used as a basis for estimates necessary to prepare financial information. Management tracks performance as compared to the budget and significant variances in actual perfonuance are a key trigger to assess whether certain estimates used in the preparation of financial infonnation must be revised.

 

The following area require management’s critical estimates and judgments:

 

(a) Estimated useful lives and depreciation of machinery and equipment

 

Depreciation of machinery and equipment are dependent upon estimates of useful lives, which are detennined through the exercise of judgements. The assessment of any impairment of these assets is dependent upon estimates of recoverable amounts that take into account factors such as economic and market conditions and the useful lives of assets.

 

4.CHANGES IN ACCOUNTING STANDARDS

 

Adoption of New Accounting Pronouncements

 

IFRS 9 - Financial Instruments

 

In July 2014, the IASB issued the final version of IFRS 9 – Financial Instruments (“IFRS 9”), which brings together the classification and measurement, impairment, and hedge-accounting phases of the LASB’s project to replace IAS 39 – Financial Instruments: Recognition and Measurement (“IAS 39”).

 

Classification and Measurement – Financial assets are classified and measured based on the business model under which they are managed and the contractual cash flow characteristics of the financial assets. Financial liabilities are classified in a similar manner as under IAS 39, except that financial liabilities measured at fair value will have fair value changes resulting from changes in the entity’s own credit risk recognized in Other Comprehensive Income (“OCI”) instead of Net Income, unless this would create an accounting mismatch.

 

IFRS 9 contains three principal classification categories for financial assets: measured at amortized cost (“AC”), fair value through other comprehensive income (“FVTOCI”) and FVTPL. The standard eliminates the previous IAS 39 categories of held to maturity, loans and receivables, and available for sale.

 

Impairment – The measurement of impairment of financial assets is based on an expected credit loss model. It is no longer necessary for a triggering event to have occurred before credit losses are recognized. IFRS 9 also includes new disclosure requirements about expected credit losses and credit risk.

  

13 

 

 

CANNAPUNCH OF NEVADA, LLC

Notes to the Financial Statements

For the Year Ended December 31, 2018 and for the Period

from March 30, 2017 to December 31, 2017

 

 

4.CHANGES IN ACCOUNTING STANDARDS (Continued)

  

Adoption of New Accounting Pronouncements (Continued)

 

Hedge Accounting The new general hedge accounting model more closely aligns hedge accounting with risk management activities undertaken by entities when hedging their financial and non-financial risk exposures. It will provide more opportunities to apply hedge accounting to reflect actual risk management activities.

 

The Company adopted IFRS 9 effective from January 1, 2018. The adoption did not result in any material change.

 

IFRS 15: Revenue from Contracts with Customers:

 

IFRS 15 supersedes IAS 11 Construction Contracts, IAS 18 Revenue and related Interpretations and it applies to all revenue arising from contracts with customers, unless those contracts are in the scope of other standards. The new standard establishes a five-step model to account for revenue arising from contracts with customers. Under IFRS 15, revenue is recognised at an amount that reflects the consideration to which an entity expects to be entitled in exchange for transferring goods or services to a customer. The standard requires entities to exercise judgement, taking into consideration all of the relevant facts and circumstances when applying each step of the model to contracts with their customers. The standard also specifies the accounting for the incremental costs of obtaining a contract and the costs directly related to fulfilling a contract. The Company has adopted IFRS 15 from incorporation date.

 

IFRS 7. Financial Instruments: Disclosure

 

IFRS 7, Financial Instruments: Disclosure, was amended to require additional disclosures on transition from IAS 39 to IFRS 9. IFRS 7 is effective on adoption of IFRS 9, which is effective for annual periods commencing on or after January 1, 2018.

 

Changes in Accounting Standards not yet Effective

 

IFRS 16–Leases

 

In January 2016, the IASB issued IFRS 16 – Leases (“IFRS 16”), which replaces IAS 17 – Leases, and its associated interpretative guidance. IFRS 16 applies a control model to the identification of leases, distinguishing between a lease and a service contract on the basis of whether the customer controls the asset being leased. For those assets detennined to meet the definition of a lease, IFRS 16 introduces significant changes to the accounting by lessees, introducing a single, on-balance sheet accounting model that is similar to current finance lease accounting, with limited exceptions for short-term leases or leases of low value assets. Lessor accounting remains similar to current accounting practice. The standard is effective for annual periods beginning on or after January 1, 2019, with early application permitted for entities that apply IFRS 15. The Company is currently evaluating the impact the final standard is expected to have on its financial statements and plans to adopt the requirements in 2019.

  

14 

 

 

CANNAPUNCH OF NEVADA, LLC

Notes to the Financial Statements

For the Year Ended December 31, 2018 and for the Period

from March 30, 2017 to December 31, 2017

 

 

5.INVENTORY

 

The Company’s inventory includes the following:

 

   December 31,  December 31,
   2018  2017
   $  $
Raw materials   65,193    23,283 
Finished goods   271,936    115,137 
    337,129    138,420 

 

Inventories expensed as cost of goods sold during the years ended December 31, 2018 and 2017, was $2,247,538 and $1,025,749, respectively.

 

6.MACHINERY AND EQUIPMENT

 

   Machinery &
   equipment
   $
Cost   
Additions    22,346
As at December 31, 2017    22,346
Additions    5,580
As at December 31, 2018    27,926
      
Depreciation     
Depreciation    745
As at December 31, 2017    745
Depreciation    5,027
As at December 31, 2018     5,772
      
Net book value     
As at December 31, 2017    21,601
As at December 31, 2018    22,154

 

Depreciation expense for the year ended December 31, 2018 and for the period from March 30, 2017 to December 31, 2017, of $5,027 and $745, respectively, is included in cost of goods sold.

 

7.MEMBERS’ EQUITY

 

During the year ended December 31, 2018 and for the period from March 30, 2017 to December 31, 2017, the members of the Company contributed cash of $nil and $58,135, respectively, to the Company.

  

15 

 

 

CANNAPUNCH OF NEVADA, LLC

Notes to the Financial Statements

For the Year Ended December 31, 2018 and for the Period

from March 30, 2017 to December 31, 2017

 

 

8.RELATED PARTY TRANSACTIONS AND BALANCES

 

Related parties are defined as management and members of the Company and/or members of their immediate family and/or other companies and/or entities in which a member or senior officer is a principal owner or senior executive.

 

Other than disclosed elsewhere in the financial statements, related party transactions and balances are as follows:

 

During the year ended December 31, 2018 and for the period from March 30, 2017 to December 31, 20107, sales of $110,811 and $63,757, respectively, made to a related corporation is included in revenues and purchases of $120,681 and $51,358, respectively, from a related corporation is included in cost of goods sold.

 

No compensation was paid to key management for the year ended December 31, 2018 and for the period from March 30, 2017 to December 31, 2017.

 

Accounts receivable as at December 31, 2018 and December 31, 2017 include $953 and $nil, respectively, representing amounts due from a related corporation.

 

9.CAPITAL MANAGEMENT

 

The Company manages its capital structure and makes adjustments to it, based on the funds available to the Company, in order to support business development. The Members do not establish quantitative return on capital criteria for management, but rather relies on the expertise of the Company’s management to sustain future development of the business. The Company defines capital to include its Members’ equity. In order to carry out the planned business development and pay for administrative costs, the Company will spend its existing working capital and raise additional amounts as needed. The Company is not subject to externally imposed capital requirements. As at December 31, 2018 and 2017, the capital of the Company was $621,039 and $289,884, respectively.

 

The Company raises capital, as necessary, to meet its needs and take advantage of perceived opportunities and, therefore, does not have a numeric target for its capital structure. Funds are primarily secured through cash injection by the Members of the Company. 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 ongoing basis and believes that this approach, given the relative size of the Company, is reasonable.

 

The Company invests all capital (after dividend) that is surplus to its immediate operational needs in short-term, liquid and highly rated financial instruments.

  

16 

 

 

CANNAPUNCH OF NEVADA, LLC

Notes to the Financial Statements

For the Year Ended December 31, 2018 and for the Period

from March 30, 2017 to December 31, 2017

 

 

10. GENERAL AND ADMINISTRATIVE

 

General and administrative expenses were comprised of:

 

   2018  2017
   $  $
Salaries and benefits   642,179    209,004 
Taxes and Licenses   109,948    22,383 
Travel   40,508    24,128 
Meals   9,452    7,648 
Office expenses   3,972    4.829 
Professional and consultmg fees   108,403    3.384 
Others   10,188    6,606 
    924,650    277,982 

 

11. LICENSOR PROFIT SHARE

 

Effective March 31, 2017, the Company entered into a Licensing Agreement (the “Agreement”) with a Third Party (“Licensor”) for use of Licensor’s medical (and subsequent adult use recreational) marijuana production establishment and equipment, in order to produce wholesale and certain retail marijuana edible and infused products for a period of 5 years to be renewed annually by mutual agreement.

 

Pursuant to the terms of the Agreement, 50% of profits or EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization) generated by sales, shall be paid as License Fee, along with any taxes and fees paid by the Licensor. On December 31, 2017, the Agreement was amended by signing a subsequent license fee agreement memo (the “Memo”). In accordance with the Memo, license fee payable by the Company would work as a credit netted against any amounts owed by Licensor for product purchases less any amounts owed by the Company for reimbursement of taxes and utilities to the Licensor.

 

On September 18, 2018, the Company entered into a Supply Agreement with the Licensor, which is contingent upon cancellation of the license fee Agreement. Pursuant to this Supply Agreement, the Company agreed to offer a 20% discount on its lowest retail price to the Licensor for a period of 5 years.

 

12.COMMITMENTS AND CONTINGENCIES

  

Contingencies

 

The Company’s operations are subject to a variety of local and state regulations. Failure to comply with one or more of those regulations could result in fines, restrictions on its operations, or losses of permits and/or licenses that could result in the Company ceasing operations. While management of the Company believes that the Company is in compliance with applicable local and state regulation at December 31, 2018, cannabis regulations continue to evolve and are subject to differing interpretations. As a result, the Company may be subject to regulatory fines, penalties, or restrictions in the future.

  

17 

 

 

CANNAPUNCH OF NEVADA, LLC

Notes to the Financial Statements

For the Year Ended December 31, 2018 and for the Period

from March 30, 2017 to December 31, 2017

 

 

12.COMMITMENTS AND CONTINGENCIES (Continued)

 

Claims and Litigation

 

From time to time, the Company may be involved in litigation relating to claims arising out of operations in the nonnal course of business. At December 31, 2018, there were no pending or threatened lawsuits that could reasonably be expected to have a material effect on the results of the Company’s operations. There are also no proceedings in which any of the Company’s directors, officers or affiliates is an adverse party or has a material interest adverse to the Company’s interest.

 

13.FINANCIAL RISK FACTORS

 

The Company’s financial instruments mainly comprise of cash, account receivables, trade payables, accrued liabilities and advance from a member.

 

(a) Fair Value

 

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The fair value measurement is based on the presumption that the transaction to sell the asset or transfer the liability takes place either in the principal market for the asset or liability or in the absence of a principal market, in the most advantageous market for the asset or liability. The principal or the most advantageous market must be accessible by the Company.

 

The fair value of an asset or a liability is measured using the assumptions that market participants would use when pricing the asset or liability, assuming that market participants act in their economic best interest. A fair value measurement of a non-fmancial asset takes into account a market participant’s ability to generate economic benefits from the asset’s highest and best use or by selling it to another market participant that would utilise the asset in its highest and best use.

 

The Company uses valuation techniques that are appropriate in the circumstances and for which sufficient data are unobservable inputs.

 

All assets and liabilities for which fair value is measured or disclosed in the financial statements are categorised within the fair value hierarchy. This is described, as follows, based on the lowest level input that is significant to the fair value measurement as a whole:

 

• Level 1 inputs are quoted prices in active markets for identical assets or liabilities at the measurement date.

 

• Level 2 inputs are observable inputs other than quoted prices included within Level 1, such as quoted prices for similar assets or liabilities in active markets, quoted prices for identical assets or liabilities in markets that are not active, or other inputs that are observable directly or indirectly.

 

• Level 3 inputs are unobservable inputs for the asset or liability that reflect the reporting entity’s own assumptions and are not based on observable market data.

 

18 

 

 

CANNAPUNCH OF NEVADA, LLC

Notes to the Financial Statements

For the Year Ended December 31, 2018 and for the Period

from March 30, 2017 to December 31, 2017

 

 

13.FINANCIAL RISK FACTORS (Continued)

 

(a) Fair Value (Continued)

 

The classification of financial instruments at their carrying and fair values is as follows:

 

   Carrying values        Fair values
Financial assets  FVTPL  AC  Total  Total
December 31, 2018  $  $  $  $
Cash   122,367    –      122,367    122,367 
Accounts receivable   –      374,649    374,649    374,649 
    122,367    374,649    497,016    497,016 
December 31, 2017                    
Cash   146,817    –      146,817    146,817 
Accounts receivable   –      81,483    81,483    81,483 
    146,817    81,483    228,300    228,300 

 

   Carrying values        Fair values
Financial liabilities  FVTPL  AC  Total  Total
December 31, 2018  $  $  $  $
Trade payables   –      174,902    174,902    174,902 
Accrued liabilities   –      58,956   58,956    58,956 
Advance from a member   –      1,402    1,402    1,402 
    –      235,260    235,260    235,260 
December 31, 2017                    
Trade payables   –      26,752    26,752    26,752 
Accrued liabilities   –      94,330    94,330    94,330 
Advance from a member   –      –      –      –   
    –      121,082    121,082    121,082 

 

The Company’s financial instruments as at December 31, 2018 and 2017, classified as “Level 1 – quoted prices in active markets” is cash. The Company has determined that there have been no transfers between levels in the hierarchy by re-assessing categorization at the reporting date.

 

The Company is exposed to credit risk and liquidity risk. The Company’s management oversees the management of these risks. The Company’s management is supported by the Members that advises on financial risks and the appropriate financial risk governance framework for the Company. The Company’s financial risk activities are governed by appropriate policies and procedures and that financial risks are identified, measured and managed in accordance with Company’s policies and Company’s risk appetite.

  

19 

 

 

CANNAPUNCH OF NEVADA, LLC

Notes to the Financial Statements

For the Year Ended December 31, 2018 and for the Period

from March 30, 2017 to December 31, 2017

 

 

13.FINANCIAL RISK FACTORS (Continued)

 

(b) Credit Risk

 

Credit risk is the risk of unexpected loss if a customer or third party to a financial instrument fails to meet its contractual obligations. Financial instruments which potentially subject the Company to concentrations of credit risk consist of cash and account receivable due from a related corporation. As at December 31, 2018 and 2017, the maximum amount exposed to credit risks was $497,016 and $228,300, respectively.

 

During the year ended December 31, 2018 and for the period from March 30, 2017 to December 31, 2017, revenue from one customer is approximately 30% and 36%, respectively, of total revenues and purchase of raw material from two suppliers were approximately nil and 33%, respectively, of total purchases.

 

(c) Liquidity Risk

 

Liquidity risk is the risk that the Company is unable to generate or obtain sufficient cash in a cost-effective manner to fund its obligations as they come due. The Company’s approach to managing liquidity risk is to ensure that it will have sufficient liquidity to meet liabilities when due. The Company manages liquidity risk through obtaining financing from its members and third parties. As at December 31, 2018 and 2017, all trade payables and accrued liabilities are due within a year.

 

14.SEGMENTED INFORMATION

 

Operating and Geographical Segments

 

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

 

that engages in business activities from which it may earn revenues and incur expenses;

whose operating results are reviewed regularly by the entity’s chief operating decision maker; and;

for which discrete financial infonnation is available.

 

At December 31, 2018 and 2017 the Company’s operations comprise a single reporting operating and geographical segment engaged in the manufacture and distribution of cannabis infused products.

 

15.SUBSEQUENT EVENTS

 

The Company’s management has evaluated subsequent events up to August 2, 2019, the date the financial statements were issued, and determined the following event:

 

On May 24, 2019 – Ayr Strategies Inc. (“AYR”), formerly Cannabis Strategies Acquisition Corp., closed its previously announced Qualifying Transaction. Through the qualifying transaction, AYR has created a vertically integrated Multi-State Operator in the U.S. cannabis sector, with an initial anchor portfolio in the Eastern and Western United States.

  

20 

 

 

SCHEDULE “F” 

SIRA INTERIM FINANCIAL STATEMENTS

 

(see attached)

 

 

 

SIRA NATURALS, INC.

 

UNAUDITED CONDENSED INTERIM FINANCIAL STATEMENTS

 

FOR THE THREE MONTHS ENDED MARCH 31, 2019 AND 2018

 

(EXPRESSED IN UNITED STATES DOLLARS)

 

Notice to reader

 

The accompanying unaudited condensed interim financial statements of Sira Naturals, Inc. (the Company) have been prepared by and are the responsibility of management. The unaudited condensed interim financial statements have not been reviewed by the Company’s auditors.

 

 

 

 

SIRA NATURALS, INC.

UNAUDITED CONDENSED INTERIM FINANCIAL STATEMENTS

 

MARCH 31, 2019 AND 2018

 

Table of Contents
  Page
   
Management’s Responsibility for Financial Reporting 1
Unaudited Condensed Interim Financial Statements  
Unaudited Condensed Interim Statements of Financial Position 2
Unaudited Condensed Interim Statements of Operations 3
Unaudited Condensed Interim Statements of Changes in Shareholder’s deficit 4
Unaudited Condensed Interim Statements of Cash Flows 5
Notes to the Unaudited Condensed Interim Financial Statements 6-15

 

 

 

 

MANAGEMENT’S RESPONSIBILITY FOR

FINANCIAL REPORTING

 

Management’s Responsibility

 

To the Members of Sira Naturals, Inc.:

 

The accompanying unaudited condensed interim financial statements and other financial information in this report were prepared by management of Sira Naturals, Inc. (“the Company”), reviewed by the Audit Committee and approved by the Board of Directors.

 

Management is responsible for the unaudited condensed interim financial statements and believes that they fairly present the Company’s financial condition and results of operation in conformity with International Financial Reporting Standards. Management has included in the Company’s unaudited condensed interim financial statements amounts based on estimates and judgments that it believes are reasonable, under the circumstances.

 

To discharge its responsibilities for financial reporting and safeguarding of assets, management believes that it has established appropriate systems of internal accounting control which provide reasonable assurance that the financial records are reliable and form a proper basis for the timely and accurate preparation of the unaudited condensed interim financial statements. Consistent with the concept of reasonable assurance, the Company recognizes that the relative cost of maintaining these controls should not exceed their expected benefits. Management further assures the quality of the financial records through careful selection and training of personnel and through the adoption and communication of financial and other relevant policies.

 

August 5, 2019

 

“Lou Karger” (Signed)   “Neil Sullivan” (Signed)
Treasurer   Controller

 

1 

 

 

SIRA NATURALS, INC. 

Unaudited Condensed Interim Statements of Financial Position

At March 31, 2019 and December 31, 2018

 

   March 31,  December 31,
   2019  2018
   $  $
ASSETS          
Current          
Cash and cash equivalents   3,315,782    2,607,676 
Accounts receivable, no allowance   1,026,229    -   
Inventory [Note 5]   8,868,104    6,197,598 
Biological assets [Note 6]   2,417,379    1,733,316 
Prepaid expenses and other assets   132,789    120,163 
    15,760,283    10,658,753 
Property, plant and equipment [Note 7]   7,521,303    7,629,881 
Right-of-use assets [Note 8]   5,434,999    -   
Other long term assets   140,401    480,401 
Total assets   28,856,986    18,769,035 
           
LIABILITIES          
Current          
Trade payables   605,217    1,557,153 
Accrued liabilities   2,025,356    1,192,208 
Income tax payable   3,715,371    3,997,954 
Lease obligations - current portion [Note 8]   142,220    -   
Debts payable - current portion [Note 9]   7,695    7,572 
    6,495,859    6,754,887 
Deferred tax liabilities   2,402,770    1,242,460 
Accrued interest payable   7,627,157    6,963,253 
Lease obligations - Non-current portion [Note 8]   5,485,755    -   
Debts payable - Non-current portion [Note 9]   14,963,691    14,965,045 
Total liabilities   36,975,232    29,925,645 
           
SHAREHOLDERS’ DEFICIT          
Accumulated deficit   (8,118,246)   (11,156,610)
Total shareholders’ deficit   (8,118,246)   (11,156,610)
Total liabilities and shareholders’ deficit   28,856,986    18,769,035 

 

Nature of operations [Note 1]
Contingencies [Note 13]
Subsequent events [Note 16]
Approved and authorized by the Board of Directors on August 5, 2019

 

“Lou Karger” (Signed)   “Neil Sullivan” (Signed)
Treasurer   Controller

  

The accompanying notes are an integral part of these unaudited condensed interim financial statements.

  

2 

 

 

SIRA NATURALS, INC. 

Unaudited Condensed Interim Statements of Operations

For the Three Months Ended March 31, 2019 and 2018

 

  

   Three months  Three months
   ended  ended
   March 31, 2019  March 31, 2018
   $  $
Revenues, net of discounts   6,670,180    2,976,969 
           
Cost of goods sold before biological asset adjustment   (1,470,860)   (1,025,728)
           
Gross profit before biological asset adjustment   5,199,320    1,951,241 
           
Fair value changes in biological assets included in cost of sales   (4,253,737)   (8,337,585)
Unrealized gain on biological asset transformation [Note 6]   7,282,658    2,070,210 
           
Gross profit (loss)   8,228,241    (4,316,134)
Expenses          
General and administrative [Note 12]   1,450,206    1,893,325 
Sales and marketing   62,315    123,889 
Depreciation [Note 7 & 8]   352,954    33,959 
Management Fee [Note 10]   49,500    49,500 
           
Total expenses   1,914,975    2,100,673 
           
Income (loss) from operations   6,313,266    (6,416,807)
           
Other expense (income)          
Interest expense   824,668    684,493 
Rental income and others   (3,000)   (82,716)
Other expense   821,668    601,777 
           
           
Income (loss) before income tax   5,491,598    (7,018,584)
           
Income tax expense   2,453,234    1,492,438 
           
Net income (loss)   3,038,364    (8,511,022)

 

The accompanying notes are an integral part of these unaudited condensed interim financial statements.

  

3 

 

SIRA NATURALS, INC.

Unaudited Condensed Interim Statements of Changes in Shareholder’s deficit 

For the Three Months Ended March 31, 2019 and 2018

 

  

   Accumulated deficit
   $
Balance as at December 31, 2017   (887,367)
      
Net loss   (8,511,022)
      
Balance as at March 31, 2018   (9,398,389)
      
Balance as at December 31, 2018   (11,156,610)
      
Net income   3,038,364 
      
Balance as at March 31, 2019   (8,118,246)

 

The accompanying notes are an integral part of these unaudited condensed interim financial statements.

  

4 

 

 

SIRA NATURALS, INC.

Unaudited Condensed Interim Statements of Cash Flows

For the Three Months Ended March 31, 2019 and 2018

 

  

   Three months  Three months
   ended  ended
   March 31, 2019  March 31, 2018
   $  $
Operating activities          
Net income (loss)   3,038,364    (8,511,022)
           
Adjustments for items not affecting cash:          
Depreciation of property, plant and equipment and right-of-use assets   352,954    236,443 
Fair value changes in biological assets included in cost of sales   (4,253,737)   (8,337,585)
Unrealized gain on biological asset transformation   7,282,658    2,070,210 
Changes in working capital items:          
Accounts Receivable   (1,026,229)   (8,990)
Inventory   (2,670,506)   6,622,734 
Biological assets   (3,712,984)   5,892,693 
Prepaid expenses and other assets   327,374    (269,552)
Deferred tax assets   -      420,205 
Deferred Tax Liability   1,160,310    1,065,460 
Trade payables   (951,936)   535,497 
Accrued liabilities   1,619,032    591,735 
Income tax payable   (282,583)   7,582 
Cash provided by operating activities   882,717    315,410 
           
Investing activities          
Net purchase of property, plant and equipment   (140,699)   (187,894)
Cash used in investing activities   (140,699)   (187,894)
           
Financing activities          
Repayment of lease obligations   (32,681)   -   
Repayment of debts   (1,231)   (7,574)
Cash used in financing activities   (33,912)   (7,574)
           
Net increase in cash   708,106    119,942 
Cash, beginning of period   2,607,676    201,697 
Cash, end of period   3,315,782    321,639 
           
Supplemental cash flow information          
Interest paid   160,764    59,743 

 

The accompanying notes are an integral part of these unaudited condensed interim financial statements.

  

5 

 

 

SIRA NATURALS, INC.

 Notes to the Unaudited Condensed Interim Financial Statements

For the Three Months Ended March 31, 2019 and 2018

 

 

1. NATURE OF OPERATIONS

 

Sira Naturals, Inc. (“Sira” or the “Company”) was incorporated as a not-for-profit Corporation on June 18, 2013 in the Commonwealth of Massachusetts, United States of America (“USA”). The Company changed its name from time to time and its latest name change was from Sage Naturals, Inc. to Sira Naturals, Inc., effective December 27, 2017. The Company’s registered address is 300 TradeCenter, Suite 7700, Woburn, MA 01801.

 

On January 23, 2018, the Company converted its status from a not-for-profit Corporation into a for-profit Corporation. The company applied the status change into a for-profit corporation to the financial statement’s presentation and the accompanying notes retrospectively for all the periods presented consistently.

 

The Company’s principal activities are the growing, processing and distribution of cannabis as regulated under the laws applicable in the USA.

 

2.  BASIS OF PRESENTATION

 

2.1 Statement of compliance

 

These unaudited condensed interim financial statements for the three months ended March 31, 2019 (and comparative results for the three months ended March 31, 2018) have been prepared in accordance with International Accounting Standard (“IAS”) 34 – Interim Financial Reporting and therefore do not contain all disclosures required by International Financial Reporting Standards (“IFRS”). These unaudited condensed interim financial statements should be read in conjunction with the Company’s 2018 financial statements and notes and have been prepared using the same accounting policies with the exception of significant accounting policy adopted as a result of initial application of IFRS 16 - Leases (“IFRS 16”) effective from January 1, 2019.

 

These unaudited condensed interim financial statements were approved and authorized for issue by the Board of Directors of the Company on August 5, 2019.

 

2.2 Basis of presentation

 

These unaudited condensed interim financial statements have been prepared on the historical cost basis except for certain financial instruments, which are measured at fair value. The unaudited condensed interim financial statements are presented in US dollars which is the presentation and functional currency of the Company.

 

3.           SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

3.1 Leases

 

The Company assesses whether a contract is or contains a lease, at inception of a contract. Leases are recognized as a right-of-use asset and corresponding liability at the commencement date. Each lease payment included in the lease liability is apportioned between the repayment of the liability and a finance cost. The finance cost is recognized in net finance costs in the statements of operations over the lease period so as to produce a constant periodic rate of interest on the remaining balance of the liability for each period. Lease liabilities include the net present value of fixed payments (including in-substance fixed payments), variable lease payments that are based on an index or a rate or subject to a fair market value renewal, amounts expected to be payable by the lessee under residual value guarantees, the exercise price of a purchase option if the lessee is reasonably certain to exercise that option, and payments of penalties for terminating the lease, if the lease term reflects the lessee exercising that option. The Company allocates the consideration in the contract to each lease component on the basis of the relative standalone price of the lease component and the aggregate stand-alone price of the non-lease components.

 

 6

 

 

SIRA NATURALS, INC.

Notes to the Unaudited Condensed Interim Financial Statements

For the Three Months Ended March 31, 2019 and 2018

 

 

3.           SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

 

3.1 Leases (continued)

 

The lease liability is net of lease incentives receivable. The lease payments are discounted using the interest rate implicit in the lease or, if that rate cannot be determined, the lessee’s incremental borrowing rate. The period over which the lease payments are discounted is the reasonably certain lease term, including renewal options that the Company is reasonably certain to exercise. Renewal options are included in a number of leases across the Company. Payments associated with short-term leases and leases of low-value assets are recognized as an expense on a straight-line basis in selling, general and administrative expenses in the statements of operations. Short-term leases are leases with a lease term of 12 months or less. Variable lease payments that do not depend on an index or a rate or subject to a fair market value renewal are expensed as incurred and recognized in selling, general and administrative expenses in the statements of operations.

 

Right-of-use assets are measured at cost which is calculated as the amount of the initial measurement of lease liability plus any lease payments made at or before the commencement date, any initial direct costs and related restoration costs. The right-of-use asset is depreciated over the lease term on a straight-line basis. The right-of-use assets are depreciated on a straight-line basis over the shorter of the lease term and the useful life of the underlying asset. If a lease transfers ownership of the underlying asset or the cost of the right-of-use asset reflects that the Company expects to exercise a purchase option, the related right-of-use asset is depreciated over the useful life of the underlying asset. The depreciation starts at the commencement date of the lease.

 

4.      CHANGES IN ACCOUNTING STANDARDS

 

Adoption of New Accounting Pronouncement

 

Adoption of IFRS 16 – Leases

 

The Company adopted IFRS 16 - Leases (“IFRS 16”) on January 1, 2019. IFRS 16 introduced a single on-balance sheet accounting model for lessees which replaced IAS 17 - Leases (“IAS 17”). Leasing activity for the Company typically involves the leases of land or buildings to operate cannabis dispensaries, processing or cultivation facilities or corporate offices.

 

The Company previously classified leases as either operating or finance leases from the perspective of the lessee. Under IFRS 16, the Company recognizes right-of-use assets and lease liabilities for most leases. The Company adopted IFRS 16 using the modified retrospective cumulative catch-up approach beginning on January 1, 2019. Under this approach, the Company did not restate its comparative amounts and recognized a right-of-use asset equal to the present value of the future lease payments. The Company elected to apply the practical expedient to only transition contracts which were previously identified as leases under IAS 17, and also elected to not recognize right-of-use assets and lease liabilities for leases of low-value assets.

 

Changes in Accounting Standards not yet Effective

 

Insurance Contracts

 

In May 2017, the International Accounting Standards Board (“IASB”) issued IFRS 17 - Insurance Contracts (“IFRS 17”), that replaces IFRS 4 - Insurance Contracts and establishes a new model for recognizing insurance policy obligations, premium revenue and claims-related expenses. IFRS 17 is effective for annual periods beginning on or after January 1, 2021; however, based on recent IASB meetings, an upcoming amendment to IFRS 17 and a deferral of the transition date by one year is anticipated. Early adoption is permitted. The Company is assessing the potential impact of this standard.

 

 7

 

  

SIRA NATURALS, INC.

Notes to the Unaudited Condensed Interim Financial Statements

For the Three Months Ended March 31, 2019 and 2018

 

 

5. INVENTORY

 

The Company’s inventory includes the following:

 

  March 31, 2019   December 31, 2018
  Capitalized Fair value Carrying   Capitalized Fair value Carrying
  cost adjustment value   cost adjustment value
  $ $ $   $ $ $
Raw Material              
Accessories - - -   152,976 - 152,976
               
Harvested cannabis              
Work in process 274,789 5,485,619 5,760,408   602,966 3,230,842 3,833,808
Finished goods 9,499 100,343 109,842   10,760 60,507 71,267
  284,288 5,585,962 5,870,250   613,726 3,291,349 3,905,075
Cannabis Oils              
Work in process 198,587 2,737,245 2,935,832   252,963 1,773,790 2,026,753
Finished goods 4,642 57,380 62,022   14,078 98,716 112,794
  203,229 2,794,625 2,997,854   267,041 1,872,506 2,139,547
               
  487,517 8,380,587 8,868,104   1,033,743 5,163,855 6,197,598
               

 

Inventories expensed as cost of goods sold during the three months ended March 31, 2019 and 2018 are $548,541 and $115,235, respectively.

 

6. BIOLOGICAL ASSETS

 

The continuity of biological assets was as follows:

  March 31, December
  2019 31, 2018
  $ $
Balance, beginning of year 1,733,316   1,081,141  
Changes in fair value less costs to sell due to biological transformation 7,282,658   11,287,162  
Transferred to inventory upon harvest (6,598,595 ) (10,634,987 )
Balance, at end 2,417,379   1,733,316  

 

As of March 31, 2019, and December 31, 2018, the weighted average fair value less cost to complete and cost to sell was $5.97 and $5.24 per gram, respectively.

 

The fair value of biological assets is categorized within Level 3 on the fair value hierarchy. The inputs and assumptions used in determining the fair value of biological assets include:

 

(a) Selling price per gram; Level 3 input
(b) Attrition rate; Level 3 input
(c) Average yield per plant; Level 3 input
(d) Standard cost per gram to compete production Level 3 input
(e) Cumulative stage of completion in production process Level 3 input

 

 8

 

 

SIRA NATURALS, INC.

Notes to the Unaudited Condensed Interim Financial Statements

For the Three Months Ended March 31, 2019 and 2018

 

 

6. BIOLOGICAL ASSETS (continued)

 

Significant unobservable assumptions used in the valuation of biological assets, including the sensitivities on changes in these assumptions and their effect on the fair value of biological assets, are as follows:

 

Significant inputs or as Range of inputs Sensitivity Effect on fair value
      March 31, December 31,
      2019 2018
      $ $
Selling price per gram* $6.61 to $7.62 Increase or decrease of $1 per gram 456,382 378,621
Average yield per plant 150 to 162 grams Increase or decrease by 5 grams per plant 90,430 9,771

 

*Selling price per gram is based on average selling prices for the period.

 

The Company’s estimates are, by their nature, subject to change and differences from the anticipated yield will be reflected in the gain or loss on biological assets in future periods.

 

As of March 31, 2019, and year ended December 31, 2018, the biological assets were on average 53% and 60% complete, respectively. During the three months ended March 31, 2019 and year ended December 31, 2018, the Company’s biological assets produced 980,002 grams and 2,323,076 grams of dried cannabis, respectively.

 

7. PROPERTY, PLANT AND EQUIPMENT

  Buildings &
leasehold
improvements
Furniture and
fixtures
  Office
equipment
Machinery
&
equipment
Auto &
trucks
Total  
  $ $   $ $ $ $  
Cost                
As at December 31, 2018 8,290,248 739,790   66,691 547,530 49,893 9,694,152  
Additions 144,349 -   - - - 144,349  
Disposals - (3,650 ) - - - (3,650 )
As at March 31, 2019 8,434,597 736,140   66,691 547,530 49,893 9,834,851  
                 
Depreciation                
As at December 31, 2018 1,744,908 181,889   17,291 108,574 11,609 2,064,271  
Depreciation 200,068 30,695   1,621 14,398 2,495 249,277  
As at March 31, 2019 1,944,976 212,584   18,912 122,972 14,104 2,313,548  
                 
Net book value                
As at December 31, 2018 6,545,340 557,901   49,400 438,956 38,284 7,629,881  
As at March 31, 2019 6,489,621 523,556   47,779 424,558 35,789 7,521,303  

 

As at March 31, 2019 and December 31, 2018, buildings and leasehold improvements include borrowing costs of $505,799, capitalized in connection with loan used for the construction of buildings.

 

Depreciation expense for the three months ended March 31, 2019 and 2018 of $Nil and $202,484, respectively, is included in cost of goods sold.

 

9 

 

 

SIRA NATURALS, INC.

Notes to the Unaudited Condensed Interim Financial Statements

For the Three Months Ended March 31, 2019 and 2018

 

 

8. RIGHT-OF-USE ASSETS AND LEASE OBLIGATIONS

 

  Right-of-use Lease
  assets obligations
     
Net book value at January 1, 2019 5,538,676 5,660,656
Depreciation and repayment 103,677 32,681
Net book value at March 31, 2019 5,434,999 5,627,975

 

Right-of-use assets and lease obligations of $5,538,676 and $5,660,656, respectively were recorded as at January 1, 2019, with no net impact on retained earnings. When measuring lease liabilities, the Company discounted lease payments using its incremental borrowing rate at January 1, 2019. The weighted-average rates applied were in the range of 10.06% to 11.62%.

 

As at March 31, 2019, the current and non-current portion of the lease obligations were $142,220 and $5,485,755, respectively.

 

9. DEBTS PAYABLE

 

The details of debts payable were as follows:

  March 31,
2019
December 31,
2018
 
  $ $  
Promissory notes (a) 14,958,333 14,958,333  
Loan payable to a third party (b) 13,053 14,284  
Total debts payable 14,971,386 14,972,617  
Less: Current portion (7,695) (7,572 )
Debts Payable - Non-current portion 14,963,691 14,965,045  

 

As at March 31, 2019, the maturity profile of the debts are as follows:

Year ending December 31 $
2019 (9 months) 7,695
2020 2,455,996
2021 -
2022 -
2023 -
2024 and thereafter 12,500,000
  14,963,691

 

10 

 

 

SIRA NATURALS, INC.

Notes to the Unaudited Condensed Interim Financial Statements

For the Three Months Ended March 31, 2019 and 2018

 

 

9.DEBTS PAYABLE (continued)

 

(a) Promissory notes

 

The outstanding balances at respective year ends represent long term debts obtained from 2013 to 2018 in the form of promissory notes. These notes carry interest rate of 18% per annum to be paid monthly.

 

Promissory notes amounting to $12,500,000 (December 31, 2018: $12,500,000) are to be repaid along with any unpaid accrued interest by April 2025. As of March 31, 2019, and December 31, 2019, there was unpaid accrued interest of $6,832,294 and $6,277,500, respectively.

 

Promissory notes amounting to $2,458,333 (December 31, 2018: $2,458,333) are to be repaid on maturity date of June 2020. As of March 31, 2019, and December 31, 2018, there was unpaid accrued interest of $257,014 and $147,900, respectively.

 

(b) Loan payable to a third party

 

Effective November 10, 2016, the Company obtained a loan of $29,393 for a term of four years from a third party for purchase of a vehicle. This loan carries interest at 5.49% per annum. The principal and interest are payable monthly until November 10, 2020.

 

10. RELATED PARTY TRANSACTIONS AND BALANCES

 

Related parties are defined as management and members of the Company and/or members of their immediate family and/or other companies and/or entities in which a member or senior officer is a principal owner or senior executive.

 

Included in expenses for the three months ended March 31, 2019 is a management fee of $49,500 charged by a related Corporation (March 31, 2018 - $49,500) under a management agreement. The management fee was paid monthly and varied based on actual costs incurred by the related corporation when providing the Company administrative, support, and management services. The management agreement was a month-to-month arrangement. As of March 31, 2019, and December 31, 2018, there was unpaid services of $16,500 and $193,600, respectively included in trade payables.

 

The Company paid $nil to related party for unpaid accrued interest from prior periods during the three months March 31, 2019.

 

The Company owes $7,083,308 in accrued interest to a related party as of March 31, 2019.

 

No compensation was paid to the key management for the three months ended March 31, 2019 and 2018.

 

11. CAPITAL MANAGEMENT

 

The Company manages its capital structure and makes adjustments to it, based on the funds available to the Company, in order to support business development. The Directors do not establish quantitative return on capital criteria for management, but rather relies on the expertise of the Company’s management to sustain future development of the business. In order to carry out the planned business development and pay for administrative costs, the Company will spend its existing working capital and raise additional amounts as needed. There were no changes in the Company’s approach to capital management during the three months ended March 31, 2019. The Company is not subject to externally imposed capital requirements.

 

11 

 

 

SIRA NATURALS, INC.

Notes to the Unaudited Condensed Interim Financial Statements

For the Three Months Ended March 31, 2019 and 2018

 

 

11. CAPITAL MANAGEMENT (continued)

 

The Company raises capital, as necessary, to meet its needs and take advantage of perceived opportunities and, therefore, does not have a numeric target for its capital structure. Funds are primarily secured through loans from third parties and promissory notes. There can be no assurance that the Company will be able to continue raising capital in this manner. Management reviews its capital management approach on an ongoing basis and believes that this approach, given the relative size of the Company, is reasonable.

 

The Company invests all capital that is surplus to its immediate operational needs in short-term, liquid and highly rated financial instruments.

 

12. GENERAL AND ADMINISTRATIVE

 

General and administrative expenses were comprised of:

  March 31,
2019
  March 31,
2018
 
  $   $  
Salaries and benefits 598,833   672,660  
Rent 26,112   573,171  
Taxes and licenses 4,626   15,959  
Bank Service charges 39,225   55,073  
Professional and consulting fees 260,310   121,628  
Insurance 65,648   49,669  
Office expenses 65,504   72,101  
Community agreements 133,674   163,247  
Security 121,540   66,830  
Computer expenses 76,260   31,971  
Utilities (1,483 ) 14,975  
Others 59,957   56,041  
  1,450,206   1,893,325  

 

13.  CONTINGENCIES

 

Contingencies

 

The Company’s operations are subject to a variety of local and state regulation. Failure to comply with one or more of those regulations could result in fines, restrictions on its operations, or losses of permits and/or licenses that could result in the Company ceasing operations. While management of the Company believes that the Company is in compliance with applicable local and state regulation at March 31, 2019, cannabis regulations continue to evolve and are subject to differing interpretations. As a result, the Company may be subject to regulatory fines, penalties, or restrictions in the future.

 

12 

 

 

SIRA NATURALS, INC.

Notes to the Unaudited Condensed Interim Financial Statements

For the Three Months Ended March 31, 2019 and 2018

 

 

13.  CONTINGENCIES (continued)

 

Claims and litigation

 

From time to time, the Company may be involved in litigation relating to claims arising out of operations in the normal course of business. At March 31, 2019, there were no pending or threatened lawsuits that could reasonably be expected to have a material effect on the results of the Company’s operations. There are also no proceedings in which any of the Company’s directors, officers or affiliates is an adverse party or has a material interest adverse to the Company’s interest.

 

14. FINANCIAL RISK FACTORS

 

The Company’s financial instruments mainly comprise of cash and cash equivalents, accounts receivable, trade payables, accrued liabilities, debts payable and lease obligations.

 

(a) Fair Value

 

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The fair value measurement is based on the presumption that the transaction to sell the asset or transfer the liability takes place either in the principal market for the asset or liability or in the absence of a principal market, in the most advantageous market for the asset or liability. The principal or the most advantageous market must be accessible by the Company.

 

The fair value of an asset or a liability is measured using the assumptions that market participants would use when pricing the asset or liability, assuming that market participants act in their economic best interest. A fair value measurement of a non-financial asset takes into account a market participant’s ability to generate economic benefits from the asset’s highest and best use or by selling it to another market participant that would utilise the asset in its highest and best use.

 

The Company uses valuation techniques that are appropriate in the circumstances and for which sufficient data are unobservable inputs.

 

All assets and liabilities for which fair value is measured or disclosed in the unaudited condensed interim financial statements are categorised within the fair value hierarchy. This is described, as follows, based on the lowest level input that is significant to the fair value measurement as a whole:

 

  Level 1 inputs are quoted prices in active markets for identical assets or liabilities at the measurement date.

 

  Level 2 inputs are observable inputs other than quoted prices included within Level 1, such as quoted prices for similar assets or liabilities in active markets, quoted prices for identical assets or liabilities in markets that are not active, or other inputs that are observable directly or indirectly.

 

  Level 3 inputs are unobservable inputs for the asset or liability that reflect the reporting entity’s own assumptions and are not based on observable market data.

 

13 

 

 

SIRA NATURALS, INC.

Notes to the Unaudited Condensed Interim Financial Statements

For the Three Months Ended March 31, 2019 and 2018

 

 

14. FINANCIAL RISK FACTORS (continued)

 

(a)Fair Value (continued)

 

The classification of financial instruments at their carrying and fair values is as follows:

 

  Carrying values     Fair values  
Financial assets FVTPL FVTOCI AC Total Total  
March 31, 2019 $ $ $ $ $  
Cash and cash equivalents 3,315,782 - - 3,315,782 3,315,782  
Account receivables - - 1,026,229 1,026,229 1,026,229  
  3,315,782 - 1,026,229 4,342,011 4,342,011  
December 31, 2018            
Cash and cash equivalents 2,607,676 - - 2,607,676 2,607,676  
           

 

    Carrying values   Fair values  
Financial liabilities   FVTPL AC Total Total  
March 31, 2019   $ $ $ $  
Trade payables   - 605,217 605,217 605,217  
Accrued liabilities   - 2,025,356 2,025,356 2,025,356  
Debts payable   - 14,971,386 14,971,386 14,971,386  
Lease obligations   - 5,627,975 5,627,975 5,627,975  
    - 23,229,934 23,229,934 23,229,934  
December 31, 2018   $ $ $ $  
Trade payables   - 1,557,153 1,557,153 1,557,153  
Accrued liabilities   - 1,192,208 1,192,208 1,192,208  
Debts payable   - 14,972,617 14,972,617 14,972,617  
    - 17,721,978 17,721,978 17,721,978  

 

The Company’s financial instruments as at March 31, 2019 and December 31, 2018 classified as “Level 1 - quoted prices in active markets” is cash. The Company has determined that there have been no transfers between levels in the hierarchy by re-assessing categorization at the reporting date.

 

The Company is exposed to credit risk, liquidity risk and interest rate risk. The Company’s management oversees the management of these risks. The Company’s management is supported by the Members that advises on financial risks and the appropriate financial risk governance framework for the Company. The Company’s financial risk activities are governed by appropriate policies and procedures and that financial risks are identified, measured and managed in accordance with company policies and company risk appetite.

 

(b) Credit Risk

 

Credit risk is the risk of unexpected loss if a customer or third party to a financial instrument fails to meet its contractual obligations. Financial instruments which potentially subject the Company to concentrations of credit risk consist of cash and cash equivalents, and accounts receivable.

 

14 

 

 

SIRA NATURALS, INC.

Notes to the Unaudited Condensed Interim Financial Statements

For the Three Months Ended March 31, 2019 and 2018

 

 

14. FINANCIAL RISK FACTORS (continued)

 

(b)Credit Risk (continued)

 

The cash and cash equivalents consist mainly of checking and operating accounts, cash and security deposits. The Company has deposited the cash equivalents with a major highly reputable US bank. For its accounts receivable, the Company ensures to deal with creditworthy customers. As at March 31, 2019 and December 31, 2018 the maximum amount exposed to credit risks was $4,342,011 and $2,607,676, respectively.

 

(c) Liquidity Risk

 

Liquidity risk is the risk that the Company is unable to generate or obtain sufficient cash in a cost-effective manner to fund its obligations as they come due. The Company’s approach to managing liquidity risk is to ensure that it will have sufficient liquidity to meet liabilities when due. The Company manages liquidity risk through obtaining financing from its members and third parties. As at March 31, 2019, all trade payables and accrued liabilities are due within a year, whereas, long term debts over a period of five years.

 

(d) Interest Rate Risk

 

Interest rate risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market interest rates. The Company is exposed to interest rate risk on its long-term debts.

 

15. SEGMENTED INFORMATION

 

Operating and geographical segments

 

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

 

that engages in business activities from which it may earn revenues and incur expenses;

whose operating results are reviewed regularly by the entity’s chief operating decision maker; and;

for which discrete financial information is available.

 

As at March 31, 2019 and December 31, 2018, the Company’s operations comprise a single reporting operating and geographical segment engaged in the growing, processing and distribution of cannabis.

 

16. SUBSEQUENT EVENTS

 

The Company’s management has evaluated subsequent events up to August 5, 2019, the date the unaudited condensed interim financial statements were issued, and determined the following event:

 

On May 24, 2019 – Ayr Strategies Inc. (“Ayr”), formerly Cannabis Strategies Acquisition Corp., closed its previously announced Qualifying Transaction. Through the qualifying transaction, Ayr has created a vertically integrated Multi-State Operator in the U.S. cannabis sector, with an initial anchor portfolio in the Eastern and Western United States.

 

15 

 

 

SCHEDULE “G”

CANOPY INTERIM FINANCIAL STATEMENTS

 

(see attached)

 

 

 

 

 

THE CANOPY NV, LLC

 

UNAUDITED CONDENSED INTERIM CONSOLIDATED FINANCIAL

STATEMENTS

 

FOR THE THREE MONTHS ENDED MARCH 31, 2019 AND 2018

 

(EXPRESSED IN UNITED STATES DOLLARS)

 

Notice to reader

 

The accompanying unaudited condensed interim consolidated financial statements of Canopy NV, LLC (the Company) have been prepared by and are the responsibility of management. The unaudited condensed interim consolidated financial statements have not been reviewed by the Company’s auditors.

 

 

 

 

THE CANOPY NV, LLC  
   
Unaudited Condensed Interim Consolidated Financial Statements  
   
March 31, 2019 and 2018  
   
Table of Contents  
  Page
   
Management’s Responsibility for Financial Reporting 1
   
Unaudited Condensed Interim Consolidated Financial Statements  
   
Unaudited Condensed Interim Consolidated Statements of Financial Position 2
   
Unaudited Condensed Interim Consolidated Statements of Operations 3
   
Unaudited Condensed Interim Consolidated Statements of Changes in Members’ Equity 4
   
Unaudited Condensed Interim Consolidated Statements of Cash Flows 5
   
Notes to the Unaudited Condensed Interim Consolidated Financial Statements 6-14

 

 

 

 

 

MANAGEMENT’S RESPONSIBILITY FOR

FINANCIAL REPORTING

 

Management’s Responsibility

 

To the Members of The Canopy NV, LLC:

 

The accompanying unaudited condensed interim consolidated financial statements and other financial information in this report were prepared by management of The Canopy NV, LLC (“the Company”), reviewed by the Audit Committee and approved by the Board of Directors.

 

Management is responsible for the unaudited condensed interim consolidated financial statements and believes that they fairly present the Company’s financial condition and results of operation in conformity with International Financial Reporting Standards. Management has included in the Company’s unaudited condensed interim consolidated financial statements amounts based on estimates and judgments that it believes are reasonable, under the circumstances.

 

To discharge its responsibilities for financial reporting and safeguarding of assets, management believes that it has established appropriate systems of internal accounting control which provide reasonable assurance that the financial records are reliable and form a proper basis for the timely and accurate preparation of unaudited condensed interim consolidated financial statements. Consistent with the concept of reasonable assurance, the Company recognizes that the relative cost of maintaining these controls should not exceed their expected benefits. Management further assures the quality of the financial records through careful selection and training of personnel and through the adoption and communication of financial and other relevant policies.

 

August 5, 2019

 

“Mark Pitchford” (Signed)   “Lilian Yohn” (Signed)
Chief Executive Officer   Chief Financial Officer

 

1 

 

 

THE CANOPY NV, LLC

Unaudited Condensed Interim Consolidated Statements of Financial Position

At March 31, 2019 and December 31, 2018

 

  March 31, December 31,
  2019 2018
  $ $
ASSETS    
Current    
Cash 222,626 172,576
Inventory [Note 5] 1,163,196 1,310,676
Advance to a related corporation [Note 10] 1,217,830 690,461
Prepaid expenses and other assets 153,353 122,167
  2,757,005 2,295,880
Intangible assets [Note 6] 1,623,114 1,623,114
Property plant and equipment [Note 7] 1,220,641 1,235,993
Right-of-use assets [Note 8] 2,427,320 -
Total assets 8,028,080 5,154,987
     
LIABILITIES    
Current    
Accrued liabilities 349,301 268,156
Lease obligations - current portion [Note 8] 62,841 -
  412,142 268,156
Debt payable [Note 13] 421,128 421,128
Lease obligations - non-current portion [Note 8] 2,397,955 -
Total liabilities 3,231,225 689,284
     
MEMBERS’ EQUITY [Note 9] 4,796,855 4,465,703
     
Total liabilities and members’ equity 8,028,080 5,154,987

 

Nature of operations [Note 1]

Contingencies [Note 14]

Subsequent events [Note 17]

 

Approved and authorized by the Board of Directors on August 5, 2019

 

“Mark Pitchford” (Signed)   “Lilian Yohn” (Signed)
Chief Executive Officer   Chief Financial Officer

 

The accompanying notes are an integral part of these unaudited condensed interim consolidated financial statements.

 

2 

 

 

THE CANOPY NV, LLC

Unaudited Condensed Interim Consolidated Statements of Operations

For the Three Months Ended March 31, 2019 and 2018

 

       
  For the Three For the Three  
  months ended months ended  
  March 31, 2019 March 31, 2018  
  $ $  
       
Revenues, net of discounts 3,627,129 2,589,630  
       
Cost of goods sold [Note 5] (2,113,680) (1,320,141 )
       
Gross profit 1,513,449 1,269,489  
       
Expenses      
General and administrative [Note 12] 590,157 396,004  
       
Sales and marketing 95,198 62,643  
       
Depreciation [Note 7 & 8] 77,596 7,158  
       
Management fee [Note 10] 180,000 60,000  
       
Total expenses 942,951 525,805  
       
Income from operations 570,498 743,684  
       
Other expense      
Net finance costs 78,446 -  
       
Net income 492,052 743,684  

 

The accompanying notes are an integral part of these unaudited condensed interim consolidated financial statements.

 

3 

 

 

THE CANOPY NV, LLC

Unaudited Condensed Interim Consolidated Statements of Changes in Members’ Equity

For the Three Months Ended March 31, 2019 and 2018

 

  Members’  
  Equity  
  $  
     
Balance as of December 31, 2017 3,280,127  
     
Distributions (444,000)  
     
Net income for the period 743,684  
     
Balance as at March 31, 2018 3,579,811  
     
Balance as of December 31, 2018 4,465,703  
     
Distributions (160,900)  
     
Net income for the period 492,052  
     
Balance as at March 31, 2019 4,796,855  

 

The accompanying notes are an integral part of these unaudited condensed interim consolidated financial statements.

 

4 

 

 

THE CANOPY NV, LLC

Unaudited Condensed Interim Consolidated Statements of Cash Flows

For the Three Months Ended March 31, 2019 and 2018

 

  Three months   Three months  
  ended   ended  
  March 31, 2019   March 31, 2018  
  $   $  
Operating activities        
Net income 492,052   743,684  
         
Adjustments for items not affecting cash:        
Depreciation of property plant and equipment and right-of-use assets 77,596   7,158  
Changes in working capital items:        
Inventory 147,480   (27,170 )
Prepaid expenses and other assets (31,186)   157,977  
Advance to a related corporation (527,369)   97,251  
Trade payables -   67,435  
Accrued liabilities 81,145   (35,991 )
Cash provided by operating activities 239,718   1,010,344  
         
Investing activities        
Purchase of property, plant and equipment (8,491)   (665,795 )
Cash used in investing activities (8,491)   (665,795 )
         
Financing activities        
Distributions (160,900)   (444,000 )
Repayment of lease obligations (20,277)   -  
Cash used in financing activities (181,177)   (444,000 )
Net increase (decrease) in cash 50,050   (99,451 )
Cash, beginning of period 172,576   821,928  
Cash, end of period 222,626   722,477  

 

The accompanying notes are an integral part of these unaudited condensed interim consolidated financial statements.

 

5 

 

 

THE CANOPY NV, LLC

Notes to the Unaudited Condensed Interim Consolidated Financial Statements

For the Three Months Ended March 31, 2019 and 2018

 

 

1.NATURE OF OPERATIONS

 

The CANOPY NV, LLC (“Canopy” or the “Company”) was incorporated as Domestic Limited Liability Company on April 1, 2016 in the State of Nevada, United States of America (“USA”). The Company’s head office is located at 1645 Crane Way, Sparks, Nevada 89431.

 

The Company’s management, operations, structure and other matters are governed through an Operating Agreement entered between the members and Managers of the Company on April 20, 2016. The Company’s principal activities, through its subsidiaries, are the distribution and sale of cannabis as regulated under the laws applicable in the USA.

 

2.    BASIS OF PRESENTATION 2.1 Statement of compliance

 

These unaudited condensed interim consolidated financial statements for the three months ended March 31, 2019 (and comparative results for the three months ended March 31, 2018) have been prepared in accordance with International Accounting Standard (“IAS”) 34 – Interim Financial Reporting and therefore do not contain all disclosures required by International Financial Reporting Standards (“IFRS”). These unaudited condensed interim consolidated financial statements should be read in conjunction with the Company’s 2018 consolidated financial statements and notes and have been prepared using the same accounting policies with the exception of significant accounting policy adopted as a result of initial application of IFRS 16 - Leases (“IFRS 16”) effective from January 1, 2019.

 

These unaudited condensed interim consolidated financial statements were approved and authorized for issue by the Board of Directors of the Company on August 5, 2019.

 

2.2 Basis of presentation

 

These unaudited condensed interim consolidated financial statements have been prepared on the historical cost basis except for certain financial instruments, which are measured at fair value, as explained in the accounting policies set out in Note 3. The unaudited condensed interim consolidated financial statements are presented in US dollars which is the presentation and functional currency of the Company and its subsidiaries.

 

3.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

3.1 Basis of consolidation

 

The unaudited condensed interim consolidated financial statements include the unaudited condensed interim financial statements of the Company and its wholly owned subsidiaries – Kynd Strainz LLC (“Kynd”) and Lemon Aide LLC (“Lemon”), Limited Liabilities Companies, incorporated in the state of Nevada. The results of subsidiaries acquired or disposed of during the period are included in the unaudited condensed interim consolidated statements of operations from the effective date of acquisition or up to the effective date of disposal, as appropriate. All inter-company transactions, balances, income and expenses are eliminated on consolidation. Lemon started operations in 2018.

 

The unaudited condensed interim financial statements of the subsidiaries are prepared for the same reporting period as the Company, using consistent accounting policies.

  

6 

 

 

THE CANOPY NV, LLC

Notes to the Unaudited Condensed Interim Consolidated Financial Statements

For the Three Months Ended March 31, 2019 and 2018

 

 

3.       SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

 

3.2 Leases

 

The Company assesses whether a contract is or contains a lease, at inception of a contract. Leases are recognized as a right-of-use asset and corresponding liability at the commencement date. Each lease payment included in the lease liability is apportioned between the repayment of the liability and a finance cost. The finance cost is recognized in net finance costs in the unaudited condensed interim consolidated statements of operations over the lease period so as to produce a constant periodic rate of interest on the remaining balance of the liability for each period. Lease liabilities include the net present value of fixed payments (including in-substance fixed payments), variable lease payments that are based on an index or a rate or subject to a fair market value renewal, amounts expected to be payable by the lessee under residual value guarantees, the exercise price of a purchase option if the lessee is reasonably certain to exercise that option, and payments of penalties for terminating the lease, if the lease term reflects the lessee exercising that option. The Company allocates the consideration in the contract to each lease component on the basis of the relative standalone price of the lease component and the aggregate stand-alone price of the non-lease components. The lease liability is net of lease incentives receivable. The lease payments are discounted using the interest rate implicit in the lease or, if that rate cannot be determined, the lessee’s incremental borrowing rate. The period over which the lease payments are discounted is the reasonably certain lease term, including renewal options that the Company is reasonably certain to exercise. Renewal options are included in a number of leases across the Company.

 

Payments associated with short-term leases and leases of low-value assets are recognized as an expense on a straight-line basis in selling, general and administrative expenses in the unaudited condensed interim consolidated statements of operations. Short-term leases are leases with a lease term of 12 months or less. Variable lease payments that do not depend on an index or a rate or subject to a fair market value renewal are expensed as incurred and recognized in Selling, general and administrative expenses in the unaudited condensed interim consolidated statements of operations.

 

Right-of-use assets are measured at cost which is calculated as the amount of the initial measurement of lease liability plus any lease payments made at or before the commencement date, any initial direct costs and related restoration costs. The right-of-use asset is depreciated over the lease term on a straight-line basis. The right-of-use assets are depreciated on a straight-line basis over the shorter of the lease term and the useful life of the underlying asset. If a lease transfers ownership of the underlying asset or the cost of the right-of-use asset reflects that the Company expects to exercise a purchase option, the related right-of-use asset is depreciated over the useful life of the underlying asset. The depreciation starts at the commencement date of the lease.

 

4.       CHANGES IN ACCOUNTING STANDARDS

 

Adoption of New Accounting Pronouncement

 

Adoption of IFRS 16 – Leases

 

The Company adopted IFRS 16 - Leases (“IFRS 16”) on January 1, 2019. IFRS 16 introduced a single on-balance sheet accounting model for lessees which replaced IAS 17 - Leases (“IAS 17”). Leasing activity for the Company typically involves the leases of land or buildings to operate cannabis dispensaries, processing or cultivation facilities or corporate offices.

 

7 

 

 

THE CANOPY NV, LLC

Notes to the Unaudited Condensed Interim Consolidated Financial Statements

For the Three Months Ended March 31, 2019 and 2018

 

 

4.      CHANGES IN ACCOUNTING STANDARDS (continued)

 

Adoption of New Accounting Pronouncement (continued)

 

Adoption of IFRS 16 – Leases (continued)

 

The Company previously classified leases as either operating or finance leases from the perspective of the lessee. Under IFRS 16, the Company recognizes right-of-use assets and lease liabilities for most leases. The Company adopted IFRS 16 using the modified retrospective cumulative catch-up approach beginning on January 1, 2019. Under this approach, the Company did not restate its comparative amounts and recognized a right-of-use asset equal to the present value of the future lease payments. The Company elected to apply the practical expedient to only transition contracts which were previously identified as leases under IAS 17, and also elected to not recognize right-of-use assets and lease liabilities for leases of low-value assets.

 

Changes in Accounting Standards not yet Effective

 

Insurance Contracts

 

In May 2017, the International Accounting Standards Board (“IASB”) issued IFRS 17 - Insurance Contracts (“IFRS 17”), that replaces IFRS 4 - Insurance Contracts and establishes a new model for recognizing insurance policy obligations, premium revenue and claims-related expenses. IFRS 17 is effective for annual periods beginning on or after January 1, 2021; however, based on recent IASB meetings, an upcoming amendment to IFRS 17 and a deferral of the transition date by one year is anticipated. Early adoption is permitted. The Company is assessing the potential impact of this standard.

 

5.       INVENTORY

 

Inventory comprised of finished goods.

 

Inventories expensed as cost of goods sold during the three months ended March 31, 2019 and 2018 is $2,113,680 and $1,320,141, respectively.

 

6.       INTANGIBLE ASSETS

 

Intangible assets represent dispensary licenses obtained by the two subsidiaries. Intangible assets of $1,623,114 include $1,500,000 contribution from a member.

 

8 

 

 

THE CANOPY NV, LLC

Notes to the Unaudited Condensed Interim Consolidated Financial Statements

For the Three Months Ended March 31, 2019 and 2018

 

 

7.  PROPERTY, PLANT AND EQUIPMENT

 

  Leasehold Furniture & Office    
  improvements Fixtures Equipment Vehicle Total
Cost $ $ $   $
As at December 31, 2018 1,051,853 167,640 77,444 6,305 1,303,242
Additions - 7,788 703 - 8,491
As at March 31, 2019 1,051,853 175,428 78,147 6,305 1,311,733
           
Depreciation          
As at December 31, 2018 22,988 33,479 10,106 676 67,249
Depreciation 13,149 6,597 3,872 225 23,843
As at March 31, 2019 36,137 40,076 13,978 901 91,092
           
Net book value          
As at December 31, 2018 1,028,865 134,161 67,338 5,629 1,235,993
As at March 31, 2019 1,015,716 135,352 64,169 5,404 1,220,641

 

Depreciation expense for the three months ended March 31, 2019 and 2018 of $Nil, is included in cost of goods sold.

 

8. RIGHT-OF-USE ASSETS AND LEASE OBLIGATIONS

 

  Right-of- Lease
  use assets obligations
  $ $
     
Net book value at January 1, 2019 2,481,073 2,481,073
Depreciation and repayment 53,753 20,277
Net book value at March 31, 2019 2,427,320 2,460,796

 

Right-of-use assets and lease obligations of $2,481,073 were recorded as at January 1, 2019, with no net impact on retained earnings. When measuring lease liabilities, the Company discounted lease payments using its incremental borrowing rate at January 1, 2019. The weighted-average rates applied were in the range of 9.84% to 11.62%.

 

As at March 31, 2019, the current and non-current portion of the lease obligations were $62,841 and $2,397,955, respectively.

 

9.       MEMBERS’ EQUITY

 

During the three months ended March 31, 2019 and 2018, members made cash contributions of $nil to the Company.

 

9 

 

 

THE CANOPY NV, LLC

Notes to the Unaudited Condensed Interim Consolidated Financial Statements

For the Three Months Ended March 31, 2019 and 2018

 

 

10.    RELATED PARTY TRANSACTIONS AND BALANCES

 

Related parties are defined as management and members of the Company and/or members of their immediate family and/or other companies and/or entities in which a member or senior officer is a principal owner or senior executive.

 

Other than disclosed elsewhere in the unaudited condensed interim consolidated financial statements, related party transactions and balances are as follows:

 

The Company purchases a substantial portion of its inventory from a related corporation. These purchases are made at arms-length rates, in line with rates charged to third party customers of the related corporation.

 

Included in expenses for the three months ended March 31, 2019 and 2018 is management fees of $180,000 and $60,000, respectively. The management fee started on January 1, 2017 and was paid monthly. The monthly fee varied based on an allocation of the related corporation’s expenses and was a month-to-month arrangement.

 

Advance to a related corporation of $1,217,830 and $690,461 were outstanding as at March 31, 2019 and December 31, 2018, respectively. These advances are unsecured, interest free and repayable on demand.

 

No compensation was paid to key management for the three months ended March 31, 2019 and 2018.

 

11.    CAPITAL MANAGEMENT

 

The Company manages its capital structure and makes adjustments to it, based on the funds available to the Company, in order to support business development. The members do not establish quantitative return on capital criteria for management, but rather relies on the expertise of the Company’s management to sustain future development of the business. The Company defines capital to include its members’ equity. In order to carry out the planned business development and pay for administrative costs, the Company will spend its existing working capital and raise additional amounts as needed. Management reviews its capital management approach on an ongoing basis and believes that this approach, given the relative size of the Company, is reasonable. There were no changes in the Company’s approach to capital management during the three ended March 31, 2019. The Company is not subject to externally imposed capital requirements. As at March 31, 2019 and December 31, 2018, the capital of the Company was $4,796,855 and $4,465,703, respectively.

 

The Company raises capital, as necessary, to meet its needs and take advantage of perceived opportunities and, therefore, does not have a numeric target for its capital structure. Funds are primarily secured through cash injection by the members of the Company. 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 ongoing basis and believes that this approach, given the relative size of the Company, is reasonable.

 

The Company invests all capital that is surplus to its immediate operational needs in short-term, liquid and highly rated financial instruments.

 

10 

 

 

THE CANOPY NV, LLC

Notes to the Unaudited Condensed Interim Consolidated Financial Statements

For the Three Months Ended March 31, 2019 and 2018

 

 

12.   GENERAL AND ADMINISTRATIVE

 

General and administrative expenses were comprised of:

  March 31,
2019
March 31,
2018
  $ $
Salaries and benefits 292,372 268,412
Rent 58,120 55,981
Taxes and licenses 129,102 23,718
Professional and consulting fees 24,840 2,350
Insurance 27,354 14,713
Office expenses 15,550 5,793
Computer expenses 13,663 6,043
Repair and maintenance 4,850 3,551
Utilities 4,838 3,419
Others 19,468 12,024
  590,157 396,004

 

13.   DEBTS PAYABLE

 

On October 1, 2018, the Company borrowed $421,128 in connection with the construction of a dispensary. The loan bears interest at a rate of 5% per annum and is due in 2020.

 

14.   CONTINGENCIES

 

Contingencies

 

The Company’s operations are subject to a variety of local and state regulation. Failure to comply with one or more of those regulations could result in fines, restrictions on its operations, or losses of permits and/or licenses that could result in the Company ceasing operations. While management of the Company believes that the Company is in compliance with applicable local and state regulation at March 31, 2019, cannabis regulations continue to evolve and are subject to differing interpretations. As a result, the Company may be subject to regulatory fines, penalties, or restrictions in the future.

 

Claims and litigation

 

From time to time, the Company may be involved in litigation relating to claims arising out of operations in the normal course of business. At March 31, 2019, there were no pending or threatened lawsuits that could reasonably be expected to have a material effect on the results of the Company’s operations. There are also no proceedings in which any of the Company’s directors, officers or affiliates is an adverse party or has a material interest adverse to the Company’s interest.

 

11 

 

 

THE CANOPY NV, LLC

Notes to the Unaudited Condensed Interim Consolidated Financial Statements

For the Three Months Ended March 31, 2019 and 2018

 

 

15.   FINANCIAL RISK FACTORS

 

The Company’s financial instruments mainly comprise of cash, advance to a related corporation, trade payables, accrued liabilities, due to related corporation and lease obligations.

 

(a) Fair Value

 

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The fair value measurement is based on the presumption that the transaction to sell the asset or transfer the liability takes place either in the principal market for the asset or liability or in the absence of a principal market, in the most advantageous market for the asset or liability. The principal or the most advantageous market must be accessible by the Company.

 

The fair value of an asset or a liability is measured using the assumptions that market participants would use when pricing the asset or liability, assuming that market participants act in their economic best interest. A fair value measurement of a non-financial asset takes into account a market participant’s ability to generate economic benefits from the asset’s highest and best use or by selling it to another market participant that would utilise the asset in its highest and best use.

 

The Company uses valuation techniques that are appropriate in the circumstances and for which sufficient data are unobservable inputs.

 

All assets and liabilities for which fair value is measured or disclosed in the unaudited condensed interim consolidated financial statements are categorised within the fair value hierarchy. This is described, as follows, based on the lowest level input that is significant to the fair value measurement as a whole:

 

Level 1 inputs are quoted prices in active markets for identical assets or liabilities at the measurement date.

 

  Level 2 inputs are observable inputs other than quoted prices included within Level 1, such as quoted prices for similar assets or liabilities in active markets, quoted prices for identical assets or liabilities in markets that are not active, or other inputs that are observable directly or indirectly.

 

  Level 3 inputs are unobservable inputs for the asset or liability that reflect the reporting entity’s own assumptions and are not based on observable market data.

 

The classification of financial instruments at their carrying and fair values is as follows:

Carrying values     Fair values
Financial assets FVTPL FVTOCI AC Total Total
March 31, 2019 $ $ $ $ $
Cash 222,626 - - 222,626 222,626
Advance to a related corporation - - 1,217,830 1,217,830 1,217,830
  222,626 - 1,217,830 1,440,456 1,440,456
           
December 31, 2018          
Cash 172,576 - - 172,576 172,576
Advance to a related corporation   - 690,461 690,461 690,461
  172,576 - 690,461 863,037 863,037

 

12 

 

 

THE CANOPY NV, LLC

Notes to the Unaudited Condensed Interim Consolidated Financial Statements

For the Three Months Ended March 31, 2019 and 2018

 

 

15.   FINANCIAL RISK FACTORS (continued)

 

(a) Fair Value (continued)

 

  Carrying values   Fair values
Financial liabilities FVTPL AC Total Total
March 31, 2019 $ $ $ $
Accrued liabilities - 349,301 349,301 349,301
Lease obligations - 2,460,796 2,460,796 2,460,796
Debt payable - 421,128 421,128 421,128
  - 3,231,225 3,231,225 3,231,225
December 31, 2018        
Accrued liabilities - 268,156 268,156 268,156
Debt payable - 421,128 421,128 421,128
  - 689,284 689,284 689,284

 

The Company’s financial instruments as at March 31, 2019 and December 31, 2018 classified as “Level 1 - quoted prices in active markets” is cash. The Company has determined that there have been no transfers between levels in the hierarchy by re-assessing categorization at the reporting date.

 

The Company is exposed to credit risk and liquidity risk. The Company’s management oversees the management of these risks. The Company’s management is supported by the members that advises on financial risks and the appropriate financial risk governance framework for the Company. The Company’s financial risk activities are governed by appropriate policies and procedures and that financial risks are identified, measured and managed in accordance with group policies and group risk appetite.

 

(b) Credit Risk

 

Credit risk is the risk of unexpected loss if a customer or third party to a financial instrument fails to meet its contractual obligations. Financial instruments which potentially subject the Company to concentrations of credit risk consist of cash and advance to a related corporation. As at March 31, 2019 and December 31, 2018, the maximum amount exposed to credit risks was $1,440,456 and $863,037, respectively.

 

(c) Liquidity Risk

 

Liquidity risk is the risk that the Company is unable to generate or obtain sufficient cash in a cost-effective manner to fund its obligations as they come due. The Company’s approach to managing liquidity risk is to ensure that it will have sufficient liquidity to meet liabilities when due. The Company manages liquidity risk through obtaining financing from its members. As at March 31, 2019, all trade payables and accrued liabilities are due within a year.

 

13 

 

 

THE CANOPY NV, LLC

Notes to the Unaudited Condensed Interim Consolidated Financial Statements

For the Three Months Ended March 31, 2019 and 2018

 

 

16. SEGMENTED INFORMATION

 

Operating and geographical segments

 

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

 

that engages in business activities from which it may earn revenues and incur expenses;

whose operating results are reviewed regularly by the entity’s chief operating decision maker; and;

for which discrete financial information is available.

 

As at March 31, 2019 and December 31, 2018, the Company’s operations comprise a single reporting operating and geographical segment engaged in the distribution and sale of cannabis.

 

17.       SUBSEQUENT EVENTS

 

The Company’s management has evaluated subsequent events up to August 5, 2019, the date the unaudited condensed interim consolidated financial statements were issued, and determined the following event:

 

On May 24, 2019 – Ayr Strategies Inc. (“Ayr”), formerly Cannabis Strategies Acquisition Corp., closed its previously announced Qualifying Transaction. Through the qualifying transaction, Ayr has created a vertically integrated Multi-State Operator in the U.S. cannabis sector, with an initial anchor portfolio in the Eastern and Western United States.

 

14 

 

 

 

SCHEDULE “H” 

WASHOE INTERIM FINANCIAL STATEMENTS

 

(see attached)

 

 

 

  

WASHOE WELLNESS, LLC

 

UNAUDITED CONDENSED INTERIM CONSOLIDATED

FINANCIAL STATEMENTS

 

FOR THE THREE MONTHS ENDED MARCH 31, 2019 AND 2018

  

(EXPRESSED IN UNITED STATES DOLLARS)

  

Notice to reader

 

The accompanying unaudited condensed interim consolidated financial statements of Washoe Wellness, LLC (the Company) have been prepared by and are the responsibility of management. The unaudited condensed interim consolidated financial statements have not been reviewed by the Company’s auditors.

 

 

 

 

WASHOE WELLNESS, LLC

 

Unaudited Condensed Interim Consolidated Financial Statements

 

March 31, 2019 and 2018

 

Table of Contents  

 

  Page
   
Management’s Responsibility for Financial Reporting 1
   
Unaudited Condensed Interim Consolidated Financial Statements  
   
Unaudited Condensed Interim Consolidated Statements of Financial Position 2
   
Unaudited Condensed Interim Consolidated Statements of Operations 3
   
Unaudited Condensed Interim Consolidated Statements of Changes in Members’ Equity 4
   
Unaudited Condensed Interim Consolidated Statements of Cash Flows 5
   
Notes to the Unaudited Condensed Interim Consolidated Financial Statements 6-18

 

 

 

 

MANAGEMENT’S RESPONSIBILITY FOR

FINANCIAL REPORTING

 

Management’s Responsibility

 

To the Members of Washoe Wellness, LLC:

 

The accompanying unaudited condensed interim consolidated financial statements and other financial information in this report were prepared by management of Washoe Wellness, LLC (“the Company”), reviewed by the Audit Committee and approved by the Board of Directors.

 

Management is responsible for the unaudited condensed interim consolidated financial statements and believes that they fairly present the Company’s financial condition and results of operation in conformity with International Financial Reporting Standards. Management has included in the Company’s unaudited condensed interim consolidated financial statements amounts based on estimates and judgments that it believes are reasonable, under the circumstances.

 

To discharge its responsibilities for financial reporting and safeguarding of assets, management believes that it has established appropriate systems of internal accounting control which provide reasonable assurance that the financial records are reliable and form a proper basis for the timely and accurate preparation of unaudited condensed interim consolidated financial statements. Consistent with the concept of reasonable assurance, the Company recognizes that the relative cost of maintaining these controls should not exceed their expected benefits. Management further assures the quality of the financial records through careful selection and training of personnel and through the adoption and communication of financial and other relevant policies.

 

August 5, 2019

  

“Mark Pitchford” (Signed)   “Lilian Yohn” (Signed)
Chief Executive Officer   Chief Financial Officer

 

1 

 

 

WASHOE WELLNESS, LLC

Unaudited Condensed Interim Consolidated Statements of Financial Position 

At March 31, 2019 and December 31, 2018

 

  

March 31,

2019

$

   December 31,
2018
$
 
ASSETS          
Current          
Cash   722,273    345,987 
Accounts receivable, no allowance   133,075    350,974 
Inventory [Note 5]   2,519,505    2,035,578 
Biological assets [Note 6]   1,646,000    1,244,313 
Other receivables   -    11,532 
Prepaid expenses and other assets   197,933    211,923 
    5,218,786    4,200,307 
Intangible assets [Note 7]   80,894    80,894 
Property, plant and equipment [Note 8]   8,961,601    8,846,196 
Investment in associate [Note 9]   1,939,517    1,664,347 
Total assets   16,200,798    14,791,744 
           
LIABILITIES          
Current          
Trade payables   577,458    861,240 
Accrued liabilities   162,209    107,472 
Advance from a related corporation [Note 12]   1,217,830    690,461 
    1,957,497    1,659,173 
Debts payable - non-current portion [Note 10]   9,162,306    9,182,006 
Total liabilities   11,119,803    10,841,179 
           
MEMBERS’ EQUITY [Note 11]   5,080,995    3,950,565 
           
Total liabilities and members’ equity   16,200,798    14,791,744 

 

Nature of operations [Note 1]

Commitment and contingencies [Note 15]

Subsequent events [Note 18]

 

Approved and authorized by the Board of Directors on August 5, 2019.

  

“Mark Pitchford” (Signed)   “Lilian Yohn” (Signed)
Chief Executive Officer   Chief Financial Officer
     

 

The accompanying notes are an integral part of these unaudited condensed interim consolidated financial statements.

 

2 

 

 

WASHOE WELLNESS, LLC

Unaudited Condensed Interim Consolidated Statements of Operations 

For the Three Months Ended March 31, 2019 and 2018

 

  

Three months

ended

March 31, 2019

$

   Three months
ended
March 31, 2018
$
 
           
Revenues, net of discounts   1,972,925    1,707,193 
           
Cost of goods sold before biological asset adjustment   (1,017,328)   (865,140)
           
Gross profit before biological asset adjustment   955,597    842,053 
           
Fair value changes in biological assets included in cost of sales   (804,650)   (551,056)
Unrealized gain on biological asset transformation   1,227,204    1,003,455 
           
Gross profit   1,378,151    1,294,452 
           
Expenses          
General and administrative [Note 14]   160,492    257,079 
           
Sales and marketing   55,369    33,258 
           
Management fees [Note 15]   120,000    - 
           
Depreciation [Note 8]   95,266    67,488 
           
Total expenses   431,127    357,825 
           
Income from operations   947,024    936,627 
           
Other income (expense)          
Share of income on equity investments [Note 9]   275,170    807,121 
Interest expense   (94,888)   (84,720)
Interest income   -    12,067 
Management fee income [Note 12]   -    60,000 
Rental income and others   23,124    23,124 
Total other income   203,406    817,592 
           
Net income   1,150,430    1,754,219 

 

The accompanying notes are an integral part of these unaudited condensed interim consolidated financial statements.

 

3 

 

 

WASHOE WELLNESS, LLC

Unaudited Condensed Interim Consolidated Statements of Changes in Members’ Equity 

For the Three Months Ended March 31, 2019 and 2018

 

  

Members’

Equity

$

 
Balance as at December 31, 2017   2,444,394 
      
Distributions   - 
      
Net income for the period   1,754,219 
      
Balance as at March 31, 2018   4,198,613 
      
Balance as at December 31, 2018   3,950,565 
      
Distributions   (20,000)
      
Net income for the period   1,150,430 
      
Balance as at March 31, 2019   5,080,995 

 

The accompanying notes are in integral part of these unaudited condensed interim consolidated financial statements.

 

 

4 

 

 

WASHOE WELLNESS, LLC

Unaudited Condensed Interim Consolidated Statements of Cash Flows 

For the Three Months Ended March 31, 2019 and 2018

 

  

Three months

ended

March 31, 2019

$

   Three months
ended
March 31, 2018
$
 
Operating activities          
Net income   1,150,430    1,754,219 
Adjustments for items not affecting cash:          
Depreciation of property, plant and equipment   110,774    78,475 
Share of income on equity investments   (275,170)   (807,121)
Unrealized gain on biological asset transformation   (1,227,204)   (1,003,455)
Fair value changes in biological assets included in cost of sales   804,650    551,056 
Changes in working capital items:          
Accounts receivable   217,899    121,649 
Other receivables   11,532    - 
Inventory   (483,927)   (459,889)
Biological assets   20,867    (64,994)
Prepaid expenses and other assets   13,990    524,202 
Trade payables   (283,782)   2,539,556 
Accrued liabilities   54,737    (11,454)
Advance from a related corporation   527,369    (97,251)
Cash provided by operating activities   642,165    3,124,993 
           
Investing activities          
Investment in associate   -    (10)
Purchase of property, plant and equipment   (226,179)   (311,762)
Receipts of loans receivable   -    13,309 
Cash used in investing activities   (226,179)   (298,463)
           
Financing activities          
Repayments of debts payable   -    (2,361,998)
Proceeds from issuance of debts payable   (19,700)   - 
Distributions   (20,000)   - 
Cash used in financing activities   (39,700)   (2,361,998)
           
Net increase in cash   376,286    464,532 
Cash, beginning of period   345,987    1,435,345 
Cash, end of period   722,273    1,899,877 
           
Supplemental cash flow information          
Interest paid   94,888    58,944 

 

The accompanying notes are an integral part of these unaudited condensed interim consolidated financial statements.

 

5 

 

 

WASHOE WELLNESS, LLC

Notes to the Unaudited Condensed Interim Consolidated Financial Statements

For the Three Months Ended March 31, 2019 and 2018

 

 

 

1.NATURE OF OPERATIONS

 

Washoe Wellness, LLC (“Washoe” or the “Company”) was incorporated as a Limited Liability Company on June 23, 2014 in the State of Nevada, United States of America (“USA”). The Company’s head office is located at 1645 Crane Way, Sparks, NV 89431.

 

The Company’s management, operations, structure and other matters are governed through an Operating Agreement entered between the Members and Managers of the Company on November 5, 2014. The Company’s principal activities, through its subsidiaries, are the growing, processing and distribution of cannabis as regulated under the laws applicable in the USA.

 

2.BASIS OF PRESENTATION

 

2.1 Statement of compliance

 

These unaudited condensed interim consolidated financial statements for the three months ended March 31, 2019 (and comparative results for the three months ended March 31, 2018) have been prepared in accordance with International Accounting Standard (“IAS”) 34 – Interim Financial Reporting and therefore do not contain all disclosures required by International Financial Reporting Standards (“IFRS”). These unaudited condensed interim consolidated financial statements should be read in conjunction with the Company’s 2018 consolidated financial statements and notes and have been prepared using the same accounting policies with the exception of significant accounting policy adopted as a result of initial application of IFRS 16 - Leases (“IFRS 16”) effective from January 1, 2019.

 

These unaudited condensed interim consolidated financial statements were approved and authorized for issue by the Board of Directors of the Company on August 5, 2019.

 

2.2 Basis of presentation

 

These unaudited condensed interim consolidated financial statements have been prepared on the historical cost basis except for certain financial instruments, which are measured at fair value. The unaudited condensed interim consolidated financial statements are presented in US dollars which is the presentation and functional currency of the Company and its subsidiaries.

 

3.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

3.1 Basis of Consolidation

 

The unaudited condensed interim consolidated financial statements include the unaudited condensed interim financial statements of the Company and its wholly owned subsidiaries – Tahoe-Reno Extractions, LLC (“TRE”), Tahoe-Reno Botanicals, LLC (“TRB”) and DWC Investments, LLC, Limited Liabilities Companies, and KLYMB Project Management, Inc., incorporated in the state of Nevada. The results of subsidiaries acquired or disposed of during the period are included in the unaudited condensed interim consolidated statements of operations from the effective date of acquisition or up to the effective date of disposal, as appropriate. All inter-company transactions, balances, income and expenses are eliminated on consolidation.

 

The unaudited condensed interim financial statements of the subsidiaries are prepared for the same reporting period as the Company, using consistent accounting policies.

 

6 

 

 

WASHOE WELLNESS, LLC

Notes to the Unaudited Condensed Interim Consolidated Financial Statements

For the Three Months Ended March 31, 2019 and 2018

 

 

 

3.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

 

3.2 Leases

 

The Company assesses whether a contract is or contains a lease, at inception of a contract. Leases are recognized as a right-of-use assets and corresponding liability at the commencement date. Each lease payment included in the lease liability is apportioned between the repayment of the liability and a finance cost. The finance cost is recognized in net finance costs in the unaudited condensed interim consolidated statement of operations over the lease period so as to produce a constant periodic rate of interest on the remaining balance of the liability for each period. Lease liabilities include the net present value of fixed payments (including in-substance fixed payments), variable lease payments that are based on an index or a rate or subject to a fair market value renewal, amounts expected to be payable by the lessee under residual value guarantees, the exercise price of a purchase option if the lessee is reasonably certain to exercise that option, and payments of penalties for terminating the lease, if the lease term reflects the lessee exercising that option. The Company allocates the consideration in the contract to each lease component on the basis of the relative standalone price of the lease component and the aggregate stand-alone price of the non-lease components. The lease liability is net of lease incentives receivable. The lease payments are discounted using the interest rate implicit in the lease or, if that rate cannot be determined, the lessee’s incremental borrowing rate. The period over which the lease payments are discounted is the reasonably certain lease term, including renewal options that the Company is reasonably certain to exercise. Renewal options are included in a number of leases across the Company.

 

Payments associated with short-term leases and leases of low-value assets are recognized as an expense on a straight-line basis in Selling, general and administrative expenses in the unaudited condensed interim consolidated statement of operations. Short-term leases are leases with a lease term of 12 months or less. Variable lease payments that do not depend on an index or a rate or subject to a fair market value renewal are expensed as incurred and recognized in selling, general and administrative expenses in the unaudited condensed interim consolidated statement of operations.

 

Right-of-use assets are measured at cost which is calculated as the amount of the initial measurement of lease liability plus any lease payments made at or before the commencement date, any initial direct costs and related restoration costs. The right-of-use asset is depreciated over the lease term on a straight-line basis. The right-of-use assets are depreciated on a straight-line basis over the shorter of the lease term and the useful life of the underlying asset. If a lease transfers ownership of the underlying asset or the cost of the right-of-use asset reflects that the Company expects to exercise a purchase option, the related right-of-use asset is depreciated over the useful life of the underlying asset. The depreciation starts at the commencement date of the lease.

 

4.CHANGES IN ACCOUNTING STANDARDS

 

Adoption of New Accounting Pronouncement

 

Adoption of IFRS 16 – Leases

 

The Company adopted IFRS 16 - Leases (“IFRS 16”) on January 1, 2019. IFRS 16 introduced a single on-balance sheet accounting model for lessees which replaced IAS 17 - Leases (“IAS 17”). The adoption of IFRS 16 did not result in any recognition of right-of-use assets and the related lease obligations as none of the leases met the criteria of capitalization.

 

7 

 

 

WASHOE WELLNESS, LLC

Notes to the Unaudited Condensed Interim Consolidated Financial Statements

For the Three Months Ended March 31, 2019 and 2018

 

 

 

4.CHANGES IN ACCOUNTING STANDARDS (continued)

 

Changes in Accounting Standards not yet Effective

 

Insurance Contracts

 

In May 2017, the International Accounting Standards Board (“IASB”) issued IFRS 17 - Insurance Contracts (“IFRS 17”), that replaces IFRS 4 - Insurance Contracts and establishes a new model for recognizing insurance policy obligations, premium revenue and claims-related expenses. IFRS 17 is effective for annual periods beginning on or after January 1, 2021; however, based on recent IASB meetings, an upcoming amendment to IFRS 17 and a deferral of the transition date by one year is anticipated. Early adoption is permitted. The Company is assessing the potential impact of this standard.

 

5.INVENTORY

 

The Company’s inventory includes the following:

 

   March 31, 2019   December 31, 2018 
  

Capitalized

cost

  

Fair value

adjustment

  

Carrying

value

   Capitalized
cost
   Fair value
adjustment
   Carrying
value
 
   $   $   $   $   $   $ 
Harvested cannabis                              
Work in process   329,856    24,073    353,929    51,922    -    51,922 
Finished goods   177,676    121,040    298,716    268,340    (29,676)   238,664 
    507,532    145,113    652,645    320,262    (29,676)   290,586 
Cannabis oils                              
Raw materials   83,669    10,909    94,578    130,409    31,713    162,122 
Work in process   575,355    49,031    624,386    1,384,047    102,105    1,486,152 
Finished goods   75,284    4,121    79,405    58,385    8,347    66,732 
    734,308    64,061    798,369    1,572,841    142,165    1,715,006 
Accessories and supplies   1,068,491    -    1,068,491    29,986    -    29,986 
    2,310,331    209,174    2,519,505    1,923,089    112,489    2,035,578 

 

Inventories expensed as cost of goods sold during the three months ended March 31, 2019 and 2018 are $70,852 and $283,753, respectively. These exclude the fair market value changes of biological assets.

 

Non-cash expense relating to change in fair value of inventory sold recognized during the three months ended March 31, 2019 and 2018 are $804,650 and $551,056, respectively.

 

8 

 

 

WASHOE WELLNESS, LLC

Notes to the Unaudited Condensed Interim Consolidated Financial Statements

For the Three Months Ended March 31, 2019 and 2018

 

 

 

6.BIOLOGICAL ASSETS

 

The continuity of biological assets was as follows:

 

  

March 31,

2019

   December 31,
2018
 
   $   $ 
Balance, at beginning   1,244,313    1,232,350 
Production costs   334,824    3,049,368 
Fair value change   1,294,067    968,197 
Transferred to inventory upon harvest   (1,227,204)   (4,005,602)
Balance, at end   1,646,000    1,244,313 

 

As of March 31, 2019, and December 31, 2018, the weighted average fair value less cost to complete and cost to sell was $3.14 and $3.39 per gram, respectively.

 

The fair value of biological assets is categorized within Level 3 on the fair value hierarchy. The inputs and assumptions used in determining the fair value of biological assets include:

 

(a) Selling price per gram; Level 3 input
(b) Attrition rate; Level 3 input
(c) Average yield per plant; Level 3 input
(d) Standard cost per gram to compete production Level 3 input
(e) Cumulative stage of completion in production process Level 3 input

 

Significant unobservable assumptions used in the valuation of biological assets, including the sensitivities on changes in these assumptions and their effect on the fair value of biological assets, are as follows:

 

Significant inputs or assumptions

  Range of inputs  Sensitivity  Effect on fair value 
         March 31, 2019   December 31, 2018 
         $   $ 
Selling price per gram*  $3.83 to $4.16  Increase or decrease of $1 per gram   617,716    366,308 
Average yield per plant**  302 to 370 grams  Increase or decrease by 5 grams per plant   37,191    21,299 

*Selling price per gram is based on average selling prices for the period.

 

The Company’s estimates are, by their nature, subject to change and differences from the anticipated yield will be reflected in the gain or loss on biological assets in future periods.

 

As of March 31, 2019, and December 31, 2018, the biological assets were on average 55% and 51% complete, respectively. During the three months ended March 31, 2019 and year ended December 31, 2018, the Company’s biological assets produced 390,345 grams and 1,181,220 grams of dried cannabis, respectively. 

 

9 

 

 

WASHOE WELLNESS, LLC

Notes to the Unaudited Condensed Interim Consolidated Financial Statements

For the Three Months Ended March 31, 2019 and 2018

 

 

 

7.INTANGIBLE ASSETS

 

Intangible assets having indefinite lives consisted of the following:

  

  

March 31,

2019

$

   December 31,
2018
$
 
Product rights   59,894    59,894 
Domain name   16,000    16,000
Trademarks   5,000    5,000 
   80,894    80,894 

 

8.PROPERTY, PLANT AND EQUIPMENT

 

 

   

Land

$

  

Buildings &

leasehold

improvements

$

  

Furniture &

fixtures

$

  

Office

equipment

$

  

Machinery &

equipment

$

  

Auto &

trucks

$

  

Total

$

 
Cost                             
As at December 31, 2018   896,444   7,447,311   62,684   104,211   1,141,003   34,322   9,685,975 
Additions   -   165,673   1,150   3,848   55,508   -   226,179 
As at March 31, 2019   896,444   7,612,984   63,834   108,059   1,196,511   34,322   9,912,154 
                              
Depreciation                             
As at December 31, 2018   -   285,893   8,134   46,436   491,609   7,707   839,779 
Depreciation   -   48,473   2,241   5,210   53,134   1,716   110,774 
As at March 31, 2019   -   334,366   10,375   51,646   544,743   9,423   950,553 
                              
Net book value                             
As at December 31, 2018   896,444   7,161,418   54,550   57,775   649,394   26,615   8,846,196 
As at March 31, 2019   896,444   7,278,618   53,459   56,413   651,768   24,899   8,961,601 

 

As at March 31, 2019 and December 31, 2018, buildings and leasehold improvements include borrowing costs of $204,660 capitalized in connection with loan used for the construction of buildings.

 

Depreciation expense for the three months ended March 31, 2019 and 2018 of $15,508 and $10,987, respectively, is included in cost of goods sold.

 

10 

 

 

WASHOE WELLNESS, LLC

Notes to the Unaudited Condensed Interim Consolidated Financial Statements

For the Three Months Ended March 31, 2019 and 2018

 

 

 

9.INVESTMENT IN ASSOCIATE

 

The Company has a 52% participating interest in one of its related corporations. Management has concluded that the current participating interest does not provide control to the Company. Accordingly, the current investment has been accounted for as investment in associate using the equity method as detailed below:

 

  

March 31,

2019

$

   December 31,
2018
$
 
Balance, at beginning   1,664,347    1,200,651 
Dividends   -    (1,178,719)
Share of income   275,170    1,642,415 
Balance, at end   1,939,517    1,664,347 

 

The following table presents a summary of statement of financial position and statement of operations of the investee:

 

  

March 31,

2019

$

   December 31,
2018
$
 
Current assets   2,757,005    2,295,880 
Non-current assets   5,271,075    2,859,107 
Current liabilities   412,128    689,284 
Revenue   3,627,129    11,748,244 
Income   570,498    3,150,573 

 

10.DEBTS PAYABLE

 

The details of debts payable were as follows:

 

  

March 31,

2019

$

   December 31,
2018
$
 
Revolving line of credit  promissory note (a)   6,561,819    6,561,749 
Loan payable to a third party (b) and (c)   2,600,487    2,620,257 
Total debts payable   9,162,306    9,182,006 
Less: Current portion   -    - 
Debts payable - Non-current portion   9,162,306    9,182,006 

 

Total debt payable includes interest payable as at March 31, 2019 and December 31, 2018 of $961,818 and $961,818 respectively.

 

11 

 

 

WASHOE WELLNESS, LLC

Notes to the Unaudited Condensed Interim Consolidated Financial Statements

For the Three Months Ended March 31, 2019 and 2018

 

 

 

10.DEBTS PAYABLE (continued)

 

As at March 31, 2019, the maturity profile of the principal amounts of debts outstanding are as follows:

 

Year ending December 31   $ 
2019 (9 months)    - 
2020    161,590 
2021    123,322 
2022    2,213,481 
Thereafter    6,663,913 
     9,162,306 

 

(a)Revolving line of credit promissory note

 

Debt under this arrangement represented financing obtained from a related corporation under an original Revolving Line of Credit Note dated November 5, 2014 of a maximum borrowing limit of $2,500,000, which was revised from time to time. Effective January 1, 2017, the Company entered into a Restated Revolving Line of Credit, which replaced the revolving line of credit note with a straight promissory note of $5,600,000 with maturity date extended indefinitely.

 

The promissory note carries an interest of 6% per annum to be paid monthly. If monthly payment of interest is not made timely, the interest for the period of the missed payment shall accrue at the default interest rate of 12%. The Company granted a 5% membership interest to the note holder due to the principal amount of note was not repaid by June 30, 2017 (First Repayment Date). Subsequently, a further 5% membership interest was granted to the note holder when the principal amount of the note was not repaid by December 31, 2017 (Second Repayment Date).

 

As at March 31, 2019, the entire principal amount remained outstanding. A 5% membership interest was granted to the note holder subsequent to the First Repayment Date, and a further 5% membership interest was granted to the note holder subsequent to the Second Repayment Date. In addition, as at March 31, 2019 and December 31, 2018, accrued interest, included in debts payable – non-current portion, the amount of $961,818 has remained unpaid. The principal amounts outstanding as at March 31, 2019 and December 31, 2018 were $5,600,000.

 

(b)Loan Payable to a Third Party

 

Effective August 24, 2017, the Company obtained a loan of $2,525,000 for a term of five years from a third party. This loan carries interest at 5% per annum with a monthly blended payment of $16,664, started from October 1, 2017 with a final payment of $2,123,899 on September 1, 2022. The loan is secured by a deed of trust with assignment of rents on the Company’s land and buildings in favour of the lender. The principal amounts outstanding as at March 31, 2019 and December 31, 2018, were $2,410,487 and $2,430,187, respectively.

 

(c)Loan Payable to a Third Party

 

On July 23, 2018, the Company borrowed $190,000 in connection with the purchase of land. The loan bears interest at a rate of 6% per annum and is due in 2023. Monthly installments of principal and interest in an amount of $3,673 beginning on July 23, 2020.The loan is secured by a deed of trust. Should the Company prepay this loan by July 23, 2019, the principal amount will be reduced by $25,000. The principal amounts outstanding as at March 31, 2019 and December 31, 2018, were $190,000.

 

 

12 

 

 

WASHOE WELLNESS, LLC

Notes to the Unaudited Condensed Interim Consolidated Financial Statements

For the Three Months Ended March 31, 2019 and 2018

 

 

 

11.MEMBERS’ EQUITY

 

In a series of transaction in Q2 2018, the Company adjusted its capital structure. On May 31, 2018, the Company (i) added additional members, granting them membership interests in exchange for services provided on a historical and ongoing basis, (ii) created a revised membership class structure to reflect these new members and (iii) allowed an existing member to make an additional capital contribution to the Company. On June 4, 2018, the aforementioned member increased the amount of the additional capital contribution of $1,100,000.

 

12.RELATED PARTY TRANSACTIONS AND BALANCES

 

Related parties are defined as management and members of the Company and/or members of their immediate family and/or other companies and/or entities in which a member or senior officer is a principal owner or senior executive.

 

Other than disclosed elsewhere in the unaudited condensed interim consolidated financial statements, related party transactions and balances are as follows:

 

Included in other income for the three months ended March 31, 2019 is management fee of $nil, received from a related corporation (March 31, 2018 - $60,000). The management fee started on January 1, 2018 and was paid monthly. The monthly fee varied based on an allocation of the Company’s expenses and was a month-to-month arrangement.

 

During the three months ended March 31, 2019, sales of $1,576,525 made to a related corporation is included in revenue and purchase of $259,772 from a related corporation is included in cost of goods sold.

 

Advance from a related corporation of $1,217,830 and $690,461 was outstanding as at March 31, 2019 and December 31, 2018, respectively. The advance from a related corporation is unsecured, interest free and is repayable on demand.

 

During the three months ended March 30, 2019 and 2018, management fees of $120,000 and $nil, respectively, were paid to a related party under consulting agreements. TRE and TRB each pay $20,000 per month ($40,000 per month in total) under these agreements, which were executed and were effective on June 1, 2018. These agreements have a three-year term and automatically renew every three years unless any party gives notice of their intent to terminate the agreement. Any party may also terminate the agreement at any time with 120 days notice.

 

The following outlines the compensation of the Company’s key management personnel:

 

  

March 31,

2019

$

   March 31,
2018
$
 
Salaries and benefits to key management personnel   6,000    43,754 

  

13 

 

 

WASHOE WELLNESS, LLC

Notes to the Unaudited Condensed Interim Consolidated Financial Statements

For the Three Months Ended March 31, 2019 and 2018

 

 

 

13.CAPITAL MANAGEMENT

 

The Company manages its capital structure and makes adjustments to it, based on the funds available to the Company, in order to support business development. The Members do not establish quantitative return on capital criteria for management, but rather relies on the expertise of the Company’s management to sustain future development of the business. The Company defines capital to include its Members’ equity. In order to carry out the planned business development and pay for administrative costs, the Company will spend its existing working capital and raise additional amounts as needed. There were no changes in the Company’s approach to capital management during the three months ended March 31, 2019. The Company is not subject to externally imposed capital requirements. As at March 31, 2019, and December 31, 2018, the capital of the Company was $5,080,995 and $3,950,565 respectively.

 

The Company raises capital, as necessary, to meet its needs and take advantage of perceived opportunities and, therefore, does not have a numeric target for its capital structure. Funds are primarily secured through cash injection by the Members of the Company. 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 ongoing basis and believes that this approach, given the relative size of the Company, is reasonable. The Company invests all capital that is surplus to its immediate operational needs in short-term, liquid and highly rated financial instruments.

 

The Company invest all capital that is surplus to its immediate operational needs in short-term, liquid and highly rated financial instruments.

 

14.GENERAL AND ADMINISTRATIVE

 

General and administrative expenses were comprised of:

  

  

March 31,

2019

$

   March 31,
2018
$
 
Salaries and benefits   78,133    161,623 
Professional and consulting fees   17,666    13,502 
Computer expenses   11,854    27,496 
Shipping expenses   11,434    13,600 
Office expenses   7,133    9,389 
Utilities   3,475    2,870 
Insurance   2,793    (9,128)
Taxes and licenses   1,506    1,185 
    -    4,712 
Others   26,498    31,830 
    160,492    257,079 

 

15.COMMITMENTS AND CONTINGENCIES

 

Contingencies

 

The Company’s operations are subject to a variety of local and state regulation. Failure to comply with one or more of those regulations could result in fines, restrictions on its operations, or losses of permits and/or licenses that could result in the Company ceasing operations.

 

14 

 

 

WASHOE WELLNESS, LLC

Notes to the Unaudited Condensed Interim Consolidated Financial Statements

For the Three Months Ended March 31, 2019 and 2018

  

 

 

15.COMMITMENTS AND CONTINGENCIES (continued)

 

Contingencies (continued)

 

While management of the Company believes that the Company is in compliance with applicable local and state regulation at March 31, 2019, cannabis regulations continue to evolve and are subject to differing interpretations. As a result, the Company may be subject to regulatory fines, penalties, or restrictions in the future.

 

Claims and litigation

 

From time to time, the Company may be involved in litigation relating to claims arising out of operations in the normal course of business. At March 31, 2019, there were no pending or threatened lawsuits that could reasonably be expected to have a material effect on the results of the Company’s operations. There are also no proceedings in which any of the Company’s directors, officers or affiliates is an adverse party or has a material interest adverse to the Company’s interest.

 

Management Fees

 

On June 1, 2018 the Company entered into consulting agreements with a related party. Under these agreements TRE and TRB each pay $20,000 per month ($40,000 per month in total) for administrative, support, and management services. These agreements have a three-year term and automatically renew every three years unless any party gives notice of their intent to terminate the agreement. Any party may also terminate the agreement at any time with 120 days notice.

  

Future minimum payments under this agreement, assuming no party terminates the agreements prior to the three-year initial term, are as follows:

 

Year ending December 31   $ 
2019 (9 months)    360,000 
2020    480,000 
2021    200,000 
     1,040,000 

 

16.FINANCIAL RISK FACTORS

 

The Company’s financial instruments mainly comprise of cash, accounts receivable, other receivables, trade payables, accrued liabilities, advance from a related corporation and debts payable.

 

(a) Fair Value

 

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The fair value measurement is based on the presumption that the transaction to sell the asset or transfer the liability takes place either in the principal market for the asset or liability or in the absence of a principal market, in the most advantageous market for the asset or liability. The principal or the most advantageous market must be accessible by the Company.

 

15 

 

 

WASHOE WELLNESS, LLC

Notes to the Unaudited Condensed Interim Consolidated Financial Statements

For the Three Months Ended March 31, 2019 and 2018

 

 

 

16.FINANCIAL RISK FACTORS (continued)

 

(a)  Fair Value (continued)

 

The fair value of an asset or a liability is measured using the assumptions that market participants would use when pricing the asset or liability, assuming that market participants act in their economic best interest. A fair value measurement of a non-financial asset takes into account a market participant’s ability to generate economic benefits from the asset’s highest and best use or by selling it to another market participant that would utilise the asset in its highest and best use.

 

The Company uses valuation techniques that are appropriate in the circumstances and for which sufficient data are unobservable inputs.

 

All assets and liabilities for which fair value is measured or disclosed in the unaudited condensed interim consolidated financial statements are categorised within the fair value hierarchy. This is described, as follows, based on the lowest level input that is significant to the fair value measurement as a whole:

 

• Level 1 inputs are quoted prices in active markets for identical assets or liabilities at the measurement date.

 

• Level 2 inputs are observable inputs other than quoted prices included within Level 1, such as quoted prices for similar assets or liabilities in active markets, quoted prices for identical assets or liabilities in markets that are not active, or other inputs that are observable directly or indirectly.

 

• Level 3 inputs are unobservable inputs for the asset or liability that reflect the reporting entity’s own assumptions and are not based on observable market data.

 

The classification of financial instruments at their carrying and fair values is as follows:

 

   Carrying values           Fair values 
Financial assets  FVTPL   FVTOCI   AC   Total   Total 
March 31, 2019  $   $   $   $   $ 
Cash   722,273    -    -    722,273    722,273 
Accounts receivable   -    -    133,075    133,075    133,075 
    722,273    -    133,075    855,348    855,348 
                          
December 31, 2018                         
Cash   345,987    -    -    345,987    345,987 
Accounts receivable   -    -    350,974    350,974    350,974 
Other receivables   -    -    11,532    11,532    11,532 
    345,987    -    362,506    708,493    708,493 

  

16 

 

 

WASHOE WELLNESS, LLC

Notes to the Unaudited Condensed Interim Consolidated Financial Statements

For the Three Months Ended March 31, 2019 and 2018

 

 

 

16.FINANCIAL RISK FACTORS (continued)

 

(a)  Fair Value (continued)

 

    Carrying values         Fair values 
Financial liabilities   FVTPL    AC    Total    Total 
March 31, 2019   $    $    $    $ 
Trade payables   -    577,458    577,458    577,458 
Accrued liabilities   -    162,209    162,209    162,209 
Advance from a related corporation   -    1,217,830    1,217,830    1,217,830 
Debts payable   -    9,162,306    9,162,306    9,162,306 
    -    11,119,803    11,119,803    11,119,803 
December 31, 2018   $    $    $    $ 
Trade payables   -    861,240    861,240    861,240 
Accrued liabilities   -    107,472    107,472    107,472 
Advance from a related corporation   -    690,461    690,461    690,461 
Debts payable   -    9,182,006    9,182,006    9,182,006 
    -    10,841,179    10,841,179    10,841,179 

 

The Company’s financial instruments as at March 31, 2019 and December 31, 2018 classified as “Level 1 - quoted prices in active markets” is cash. The Company has determined that there have been no transfers between levels in the hierarchy by re-assessing categorization at the reporting date.

 

The Company is exposed to credit risk, liquidity risk and interest rate risk. The Company’s management oversees the management of these risks. The Company’s management is supported by the Members that advises on financial risks and the appropriate financial risk governance framework for the Company. The Company’s financial risk activities are governed by appropriate policies and procedures and that financial risks are identified, measured and managed in accordance with group policies and group risk appetite.

 

(b) Credit Risk

 

Credit risk is the risk of unexpected loss if a customer or third party to a financial instrument fails to meet its contractual obligations. Financial instruments which potentially subject the Company to concentrations of credit risk consist of cash, accounts receivable and other receivables. For its accounts receivable, the Company ensures to deal with creditworthy customers. As at March 31, 2019 and 31 December 2018, the maximum amount exposed to credit risks was $855,348 and $708,493 respectively.

 

During the three months ended March 31, 2019, revenue from one customer is approximately 41% (March 31, 2018: 41%) of total revenue and none for purchases of raw materials from suppliers (March 31, 2018: none).

 

(c) Liquidity Risk

 

Liquidity risk is the risk that the Company is unable to generate or obtain sufficient cash in a cost-effective manner to fund its obligations as they come due. The Company’s approach to managing liquidity risk is to ensure that it will have sufficient liquidity to meet liabilities when due. The Company manages liquidity risk through obtaining financing from its members and third parties. As at March 31, 2019, all trade payables and accrued liabilities are due within a year, whereas, long term debts over a period of seven years.

 

17 

 

 

WASHOE WELLNESS, LLC

Notes to the Unaudited Condensed Interim Consolidated Financial Statements

For the Three Months Ended March 31, 2019 and 2018

 

 

 

17.SEGMENTED INFORMATION

 

Operating and geographical segments

 

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

 

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

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

• for which discrete financial information is available.

 

As at March 31, 2019 and December 31, 2018, the Company’s operations comprise a single reporting operation and geographical segment engaged in the growing, processing and distribution of cannabis.

 

18. SUBSEQUENT EVENTS

 

The Company’s management has evaluated subsequent events up to August 5, 2019, the date the unaudited condensed interim consolidated financial statements were issued, and determined the following event:

 

On May 24, 2019 – Ayr Strategies Inc. (“Ayr”), formerly Cannabis Strategies Acquisition Corp., closed its previously announced Qualifying Transaction. Through the qualifying transaction, Ayr has created a vertically integrated Multi-State Operator in the U.S. cannabis sector, with an initial anchor portfolio in the Eastern and Western United States.

 

18 

 

 

SCHEDULE “I” 

LIVFREE INTERIM FINANCIAL STATEMENTS

 

(see attached)

 

 

 

  

LIVFREE WELLNESS, LLC

 

UNAUDITED CONDENSED INTERIM CONSOLIDATED 

FINANCIAL STATEMENTS

  

FOR THE THREE MONTHS ENDED MARCH 31, 2019 AND 2018 

 

(EXPRESSED IN UNITED STATES DOLLARS) 

 

Notice to reader

 

The accompanying unaudited condensed interim consolidated financial statements of Livfree Wellness, LLC (the Company) have been prepared by and are the responsibility of management. The unaudited condensed interim consolidated financial statements have not been reviewed by the Company’s auditors

 

 

 

  

LIVFREE WELLNESS, LLC

 

Unaudited Condensed Interim Consolidated Financial Statements

 

March 31, 2019 and 2018  

 

Table of Contents  

 

  Page
   
Management’s Responsibility for Financial Reporting 1
   
Unaudited Condensed Interim Consolidated Financial Statements  
   
Unaudited Condensed Interim Consolidated Statements of Financial Position 2
   
Unaudited Condensed Interim Consolidated Statements of Operations 3
   
Unaudited Condensed Interim Consolidated Statements of Changes in Equity 4
   
Unaudited Condensed Interim Consolidated Statements of Cash Flows 5
   
Notes to the Unaudited Condensed Interim Consolidated Financial Statements 6-15

 

 

 

 

 

MANAGEMENT’S RESPONSIBILITY FOR

FINANCIAL REPORTING

 

Management’s Responsibility

 

To the Members of Livfree Wellness, LLC:

 

The accompanying unaudited condensed interim consolidated financial statements and other financial information in this report were prepared by management of Livfree Wellness, LLC (“the Company”), reviewed by the Audit Committee and approved by the Board of Directors.

 

Management is responsible for the unaudited condensed interim consolidated financial statements and believes that they fairly present the Company’s financial condition and results of operation in conformity with International Financial Reporting Standards. Management has included in the Company’s unaudited condensed interim consolidated financial statements amounts based on estimates and judgments that it believes are reasonable, under the circumstances.

 

To discharge its responsibilities for financial reporting and safeguarding of assets, management believes that it has established appropriate systems of internal accounting control which provide reasonable assurance that the financial records are reliable and form a proper basis for the timely and accurate preparation of unaudited condensed interim consolidated financial statements. Consistent with the concept of reasonable assurance, the Company recognizes that the relative cost of maintaining these controls should not exceed their expected benefits. Management further assures the quality of the financial records through careful selection and training of personnel and through the adoption and communication of financial and other relevant policies.

 

August 5, 2019

  

“Steve Menzies” (Signed)   “Timothy Harris” (Signed)
Managing Member   Chief Financial Officer

  

1 

 

 

LIVFREE WELLNESS, LLC

Unaudited Condensed Interim Consolidated Statements of Financial Position 

At March 31, 2019 and December 31, 2018

 

  

March 31,

2019

$

   December 31,
2018
$
 
ASSETS        
Current        
Cash   2,182,938    2,196,398 
Inventory [Note 5]   2,557,557    2,344,459 
Due from a related corporation [Note 11]   89,389    - 
Prepaid expenses and other assets   123,589    248,769 
    4,953,473    4,789,626 
Property, plant and equipment [Note 6]   1,673,445    1,625,978 
Investment in associate [Note 8]   3,331,885    3,354,501 
Right-of-use assets [Note 7]   2,230,783    - 
Total assets   12,189,586    9,770,105 
           
LIABILITIES          
Current          
Trade payables   849,613    1,150,649 
Accrued liabilities   1,426,638    984,367 
Distributions payables [Note 11]   -    280,000 
Lease obligations - current portion [Note 7]   231,379    - 
Debt payable - current portion [Note 9]   160,000    220,000 
    2,667,630    2,635,016 
Lease obligations - Non-current portion [Note 7]   1,985,735    - 
Total liabilities   4,653,365    2,635,016 
           
MEMBERS’ EQUITY [Note 10]   7,536,221    7,135,089 
           
Total liabilities and members’ equity   12,189,586    9,770,105 

 

Nature of operations [Note 1]

Contingencies [Note 14]

Subsequent events [Note 17]

 

Approved and authorized by the Board of Directors on August 5, 2019                

 

“Steve Menzies” (Signed)   “Timothy Harris” (Signed)
Managing Member   Chief Financial Officer

 

The accompanying notes are an integral part of these unaudited condensed interim consolidated financial statements.

 

2 

 

 

LIVFREE WELLNESS, LLC

Unaudited Condensed Interim Consolidated Statements of Operations 

For the Three Months Ended March 31, 2019 and 2018

 

  

Three months

ended

March 31, 2019

$

   Three months
ended
March 31, 2018
$
 
           
Revenues, net of discounts   11,935,852    7,238,675 
           
Cost of goods sold   (7,651,562)   (4,637,085)
           
Gross profit   4,284,290    2,601,590 
           
Expenses          
General and administrative [Note 13]   961,988    726,196 
           
Sales and marketing   220,044    59,792 
           
Depreciation [Note 6 & 7]   137,156    45,048 
           
Total expenses   1,319,188    831,036 
           
Net income from operations   2,965,102    1,770,554 
           
Other expenses (income)          
Net finance costs   41,354    - 
Share of loss (income) on investment in associate [Note 8]   22,616    (68,725)
           
Total other expenses (income)   63,970    (68,725)
           
Net income   2,901,132    1,839,279 

 

The accompanying notes are an integral part of these unaudited condensed interim consolidated financial statements.

 

3 

 

 

LIVFREE WELLNESS, LLC

Unaudited Condensed Interim Consolidated Statements of Changes in Equity

For the Three Months Ended March 31, 2019 and 2018

 

  

Members’

Equity

$

 
Balance as at December 31, 2017   2,879,700 
      
Distributions   - 
      
Net income for the period   1,839,279 
      
Balance as at March 31, 2018   4,718,979 
      
Balance as at December 31, 2018   7,135,089 
      
Distributions   (2,500,000)
      
Net income for the period   2,901,132 
      
Balance as at March 31, 2019   7,536,221 

 

The accompanying notes are in integral part of these unaudited condensed interim consolidated financial statements.

 

4 

 

 

LIVFREE WELLNESS, LLC

Unaudited Condensed Interim Statements of Cash Flows

For the Three Months Ended March 31, 2019 and 2018

 

  

Three months

ended

March 31, 2019

$

   Three months
ended
March 31, 2018
$
 
Operating activities          
Net income   2,901,132    1,839,279 
           
Adjustments for items not affecting cash:          
Depreciation of property, plant and equipment and right-of-assets   137,156    45,048 
Share of loss in investment in associate   22,616    (68,725)
Changes in working capital items:          
Inventory   (213,098)   (85,276)
Due from a related corporation   (89,389)   (430,392)
Prepaid expenses and other assets   67,820    (32,417)
Trade payables   (301,036)   1,097,844 
Accrued liabilities   442,271    207,413 
Distributions payables   (280,000)   (1,980,000)
Cash provided by operating activities   2,687,472    592,774 
           
Investing activities          
Change in investment in associate, net   -    (400,000)
Net purchase of property, plant and equipment   (100,905)   (102,941)
Cash used in investing activities   (100,905)   (502,941)
           
Financing activities          
Repayment of debts   (60,000)   (60,000)
Distributions   (2,500,000)   - 
Repayment of lease obligations   (40,027)   - 
Cash used in financing activities   (2,600,027)   (60,000)
           
Net (decrease) increase in cash   (13,460)   29,833 
Cash, beginning of period   2,196,398    898,658 
Cash, end of period   2,182,938    928,491 

 

The accompanying notes are an integral part of these unaudited condensed interim consolidated financial statements.

 

5 

 

 

LIVFREE WELLNESS, LLC

Notes to the Unaudited Condensed Interim Consolidated Financial Statements

For the Three Months Ended March 31, 2019 and 2018

 

 

1.NATURE OF OPERATIONS

 

Livfree Wellness, LLC (“LivFree” or the “Company”) [formerly LivFree Wellness Reno LLC (“Reno”)] was incorporated as a Limited Liability Company on July 16, 2014 in the State of Nevada, United States of America (“USA”). The Company’s head office is located at 5347 S. Decatur Blvd Las Vegas NV 89118.

 

The Company’s principal activities are buying and selling of cannabis as regulated under the laws applicable in the USA.

 

2.BASIS OF PRESENTATION

 

2.1 Statement of compliance

 

These unaudited condensed interim consolidated financial statements for the three months ended March 31, 2019 (and comparative results for the three months ended March 31, 2018) have been prepared in accordance with International Accounting Standard (“IAS”) 34 – Interim Financial Reporting and therefore do not contain all disclosures required by International Financial Reporting Standards (“IFRS”). These unaudited condensed interim consolidated financial statements should be read in conjunction with the Company’s 2018 consolidated financial statements and notes and have been prepared using the same accounting policies with the exception of significant accounting policy adopted as a result of initial application of IFRS 16 - Leases (“IFRS 16”) effective from January 1, 2019.

 

These unaudited condensed interim consolidated financial statements were approved and authorized for issue by the Board of Directors of the Company on August 5, 2019.

 

2.2 Basis of presentation

 

These unaudited condensed interim consolidated financial statements have been prepared on the historical cost basis except for certain financial instruments, which are measured at fair value, as explained in the accounting policies set out in Note 3. The unaudited condensed interim consolidated financial statements are presented in US dollars which is the presentation and functional currency of the Company and its subsidiaries.

 

3.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

3.1 Basis of consolidation

 

The unaudited condensed interim consolidated financial statements include the financial statements of the Company and its wholly owned subsidiaries Billco Holdings, LLC (“Billco”) and BP Solutions LLC (“BP”), Limited Liabilities Companies, incorporated in the state of Nevada. The results of subsidiaries acquired or disposed of during the period is included in the unaudited condensed interim consolidated financial statements from the effective date of acquisition or up to the effective date of disposal, as appropriate. All inter-company transactions, balances, income and expenses are eliminated on consolidation. The unaudited condensed interim financial statements of the subsidiaries are prepared for the same reporting period as the Company, using consistent accounting policies.

  

6 

 

 

LIVFREE WELLNESS, LLC

Notes to the Unaudited Condensed Interim Consolidated Financial Statements

For the Three Months Ended March 31, 2019 and 2018

 

 

3.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

 

3.2 Leases

 

The Company assesses whether a contract is or contains a lease, at inception of a contract. Leases are recognized as a right-of-use assets and corresponding liability at the commencement date. Each lease payment included in the lease liability is apportioned between the repayment of the liability and a finance cost. The finance cost is recognized in net finance costs in the unaudited condensed interim consolidated statement of operations over the lease period so as to produce a constant periodic rate of interest on the remaining balance of the liability for each period. Lease liabilities include the net present value of fixed payments (including in-substance fixed payments), variable lease payments that are based on an index or a rate or subject to a fair market value renewal, amounts expected to be payable by the lessee under residual value guarantees, the exercise price of a purchase option if the lessee is reasonably certain to exercise that option, and payments of penalties for terminating the lease, if the lease term reflects the lessee exercising that option. The Company allocates the consideration in the contract to each lease component on the basis of the relative standalone price of the lease component and the aggregate stand-alone price of the non-lease components. The lease liability is net of lease incentives receivable. The lease payments are discounted using the interest rate implicit in the lease or, if that rate cannot be determined, the lessee’s incremental borrowing rate. The period over which the lease payments are discounted is the reasonably certain lease term, including renewal options that the Company is reasonably certain to exercise. Renewal options are included in a number of leases across the Company.

 

Payments associated with short-term leases and leases of low-value assets are recognized as an expense on a straight-line basis in selling, general and administrative expenses in the unaudited condensed interim consolidated statement of operations. Short-term leases are leases with a lease term of 12 months or less. Variable lease payments that do not depend on an index or a rate or subject to a fair market value renewal are expensed as incurred and recognized in Selling, general and administrative expenses in the unaudited condensed interim consolidated statement of operations.

 

Right-of-use assets are measured at cost which is calculated as the amount of the initial measurement of lease liability plus any lease payments made at or before the commencement date, any initial direct costs and related restoration costs. The right-of-use asset is depreciated over the lease term on a straight-line basis. The right-of-use assets are depreciated on a straight-line basis over the shorter of the lease term and the useful life of the underlying asset. If a lease transfers ownership of the underlying asset or the cost of the right-of-use asset reflects that the Company expects to exercise a purchase option, the related right-of-use asset is depreciated over the useful life of the underlying asset. The depreciation starts at the commencement date of the lease.

 

4.CHANGES IN ACCOUNTING STANDARDS

 

Adoption of New Accounting Pronouncement

 

Adoption of IFRS 16 – Leases

 

The Company adopted IFRS 16 - Leases (“IFRS 16”) on January 1, 2019. IFRS 16 introduced a single on-balance sheet accounting model for lessees which replaced IAS 17 - Leases (“IAS 17”). Leasing activity for the Company typically involves the leases of land or buildings to operate cannabis dispensaries, processing or cultivation facilities or corporate offices.

 

7 

 

 

LIVFREE WELLNESS, LLC

Notes to the Unaudited Condensed Interim Consolidated Financial Statements

For the Three Months Ended March 31, 2019 and 2018

 

 

4.CHANGES IN ACCOUNTING STANDARDS (continued)

 

Adoption of New Accounting Pronouncement (continued)

 

Adoption of IFRS 16 – Leases (continued)

 

The Company previously classified leases as either operating or finance leases from the perspective of the lessee. Under IFRS 16, the Company recognizes right-of-use assets and lease liabilities for most leases. The Company adopted IFRS 16 using the modified retrospective cumulative catch-up approach beginning on January 1, 2019. Under this approach, the Company did not restate its comparative amounts and recognized a right-of-use asset equal to the present value of the future lease payments. The Company elected to apply the practical expedient to only transition contracts which were previously identified as leases under IAS 17, and also elected to not recognize right-of-use assets and lease liabilities for leases of low-value assets.

 

Changes in Accounting Standards not yet Effective

 

Insurance Contracts

 

In May 2017, the International Accounting Standards Board (“IASB”) issued IFRS 17 - Insurance Contracts (“IFRS 17”), that replaces IFRS 4 - Insurance Contracts and establishes a new model for recognizing insurance policy obligations, premium revenue and claims-related expenses. IFRS 17 is effective for annual periods beginning on or after January 1, 2021; however, based on recent IASB meetings, an upcoming amendment to IFRS 17 and a deferral of the transition date by one year is anticipated. Early adoption is permitted. The Company is assessing the potential impact of this standard.

 

5.INVENTORY

 

Inventory comprised of finished goods.

 

Inventories expensed as cost of goods sold for the three months ended March 31, 2019 and 2018 are $6,402,651 and $3,897,134, respectively.

 

8 

 

 

LIVFREE WELLNESS, LLC

Notes to the Unaudited Condensed Interim Consolidated Financial Statements

For the Three Months Ended March 31, 2019 and 2018

 

 

6.PROPERTY, PLANT AND EQUIPMENT

 

    Leasehold   Furniture and   Office &   Total 
    improvements   fixtures   Equipment     
    $   $   $   $ 
                  
Cost                 
As at December 31, 2018    1,836,213    56,605    123,934    2,016,752 
Additions    85,090    -    20,105    105,195 
Disposals    (4,290)   -    -    (4,290)
As at March 31, 2019    1,917,013    56,605    144,039    2,117,657 
                      
Depreciation                     
As at December 31, 2018    352,815    10,763    27,196    390,774 
Depreciation    44,016    2,144    7,278    53,438 
As at March 31, 2019    396,831    12,907    34,474    444,212 
                      
Net book value                     
As at December 31, 2018    1,483,398    45,842    96,738    1,625,978 
As at March 31, 2019    1,520,182    43,698    109,565    1,673,445 

 

Depreciation expense for the three months ended March 31, 2019 and 2018 of $53,438 and $45,048, is included within operating expenses.

 

7. RIGHT-OF-USE ASSETS AND LEASE OBLIGATIONS

  

  

Right-of-use

assets

  

Lease

obligations

 
   $   $ 
Net book value at January 1, 2019   2,314,501    2,257,141 
Depreciation and repayment   83,718    40,027 
Net book value at March 31, 2019   2,230,783    2,217,114 

 

Right-of-use assets and lease obligations of $2,314,501 were recorded as at January 1, 2019, with no net impact on retained earnings. When measuring lease liabilities, the Company discounted lease payments using its incremental borrowing rate at January 1, 2019. The weighted-average rates applied were in the range of 10.29% to 10.90%.

 

As at March 31, 2019, the current and non-current portion of the lease obligations were $231,379 and $1,985,735, respectively.

 

9 

 

 

LIVFREE WELLNESS, LLC

Notes to the Unaudited Condensed Interim Consolidated Financial Statements

For the Three Months Ended March 31, 2019 and 2018

 

 

8.INVESTMENT IN ASSOCIATE

 

Pursuant to Membership Interest Purchase and Sale Agreement dated July 1, 2017, the Company acquired 50% membership interest in JDSS Investments LLC. Per the purchase agreement section 2.0. total purchase price shall be $2.4 million. Management has concluded that the current investment is to be accounted for as an investment in associate using the equity method as detailed below:

 

  

March 31,

2019

   December 31,
2018
 
 $   $ 
Balance, at beginning   3,354,501    1,586,966 
Additions   -    1,492,636 
Share of (loss) income   (22,616)   274,899 
Balance, at end   3,331,885    3,354,501 

 

The following table presents a summary of statement of financial position and statement of operations of the investee:

 

  

March 31,

2019

   December 31,
2018
 
   $   $ 
Current assets   2,569,874    2,490,315 
Non-current assets   2,771,490    2,839,647 
Current liabilities   368,361    314,421 
Revenue   1,230,192    4,736,053 
(Loss) income   (42,539)   595,147 

 

9.DEBT PAYABLE

 

Effective December 12, 2014, the Company obtained a loan of $460,000 from a third party. The loan was unsecured, carried no interest and there was no repayment term.

 

On January 16, 2018, the Company entered into Settlement Agreement (the “Agreement”) with the debt holder and one of its existing members for the repayment of debt in accordance with an agreed repayment schedule. The Company agreed to pay $20,000 within 30 days from the execution of this Agreement and the remaining balance to be paid in 22 equal monthly payments of $20,000. The current and non-current portion of the debt has been classified in accordance with the agreed repayment schedule.

 

The details of debt payable were as follows:

 

  

March 31,

2019

   December 31,
2018
 
   $   $ 
Loan payable to a third party   160,000    220,000 
Less: Current portion   (160,000)   (220,000)
Debt payable - Non-current portion   -    - 

 

10 

 

 

LIVFREE WELLNESS, LLC

Notes to the Unaudited Condensed Interim Consolidated Financial Statements

For the Three Months Ended March 31, 2019 and 2018

 

 

10.MEMBERS’ EQUITY

 

During the three months ended March 31, 2019 and March 31, 2018, the members of the Company contributed in cash amounting to $nil.

 

During the three months ended March 31, 2019 and March 31, 2018, the distributions to the members of the Company in cash amounted to $2,500,000 and $nil, respectively.

 

As at March 31, 2019 and December 31, 2018, distributions payables balance was $nil and $280,000.

 

11.RELATED PARTY TRANSACTIONS AND BALANCES

 

Related parties are defined as management and members of the Company and/or members of their immediate family and/or other companies and/or entities in which a member or senior officer is a principal owner or senior executive.

 

Other than disclosed elsewhere in the unaudited condensed interim consolidated financial statements, related party transactions and balances are as follows:

 

Total rent expense for three months ended March 31, 2019 and 2018, include rent charged from a related corporation amounting to $17,458 and $nil, respectively.

 

During the three months ended March 31, 2019 and 2018, purchases of harvested cannabis totaling $118,188 and $56,412, respectively, from a related party is included in cost of goods sold.

 

Due from a related corporation of $80,389 and $nil were outstanding as at March 31, 2019 and December 31, 2018, respectively. These advances are unsecured, interest free and repayable on demand.

 

No compensation was paid to key management for the three months ended March 31, 2019 and 2018.

 

12.CAPITAL MANAGEMENT

 

The Company manages its capital structure and makes adjustments to it, based on the funds available to the Company, in order to support business development. The Members do not establish quantitative return on capital criteria for management, but rather relies on the expertise of the Company’s management to sustain future development of the business. The Company defines capital to include its Members’ equity. In order to carry out the planned business development and pay for administrative costs, the Company will spend its existing working capital and raise additional amounts as needed. There were no changes in the Company’s approach to capital management during the three months ended March 31, 2019. The Company is not subject to externally imposed capital requirements. As at March 31, 2019 and December 31, 2018, the capital of the Company was $7,536,221 and $7,135,089 respectively.

 

The Company raises capital, as necessary, to meet its needs and take advantage of perceived opportunities and, therefore, does not have a numeric target for its capital structure. Funds are primarily secured through cash injection by the Members of the Company. 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 ongoing basis and believes that this approach, given the relative size of the Company, is reasonable.

 

The Company invests all capital that is surplus to its immediate operational needs in short-term, liquid and highly rated financial instruments.

  

11 

 

 

LIVFREE WELLNESS, LLC

Notes to the Unaudited Condensed Interim Consolidated Financial Statements

For the Three Months Ended March 31, 2019 and 2018

 

 

13.GENERAL AND ADMINISTRATIVE

 

General and administrative expenses were comprised of:

  

  

Three months

ended March

31, 2019

   Three months
ended March
31, 2018
 
   $   $ 
Salaries and benefits   683,943    468,197 
Insurance   80,188    38,907 
Office expenses   64,988    31,385 
Utilities   19,518    18,288 
Travel   17,906    15,817 
Taxes and licenses   8,885    2,475 
Professional and consulting fees   4,551    61,733 
Rent   3,000    75,000 
Others   79,009    14,394 
    961,988    726,196 

 

14.CONTINGENCIES

 

Contingencies

 

The Company’s operations are subject to a variety of local and state regulations. Failure to comply with one or more of those regulations could result in fines, restrictions on its operations, or losses of permits and/or licenses that could result in the Company ceasing operations. While management of the Company believes that the Company is in compliance with applicable local and state regulation at March 31, 2019, cannabis regulations continue to evolve and are subject to differing interpretations. As a result, the Company may be subject to regulatory fines, penalties, or restrictions in the future.

 

Claims and litigation

 

From time to time, the Company may be involved in litigation relating to claims arising out of operations in the normal course of business. At March 31, 2019, there were no pending or threatened lawsuits that could reasonably be expected to have a material effect on the results of the Company’s operations. There are also no proceedings in which any of the Company’s directors, officers or affiliates is an adverse party or has a material interest adverse to the Company’s interest.

 

An affiliate of the Company engaged a contractor to determine if a site met the requirements for a new grow facility. Based on the survey done by the contractor, the Company proceeded with the purchase and incurred a loss when the site was subsequently determined not to be suitable. The Company filed a claim with the contractor’s insurer to recover its losses and commenced litigation when the insurer refused to pay any portion of the claim. In 2018, the Company’s legal counsel indicated they were not able to collect the $250,000 paid by the Company. As a result, the Company recognized $250,000 of bad debt expense.

 

12 

 

 

LIVFREE WELLNESS, LLC

Notes to the Unaudited Condensed Interim Consolidated Financial Statements

For the Three Months Ended March 31, 2019 and 2018

 

 

15.FINANCIAL RISK FACTORS

 

The Company’s financial instruments mainly comprise of cash, due from a related corporation, trade payables, accrued liabilities, distributions payable, debts payable and lease obligations.

 

(a) Fair Value

 

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The fair value measurement is based on the presumption that the transaction to sell the asset or transfer the liability takes place either in the principal market for the asset or liability or in the absence of a principal market, in the most advantageous market for the asset or liability. The principal or the most advantageous market must be accessible by the Company.

 

The fair value of an asset or a liability is measured using the assumptions that market participants would use when pricing the asset or liability, assuming that market participants act in their economic best interest. A fair value measurement of a non-financial asset takes into account a market participant’s ability to generate economic benefits from the asset’s highest and best use or by selling it to another market participant that would utilise the asset in its highest and best use.

 

The Company uses valuation techniques that are appropriate in the circumstances and for which sufficient data are unobservable inputs.

 

All assets and liabilities for which fair value is measured or disclosed in the unaudited condensed interim consolidated financial statements are categorised within the fair value hierarchy. This is described, as follows, based on the lowest level input that is significant to the fair value measurement as a whole:

 

• Level 1 inputs are quoted prices in active markets for identical assets or liabilities at the measurement date.

 

• Level 2 inputs are observable inputs other than quoted prices included within Level 1, such as quoted prices for similar assets or liabilities in active markets, quoted prices for identical assets or liabilities in markets that are not active, or other inputs that are observable directly or indirectly.

 

• Level 3 inputs are unobservable inputs for the asset or liability that reflect the reporting entity’s own assumptions and are not based on observable market data.

 

The classification of financial instruments at their carrying and fair values is as follows:

 

    Carrying values         Fair values 
Financial assets   FVTPL    FVTOCI    AC    Total    Total 
March 31, 2019  $   $   $   $   $ 
Cash   2,182,938    -    -    2,182,938    2,182,938 
Due from a related corporation   -    -    89,389    89,389    89,389 
    2,182,938    -    89,389    2,272,327    2,272,327 
December 31, 2018                         
Cash   2,196,398    -    -    2,196,398    2,196,398 
    2,196,398    -    -    2,196,398    2,196,398 

  

13 

 

 

LIVFREE WELLNESS, LLC

Notes to the Unaudited Condensed Interim Consolidated Financial Statements

For the Three Months Ended March 31, 2019 and 2018

 

 

15.FINANCIAL RISK FACTORS (continued)

 

(a)  Fair Value (continued)

 

    Carrying values         Fair values 
Financial liabilities   FVTPL    AC    Total    Total 
March 31, 2019  $   $   $   $ 
Trade payables   -    849,613    849,613    849,613 
Accrued liabilities   -    1,426,638    1,426,638    1,426,638 
Debt payable   -    160,000    160,000    160,000 
Lease obligations   -    2,217,114    2,217,114    2,217,114 
    -    4,653,365    4,653,365    4,653,365 
December 31, 2018                    
Trade payables   -    1,150,649    1,150,649    1,150,649 
Accrued liabilities   -    984,367    984,367    984,367 
Distributions payable   -    280,000    280,000    280,000 
Debt payable   -    220,000    220,000    220,000 
    -    2,635,016    2,635,016    2,635,016 

 

The Company’s financial instruments as at March 31, 2019 and December 31, 2018, classified as “Level 1 - quoted prices in active markets” is cash. The Company has determined that there have been no transfers between levels in the hierarchy by re-assessing categorization at the reporting date.

 

The Company is exposed to credit risk and liquidity risk. The Company’s management oversees the management of these risks. The Company’s management is supported by the Members that advises on financial risks and the appropriate financial risk governance framework for the Company. The Company’s financial risk activities are governed by appropriate policies and procedures and that financial risks are identified, measured and managed in accordance with Company’s policies and Company’s risk appetite.

 

(b) Credit Risk

 

Credit risk is the risk of unexpected loss if a customer or third party to a financial instrument fails to meet its contractual obligations. Financial instruments which potentially subject the Company to concentrations of credit risk consist of cash and due from a related corporation. As at March 31, 2019 and December 31, 2018, the maximum amount exposed to credit risks was $2,272,327 and $2,196,398, respectively.

 

(c) Liquidity Risk

 

Liquidity risk is the risk that the Company is unable to generate or obtain sufficient cash in a cost-effective manner to fund its obligations as they come due. The Company’s approach to managing liquidity risk is to ensure that it will have sufficient liquidity to meet liabilities when due. The Company manages liquidity risk through obtaining financing from its members and third parties. As at March 31, 2019 and December 31, 2018, all trade payables, accrued liabilities, distributions payable and debt payable are due within a year.

 

14 

 

 

LIVFREE WELLNESS, LLC

Notes to the Unaudited Condensed Interim Consolidated Financial Statements

For the Three Months Ended March 31, 2019 and 2018

 

 

16.SEGMENTED INFORMATION

 

Operating and geographical segments

 

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

 

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

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

• for which discrete financial information is available.

 

As at March 31, 2019 and December 31, 2018, the Company’s operations comprise a single reporting operating and geographical segment engaged in buying and selling of cannabis.

 

17. SUBSEQUENT EVENTS

 

The Company’s management has evaluated subsequent events up to August 5, 2019, the date the unaudited condensed interim consolidated financial statements were issued, and determined the following event:

 

On May 24, 2019 – Ayr Strategies Inc. (“Ayr”), formerly Cannabis Strategies Acquisition Corp., closed its previously announced Qualifying Transaction. Through the qualifying transaction, Ayr has created a vertically integrated Multi-State Operator in the U.S. cannabis sector, with an initial anchor portfolio in the Eastern and Western United States.

 

15 

 

 

SCHEDULE “J” 

CANNAPUNCH INTERIM FINANCIAL STATEMENTS

 

(see attached)

 

 

 

 

CANNAPUNCH OF NEVADA, LLC

 

UNAUDITED CONDENSED INTERIM FINANCIAL STATEMENTS

 

FOR THE THREE MONTHS ENDED MARCH 31, 2019 AND 2018

 

(EXPRESSED IN UNITED STATES DOLLARS)

 

Notice to reader

 

The accompanying unaudited condensed interim financial statements of CannaPunch of Nevada LLC. (the Company) have been prepared by and are the responsibility of management. The unaudited condensed interim financial statements have not been reviewed by the Company's auditors.

 

 

 

 

CANNAPUNCH OF NEVADA, LLC

UNAUDITED CONDENSED INTERIM FINANCIAL STATEMENTS

 

March 31, 2019 and 2018

 

Table of Contents
 
  Page
Management's Responsibility for Financial Reporting 1
   
Unaudited Condensed Interim Financial Statements  
   
Unaudited Condensed Interim Statement of Financial Position 2
   
Unaudited Condensed Interim Statement of Operations 3
   
Unaudited Condensed Interim Statement of Changes in Members’ Equity 4
   
Unaudited Condensed Interim Statement of Cash Flows 5
   
Notes to the Unaudited Condensed Interim Financial Statements 6-13

 

 

 

 

MANAGEMENT'S RESPONSIBILITY FOR

FINANCIAL REPORTING

 

Management's Responsibility

 

To the Members of CannaPunch of Nevada, LLC:

 

The accompanying unaudited condensed interim financial statements and other financial information in this report were prepared by management of CannaPunch of Nevada LLC. ("the Company"), reviewed by the Audit Committee and approved by the Board of Directors.

 

Management is responsible for the unaudited condensed interim financial statements and believes that they fairly present the Company's financial condition and results of operation in conformity with International Financial Reporting Standards. Management has included in the Company's unaudited condensed interim financial statements amounts based on estimates and judgments that it believes are reasonable, under the circumstances.

 

To discharge its responsibilities for financial reporting and safeguarding of assets, management believes that it has established appropriate systems of internal accounting control which provide reasonable assurance that the financial records are reliable and form a proper basis for the timely and accurate preparation of the unaudited condensed interim financial statements. Consistent with the concept of reasonable assurance, the Company recognizes that the relative cost of maintaining these controls should not exceed their expected benefits. Management further assures the quality of the financial records through careful selection and training of personnel and through the adoption and communication of financial and other relevant policies.

 

August 5, 2019

 

“Mark Smith” (Signed)  
Chief Executive Officer  

 

1 

 

 

CANNAPUNCH OF NEVADA, LLC
Unaudited Condensed Interim Statement of Financial Position
At March 31, 2019 and December 31, 2018

 

 

   March 31,   December 31, 
   2019   2018 
   $   $ 
ASSETS        
Current        
Cash   193,329    122,367 
Inventory [Note 5]   369,761    337,129 
Accounts receivable, trade, no allowance   533,871    374,649 
    1,096,961    834,145 
Property, plant and equipment [Note 6]   460,823    22,154 
Right-of-use assets [Note 7]   593,978    - 
Total assets   2,151,762    856,299 
           
LIABILITIES          
Current          
Trade payables   247,445    174,902 
Accrued liabilities   255,968    58,956 
Advance from a member   1,402    1,402 
Lease obligations - current portion [Note 7]   116,879    - 
Total liabilities   621,694    235,260 
Advance from related party   285,000    - 
Lease obligations - non-current portion [Note 7]   486,035    - 
Total liabilities   1,392,729    235,260 
           
MEMBERS' EQUITY [Note 8]   759,033    621,039 
           
Total liabilities and members' equity   2,151,762    856,299 

 

Nature of operations [Note 1] 

Contingencies [Note 13] 

Subsequent events [Note 16] 

 

Approved and authorized on behalf of the Board of Directors on August 5, 2019

 

“Mark Smith” (Signed)   
Chief Executive Officer  

 

The accompanying notes are an integral part of these unaudited condensed interim financial statements.

  

2 

 

 

CANNAPUNCH OF NEVADA, LLC

Unaudited Condensed Interim Statement of Operations

For the Three Months Ended March 31, 2019 and 2018

 

 

   Three months   Three months 
   ended   ended 
   March 31, 2019   March 31, 2018 
    $    $ 
Revenues, net of discounts   1,598,666    1,540,443 
           
Cost of goods sold   (805,234)   (816,833)
           
Gross profit   793,432    723,610 
           
Expenses          
General and administrative [Note 11]   211,050    189,740 
           
Sales and marketing   22,932    40,517 
           
Licensor profit share [Note 12]   224,730    339,542 
           
Total expenses   458,712    569,799 
           
Net income from operations   334,720    153,811 
           
Other expense          
Net finance costs   15,969    - 
           
Net income   318,751    153,811 

 

The accompanying notes are an integral part of these unaudited condensed interim financial statements.

 

3 

 

 

CANNAPUNCH OF NEVADA, LLC
Statement of Changes in Members’ Equity
For the Three Months Ended March 31, 2019 and 2018

 

 

 

   Members’ 
   Equity 
   $ 
     
Balance as at December 31, 2017   289,884 
      
Distributions   (178,044)
      
Net income for the period   153,811 
      
Balance as at March 31, 2018   265,651 
      
Balance as at December 31, 2018   621,039 
      
Contributions [Note 8]   47,180 
      
Distributions   (227,937)
      
Net income for the period   318,751 
      
Balance as at March 31, 2019   759,033 

 

The accompanying notes are an integral part of these unaudited condensed interim financial statements.

  

4 

 

 

CANNAPUNCH OF NEVADA, LLC

Statement of Cash Flows

For the Three Months Ended March 31, 2019 and 2018

 

 

 

   Three months   Three months 
   ended March   ended March 
   31, 2019   31, 2018 
   $   $ 
Operating activities          
Net income   318,751    153,811 
           
Adjustments for items not affecting cash:          
Depreciation on property, plant and equipment and right-of-use assets   47,821    1,117 
Changes in working capital items:          
Inventory   (32,632)   (8,594)
Accounts receivable, trade, no allowance   (159,222)   (106,148)
Prepaid expenses   -    22,645 
Trade payables   72,543    127,258 
Accrued liabilities   197,012    (70,721)
Advance from a member   -    1,402 
Cash provided by operating activities   444,273    120,770 
           
Investing activities          
Purchase of machinery and equipment   (450,851)   - 
Cash used in investing activities   (450,851)   - 
           
Financing activities          
Advance from a related party - Non current   285,000    - 
Repayment of lease obligations   (26,703)   - 
Contributions   47,180    - 
Distributions   (227,937)   (178,044)
Cash provided by (used in) financing activities   77,540    (178,044)
           
Net increase (decrease) in cash   70,962    (57,274)
Cash, beginning of the period   122,367    146,817 
Cash, end of period   193,329    89,543 

 

The accompanying notes are an integral part of these unaudited condensed interim financial statements.

 

5 

 

 

CANNAPUNCH OF NEVADA, LLC
Notes to the Unaudited Condensed Interim Financial Statements
For the Three Months Ended March 31, 2019 and 2018

 

 

1.NATURE OF OPERATIONS

 

CannaPunch of Nevada LLC (“CannaPunch” or the “Company”) was incorporated as a Limited Liability Company on March 30, 2017 in the State of Nevada, United States of America (“USA”). The Company’s head office is located at 5425 Polaris Ave, Las Vegas, NV 89118.

 

The Company’s principal activities are the manufacture and distribution of cannabis infused products as regulated under the laws applicable in the USA.

 

2.BASIS OF PRESENTATION

 

2.1 Statement of compliance

 

These unaudited condensed interim financial statements for the three months ended March 31, 2019 (and comparative results for the three months ended March 31, 2018) have been prepared in accordance with International Accounting Standard (“IAS”) 34 – Interim Financial Reporting and therefore do not contain all disclosures required by International Financial Reporting Standards (“IFRS”). These unaudited condensed interim financial statements should be read in conjunction with the Company’s 2018 financial statements and notes and have been prepared using the same accounting policies with the exception of significant accounting policy adopted as a result of initial application of IFRS 16 - Leases (“IFRS 16”) effective from January 1, 2019.

 

These unaudited condensed interim financial statements were approved and authorized for issue by the Board of Directors of the Company on August 5, 2019.

 

2.2Basis of presentation

 

These unaudited condensed interim financial statements have been prepared on the historical cost basis except for certain financial instruments, which are measured at fair value. The unaudited condensed interim financial statements are presented in US dollars which is the presentation and functional currency of the Company.

 

3.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

3.1 Leases

 

The Company assesses whether a contract is or contains a lease, at inception of a contract. Leases are recognized as a right-of-use asset and corresponding liability at the commencement date. Each lease payment included in the lease liability is apportioned between the repayment of the liability and a finance cost. The finance cost is recognized in net finance costs in the unaudited condensed interim statements of operations over the lease period so as to produce a constant periodic rate of interest on the remaining balance of the liability for each period. Lease liabilities include the net present value of fixed payments (including in-substance fixed payments), variable lease payments that are based on an index or a rate or subject to a fair market value renewal, amounts expected to be payable by the lessee under residual value guarantees, the exercise price of a purchase option if the lessee is reasonably certain to exercise that option, and payments of penalties for terminating the lease, if the lease term reflects the lessee exercising that option. The Company allocates the consideration in the contract to each lease component on the basis of the relative standalone price of the lease component and the aggregate stand-alone price of the non-lease components. The lease liability is net of lease incentives receivable. The lease payments are discounted using the interest rate implicit in the lease or, if that rate cannot be determined, the lessee’s incremental borrowing rate. The period over which the lease payments are discounted is the reasonably certain lease term, including renewal options that the Company is reasonably certain to exercise. Renewal options are included in a number of leases across the Company.

  

6 

 

 

CANNAPUNCH OF NEVADA, LLC
Notes to the Unaudited Condensed Interim Financial Statements
For the Three Months Ended March 31, 2019 and 2018

 

 

3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

 

3.1 Leases (continued)

 

Payments associated with short-term leases and leases of low-value assets are recognized as an expense on a straight-line basis in selling, general and administrative expenses in the unaudited condensed interim statements of operations. Short-term leases are leases with a lease term of 12 months or less. Variable lease payments that do not depend on an index or a rate or subject to a fair market value renewal are expensed as incurred and recognized in Selling, general and administrative expenses in the unaudited condensed interim statements of operations.

 

Right-of-use assets are measured at cost which is calculated as the amount of the initial measurement of lease liability plus any lease payments made at or before the commencement date, any initial direct costs and related restoration costs. The right-of-use asset is depreciated over the lease term on a straight-line basis. The right-of-use assets are depreciated on a straight-line basis over the shorter of the lease term and the useful life of the underlying asset. If a lease transfers ownership of the underlying asset or the cost of the right-of-use asset reflects that the Company expects to exercise a purchase option, the related right-of-use asset is depreciated over the useful life of the underlying asset. The depreciation starts at the commencement date of the lease.

 

4. CHANGES IN ACCOUNTING STANDARDS

 

Adoption of New Accounting Pronouncements

 

Adoption of IFRS 16 – Leases

 

The Company adopted IFRS 16 - Leases (“IFRS 16”) on January 1, 2019. IFRS 16 introduced a single on-balance sheet accounting model for lessees which replaced IAS 17 - Leases (“IAS 17”). Leasing activity for the Company typically involves the leases of land or buildings to operate cannabis dispensaries, processing or cultivation facilities or corporate offices.

 

The Company previously classified leases as either operating or finance leases from the perspective of the lessee. Under IFRS 16, the Company recognizes right-of-use assets and lease liabilities for most leases. The Company adopted IFRS 16 using the modified retrospective cumulative catch-up approach beginning on January 1, 2019. Under this approach, the Company did not restate its comparative amounts and recognized a right-of-use asset equal to the present value of the future lease payments. The Company elected to apply the practical expedient to only transition contracts which were previously identified as leases under IAS 17, and also elected to not recognize right-of-use assets and lease liabilities for leases of low-value assets.

 

Changes in Accounting Standards not yet Effective

 

Insurance Contracts

 

In May 2017, the International Accounting Standards Board (“IASB”) issued IFRS 17 - Insurance Contracts (“IFRS 17”), that replaces IFRS 4 - Insurance Contracts and establishes a new model for recognizing insurance policy obligations, premium revenue and claims-related expenses. IFRS 17 is effective for annual periods beginning on or after January 1, 2021; however, based on recent IASB meetings, an upcoming amendment to IFRS 17 and a deferral of the transition date by one year is anticipated. Early adoption is permitted. The Company is assessing the potential impact of this standard.

 

7 

 

 

CANNAPUNCH OF NEVADA, LLC

Notes to the Unaudited Condensed Interim Financial Statements

For the Three Months Ended March 31, 2019 and 2018

 

 

 

5.INVENTORY

 

The Company’s inventory includes the following:

 

   March 31,   December 31, 
   2019   2018 
    $    $ 
Raw materials   44,486    65,193 
Finished goods   325,275    271,936 
    369,761    337,129 

 

Inventories expensed as cost of goods sold during the three months ended March 31, 2019 and 2018 is $545,844 and $661,327 respectively.

 

6.MACHINERY AND EQUIPMENT

 

    Machinery and 
    equipment 
    $ 
Cost     
As at December 31, 2018    27,926 
Additions    450,851 
As at March 31, 2019    478,777 
       
Depreciation      
As at December 31, 2018    5,772 
Depreciation    12,182 
As at March 31, 2019    17,954 
       
Net book value      
As At December 31, 2018    22,154 
As at March 31, 2019    460,823 

 

Depreciation expense for the three months period ended March 31, 2019 and 2018 of $12,182 and $1,117 is included in cost of goods sold.

 

8 

 

 

CANNAPUNCH OF NEVADA, LLC
Notes to the Unaudited Condensed Interim Financial Statements

For the Three Months Ended March 31, 2019 and 2018

 

 

7.RIGHT OF-USE ASSETS AND LEASE OBLIGATIONS

  

   Right-of-use   Lease 
   assets   obligations 
    $    $ 
Net book value at January 1, 2019   629,617    629,617 
Depreciation and repayment   35,639    26,703 
Net Book value at March 31, 2019   593,978    602,914 

 

Right-of-use assets and lease liabilities of $629,617 were recorded as at January 1, 2019, with no net impact on retained earnings. When measuring lease liabilities, the Company discounted lease payments using its incremental borrowing rate at January 1, 2019. The weighted-average rate applied was 10.29%.

 

As at March 31, 2019, the current and the non-current portion of the lease obligations were $116,879 and $486,035 respectively.

 

8.MEMBERS’ EQUITY

 

During the three months ended March 31, 2019 and 2018, the members of the Company contributed cash of $47,180 and $nil, respectively, to the Company.

 

9.RELATED PARTY TRANSACTIONS AND BALANCES

 

Related parties are defined as management and members of the Company and/or members of their immediate family and/or other companies and/or entities in which a member or senior officer is a principal owner or senior executive.

 

Other than disclosed elsewhere in the unaudited condensed interim financial statements, related party transactions and balances are as follows:

 

During the three months ended March 31, 2019 and 2018, sales of $86,058 and $9,565, respectively, made to a related corporation is included in revenue and purchase of $17,915 and $13,653, respectively, from a related corporation is included in cost of goods sold.

 

No compensation was paid to key management for the three months ended March 31, 2019 and 2018.

 

Accounts receivable as at March 31, 2019 and December 31, 2018 include $nil and $953, respectively, representing amounts due from a related corporation.

 

10.CAPITAL MANAGEMENT

 

The Company manages its capital structure and makes adjustments to it, based on the funds available to the Company, in order to support business development. The Members do not establish quantitative return on capital criteria for management, but rather relies on the expertise of the Company's management to sustain future development of the business. The Company defines capital to include its Members’ equity. In order to carry out the planned business development and pay for administrative costs, the Company will spend its existing working capital and raise additional amounts as needed. The Company is not subject to externally imposed capital requirements. As at March 31, 2019 and December 31, 2018, the capital of the Company was $759,033 and $621,039, respectively.

  

9 

 

 

CANNAPUNCH OF NEVADA, LLC
Notes to the Unaudited Condensed Interim Financial Statements

For the Three Months Ended March 31, 2019 and 2018

 

 

10.CAPITAL MANAGEMENT (continued)

 

The Company raises capital, as necessary, to meet its needs and take advantage of perceived opportunities and, therefore, does not have a numeric target for its capital structure. Funds are primarily secured through cash injection by the Members of the Company. 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 ongoing basis and believes that this approach, given the relative size of the Company, is reasonable.

 

The Company invests all capital that is surplus to its immediate operational needs in short-term, liquid and highly rated financial instruments.

 

11.GENERAL AND ADMINISTRATIVE

 

General and administrative expenses were comprised of: 

 

   March 31,   March 31, 
   2019   2018 
    $    $ 
Salaries and benefits   130,967    128,113 
Taxes and Licenses   41,061    22,551 
Travel   18,488    5,631 
Meals   2,327    - 
Office expenses   1,754    1,591 
Professional and consulting fees   14,327    29,658 
Others   2,126    2,196 
    211,050    189,740 

 

12.LICENSOR PROFIT SHARE

 

Effective March 31, 2017, the Company entered into a Licensing Agreement (the “Agreement”) with a Third Party (“Licensor”) for use of Licensor’s medical (and subsequent adult use recreational) marijuana production establishment and equipment, in order to produce wholesale and certain retail marijuana edible and infused products for a period of 5 years to be renewed annually by mutual agreement.

 

Pursuant to the terms of the Agreement, 50% of profits or EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization) generated by sales, shall be paid as License Fee, along with any taxes and fees paid by the Licensor. On December 31, 2017, the Agreement was amended by signing a subsequent license fee agreement memo (the “Memo”). In accordance with the Memo, license fee payable by the Company would work as a credit netted against any amounts owed by Licensor for product purchases less any amounts owed by the Company for reimbursement of taxes and utilities to the Licensor.

 

On September 18, 2018, the Company entered into a Supply Agreement with the Licensor, which is contingent upon cancellation of the license fee Agreement. Pursuant to this Supply Agreement, the Company agreed to offer a 20% discount on its lowest retail price to the Licensor for a period of 5 years.

 

10 

 

 

CANNAPUNCH OF NEVADA, LLC Notes to the

Notes to the Unaudited Condensed Interim Financial Statements

For the Three Months Ended March 31, 2019 and 2018

 

13. CONTINGENCIES

 

Contingencies

 

The Company's operations are subject to a variety of local and state regulations. Failure to comply with one or more of those regulations could result in fines, restrictions on its operations, or losses of permits and/or licenses that could result in the Company ceasing operations. While management of the Company believes that the Company is in compliance with applicable local and state regulation at March 31, 2019, cannabis regulations continue to evolve and are subject to differing interpretations. As a result, the Company may be subject to regulatory fines, penalties, or restrictions in the future.

 

Claims and litigation

 

From time to time, the Company may be involved in litigation relating to claims arising out of operations in the normal course of business. At March 31, 2019, there were no pending or threatened lawsuits that could reasonably be expected to have a material effect on the results of the Company's operations. There are also no proceedings in which any of the Company's directors, officers or affiliates is an adverse party or has a material interest adverse to the Company's interest.

 

14.FINANCIAL RISK FACTORS

 

The Company’s financial instruments mainly comprise of cash, account receivable, trade payables, accrued liabilities, advance from a member, advance from related party and lease obligations.

 

(a) Fair Value

 

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The fair value measurement is based on the presumption that the transaction to sell the asset or transfer the liability takes place either in the principal market for the asset or liability or in the absence of a principal market, in the most advantageous market for the asset or liability. The principal or the most advantageous market must be accessible by the Company.

 

The fair value of an asset or a liability is measured using the assumptions that market participants would use when pricing the asset or liability, assuming that market participants act in their economic best interest. A fair value measurement of a non-financial asset takes into account a market participant's ability to generate economic benefits from the asset’s highest and best use or by selling it to another market participant that would utilise the asset in its highest and best use.

 

The Company uses valuation techniques that are appropriate in the circumstances and for which sufficient data are unobservable inputs.

 

All assets and liabilities for which fair value is measured or disclosed in the financial statements are categorised within the fair value hierarchy. This is described, as follows, based on the lowest level input that is significant to the fair value measurement as a whole:

 

  Level 1 inputs are quoted prices in active markets for identical assets or liabilities at the measurement date.

 

•   Level 2 inputs are observable inputs other than quoted prices included within Level 1, such as quoted prices for similar assets or liabilities in active markets, quoted prices for identical assets or liabilities in markets that are not active, or other inputs that are observable directly or indirectly.

 

11 

 

 

CANNAPUNCH OF NEVADA, LLC
Notes to the Unaudited Condensed Interim Financial Statements
For the Three Months Ended March 31, 2019 and 2018

 

  

14.FINANCIAL RISK FACTORS (continued)

 

(a)Fair Value (continued)

 

•  Level 3 inputs are unobservable inputs for the asset or liability that reflect the reporting entity’s own assumptions and are not based on observable market data.

 

The classification of financial instruments at their carrying and fair values is as follows: 

    Carrying values         Fair values 
Financial assets   FVTPL    AC    Total    Total 
March 31, 2019   $    $    $    $ 
Cash   193,329    -    193,329    193,329 
Accounts receivable   -    533,871    533,871    533,871 
    193,329    533,871    727,200    727,200 
Deceber 31, 2018                    
Cash   122,367    -    122,367    122,367 
Accounts receivable   -    374,649    374,649    374,649 
    122,367    374,649    497,016    497,016 

 

    Carrying values         Fair values 
Financial liabilities   FVTPL    AC    Total    Total 
March 31, 2019   $    $    $    $ 
Trade payables   -    247,445    247,445    247,445 
Accrued liabilities   -    255,968    255,968    255,968 
Advance from a member   -    1,402    1,402    1,402 
Advance from related party   -    285,000    285,000    285,000 
Lease obligations   -    602,914    602,914    602,914 
    -    1,392,729    1,392,729    1,392,729 
December 31, 2018                    
Trade payables   -    174,902    174,902    174,902 
Accrued liabilities   -    58,956    58,956    58,956 
Advance from a member   -    1,402    1,402    1,402 
    -    235,260    235,260    235,260 

 

The Company’s financial instruments as at March 31, 2019 and December 31, 2018, classified as “Level 1 - quoted prices in active markets” is cash. The Company has determined that there have been no transfers between levels in the hierarchy by re-assessing categorization at the reporting date.

 

The Company is exposed to credit risk and liquidity risk. The Company’s management oversees the management of these risks. The Company`s management is supported by the Members that advises on financial risks and the appropriate financial risk governance framework for the Company. The Company’s financial risk activities are governed by appropriate policies and procedures and that financial risks are identified, measured and managed in accordance with Company’s policies and Company’s risk appetite.

 

12 

 

 

CANNAPUNCH OF NEVADA, LLC
Notes to the Unaudited Condensed Interim Financial Statements

For the Three Months Ended March 31, 2019 and 2018

 

 

14.FINANCIAL RISK FACTORS (continued)

 

(b) Credit Risk

 

Credit risk is the risk of unexpected loss if a customer or third party to a financial instrument fails to meet its contractual obligations. Financial instruments which potentially subject the Company to concentrations of credit risk consist of cash and accounts receivable due from a related corporation. As at March 31, 2019 and December 31, 2018, the maximum amount exposed to credit risks was $727,200 and $497,016 respectively.

 

During the three months ended March 31, 2019 and 2018, revenue from one customer is approximately nil% and 32%, respectively, of total revenue and purchase of raw material from one supplier were approximately 29% and nil%, respectively, of total purchases.

 

(c) Liquidity Risk

 

Liquidity risk is the risk that the Company is unable to generate or obtain sufficient cash in a cost-effective manner to fund its obligations as they come due. The Company’s approach to managing liquidity risk is to ensure that it will have sufficient liquidity to meet liabilities when due. The Company manages liquidity risk through obtaining financing from its members and third parties. As at March 31, 2019 and December 31, 2018, all trade payables and accrued liabilities are due within a year.

 

15.SEGMENTED INFORMATION

 

Operating and geographical segments

 

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

 

that engages in business activities from which it may earn revenues and incur expenses;

whose operating results are reviewed regularly by the entity’s chief operating decision maker; and;

for which discrete financial information is available.

 

As at March 31, 2019 and December 31, 2018 the Company’s operations comprise a single reporting operating and geographical segment engaged in the manufacture and distribution of cannabis infused products.

 

16. SUBSEQUENT EVENTS

 

The Company’s management has evaluated subsequent events up to August 5, 2019, the date the unaudited condensed interim financial statements were issued, and determined the following event:

 

On May 24, 2019 – Ayr Strategies Inc. (“Ayr”), formerly Cannabis Strategies Acquisition Corp., closed its previously announced Qualifying Transaction. Through the qualifying transaction, Ayr has created a vertically integrated Multi-State Operator in the U.S. cannabis sector, with an initial anchor portfolio in the Eastern and Western United States.

  

13 

 

 

SCHEDULE “K” 

PRO FORMA FINANCIAL STATEMENTS

 

(see attached)

 

 

 

 

Ayr Strategies Inc.

(formerly, Cannabis Strategies Acquisition Corp.)

 

UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS

 

AS AT AND FOR THE THREE MONTHS ENDED MARCH 31, 2019
AND FOR THE TWELVE MONTHS ENDED DECEMBER 31, 2018

 

(EXPRESSED IN UNITED STATES DOLLARS)

 

 

 

 

Ayr Strategies Inc.

(formerly, Cannabis Strategies Acquisition Corp.)

 

Unaudited Pro Forma Consolidated Financial Statements  
   
Unaudited Pro Forma Consolidated Statement of Financial Position 1
   
Unaudited Pro Forma Consolidated Statements of Operations 2 - 3
   
Notes to the Unaudited Pro Forma Consolidated Financial Statements 4 -18

 

 

 

 

Ayr Strategies Inc. (formerly, Cannabis Strategies Acquisition Corp.)

Unaudited Pro Forma Consolidated Statement of Financial Position

As at March 31, 2019

 

US$ AYR Sira Canopy Washoe LivFree CannaPunch Subtotal Notes Acquisition Notes Pro-Forma Total
  March 31,
2019
$
March 31,
2019
$
March 31,
2019
$
March 31,
2019
$
March 31,
2019
$
March 31,
2019
$
$  $ Adjustments

$
March 31,
2019
$
ASSETS                        
Current                        
Cash 36,355 3,315,782 222,626 722,273 2,182,938 193,329 6,673,303 8a,e,f 30,566,737 8h (3,529,170) 33,710,870
Accounts receivable, trade, no allowance - 1,026,229 - 133,075 - 533,871 1,693,175   - 6a (93,211) 1,599,964
Deposit 15,096 - - - - - 15,096   -   - 15,096
Inventory - 8,868,104 1,163,196 2,519,505 2,557,557 369,761 15,478,123 8i 15,163,525   - 30,641,648
Biological assets - 2,417,379 - 1,646,000 - - 4,063,379   -   - 4,063,379
Prepaid expenses and other assets - 132,789 153,353 197,933 123,589 - 607,664       - 607,664
Advance to a related corporation - - 1,217,830 - 89,389 - 1,307,219 8i (1,307,219)   - -
  51,451 15,760,283 2,757,005 5,218,786 4,953,473 1,096,961 29,837,959   44,423,043   (3,622,381) 70,638,621
Restricted cash and short-term                        
investments held in escrow 101,986,737 - - - - - 101,986,737 8e (101,986,737)   - -
Intangible assets - - 1,623,114 80,894 - - 1,704,008 8b 57,816,886   - 59,520,894
Property, plant and equipment - 7,521,303 1,220,641 8,961,601 1,673,445 460,823 19,837,813   -   - 19,837,813
Right-of-use assets - 5,434,999 2,427,320 - 2,230,783 593,978 10,687,080   -   - 10,687,080
Goodwill - - - - - - - 8c 148,164,731   - 148,164,731
Investment in associate - - - 1,939,517 3,331,885 - 5,271,402   -   - 5,271,402
Deferred tax assets - - - - - - -   -   - -
Other long term assets - 140,401 - - - - 140,401   -   - 140,401
Total assets 102,038,188 28,856,986 8,028,080 16,200,798 12,189,586 2,151,762 169,465,400   148,417,923   (3,622,381) 314,260,942
LIABILITIES                        
Current                        
Trade payables 3,650,804 605,217 - 577,458 849,613 247,445 5,930,537   - 6a (93,211) 5,837,326
Accrued liabilities - 2,025,356 349,301 162,209 1,426,638 255,968 4,219,472   -   - 4,219,472
Advance from a related corporation 612,385 - - 1,217,830 - - 1,830,215 8i (1,307,219) 6a - 522,996
Income tax payable - 3,715,371 - - - - 3,715,371   -   - 3,715,371
Distributions payables - - - - - - -   -   - -
Lease liabilities - current portion - 142,220 62,841 - 231,379 116,879 553,319   -   - 553,319
Debts/notes payable - current portion - 7,695 - - 160,000 - 167,695   -   - 167,695
Advance from a member - - - -   1,402 1,402   -   - 1,402
  4,263,189 6,495,859 412,142 1,957,497 2,667,630 621,694 16,418,011   (1,307,219)   (93,211) 15,017,581
Deferred underwriters’ commission 3,529,170 - - - - - 3,529,170   - 8h (3,529,170) -
Class A restricted voting shares subject to redemption 201,666,850 - - - - - 201,666,850   - 8g (201,666,850) -
Warrant liability 106,623,318 -   - - - 106,623,318   -   - 106,623,318
Deferred tax liability - 2,402,770 - - - - 2,402,770   -   - 2,402,770
Accrued interest payable - 7,627,157 - - - - 7,627,157   -   - 7,627,157
Advances from related party - - - - - 285,000 285,000   -   - 285,000
Lease liabilities - Non-current portion - 5,485,755 2,397,555 - 1,985,735 486,035 10,355,480   -   - 10,355,480
Debts payable - Non-current portion - 14,963,691 421,128 9,162,306 - - 24,547,125 8a 37,140,000   - 61,687,125
Total liabilities 316,082,527 36,975,232 3,231,225 11,119,803 4,653,365 1,392,729 373,454,881   35,832,781   (205,289,231) 203,998,431
Members’ equity - (8,118,246) 4,796,855 5,080,995 7,536,221 759,033 10,054,858 8d (10,054,858)   - -
Shares capital 1,711.826 - - - - - 1,711,826 8a 125,140,000 8g 201,666,850 328,518,676
Accumulated deficit (215,756,165) - - - - - (215,756,165) 8f (2,500,000)   - (218,256,165)
Contributed surplus - - - - - - -   -   - -
  (214,044,339) (8,l18,246) 4,796,855 5,080,995 7,536,221 759,033 (203,989,481)   112,585,142   201,666,850 110,262,511
Total liabilities and members’ equity 102,038,188 28,856,986 8,028,080 16,200,798 12,189,586 2,151,762 169,465,400   148,417,923   (3,622,381) 314,260,942

 

The accompanying notes are an integral part of these unaudited pro forma consolidated financial statements. 

 

 1

 

Ayr Strategies Inc. (formerly, Cannabis Strategies Acquisition Corp.)

Unaudited Pro Forma Consolidated Statement of Operations

For the Three Months Ended March 31, 2019

 
us$ AYR Sira Canopy Washoe LivFree CannaPunch Subtotal Notes

Pro-Forma

Consolidated
  March 31, March 31, March 31, March 31, March 31, March 31, March 31,   Adjustments  March 31,
  2019 2019 2019 2019 2019 2019 2019     2019
  $ $ $ $ $ $ $   $ $
                     
Revenues, net of discounts - 6,670,180 3,627,129 1,972,925 11,935,852 1,598,666 25,804,752 6b (2,080,660) 23,724,092
                     
Cost of goods sold before biological asset adjustment - 1,470,860 2,113,680 1,017,328 7,651,562 805,234 13,058,664 6b (2,080,660) 10,978,004
  - 5,199,320 1,513,449 955,597 4,284,290 793,432 12,746,088   - 12,746,088
Fair value changes in biological assets included in cost of sales - (4,253,737) - (804,650) - - (5,058,387)   - (5,058,387)
Unrealized gain on biological asset transformation - 7,282,658 - 1,227,204 - - 8,509,862   - 8,509,862
Gross profit (loss) - 8,228,241 1,513,449 1,378,151 4,284,290 793,432 16,197,563   - 16,197,563
                     
Expenses                    
Transaction Costs - - - - - - - 6c 2,500,000 2,500,000
General and Administrative 1,540,740 1,450,206 590,157 160,492 961,988 211,050 4,914,633   - 4,914,633
Sales and Marketing - 62,315 95,198 55,369 220,044 22,932 455,858   - 455,858
Depreciation - 352,954 77,596 95,266 137,156 - 662,972   - 662,972
Licensor profit share - - - - - 224,730 224,730   - 224,730
Management fee - 49,500 180,000 120,000 - - 349,500     349,500
Net unrealized loss on changes in the fair value of financial liabilities 135,781,900 - - - - - 135,781,900   - 135,781,900
Total Expenses 137,322,640 1,914,975 942,951 431,127 1,319,188 458,712 142,389,593   2,500,000 144,889,593
                     
Net income (loss) from operations (137,322,640) 6,313,266 570,498 947,024 2,965,102 334,720 (126,192,030)   (2,500,000) (128,692,030)
                     
Other (income) expense                    
Share of (income) loss on equity investments - - - (275,170) 22,616 - (252,554)   - (252,554)
Interest expense / Finance cost - 824,668 78,446 94,888 41,354 15,969 1,055,325   - 1,055,325
Interest income (227,164) - - - - - (227,164)   - (227,164)
Foreign exchange gain (16,745) - - - - - (16,745)   - (16,745)
Management fee income - - - - - - -   - -
Rental income and others - (3,000) - (23,124) - - (26,124)   - (26,124)
Total other (income) expense (243,909) 821,668 78,446 (203,406) 63,970 15,969 532,738   - 532,738
                     
Income tax (recovery) expense - 2,453,234 - - - - 2,453,234   - 2,453,234
                     
Net income (loss) and comprehensive income (loss) (137,078,731) 3,038,364 492,052 1,150,430 2,901,132 318,751 (129,178,002)   (2,500,000) (131,678,002)
                     
Loss per share - basic and diluted               9   (7.23)
Weighted average number of shares outstanding               9   18,214,341
For adjusted EBITDA refer to Note 10                    

 

The accompanying notes are an integral part of these unaudited pro forma consolidated financial statements.

  

 2

 

 

Ayr Strategies Inc. (formerly, Cannabis Strategies Acquisition Corp.)

Unaudited Pro Forma Consolidated Statement of Operations

For the Twelve Months Ended December 31, 2018

 

US$ AYR Sira Canopy Washoe LiveFree CannaPunch Subtotal Notes Pro-Forma Consolidated
  December 31, December 31, December 31, December 31, December 31, December 31,     Adjustments December 31,
  2018 2018 2018 2018 2018 2018       2018
  $ $ $ $ $ $ $   $ $
Revenues, net of discounts - 16,398,127 11,748,244 7,017,779 34,058,319 6,658,021 75,880,490 6b (5,016,480) 70,864,010
Cost of goods sold before biological asset adjustment - 3,823,025 6,821,581 4,636,341 22,142,020 2,961,681 40,384,648 6b (5,016,480) 35,368,168
  - 12,575,102 4,926,663 2,381,438 11,916,299 3,696,340 35,495,842   - 35,495,842
Fair value changes in biological assets included in cost of - (18,470,531) - (4,005,602) - - (22,476,133)   (22,476,133)
Unrealized gain on biological asset transformation - 11,287,162 - 5,086,289 - - 16,373,451   16,373,451
Gross profit (loss) - 5,391,733 4,926,663 3,462,125 11,916,299 3,696,340 29,393,160   - 29,393,160
                     
Expenses                    
Transaction costs 392 467 - - - - - 392,467 6c 2,500,000 2,892,467
General  and administrative 3,244,682 6,988,439 867,613 825,863 4,024,862 924,650 16,876,109     16,876,109
Sales and marketing - 323,495 310,863 189,074 512,282 77,198 1,412,921     1,412,912
Depreciation - 150,089 50,766 51,831 191,301 - 443,987     443,987
Licensor profit share - - - - - 1,123,212 1,123,212     1,123,212
Management fee - 342,472 546,848 240,000 - - 1,129,320 6b (125,000) 1,004,320
Net unrealized loss on changes in the fair value of financial liabilities 72,449,316 - - - - - 72,449,316     72,449,316
Total expenses 76,086,465 7,804,495 1,776,090 1,306,768 4,728,445 2,125,060 93,827,323   2,375,000 96,202,323
                     
Net income (loss) from operations (76,086,465) (2,412,762) 3,150,573 2,155,357 7,187,854 1,571,280 (64,434,163)   (2,375,000) (66,809,163)
                     
Other (income) expense                    
Share of (income) loss on equity investments - - - (1,642,415) (274,899) - (1,917,314)     (1,917,314)
Interest expense - 2,738,950 - 343,344 - - 3,082,294     3,082,294
Interest income (934,831) - - (12,067) - - (946,898)     (946,898)
Foreign exchange loss 20,212 - - - - - 20,212     20,212
Management fee income - - - (125,000) - - (125,000) 6b 125,000
Rental income and others - (19,850) - (91,368) - - (111,218)     (111,218)
Total other (income) expense (914,619) 2,719,100 - (1,527,506) (274,899) - 2,076   125,000 127,076
                     
Income tax (recovery) expense - 5,137,381 - - - - 5,137,381     5,137,381
                     
Net income (loss) and comprehensive income (loss) (75,171,846) (10,269,243) 3,152,573 3,682,863 7,462,753 1,571,280 (69,573,620)   (2,500,000) (72,073,620)
                     
Loss per share - basic and diluted               9   (3.96)
Weighted average number of share outstanding               9   18,214,341
For Adjusted EBITDA refer to Note 10                    

 

The accompanying notes are an integral part of these unaudited pro forma consolidated financial statements.

 

 3

 

Ayr Strategies Inc. (formerly, Cannabis Strategies Acquisition Corp.) 

 

 

Notes to the Unaudited Pro Forma Consolidated Financial Statements 

As at March 31, 2019 (Expressed in US$)

 

 

1)       Description of Transactions

 

On October 17, 2018, Ayr Strategies Inc. (“Ayr” or the “Corporation” – formerly Cannabis Strategies Acquisition Corp. – “CSAC”) and its wholly-owned subsidiary, CSAC Acquisition Inc. (“CSAC AcquisitionCo”), entered into the following definitive agreements to acquire five (5) businesses (the “Target Businesses”):

 

 

 

Equity Exchange Agreement dated as of October 17, 2018, among Green Partners Investor LLC and Green Partners Sponsor I, LLC as the shareholders of Sira Naturals, Inc. (“Sira”), Louis Karger as sellers’ representative, Sira, CSAC AcquisitionCo and Ayr, as amended and restated (the “Sira Agreement”);

 

Equity Purchase Agreement dated as of October 17, 2018, among The Canopy NV, LLC (“Canopy”), Lemon Aide, LLC, Kynd-Strainz, LLC, CSAC AcquisitionCo and Ayr, as amended (the “Canopy Agreement”);

  

Equity Purchase Agreement dated as of October 17, 2018, among the members of Washoe, Mark E. Pitchford as sellers’ representative, Washoe Wellness, LLC (“Washoe”), CSAC AcquisitionCo and Ayr, as amended (the “Washoe Agreement”);

  

Equity Purchase Agreement, dated as of October 17, 2018, among the members of LivFree Wellness, LLC (“LivFree”), Steve Menzies as sellers’ representative, LivFree, CSAC AcquisitionCo and Ayr, as mended (the “LivFree Agreement”); and

  

Equity Purchase Agreement dated as of October 17, 2018, among Mark Smith and Daniel Griffin as the members of CannaPunch of Nevada LLC (“CannaPunch”), CannaPunch, Mark Smith as sellers’ representative, CSAC AcquisitionCo and Ayr, as amended (the “CannaPunch Agreement”, and together with the Sira Agreement, the Canopy Agreement, the Washoe Agreement and the LivFree Agreement, the “Definitive Agreements”).

  

The description of the Definitive Agreements, both below and in Ayr’s final non-offering prospectus dated February 15, 2019 (the “Prospectus”), is a summary only, is not exhaustive and is qualified in its entirety by reference to the terms of the Definitive Agreements, which may be found on Ayr’s profile on SEDAR at www.sedar.com.

  

Subsequent to March 31, 2019 and pursuant to the above mentioned Definitive Agreements, on May 24, 2019, the Corporation completed its concurrent acquisitions of the target businesses of Sira, Canopy (by acquisition of its two operating subsidiaries, Kynd-Strainz, LLC and Lemon Aide, LLC), Washoe, LivFree and CannaPunch, which collectively constituted its qualifying transaction (collectively, the “Qualifying Transaction”). In connection with the closing of the Qualifying Transaction, all non-redeemed Class A Restricted Voting shares of the Corporation (the “Class A Restricted Voting Shares”) were automatically converted into subordinate voting shares of the Corporation (the “Subordinate Voting Shares”), and all Class B shares of the Corporation (the “Class B Shares”) were automatically converted into multiple voting shares of the Corporation (the “Multiple Voting Shares”). Following the closing of the Qualifying Transaction, the Subordinate Voting Shares, the share purchase warrants of the Corporation and the rights of the Corporation began trading on the Neo Exchange Inc. (the “Exchange”) under the symbols “AYR.A”, “AYR.WT” and “AYR.RT”, respectively. The Multiple Voting Shares are not listed on the Exchange.

  

 4

 

Ayr Strategies Inc. (formerly, Cannabis Strategies Acquisition Corp.) 

 

 

Notes to the Unaudited Pro Forma Consolidated Financial Statements 

As at March 31, 2019 (Expressed in US$)

 

 

Acquisition of Sira

  

Pursuant to the Sira Agreement, the shareholders of Sira agreed to contribute all of the issued and outstanding securities of Sira to CSAC AcquisitionCo in exchange for (i) a note in the amount of $5,000,000 (the “Sira Promissory Note”) to a lender of Sira that will be secured by a first-priority security interest over all of the assets of Sira, (ii) the issuance of an aggregate of 1,885,606 non-voting common stock of CSAC AcquisitionCo (such shares of CSAC AcquisitionCo, the “Exchangeable Shares”) that are exchangeable on a  one-for-one basis into Subordinate Voting Shares with a deemed value of $15.91, and (iii) a cash payment of $15,000,000 to pay existing indebtedness of Sira. All of the Exchangeable Shares issuable under the Sira Agreement will be subject to a twelve-month post-closing lock-up period. Exchange of the Exchangeable Shares for Subordinate Voting Shares is also subject to applicable restrictions under applicable U.S. securities laws. Additionally, CSAC AcquisitionCo will pay by wire transfer to the shareholders of Sira, each shareholder’s pro rata share of the fair market value of Sira’s inventory above a target level set at $800,000 (the “Inventory Payment”), pursuant to a formula to be agreed to between Sira and CSAC AcquisitionCo. One-third of this Inventory Payment will be paid by CSAC AcquisitionCo following the closing date of the Qualifying Transaction and the remaining two-thirds within 90 days following the closing.

  

The Sira Agreement also contains an earn-out provision that may entitle the sellers to earn additional consideration, if certain milestones (as defined in the Sira Agreement) are achieved at Sira’s planned cultivation facility in Milford, MA over its first full year of operation. Such facility may not be financed with third-party debt that exceeds 50% of the cost of construction and a first priority mortgage (which would be subordinated to any third-party construction lender) on such facility will provide further security for the Sira Promissory Note. Ayr may set off indemnification claims against any payments to be made by it under the earn-out provision and/or the Sira Promissory Note, except the total amount set off against earn-out payments and the Sira Promissory Note may not exceed $5,000,000 in the aggregate.

  

Acquisition of Canopy

  

Pursuant to the Canopy Agreement: (i) Canopy agreed to contribute all of the assets of its two operating companies, Lemon Aide, LLC and Kynd-Strainz, LLC (together, the “Canopy Target Businesses”), except for certain retained licenses and associated inventory, the transfer of which is subject to consent from regulatory authorities (the “Canopy Consents”), to a “NewCo” entity (the “Canopy NewCo”) (the “Canopy Reorganization”); (ii) CSAC AcquisitionCo agreed to acquire all of the equity interests of Canopy NewCo in exchange for (A) a promissory note in the amount of $4,500,000 to Canopy that will be secured by a first-priority security interest over all of the assets of Canopy NewCo, (B) the issuance to Canopy of an aggregate of 250,000 Exchangeable Shares with a deemed value of $5,500,000 and (C) cash consideration in the amount of $7,000,000, some of which will be used to pay debt and expenses of Canopy, as well as applicable taxes; (iii) CSAC AcquisitionCo agreed to assume a loan in the amount of approximately $400,000; and (iv) Canopy agreed to take all reasonable measures in good faith to secure the Canopy Consents and once obtained, agreed to convey the retained assets to Ayr via the transfer of the equity interests in the Canopy Target Businesses or the retained assets to CSAC AcquisitionCo for nominal consideration. 102,273 Exchangeable Shares issuable under the Canopy Agreement will be subject to a six-month post-closing lock-up period, a further 102,273 Exchangeable Shares will be subject to a twelve-month post-closing lock-up period, and 45,454 Exchangeable Shares will not be subject to any lock-up period. On closing, Canopy granted to Ayr or its affiliates a five-year option to purchase the real property owned by affiliates of Canopy and used in the business of the Canopy Target Businesses at fair market value.

  

 5

 

Ayr Strategies Inc. (formerly, Cannabis Strategies Acquisition Corp.) 

  

Notes to the Unaudited Pro Forma Consolidated Financial Statements 

As at March 31, 2019 (Expressed in US$)

 

 

Exchange of the Exchangeable Shares for Subordinate Voting Shares is also subject to applicable restrictions under applicable U.S. securities laws. The sellers have no obligation to indemnify for losses incurred by Ayr as a result of the Canopy Reorganization except for certain obligations with respect to obtaining necessary regulatory approval.

  

Additionally, Ayr agreed to issue additional Exchangeable Shares up to a year following the closing date in certain circumstances, subject to certain limitations. More specifically, if the trailing 3-day volume-weighted average trading price of the Subordinate Voting Shares (the “Closing Price”) is less than C$29.00 on: (i) the closing date of the Canopy acquisition, a number of additional Exchangeable Shares may be issued to Canopy so that the cumulative market value of the Exchangeable Shares issued to Canopy on the closing date with no lock-up period is equal to $999,998; (ii) the date that is 180 days after the closing date of the Canopy acquisition, a number of additional Exchangeable Shares may be issued to Canopy so that the cumulative market value of the Exchangeable Shares issued to Canopy with a 6-month lock-up period is equal to $2,250,006; or (iii) the date that is 360 days after the closing date of the Canopy acquisition, a number of additional Exchangeable Shares may be issued to Canopy so that the cumulative market value of the Exchangeable Shares issued to Canopy with a 12-month lock-up period is equal to $ 2,250,006. Under no circumstances may the total number of additional Exchangeable Shares to be issued under this make-whole provision exceed 10% of the total number of issued and outstanding Class B Shares as of the closing date of the Qualifying Transaction.

 

Acquisition of Washoe

 

Pursuant to the Washoe Agreement: (i) Washoe and the members of Washoe agreed to contribute all of the assets of Washoe and its subsidiaries (including certain parcels of real property owned by Washoe or a subsidiary), except for certain retained licenses and associated inventory, the transfer of which is subject to consent from regulatory authorities (the “Washoe Consents”), to a “NewCo” entity (the “Washoe NewCo”) (the “Washoe Reorganization”); (ii) CSAC AcquisitionCo agreed to acquire all of the equity interests of the Washoe NewCo in exchange for (A) a promissory note in the amount of $5,640,000 to the members of Washoe that will be secured by a first-priority security interest over all of the assets of Washoe NewCo, (B)  the issuance to the members of Washoe of an aggregate of 256,364 Exchangeable Shares with a deemed value of $5,640,000 and (C) cash consideration in the amount of $16,670,000, some of which will be used to pay debt and expenses of Washoe, as well as applicable taxes; (iii) Washoe and its members agreed to take all reasonable measures in good faith to secure the Washoe Consents, and once obtained, agreed to convey the retained assets to Ayr via the transfer of the equity interests in Washoe or the retained assets to CSAC AcquisitionCo for nominal consideration; (iv) CSAC AcquisitionCo agreed to assume a member loan in the amount of approximately $6.5 million and issue 13,636 Exchangeable Shares in the name of such member (the “Washoe Lender”); and (v) CSAC AcquisitionCo agreed to assume mortgage debt of approximately $2.6 million in the aggregate, secured by real property owned by Washoe or its subsidiaries. 128,182 Exchangeable Shares issuable under the Washoe Agreement will be subject to a six-month post-closing lock-up period, and the other 128,182 Exchangeable Shares will be subject to a twelve-month post-closing lock-up period.

 

Exchange of the Exchangeable Shares for Subordinate Voting Shares is also subject to applicable restrictions under applicable U.S. securities laws. The sellers have no obligation to indemnify for losses incurred by Ayr as a result of the Washoe Reorganization except for certain obligations with respect to obtaining necessary regulatory approval.

 

 6

 

Ayr Strategies Inc. (formerly, Cannabis Strategies Acquisition Corp.)

 

Notes to the Unaudited Pro Forma Consolidated Financial Statements 

As at March 31, 2019 (Expressed in US$)

 

 

Additionally, Ayr agreed to issue additional Exchangeable Shares up to a year following the closing date in certain circumstances, subject to certain limitations. More specifically, if the Closing Price is less than C$29.00 on: (i) the date that is 180 days after the closing date of the Washoe acquisition, a number of additional Exchangeable Shares may be issued to the sellers of Washoe so that the cumulative market value of the Exchangeable Shares issued to such persons with a 6-month lock-up period is equal to $2,820,000 and a number of additional Exchangeable Shares may be issued to the Washoe Lender so that the cumulative market value of the Exchangeable Shares issued to the Washoe Lender with a 6-month lock-up period is equal to $150,000 or (ii) the date that is 360 days after the closing date of the Washoe acquisition, a number of additional Exchangeable Shares may be issued to the sellers of Washoe so that the cumulative market value of the Exchangeable Shares issued to such persons with a 12-month lock-up period is equal to $2,820,006 and a number of additional Exchangeable Shares may be issued to the Washoe Lender so that the cumulative market value of the Exchangeable Shares issued to the Washoe Lender with a 12-month lock-up period is equal to $150,000. Under no circumstances may the total number of additional Exchangeable Shares to be issued under this make-whole provision exceed 10% of the total number of issued and outstanding Class B Shares as of closing date of the Qualifying Transaction. On closing, Washoe granted to Ayr or its affiliates a five-year option to purchase the real property owned by affiliates of Washoe and used in the business of Washoe at fair market value.

  

Acquisition of LivFree

  

Pursuant to the LivFree Agreement: (i) LivFree and the members of LivFree agreed to contribute all of the assets of LivFree and its subsidiaries, except for certain retained licenses and associated inventory, the transfer of which is subject to consent from regulatory authorities (the “LivFree Consents”), to a “NewCo” entity (“LivFree NewCo”) (the “LivFree Reorganization”); (ii) CSAC AcquisitionCo agreed to acquire all of the equity interests of LivFree NewCo in exchange for (A) a promissory note in the amount of $20,000,000 to the members of LivFree that will be secured by a first-priority security interest over all of the assets of LivFree NewCo, (B) the issuance to the members of LivFree of an aggregate of 4,342,432 Exchangeable Shares with a deemed value of $70,000,000 (approximately $16.10 per Exchangeable Share) and (C) cash consideration in the amount of $29,500,000, some of which will be used to pay debt and expenses of LivFree, as well as applicable taxes; and (iv) LivFree and its members agreed to take all reasonable measures in good faith to secure the LivFree Consents, and once obtained, agreed to convey the retained assets to Ayr via the transfer of the equity interests in LivFree or the retained assets to CSAC AcquisitionCo for nominal consideration. 3,038,986 Exchangeable Shares issuable under the LivFree Agreement will be subject to a six-month post-closing lock-up period, and the other 1,303,446 Exchangeable Shares will be subject to a twelve-month post- closing lock-up period. Exchange of the Exchangeable Shares for Subordinate Voting Shares is also subject to applicable restrictions under applicable U.S. securities laws. The sellers have no obligation to indemnify for losses incurred by Ayr as a result of the LivFree Reorganization except for certain obligations with respect to obtaining necessary regulatory approval. On closing, LivFree granted to Ayr or its affiliates a five-year option to purchase the real property owned by affiliates of LivFree and used in the business of LivFree at fair market value.

  

Acquisition of CannaPunch

  

Pursuant to the CannaPunch Agreements: (i) CSAC AcquisitionCo agreed to acquire all of the equity interests of CannaPunch NewCo in exchange for (A) a promissory note in the amount of $ 2,000,000 to the members of CannaPunch that will be secured by a first-priority security interest over all of the assets of CannaPunch NewCo, (B) the issuance to the members of CannaPunch of an aggregate of 866,668 Exchangeable Shares with a deemed value of $14,000,000 and (C) cash consideration in the amount of $750,000, some of which will be used to pay debt and expenses of CannaPunch, as well as applicable taxes. 433,334 Exchangeable Shares will be subject to a twelve-month post-closing lock-up period. Exchange of the Exchangeable Shares for Subordinate Voting Shares is also subject to applicable restrictions under applicable U.S. securities laws. On closing, CannaPunch granted to Ayr or its affiliates (i) a five-year option to purchase the real property owned by affiliates of CannaPunch and used in the business of CannaPunch at fair market value and (ii) a license to use the CannaPunch name in all jurisdictions other than in the State of Colorado.

  

 7

 

Ayr Strategies Inc. (formerly, Cannabis Strategies Acquisition Corp.)

 

Notes to the Unaudited Pro Forma Consolidated Financial Statements

As at March 31, 2019 (Expressed in US$)

 

  

2)Basis of Presentation

 

The unaudited pro forma consolidated statement of financial position (“Pro Forma Statement of Financial Position”) as at March 31, 2019 has been prepared by Ayr to give effect to the Acquisitions comprising the Qualifying Transactions, as if they had occurred on March 31, 2019. The unaudited Pro Forma Consolidated Statement of Operations for the three month period ended March 31, 2019 and for the twelve months ended December 31, 2018 have been prepared by AYR to give effect to the acquisitions comprising the Qualifying Transaction, as if they had occurred on January 1, 2018.

  

Ayr financial statements have been translated per the Bank of Canada exchange rates as detailed below:

  

Statement of financial position as at March 31, 2019 has been translated at period end rate of CAD/USD of 0.7483.

 

 

Statement of operations for the three months period ended March 31, 2019 has been translated at 3 month (January to March 2019) average rate of CAD/USD of 0.7522.

 

 

Statement of operations for the twelve months ended September 30, 2018 (for the purpose of constructed statement of operations for the twelve months ended December 31, 2018) has been translated at 12 month (October 2017 to September 2018) average rate of CAD/USD of 0.7793.

Statement of operations for three months ended December 31, 2017 (for the purpose of constructed statement of operations for the twelve months ended December 31, 2018) has been translated at 3 month (October to December 2017) average rate of CAD/USD of 0.7867.

 

 

Statement of operations for three months ended December 31, 2018 (for the purpose of constructed statement of operations for the twelve months ended December 31, 2018) has been translated at 3 month (October to December 2018) average rate of CAD/USD of 0.7575.

  

The Unaudited Pro Forma Consolidated Financial Statements are derived from the following:

  

The unaudited condensed interim financial statements of Ayr, Sira, Canopy, Washoe, LivFree and CannaPunch for the three months period ended March 31, 2019.

 

 

The audited financial statements of Sira, Canopy, Washoe, LivFree and CannaPunch for the twelve months ended December 31, 2018.

 

 

The audited financial statements of Ayr for the twelve months ended September 30, 2018 (for the purpose of constructed statement of operations for the twelve months ended December 31, 2018).

 

 

The audited financial statements of AYR for the short period (three months) ended December 31, 2018 (for the purpose of constructed statement of operations for the twelve months ended December 31, 2018).

The unaudited condensed interim financial statements of AYR for the three months period ended December 31, 2017 (for the purpose of constructed statement of operations for the twelve months ended December 31, 2018).

 

 8

 

Ayr Strategies Inc. (formerly, Cannabis Strategies Acquisition Corp.)

  

Notes to the Unaudited Pro Forma Consolidated Financial Statements 

As at March 31, 2019 (Expressed in US$)

 

  

The unaudited Pro Forma Consolidated Financial Statements were prepared using the acquisition method of accounting in accordance with IFRS 3, Business Combinations, with Ayr being the accounting and legal acquirer. It uses the fair value concepts defined in IFRS 13, Fair Value Measurement, and was based on the historical financial statements of Ayr, Sira, Canopy, Washoe, LivFree and CannaPunch. All financial data in the unaudited Pro Forma Consolidated Financial Statements are presented in United States Dollars, unless stated otherwise.

  

Under the acquisition method of accounting, the assets acquired and liabilities assumed are recorded as of the completion of the acquisitions comprising the Qualifying Transaction at their respective fair values. Under IFRS 3, acquisition-related transaction costs (i.e., advisory, legal, valuation, other professional fees) and certain acquisition-related restructuring charges are not included as a component of consideration transferred but are accounted for as expenses in the periods in which the costs are incurred.

  

The accounting for the acquisitions comprising the Qualifying Transaction is dependent upon valuations, where available, that are provisional and are subject to change. Management will finalize the acquisition accounting for the acquisitions comprising the Qualifying Transaction no later than one year from the date of the respective acquisition dates as required under IFRS 3. Accordingly, certain pro forma adjustments are preliminary and have been prepared solely for the purpose of these unaudited Pro Forma Consolidated Financial Statements. Differences between these provisional estimates and the final acquisition accounting may occur and these differences could have a material impact on Ayr future financial performance. In addition, the unaudited Pro Forma Consolidated Statements of Operations do not reflect any cost savings, operating synergies or revenue enhancements that the consolidated businesses may achieve, the costs to integrate the operations of Ayr and the acquisitions comprising the Qualifying Transaction, or any costs necessary to achieve these cost savings, operating synergies and revenue enhancements.

  

3)Accounting Policies

  

The accounting policies used in the preparation of these unaudited Pro Forma Consolidated Financial Statements are consistent with those described in the audited financial statements of Ayr for the year ended March 31, 2019. Ayr has conducted a review of the acquisitions’ accounting policies and has not identified any differences in accounting policies that were applied historically by these entities. Additional accounting policies related to the Target Businesses companies will be included in the Ayr consolidated financial statements after acquisition on going forward basis. For purposes of these unaudited Pro Forma Consolidated Financial Statements, certain reclassifications have been made to the acquisitions’ historical financial statements (as described in notes 6 and 8) to conform to the classifications adopted by Ayr.

  

4)Preliminary Purchase Price Consideration

  

Each of the acquisitions comprising the Qualifying Transaction is subject to specific terms relating to satisfaction of the purchase price by Ayr and incorporates payments in cash, notes payables and shares. In addition, the purchase prices may be adjusted for consideration of acquisition date working capital. No working capital adjustments have been reflected in the unaudited Pro Forma Consolidated Financial Statements. IFRS 3 requires that contingent consideration be estimated and recorded at the acquisition date with subsequent changes to estimates reflected in earnings. For purposes of the unaudited Pro Forma Consolidated Financial Statements, all estimates of contingent consideration are preliminary and subject to change. In addition, the purchase prices may be adjusted for consideration of acquisition date working capital. No working capital adjustments have been reflected in the unaudited Pro Forma Financial Statements. The purchase prices do not include any assumed debt of the Target Businesses.

  

 9

 

Ayr Strategies Inc. (formerly, Cannabis Strategies Acquisition Corp.) 

  

Notes to the Unaudited Pro Forma Consolidated Financial Statements 

As at March 31, 2019 (Expressed in US$)

 

  

The total purchase price consideration is summarized as follows:

 

 

  Cash Note Payable Share Capital Total
  $ $ $ $
Sira 15,000,000 5,000,000 30,000,000 50,000,000
Canopy 7,000,000 4,500,000 5,500,000 17,000,000
Washoe 16,670,000 5,640,000 5,640,000 27,950,000
Livfree 29,500,000 20,000,000 70,000,000 119,500,000
Cannapunch 750,000 2,000,000 14,000,000 16,750,000
Total Consideration 68,920,000 37,140,000 125,140,000 231,200,000

 

Sira Acquisition

  

Pursuant to the terms of the Sira Agreement, Ayr satisfied the purchase price of $50 million for Sira through the following:

  

i.$15.0 million of the Sira purchase price was paid in the form of cash consideration.

  

ii.$5.0 million of the Sira purchase price was paid in the form of a promissory note payable.

  

iii.$30.0 million of the Sira purchase price was paid in the form of 1,885,606 Exchangeable Shares that are exchangeable on a one-for-one basis into an equal number of Subordinate Voting Shares.

  

iv.The Sira Agreement also contains an earn-out provision that may entitle the sellers to earn additional consideration, if certain Adjusted EBITDA (as defined in the Sira Agreement) milestones are achieved at Sira’s planned cultivation facility in Milford, MA over its first full year of operation, which is expected to be 2020. See “Description of Transactions – Acquisition of Sira.”

  

Additionally, CSAC AcquisitionCo must pay an amount equal to the fair market value of Sira’s inventory above a target level set at $800,000 (the “Inventory Payment”), pursuant to a formula specified in the Sira Agreement. One- third of this Inventory Payment, in the amount of $ 2,500,000, was paid by CSAC AcquisitionCo on the Closing Date and the remaining two-thirds will be paid within 120 days following the Closing Date.

  

Canopy Acquisition

  

Pursuant to the terms of the Sira Agreement, Ayr satisfied the purchase price of $17 million for Canopy through the following:

  

i.$7.0 million of the Canopy purchase price was paid in the form of cash consideration.

  

ii.$4.50 million of the Canopy purchase price was paid in the form of a promissory note payable.

  

iii.$5.50 million of the Canopy purchase price was paid in the form of 250,000 Exchangeable Shares that are exchangeable on a one-for-one basis into an equal number of Subordinate Voting Shares.

  

 10

 

Ayr Strategies Inc. (formerly, Cannabis Strategies Acquisition Corp.)

 

Notes to the Unaudited Pro Forma Consolidated Financial Statements

As at March 31, 2019 (Expressed in US$)

 

  

iv.an additional 15,360 Exchangeable Shares were issued to Canopy pursuant to certain make-whole provisions (the “Canopy Make-Whole Provisions”) in the definitive agreement in respect of the Canopy acquisition (the “Canopy Agreement”); and

  

v.Pursuant to the terms of the Canopy Agreement, Ayr assumed Canopy loans outstanding with total principal value of approximately $400,000.

  

Additional Exchangeable Shares are also issuable to the Canopy sellers under the Canopy Make-Whole Provisions based on a formula specified therein relating to the market price of the Subordinate Voting Shares on certain specified dates.

  

Washoe Acquisition

  

Pursuant to the terms of the Washoe Agreement, Ayr satisfied the purchase price of $27.950 million for Washoe through the following:

  

i.$16.670 million of the Washoe purchase price was paid in the form of cash consideration.

  

ii.$5.640 million of the Washoe purchase price was paid in the form of a promissory note payable.

  

iii.$5.640 million of the Washoe purchase price was paid in the form of 256,364 Exchangeable Shares that are exchangeable on a one-for-one basis into an equal number of Subordinate Voting Shares.

  

iv.Pursuant to the terms of the Washoe Agreement, Ayr assumed Washoe loans outstanding with total principal value of approximately $9,100,000 and issued 13,636 Exchangeable Shares to a Washoe lender.

 

 

 

In addition, (i) CSAC AcquisitionCo agreed to fund a bonus plan in the amount of $5,000,000 that would be payable over two years following the Closing Date to various employees and consultants of Washoe, and (ii) additional Exchangeable Shares are issuable to the Washoe sellers under certain make-whole provisions of the Washoe Agreement based on a formula specified therein relating to the market price of the Subordinate Voting Shares on certain specified dates.

  

LivFree Acquisition

  

Pursuant to the terms of the LivFree Agreement, Ayr satisfied the purchase price of $119.50 million for LivFree through the following:

  

i.$29.50 million of the LivFree purchase price was paid in the form of cash consideration.

  

ii.$20.0 million of the LivFree purchase price was paid in the form of a promissory note payable.

  

iii.$70 million of the LivFree purchase price was paid in the form of 4,342,432 Exchangeable Shares that are exchangeable on a one-for-one basis into an equal number of Subordinate Voting Shares.

  

iv.Pursuant to an amendment to the definitive agreement in respect of the LivFree Acquisition, such amendment dated as of the Closing Date, CSAC AcquisitionCo issued an additional 321,750 Exchange Shares to the LivFree sellers.

  

 11

 

Ayr Strategies Inc. (formerly, Cannabis Strategies Acquisition Corp.)

 

Notes to the Unaudited Pro Forma Consolidated Financial Statements 

As at March 31, 2019 (Expressed in US$)

 

  

CannaPunch Acquisition

 

Pursuant to the terms of the CannaPunch Agreement, Ayr satisfied the purchase price of $16.75 million for CannaPunch through the following:

  

i.$0.750 million of the CannaPunch purchase price was paid in the form of cash consideration.

  

ii.$2.0 million of the CannaPunch purchase price was paid in the form of a promissory note payable.

 

iii.$14.0 million of the CannaPunch purchase price was paid in the form of 866,668 Exchangeable Shares that are exchangeable on a one-for-one basis into an equal number of Subordinate Voting Shares.

  

iv.Pursuant to an amendment to the definitive agreement in respect of the CannaPunch acquisition, such amendment dated June 7, 2019, CSAC AcquisitionCo issued an additional 32,071 Exchangeable Shares to the CannaPunch sellers.

 

5)Preliminary Acquisition Accounting

  

Assuming an acquisition date of January 1, 2018, a preliminary estimate of the fair values of the assets to be acquired and the liabilities to be assumed by Ayr in connection with the proposed acquisitions is as follows:

 

US$ Ref Sira Canopy Washoe Livfree Cannapunch Total
    $ $ $ $ $ $
ASSETS ACQUIRED              
Cash and cash equivalents a 3,315,782 222,626 722,273 2,182,938 193,329 6,636,948
Accounts receivable, trade, no allowance a 1,026,229 - 133,075 - 533,871 1,693,175
Inventory f 15,470,123 4,252,023 5,686,129 4,239,362 994,011 30,641,648
Biological assets f 2,417,379 - 1,646,000 - - 4,063,379
Advance to a related corporation   - 1,217,830 - 89,389 - 1,307,219
Prepaid expenses and other assets a 132,789 153,353 197,933 123,589 - 607,664
Intangible assets c 19,109,000 8,789,000 6,080,894 25,542,000 - 59,520,894
Property, plant and equipment f 7,521,303 1,220,641 8,961,601 1,673,445 460,823 19,837,813
Right-of-use assets   5,434,999 2,427,320 - 2,230,783 593,978 10,687,080
Investment in associate a - - 1,939,517 3,331,885 - 5,271,402
Other long term assets   140,401 - - - - 140,401
Total assets acquired at fair value   54,568,005 18,282,793 25,367,422 39,413,391 2,776,012 140,407,623
LIABILITIES ASSUMED              
Trade payables b 605,217 - 577,458 849,613 247,445 2,279,733
Accrued liabilities b 2,025,356 349,301 162,209 1,426,638 255,968 4,219,472
Income tax payable b 3,715,371 - - - - 3,715,371
Deferred tax liabilities   2,402,770 - - - - 2,402,770
Accrued interest payable b 7,627,157 - - - - 7,627,157
Advance from a related corporation - current b - - 1,217,830 - - 1,217,830
Advance from a related corporation - non-current b - - - - 285,000 285,000
Advance from a member   - - - - 1,402 1,402
Lease liabilities - current portion   142,220 62,841 - 231,379 116,879 553,319
Lease liabilities - non-current portion   5,485,755 2,397,955 - 1,985,735 486,035 10,355,480
Debts payable - current portion b 7,695 - - 160,000 - 167,695
Debts payable - non-current portion b,d 14,963,691 421,128 9,162,306 - - 24,547,125
Total liabilities assumed at fair value   36,975,232 3,231,225 11,119,803 4,653,365 1,392,729 57,372,354
Goodwill e 32,407,227 1,948,432 13,702,381 84,739,974 15,366,717 148,164,731
Total Purchase Price   50,000,000 17,000,000 27,950,000 119,500,000 16,750,000 231,200,000

  

a)The carrying values of the assets acquired, including cash and equivalents, accounts receivable, prepaid expenses and other assets, investment in associates and deferred tax assets are all assumed to be representative of their estimated fair values given the short timeframe until settlement.

  

 12

 

Ayr Strategies Inc. (formerly, Cannabis Strategies Acquisition Corp.)

 

 

Notes to the Unaudited Pro Forma Consolidated Financial Statements 

As at March 31, 2019 (Expressed in US$)

 

  

b)The carrying values of the liabilities assumed, including trade payables, accrued liabilities, advance from a related corporation, income tax payable, accrued interest payable and debts payable are all assumed to be representative of their estimated fair values given the short timeframe until settlement.

  

c)A preliminary fair value estimate of $59,520,894 has been assigned to intangible assets representing licenses and intellectual properties. The assumptions used to determine the fair value of the acquired licenses and intellectual properties may change as Ayr finalises valuations of the acquired intangible assets following the completion of the acquisitions comprising the Qualifying Transaction.

  

d)The carrying value of long term borrowings approximates the fair value of these liabilities. The value is preliminary and subject to change.

  

e)Goodwill represents the difference between the acquisition date fair value of the consideration transferred and the values assigned to the assets acquired and liabilities assumed. Goodwill is not amortized and is not deductible for tax purposes.

  

f)Assets acquired at their fair market values include inventory, biological assets and property, plant and equipment.

  

6)Pro Forma adjustments to the statement of operations in connection with acquisitions

  

The following summarizes the pro forma adjustments in connection with the acquisitions of the Target Businesses to give effect to the acquisitions as if they had occurred on April 1, 2019 for purposes of the unaudited Pro Forma Consolidated Statements of Operations for the three months ended March 31, 2019 and twelve months ended December 31, 2018:

  

a)Intercompany balances were eliminated on consolidation consequent to acquisitions of the Target Businesses by Ayr.

  

b)Intercompany transactions in the nature of sales, purchases and management fee were eliminated on consolidation consequent to the acquisitions of the Target Businesses by Ayr.

  

c)To incorporate additional estimated transaction cost of $2,500,000 to be incurred in connection of acquisition of the Target Businesses by Ayr.

  

d)The tax rate is expected to be approximately 23% as a result of acquisitions. However, no impact of tax other than what is reflected historically on the financial statements of Ayr and the entities being acquired, has been shown in the unaudited Pro Forma statements. As the target businesses operate in the cannabis industry, they are subject to the limitations of the U.S. Internal Revenue Code Section 280E.

  

7)Constructed/calculated statements of operations

  

The financial statements of the businesses used to prepare the unaudited Pro Forma Consolidated Financial Statements, were prepared for the purpose of the unaudited Pro Forma Consolidated Financial Statements and do not conform with the financial statements for the businesses included elsewhere in the Prospectus.

  

 13

 

Ayr Strategies Inc. (formerly, Cannabis Strategies Acquisition Corp.) 

 

 

Notes to the Unaudited Pro Forma Consolidated Financial Statements 

As at March 31, 2019 (Expressed in US$)

 

 

 

For the purpose of the unaudited Pro Forma Consolidated Financial Statements, the Ayr unaudited Pro Forma Consolidated Statements of Operations for the twelve months ended December 31, 2018 were calculated as follows:

US$ AYR (USD)
  12M Ended
September 30,
2018
$
Less: 3M Ended
December 31,
2017
$
Plus: 3M Ended
December 31,
2018
$
12M Ended
December 31,
2018
$
Revenues, net of discounts - - - -
         
Cost of goods sold before biological asset adjustment    - - - -
  - - - -
Fair value changes in biological assets included in cost of sales  - - - -
Unrealized gain on biological asset transformation - - - -
Gross profit (loss) - - - -
Expenses        
Transaction costs 7,115,646 6,723,178 - 392,467
General and administrative 916,469 13,391 2,341,604 3,244,682
Sales and marketing - - - -
Depreciation - - - -
Licensor profit share - - - -
Management fee - - - -
Foreign exchange - - 20,212 20,212
Net unrealized loss on changes in the fair value of financial liabilities 29,454,070 (491,688) 42,503,558 72,449,316
Total expenses 37,486,185 6,244,882 44,865,374 76,106,677
         
Income (loss) from operations (37,486,185) (6,244,882) (44,865,374) (76,106,677)
         
Òther (income) expense        
Share of (income) loss on equity investments - - - -
Interest expense - - - -
Interest income (727,526) (24,248) (231,553) (934,831)
Management fee income - - - -
Rental income and others - - - -
Total other (income) expense (727,526) (24,248) (231,553) (934,831)
         
Income tax (recovery) expense - - - -
         
Net income (loss) (36,758,658) (6,220,634) (44,633,822) (75,171,846)

 14

 

 

Ayr Strategies Inc. (formerly, Cannabis Strategies Acquisition Corp.)

 

Notes to the Unaudited Pro Forma Consolidated Financial Statements

As at March 31, 2019 (Expressed in US$)

 

 

8)Pro Forma adjustments to the unaudited Pro Forma Consolidated Statement of Financial Position in connection with the Acquisitions of the Target Businesses

  

The following summarizes the pro forma adjustments in connection with the acquisitions of the Target Businesses to give effect to the acquisitions as if they had occurred on January 1, 2018 for purposes of the unaudited Pro Forma Consolidated Statement of Financial Position as at December 31, 2018:

 

a)Cash, shares and notes payable totaling $231,200,000 is paid/issued on the acquisitions.

  

b)To reflect the fair value adjustment to the licenses and intellectual property as discussed under “Preliminary Acquisition Accounting” section above (refer to note 5(c)).

  

c)Goodwill represents the excess of the preliminary estimated purchase price over the estimated fair value of the tangible and identifiable intangible assets acquired and liabilities assumed by Ayr. Goodwill represents the value of intangible assets that do not qualify for separate recognition.

  

d)All members’ equity relating to the Target Businesses were eliminated upon each respective acquisition thereof by Ayr.

  

e)Upon the acquisition of each of the Target Businesses, the restricted cash and short-term investments held in escrow was transferred to cash.

  

f)To incorporate additional estimated transaction cost of $2,500,000 to be incurred in connection of acquisition of the Target Businesses by Ayr.

  

g)This adjustment relates to the closing of the Qualifying Transaction. This adjustment has been presented based on the redemption of 1,000 Class A Restricted Voting Shares. The adjustment includes the following elements: (i) release of $101 million from restricted cash held in the form of flexible guaranteed investment certificates to cash, and (ii) release of $3.5 million to pay deferred underwriters commission.

  

h)To show the repayment of the deferred underwriters’ commission as a reduction of the liability and cash.

  

i)To adjust for the fair market value of assets taken over by Ayr on acquisition as disclosed in Note 5.

  

9)Pro Forma Earnings per Share (“Pro Forma EPS”)

  

The Pro Forma EPS have been adjusted to reflect the unaudited Pro Forma Consolidated Statement of Operations for the three months period ended March 31, 2019 and the twelve months ended December 31, 2018. In addition, the number of shares used in calculating the unaudited Pro Forma Consolidated Basic and Diluted Earnings Per Share has been adjusted to reflect the estimated total number of shares of Ayr that would be outstanding as of the closing of the acquisitions of the Target Businesses.

  

The pro forma total number of shares of stock of the consolidated corporation that would be outstanding after the expected closing of the acquisitions of the Target Businesses noted below in the table.

  

The following is a breakdown of the Pro Forma EPS calculation:

 

   Three Months Ended
March 31, 2019
   Twelve Months Ended
December 31, 2018
 
Net loss  $(131,678,002)  $(72,073,620)
           
Ayr Strategies Inc. shares:          
Multiple voting shares   3,696,486    3,696,486 
Subordinate voting shares   14,517,855    14,517,855 
Weighted average number of shares outstanding   18,214,341    18,214,341 
           
Loss per share - basic and diluted  $(7.23)  $(3.96)

  

 15

 

Ayr Strategies Inc. (formerly, Cannabis Strategies Acquisition Corp.) 

 

 

Notes to the Unaudited Pro Forma Consolidated Financial Statements 

As at March 31, 2019 (Expressed in US$)

 

 

10)Reconciliation of Non-IFRS Measures

  

The Company reports certain non-IFRS measures that are used to evaluate the performance of such businesses and the performance of their respective segments, as well as to manage their capital structure. As non -IFRS measures generally do not have a standardized meaning, they may not be comparable to similar measures presented by other issuers. Securities regulations require such measures to be clearly defined and reconciled with their most directly comparable IFRS measure.

  

The Company references non-IFRS measures and cannabis industry metrics in this document and elsewhere. These measures are not recognized measures under IFRS and do not have a standardized meaning prescribed by IFRS and are therefore unlikely to be comparable to similar measures presented by other companies. Rather, these are provided as additional information to complement those IFRS measures by providing further understanding of the results of the operations of the Company from management’s perspective. Accordingly, these measures should not be considered in isolation, nor as a substitute for analysis of the Company’s financial information reported under IFRS. Non-IFRS measures used to analyze the performance of the Target Businesses include “Adjusted EBITDA”.

  

The Company believes that these non-IFRS financial measures provide meaningful supplemental information regarding the Company’s performances and may be useful to investors because they allow for greater transparency with respect to key metrics used by management in its financial and operational decision-making. These financial measures are intended to provide investors with supplemental measures of the Company’s operating performances and thus highlight trends in the Company’s core businesses that may not otherwise be apparent when solely relying on the IFRS measures.

  

Adjusted EBITDA

  

“Adjusted EBITDA” represents income (loss) from operations, as reported, before interest, tax, and adjusted to exclude extraordinary items, non-recurring items, other non-cash items, including stock based compensation expense, depreciation, and the non-cash effects of accounting for biological assets and inventories, and further adjusted to remove acquisition related costs.

  

The following is a reconciliation of how Ayr calculates Adjusted EBITDA and reconciles it to IFRS figures, based on figures derived from the financial statements of Ayr and the respective Target Businesses.

  

 16

 

Ayr Strategies Inc. (formerly, Cannabis Strategies Acquisition Corp.)

 

 

Notes to the Unaudited Pro Forma Consolidated Financial Statements

As at March 31, 2019 (Expressed in US$)

 

 

Adjusted EBITDA Reconciliation for the twelve months ended December 31, 2018

 

Period  12 mo ended
12/31/2018
As Reported
  12 mo ended
12/31/2018
As Reported
  12 mo ended
12/31/2018
As Reported
  12 mo ended
12/31/2018
As Reported
  12 mo ended
12/31/2018
As Reported
    12 mo ended
12/31/2018
Pro forma
   12 mo ended
12/31/2018
As Reported
    12 mo ended
12/31/2018
Pro forma
 
                                 
   Washoe  Canopy  LivFree  Sira  CannaPunch    Total Anchor Portfolio    Ayr2    Combined  
Net income (loss) from operations  3,682,863  3,150,573  7,462,753  (10,269,243)  1,571,280    5,598,226    (77,671,846)    (72,073,620)  
                                 
Non-cash items accounting for biological assets and inventories                                
Fair value changes in biological assets  5,086,289      18,470,531      23,556,820        23,556,820  
Unrealized gain on changes in fair value of biological assets  (4,005,602)      (11,287,162)      (15,292,764)        (15,292,764)  
   1,080,687      7,183,369      8,264,056        8,264,056  
                                 
Interest  331,277      2,738,950      3,070,227    (934,831)    2,135,396  
Depreciation and amortization  51,831  50,766  191,301  965,936  5,027    1,264,861        1,264,861  
Acquisition costs        324,299  318,448  20,883         3,045,800    3,045,800  
Share-based compensation expense                      
Other1  (1,858,783)  546,848  (274,899)  5,117,531  1,123,212    4,653,909    75,560,877    80,214,786  
   (1,475,675)  597,614  240,701  9,140,865  1,149,122    9,652,627    77,671,846    84,824,473  
                                 
Adjusted EBITDA  3,287,875  3,748,187  7,703,454  6,054,991  2,720,402    23,514,909    (0)    23,514,909  

 

 

1 Other adjustments made to exclude the impact of management fees, profit sharing arrangements, transaction fees, and the net unrealized loss on changes in the fair value of financial liabilities

 

2 Includes pro forma adjustments as outlined in the notes to the Unaudited Pro Forma Consolidated Financial Statements

 

 17

 

Ayr Strategies Inc. (formerly, Cannabis Strategies Acquisition Corp.)

 

 

Notes to the Unaudited Pro Forma Consolidated Financial Statements

As at March 31, 2019 (Expressed in US$)

 

  

Adjusted EBITDA Reconciliation for the three months ended March 31, 2019

 

 

Period  3 mo ended
3/31/2019
As Reported
  3 mo ended
3/31/2019
As Reported
  3 mo ended
3/31/2019
As Reported
  3 mo ended
3/31/2019
As Reported
  3 mo ended
3/31/2019
As Reported
    3 mo ended
3/31/2019
Pro forma
   3 mo ended
3/31/2019
As Reported
    3 mo ended
3/31/2019
Pro forma
 
                                 
   Washoe  Canopy  LivFree  Sira  CannaPunch    Total Anchor
Portfolio
   Ayr2    Combined  
Net income (loss) from operations  1,150,430  492,052  2,901,132  3,038,364  318,751    7,900,729    (139,578,731)    (131,678,002)  
                                 
Non-cash items accounting for biological assets and inventories                                
Fair value changes in biological assets  804,650   –    4,253,838      5,058,488        5,058,488  
Unrealized gain on changes in fair value of biological assets  (1,227,204)      (7,282,658)      (8,509,862)        (8,509,862)  
   (422,554)      (3,028,820)      (3,451,374)        (3,451,374)  
                                 
Interest  94,888  78,446  41,354  824,668  15,969    1,055,325    (227,164)    828,161  
Depreciation and amortization  95,266  77,596  137,156  352,954  47,821    710,793         710,793  
Acquisition costs  5,362  11,200     122,438            3,012,026    3,012,026  
Share-based compensation expense                      
Other1  (178,294)  180,000  22,616  2,499,734  224,730    2,748,786    136,793,869    139,542,655  
   17,222  347,242  201,126  3,799,794  288,520    4,653,904    139,578,731    144,093,635  
                                 
Adjusted EBITDA  745,098  839,294  3,102,258  3,809,338  607,271    9,103,259    0    9,103,259  

 

 18