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