Namaste Technologies Inc. Consolidated Financial Statements. For the years ending August 31, 2017 and 2016 Expressed in Canadian dollars (Audited)

Transcription

1 Consolidated Financial Statements For the years ending and 2016 Expressed in Canadian dollars

2 Table of Contents Page Management Responsibility Independent Auditor s Report Consolidated Financial Statements Consolidated Statements of Financial position... 1 Consolidated Statements of Loss... 2 Consolidated Statements of Comprehensive Loss... 3 Consolidated Statements of Changes in Equity... 4 Consolidated Statements of Cash Flows

3 Management s Responsibility To the Shareholders of Namaste Technologies Inc.: The accompanying audited consolidated financial statements ( financial statements ) of Namaste Technologies Inc. and all the information in the management discussions and analysis ( MD&A ) are the responsibility of management and are approved by the Board of Directors. The financial statements have been prepared by management in accordance with International Financial Reporting Standards. When alternative accounting methods exist, management has chosen those it considers most appropriate in the circumstances. The significant accounting policies used are described in Note 3 to the financial statements. Certain amounts in the financial statements are based on estimates and judgments. Management has determined such amounts on a reasonable basis to ensure that the financial statements are presented fairly, in all material respects. Management has prepared the financial information presented elsewhere in the MD&A and has ensured that it is consistent with that in the financial statements. The Company s Chief Executive Officer ( CEO ) and Chief Financial Officer ( CFO ) are responsible for establishing and maintaining disclosure controls and procedures and internal control over financial reporting. The CEO and the CFO have supervised an evaluation of the effectiveness of the Company s internal control over financial reporting, as at August 31, As at, management identified material misstatement from the prior year. During the uncovering of these misstatements, management identified internal control weaknesses over financial reporting. These weaknesses will be improved during the course of the fiscal year. The Board of Directors is responsible for ensuring that management fulfills its responsibilities for financial reporting and is ultimately responsible for reviewing and approving the financial statements. The Board of Directors carries out this responsibility principally through its Audit Committee. The Audit Committee is appointed by the Board of Directors, and all of its members are independent directors. The Audit Committee meets periodically with management to discuss disclosure controls and procedures, internal control over financial reporting, management information systems, accounting policies, auditing and financial reporting issues, to satisfy itself that each party is properly discharging its responsibilities, and to review the financial statements, the Management s Discussion and Analysis and the independent auditor s report. The Audit Committee reports its findings to the Board of Directors for consideration when approving the financial statements for issuance to the shareholders. The Audit Committee also considers, for review by the Board of Directors and approval by the shareholders, the engagement or reappointment of the independent auditor, and reviews and approves the terms of its engagement as well as the fee, scope and timing of its services. The financial statements have been audited, on behalf of the shareholders, by MNP, the independent auditor, in accordance with Canadian generally accepted auditing standards. The independent auditor has full and free access to the Audit Committee and may meet with or without the presence of management. January 7, 2018 (Signed) Sean Dollinger President and Chief Executive Officer (Signed) Philip van den Berg Chief Financial Officer

4 Independent Auditor s Report Independent Auditors Report To the Shareholders of Namaste Technologies Inc.: We have audited the accompanying consolidated financial statements of Namaste Technologies Inc., and its subsidiaries, which comprise the consolidated statements of financial position as at and August 31, 2016, and the consolidated statements of loss and other comprehensive loss, changes in equity and cash flows for the years then ended, and a summary of significant accounting policies and other explanatory information. Management s Responsibility 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 financial statements that are free from material misstatement, whether due to fraud or error. Auditors' Responsibility Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with Canadian generally accepted auditing standards. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditors judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity s preparation and fair presentation of the consolidated financial statements 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 entity s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that the audit evidence we have obtained in our audits is sufficient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of Namaste Technologies Inc., and its subsidiaries, as at, August 31, 2016 and their financial performance and their cash flows for the years then ended in accordance with International Financial Reporting Standards. Emphasis of Matter Restated Comparative Information: Without qualifying our opinion, we draw attention to Note 3.20 in the consolidated financial statements which explains that certain comparative information previously reported in the Company's consolidated financial statements as at and for the year ended August 31, 2016 have been restated. Montréal, Québec January 8, CPA auditor, CA, public accountancy permit No. A122514

5 Consolidated Statements of Financial Position As at and August 31, 2016 Assets Current August 31, Restated Cash 1,132, ,665 Receivables Note 6 303,230 40,694 Inventory Note 8 2,497, ,306 Prepaids and deposits Note 7 667,912 91,946 Tax receivable Note ,822 - Corporate taxes receivable 15,009 31,881 Due from related parties Note 10 81,612 6,531 Total current assets 4,869,239 1,228,023 Long-term Intangibles Note 5 6,227, ,342 Goodwill Note 5 2,827,420 1,990,716 Total long-term assets 9,055,131 2,883,058 Total assets 13,924,370 4,111,081 Liabilities Current Accounts payable and accrued liabilities Note 9 777, ,148 Loan payable Note 13 94,981 - Earn-outs payable Note 4 489, ,092 Due to related parties Note ,317 Total current liabilities 1,362,165 1,191,557 Long-term Loan payable Note ,943 - Earn-outs payable Note 4-1,232,935 Deferred tax liability Note ,868 - Total long-term liabilities 1,034,811 1,232,935 Shareholders' equity Share capital Note 11 21,637,191 1,929,133 Deferred share issuance Note 4 1,190, ,831 Warrant and option reserve Note 11 6,354, ,317 Contributed surplus 1,798, ,061 Accumulated other comprehensive income (299,016) (163,672) Retained earnings deficit (19,154,345) (1,797,081) Total shareholders' equity 11,527,394 1,686,589 Total shareholders' equity & liabilities 13,924,370 4,111,081 Approved on behalf of the Board of Directors on January 7, 2018: (Signed) Sean Dollinger Director (Signed) Philip van den Berg Director

6 Consolidated Statements of Loss For the twelve months ended and August 31, 2016 August 31, Restated Sales 10,981,414 3,488,902 Cost of goods sold 9,603,286 2,368,428 Gross profit 1,378,128 1,120,474 Operating expenses Selling expenses Note 15 3,119, ,291 Administration expenses Note 15 6,687,474 2,390,060 Other expenses Note , ,982 Impairment of goodwill and intangibles Note 5, 15 9,187,428 - Total operating expenses 19,507,527 3,364,333 Loss before other income and income taxes (18,129,399) (2,243,859) Other income 771,799 91,548 Loss before income taxes (17,357,600) (2,152,311) Income tax expense (benefit) Current Note ,843 - Deferred Note 16 (164,179) - Net loss (17,357,264) (2,152,311) Net loss per share, basic and diluted: $(0.12) $(0.04) Weighted average number of outstanding common shares, basic and diluted: 140,038,698 53,458,671

7 Consolidated Statements of Comprehensive Loss For the twelve months ended and August 31, 2016 August 31, Restated Net loss (17,357,264) (2,152,311) Other comprehensive income Cumulative translation adjustment (135,344) (160,244) Net comprehensive loss for the year (17,492,608) (2,312,555)

8 Consolidated Statements of Changes in Shareholders Equity As at and August 31, 2016 Statement of change in equity - year ending August 31, restated Common shares Common shares $ Deferred shares $ Options and warrants $ Accumulate d OCI $ Contributed surplus $ Retained earnings $ Total $ Shareholders equity August 31, as reported (3,428) - 355, ,802 Shares issued on business Combination Note 1 36,218, Shares retained by Next Gen shareholders Note 1 8,310, , ,618 Share issuance Note 12 23,323,794 1,640, ,640,349 Deferred shares Note , ,831 Options and warrants issued Note , ,317 Share issuance costs - (209,834) (209,834) Forgiveness of related party amounts , ,061 Net loss (2,152,311) (2,152,311) Other comprehensive loss (160,244) - - (160,244) Shareholders equity August 31, restated 67,852,297 1,929, , ,317 (163,672) 250,061 (1,797,081) 1,686,589

9 Consolidated Statements of Changes in Shareholders Equity As at and August 31, 2016 Statement of change in equity - year ending Common shares Common shares $ Deferred shares $ Options and warrants $ Accumulate d OCI $ Contributed surplus $ Retained earnings $ Total $ Shareholders equity August 31, restated 67,852,297 1,929, , ,317 (163,672) 250,061 (1,797,081) 1,686,589 Share issuance Note 12 71,176,927 8,875,804-5,561, ,436,992 Issuance costs 600,000 (2,414,593) - 1,200, (1,214,055) Shares issued to acquire VaporSeller Note 5, 12 3,400, ,100 (405,100) Shares issued to acquire URT1 Note 5, 12 15,784,754 5,501, ,501,358 Shares issued to acquire Australian VaporizerNote 5, 12 1,988, , ,573 Shares issued to acquire CannMart Note 5, 12 8,668,515 2,500, ,500,000 Share issued on convertible debenture 2,804, , ,000 Deferred shares Note 5, ,000, ,000,000 Net loss (17,357,264) (17,357,264) Shares issued on exercise of options and warnote 12 10,181,362 2,994,170 (95) (1,279,679) ,714,396 Share-based compensation Note 12 2,219, , ,548,503-2,147,691 Shares issued for services 1,040, , ,458 Other comprehensive loss (135,344) - - (135,344) Shareholders equity 185,715,916 21,637,191 1,190,636 6,354,364 (299,016) 1,798,564 (19,154,345) 11,527,394

10 Consolidated Annual Statements of Cash Flow August 31, Restated Net loss (17,357,264) (2,152,311) Adjustments for: Share based compensation 2,147, ,826 Foreign exchange gain (79,233) (160,244) Non-cash listing costs - 570,350 Other non-cash income (696,011) (91,548) Depreciation 12,794 - Shares issued for services 270,458 - Deferred tax recovery (164,179) - Amortization of intangible assets 430,029 - Impairment of goodwill and intangibles 9,187,428 - Cashflow used in operating activities before changes in working capital (6,248,287) (1,555,927) Changes in non-cash working capital Note 19 (1,577,103) (136,408) Cash provided by (used for) the following activities (7,825,390) (1,692,335) `` Financing activities Change in related party balances (300,846) 340,235 Long-term debt payment (137,301) - Earn-out payment (661,750) - Proceeds from issuance of share capital 14,436,992 1,358,783 Share issuance costs (1,214,055) - Issuance of convertible debenture 400,000 - Proceeds from exercise of warrants and options 1,714, ,491 Cash flows from financing activities 14,237,436 2,293,509 Investing activities Investment in asset and business acquisitions (5,392,941) (656,200) Cash flows used in investing activities (5,392,941) (656,200) Decrease in cash resources 1,019,105 (55,026) Cash resources, beginning of the year 113, ,691 Cash resources (deficiency), end of the year 1,132, ,665

11 1. Nature of operations and background information Namaste Technologies Inc. ( Namaste or the Company ) is an e-commerce business that distributes vaporizers and accessories for aromatherapy purposes. Namaste is an entity formed under the British Columbia Business Corporations Act. The Company is a reporting issuer in British Columbia, Alberta and Ontario, listed (since February 19, 2014) on the Canadian Securities Exchange ( CSE ) under the trading symbol N. The Company s head office is located at Suite 2300, Bentall 5, 550 Burrard Street, Vancouver, British Columbia, V6C 2B5, Canada. These consolidated financial statements have been prepared in accordance with International Financial Reporting Standards ("IFRS") as issued by the International Accounting Standards Board ( IASB ), and, in the opinion of management, include all adjustments necessary for fair presentation. These consolidated financial statements were approved and authorized by the Board of Directors of the Company on January 7, On February 26, 2016, the Company entered in to a three-cornered amalgamation of Canada Inc. ( Dollinger Canada ), an incorporated entity that was comprised of a vaporizer and accessories division (the Division ) formerly included in the operations of Dollinger Enterprises USA Inc. ( Dollinger USA ), Next Gen Metals Inc. ( Next Gen ), an incorporated public entity listed on the CSE, and Green Rush Analytical Laboratories Inc. ( Green Rush ), a wholly owned subsidiary of Next Gen. The consolidated statement of financial position gives effect to the Transaction as closed on February 26, Going concern These consolidated financial statements have been prepared in accordance with International Financial Reporting Standards ( IFRS ) as issued by the International Accounting Standards Board ( IASB ) applicable to a going concern which assumes that the Company will be able to continue its operations and will be able to realize its assets and discharge its liabilities in the normal course of business for the foreseeable future. The ability of the Company to continue as a going concern is dependent on generating profitable operations, raising additional financing, and developing its products and services. As at, the Company has an accumulated deficit of $19,154,345 (August 31, $1,797,081), a working capital surplus of $3,507,074 (August 31, $36,466), and is not yet generating positive cash flows from operations. The accumulated deficit increased in fiscal 2017 primarily due to non-cash charges that were incurred during the period, but were not incurred in the prior period. These costs included an inventory write-down of $601,902, share-based compensation of $2,147,691, amortization of intangibles of $430,209, and impairment of goodwill and intangibles of $9,187,428. Historically, management has been successful in obtaining sufficient funding for operating and capital requirements. Subsequent to year end, the Company completed a successful private placement whereby a total of 14,409,000 Units of the Company were issued and sold, at a price per Unit of $0.25, for total gross proceeds of $3,602,250 (see Note 20). Also, on December 7, 2017 the Company announced that it exercised its right under a warrant indenture agreement and thereby accelerated the expiry of warrants issued under that agreement which was anticipated to yield further funding for the Company. Furthermore, due to the Company s strong growth, sales have increased in line with expectations as more traffic is driven through our online sales platforms. Management has also undertaken steps to decrease various overhead costs 11

12 and has actively entered a new market for the distribution of cannabis products which it anticipates will present high growth opportunities. There is, however, no assurance that the Company will be able to generate profits from operations or that additional future funding will be available to the Company, or that such funding will be available on terms which are acceptable to the management of the Company. These financial statements do not reflect any adjustments to the carrying values of assets and liabilities and the reported amounts of expenses and balance sheet classifications that would be necessary if the going concern assumption was not appropriate and such adjustments could be material. 2. Basis of preparation 2.1. Basis of presentation The principal accounting policies adopted in the preparation of the consolidated financial statements are set out below. The consolidated financial statements are presented in Canadian dollars, which is the Company s presentation currency. The functional currencies of the Group are as follows: Functional currencies Namaste Technologies Inc. Namaste Technologies Holdings Inc. Dollinger Enterprises US Ltd. Namaste Bahamas Inc. Australian Vaporizers Pty Ltd. CannMart Inc. Next Gen USA Inc. Currency Canadian Canadian United States United States Australian Canadian United States The preparation of financial statements in compliance with IFRS requires the use of certain critical accounting estimates. It also requires management to exercise judgment in applying the Company s accounting policies. The areas where significant judgments and estimates have been made in preparing the consolidated financial statements and their effect are disclosed below. The consolidated financial statements have been prepared on the historical cost basis except for certain non-current assets and financial instruments, which are measured at fair value, as explained in the accounting policies in Note Use of management estimates, judgments and measurement uncertainty The preparation of these consolidated financial statements requires management to make judgments and estimates and form assumptions that affect the reported amounts of assets and liabilities at the date of the consolidated financial statements and reported amounts of revenues and expenses during the reporting period. Such estimates primarily relate to unsettled transactions and events as at the date of the consolidated financial statements. On an ongoing basis, management evaluates its judgments and estimates in relation to assets, liabilities, revenues, and expenses. Management uses various factors it believes to be reasonable under the given circumstances as the basis for its 12

13 judgments and estimates. Actual outcomes differ from these estimates under different assumptions and conditions. The critical judgements and significant estimates in applying accounting policies that have the most significant effect on the amounts recognized in the consolidated financial statements are: Key judgements include: Going concern Impairment of non-financial assets. Non-financial assets include property, plant and equipment and Intangible assets. Impairment exists when the carrying value of an asset or cash generating unit exceeds its recoverable amount, which is the higher of its fair value less costs of disposal and its value in use. The fair value less costs of disposal calculation is based on available data from binding sales transactions in an arm s length transaction of similar assets or observable market prices less incremental costs for disposing of the asset. The value in use calculation is based on a discounted cash flow model. The recoverable amount is most sensitive to the discount rate. The determination of whether a transaction meets the definition of a business combination The determination of cash generating units ( CGU s). The determination of CGUs requires judgment in determining the lowest level for which there are largely independent cash inflows generated by the asset group level. This determination could have an impact on the results of impairment testing and, as appropriate, on the impairment charge recorded in the consolidated statements of net income and comprehensive income. Key sources of estimation uncertainty include: The value of inventory write-down The fair value of deferred taxes (Note 15) The estimated impact of new and revised standards Allowance for doubtful accounts (Note 6) The measurement of the purchase price allocation and the fair value of the consideration paid in a business combination (Note 4) The measurement of the value of intangibles and goodwill (Note 5) Allowance for doubtful accounts. The Company makes an assessment of whether accounts receivable is collectible from customers. Accordingly, we establish an allowance for estimated losses arising from nonpayment and other sales adjustments, taking into consideration customer credit-worthiness, current economic trends and past experience. If future collections differ from estimates, future earnings would be affected. Useful lives of equipment. The Company estimates the useful lives of property, plant and equipment based on the period over which the assets are expected to be available for use. The estimated useful lives of property, plant and equipment are reviewed periodically and are updated if expectations differ from previous estimates due to physical wear and tear, technical or commercial obsolescence and legal or other limits on the use of the relevant assets. In addition, the estimation of the useful lives of property, plant and equipment are based on 13

14 internal technical evaluation and experience with similar assets. It is possible, however, that future results of operations could be materially affected by changes in the estimates brought about by changes in factors mentioned above. The amounts and timing of recorded expenses for any period would be affected by changes in these factors and circumstances. A reduction in the estimated useful lives of the property, plant and equipment would increase the recorded expenses and decrease the non-current assets. Share-based payment transactions and warrants. The Company measures the cost of equity-settled transactions with employees and directors by reference to the fair value of the equity instruments at the date at which they are granted. Estimating fair value for share-based payment transactions requires determining the most appropriate valuation model, which is dependent on the terms and conditions of the grant. This estimate also requires determining and making assumptions about the most appropriate inputs to the valuation model including the expected life, volatility, dividend yield of the share option and forfeiture rate. Similar calculations are made in order to value warrants. Such judgments and assumptions are inherently uncertain. Changes in these assumptions affect the fair value estimates. Useful lives of intangible assets. Fair value of financial instruments. The estimated fair value of financial assets and liabilities, by their very nature, are subject to measurement uncertainty. The Company uses consistent valuation methodologies by third party experts to determine the fair value of financial assets and liabilities such as purchase options and convertible debentures held at fair value. Refer to Note 14 for information on methodology and key assumptions. Determining the fair value of intangible assets acquired in asset purchases requires management to make assumptions and estimates about future events. The methodology used to determine the fair value of the intangible assets at date of acquisition is the same as that used to determine fair value less costs of disposal for purposes of annual impairment testing New standards and interpretations to be adopted in future periods At the date of authorization of these consolidated financial statements, the IASB and IFRS Interpretations Committee (IFRIC) have issued the following new and revised Standards and Interpretations which were either effective during the fiscal year or are not yet effective as indicated and which the Company has not early adopted. However, the Company is currently assessing what impact the application of these standards or amendments will have on the consolidated financial statements. International Accounting Standards ( IAS ) 1 Presentation of Financial Statements was amended by the IASB in December The amendments are designed to further encourage companies to apply professional judgement in determining what information to disclose in their financial statements. For example, the amendments make clear that materiality applies to the whole of financial statements and that the inclusion of immaterial information can inhibit the usefulness of financial disclosures. Furthermore, the amendments clarify that companies should use professional judgement in determining where and in what order information is presented in the financial disclosures. The effective date is for annual periods beginning or after January 1, Entities may still choose to apply IAS 1 immediately, but are not required to do so. This application of this amendment had no impact on the Company. IAS 7 Statement of Cash Flows has been revised to incorporate amendments issued by the IASB in January The amendments require entities to provide disclosures that enable users of financial statements to evaluate changes in liabilities arising from financing activities. The amendments are effective for annual periods beginning on or after 14

15 January 1, IFRS 9 Financial Instruments was issued in final form in July 2014 by the IASB and will replace IAS 39 Financial Instruments: Recognition and Measurement. IFRS 9 uses a single approach to determine whether a financial asset is measured at amortized cost or fair value, replacing the multiple rules in IAS 39. The approach in IFRS 9 is based on how an entity manages its financial instruments in the context of its business model and the contractual cash flow characteristics of the financial assets. Most of the requirements in IAS 39 for classification and measurement of financial liabilities were carried forward unchanged to IFRS 9. The new standard also requires a single impairment method to be used, replacing the multiple impairment methods in IAS 39. IFRS 9 also includes requirements relating to a new hedge accounting model, which represents a substantial overhaul of hedge accounting which will allow entities to better reflect their risk management activities in the financial statements. The most significant improvements apply to those that hedge non-financial risk, and so these improvements are expected to be of particular interest to non-financial institutions. IFRS 9 is effective for annual periods beginning on or after January 1, 2018, however early adoption is permitted. IFRS 15 Revenue from Contracts with Customers. In May 2014, the IASB issued IFRS 15, Revenue from Contracts with Customers. IFRS 15 specifies how and when to recognize revenue as well as requiring entities to provide users of financial statements with more informative, relevant disclosures. The standard supersedes IAS 18, Revenue, IAS 11, Construction Contracts, and a number of revenue-related interpretations. Application of the standard is mandatory for all IFRS reporters and it applies to nearly all contracts with customers: the main exceptions are leases, financial instruments and insurance contracts. IFRS 15 must be applied in an entity s first annual IFRS financial statements for periods beginning on or after January 1, 2018, with early adoption permitted. IFRS 16 - Leases replaces IAS 17, Leases. The new model requires the recognition of almost all lease contracts on a lessee s statement of financial position as a lease liability reflecting future lease payments and a right-of-use asset with exception for certain short-term leases and leases of low-value assets. In addition, the lease payments are required to be presented on the statement of cash flow within the operating and financing activities for the interest and principal portions, respectively. IFRS 16 is effective for annual period beginning on or after January 1, 2019, with early adoption permitted if IFRS 15, Revenue of Contracts with Customers, is also applied. The Company has yet to evaluate the impact of this new standard. IFRIC 22 Foreign Currency Transactions and Advance Consideration issued by the IASB in December 2016, provides guidance on the issue of the "date of the transaction" for the purpose of determining the exchange rate at the time of the transaction, to apply to transactions that are within the scope of IAS 21, Effects of Changes in Foreign Exchange Rates, which involve the receipt or payment of an advance consideration in a foreign currency. The interpretation applies for annual reporting periods beginning on or after January 1, IFRIC 23 Uncertainty over income tax treatments issued by the IASB in June 2017, provides guidance as to when it is appropriate to recognize a current tax asset when the taxation authority requires an entity to make an immediate payment related to an amount in dispute. This interpretation applies for annual reporting periods beginning on or after January 1, Summary of significant accounting polices The accounting policies set out below have been applied consistently to all periods presented in the consolidated financial statements. 15

16 3.1. Basis of consolidation The consolidated financial statements include the accounts of the Company and entities controlled by the Company and its subsidiaries. The consolidated financial statements incorporate the financial statements of the Company and entities controlled by the Company and its subsidiaries. Control is achieved when the Company: has power over the investees; is exposed, or has rights, to variable returns from its involvement with the investee; and has the ability to use its power to affect its returns. Subsidiaries of the parent Company, Namaste Technologies Inc., are as follows: Equity interests August 31, 2016 Namaste Technologies Holdings Inc. 100% 100% Dollinger Enterprises US Ltd. 100% 100% Namaste Bahamas Inc. 100% 100% Australian Vaporizers Pty Ltd. 100% - CannMart Inc. 100% - Next Gen USA Inc. 100% 100% Consolidation of a subsidiary begins when the Company obtains control over the subsidiary and ceases when the Company loses control of the subsidiary. Specifically, income and expenses of a subsidiary acquired or disposed of during the year are included in the consolidated statements of income and other comprehensive income from the date the Company gains control until the date when the Company ceases to control the subsidiary All intercompany transactions, balances, revenue and expenses are eliminated in full on consolidation Property and equipment Property and equipment are stated at cost, less accumulated depreciation and any accumulated impairment losses. The gain or loss arising on the disposal or retirement of an item of property and equipment is determined as the difference between the sales proceeds and the carrying amount of the asset and is recognized in the statement of income (loss). Expenditure to replace a component of an item of property, plant or equipment that is accounted for separately is capitalized and the existing carrying amount of the component written off. Other subsequent expenditure is capitalized if future economic benefits will arise from the expenditure. All other expenditures, including repair and maintenance, are recognized in the statement of income (loss) as incurred. Depreciation is charged to the income statement based on the cost, less estimated residual value, of the asset on a straight-line basis over the estimated useful life. Depreciation commences when the assets are available for use. The estimated useful lives are as follows: 16

17 Production equipment 5 years; Furniture and fixtures 3-5 years; Computer equipment 2 years; Leasehold improvements 5 years. Assets held for sale. Assets for which a management decision has been made to advertise for sale on the open market and are expected to be sold in a twelve months period are adjusted to fair value less costs to sell and reclassified to current assets Business combinations Acquisitions of business are accounted for using the acquisition method. The consideration transferred in a business combination is measured at fair value. This is calculated as the sum of the acquisition date fair values of the assets transferred by the Company and liabilities incurred by the Company to the former owners of the acquiree in exchange for control of the acquiree. Acquisition related costs are recognized in profit and loss as incurred. Goodwill is measured as the excess of the sum of the consideration transferred, the amount of any non-controlling interests in the acquiree, and the fair value of the acquirer s previously held equity interest in the acquiree (if any) over the net of the acquisition date amounts of the identifiable assets acquired and the liabilities assumed. If, after reassessment, the net of the acquisition date amounts of the identifiable assets acquired and liabilities assumed exceeds the sum of the consideration transferred, the amount of any non-controlling interests in the acquiree and the fair value of the acquirer s previously held interest in the acquiree (if any), the excess is recognized immediately in profit or loss as a bargain purchase gain. When the consideration transferred by the Company in a business combination includes assets or liabilities resulting from a contingent consideration arrangement, the contingent consideration is measured at its acquisition date fair value and included as part of the consideration transferred in a business combination. Changes in the fair value of the contingent consideration that qualify as measurement period adjustments are adjusted retrospectively, with corresponding adjustments against goodwill. Measurement period adjustments are adjustments that arise from additional information obtained during the measurement period (which cannot exceed one year from the acquisition date) about facts and circumstances that existed at the acquisition date. The subsequent accounting for changes in the fair value of the contingent consideration that do not qualify as measurement period adjustments depends on how the contingent consideration is classified. Contingent consideration that is classified as equity is not re-measured at subsequent reporting dates and its subsequent settlement is accounted for within equity. Contingent consideration that is classified as an asset or a liability is re-measured at subsequent reporting dates in accordance with IAS 39 Financial Instruments: recognition and measurement, or IAS 37 Provisions, Contingent Liabilities and Contingent Assets, as appropriate, with the corresponding gain or loss being recognized in profit or loss. When a business combination is achieved in stages, the Company s previously held equity interest in the acquiree is re-measured to fair value at the acquisition date (i.e. the date when the Company obtains control) and the resulting gain or loss, if any, is recognized in profit or loss. Amounts arising from interests in the acquiree prior to the acquisition date that have previously been recognized in other comprehensive income are reclassified to profit or loss where such treatment would be appropriate if that interest were disposed of. 17

18 3.4. Goodwill Goodwill arising on an acquisition of a business is carried at cost as established at the date of acquisition of the business less accumulated impairment losses, if any. Where goodwill forms part of a cash-generating unit and part of the operation within the unit is disposed of, the goodwill associated with the operation disposed of is included in the carrying amount of the operation when determining the gain or loss on disposal of the operation. Goodwill disposed of in this circumstance is measured based on the relative values of the operation and the portion of the cash-generating unit retained Cash and cash equivalents Cash and cash equivalents consist of cash on hand, bank balances and short-term deposits with original maturities of three months or less. As at and as at August 31, 2016, there were no cash equivalents Inventory Inventory is valued at the lower of cost and net realizable value. Cost comprises all costs of purchases and other costs incurred in brining inventories to their present location and condition. The Company uses the weighted average method to track and cost inventory items. The inventory consists of vaporizers, vaporizer accessories, and therapeutic herbs. The inventory consists solely of goods currently available for sale and does not include any unfinished goods or work-in-progress. Inventory is written down to net realizable value by item when a decline in the price of items indicates that the cost is higher than the net realizable value. When events having caused a decline in the valuation of inventories no longer exist, the amount of the write-down is reversed so that the new carrying amount is the lower of the cost and the revised net realizable value Accounts payable and accrued liabilities Liabilities are recognized for amounts to be paid in the future for goods or services received, whether billed by the supplier or not. Provisions are recognized when the Company has an obligation (legal or constructive) arising from a past event, and the Company has a present obligation, and the costs to settle this obligation are both probable and able to be reliably measured Related party transactions Parties are considered to be related if one party has the ability, directly or indirectly, to control the other party or exercise significant influence over the other party in making financial and operating policy decisions. Parties are also considered to be related if they are subject to common control or common significant influence. Related parties may be individuals or corporate entities. A transaction is considered to be a related party transaction when there is a transfer of resources or obligations between related parties Revenue recognition The Company derives its revenues from the online sales of vaporizers and accessories through e-commerce platforms. Revenue is recognized when goods are dispatched, the amount of revenue can be measured reliably, the receipt of 18

19 economic benefits are probable and costs incurred can be measured reliably Leases Leases are classified as finance leases whenever the terms of the lease transfer substantially all the risks and rewards of ownership to the lessee. All other leases are classified as operating leases. As at and August 31, 2016, the Company did not have any finance leases. Operating lease payments are recognized as an expense on a straight-line basis over the lease term, except where another systematic basis is more representative of the time pattern in which economic benefits from the leased asset are consumed Share-based payments Share-based payments to employees are measured at the fair value of the instruments issued and recognized over the vesting periods. Share-based payments to non-employees are measured at the fair value of goods or services received or the fair value of the equity instruments issued, if it is determined the fair value of the goods or services cannot be reliably measured, and are recorded at the date the goods or services are received. The corresponding amount is recorded to the stock options reserve. The fair value of options is determined using the Black-Scholes Option Pricing Model which incorporates all market vesting conditions. The number of shares and options expected to vest is reviewed and adjusted at the end of each reporting period such that the amount recognized for services received as consideration for the equity instruments granted shall be based on the number of equity instruments that will eventually vest Income taxes Tax expense is recognized in the statement of profit and loss, except to the extent it relates to items directly in equity, in which case the related tax is recognized in equity. Current tax assets and liabilities for the current and prior periods are measured at the amount expected to be recovered from or paid to the taxation authorities. The tax rates and tax laws used to compute the amount are those that are enacted or substantively enacted by the date of the statement of financial position. Current tax expense is the expected tax payable on the taxable income for the year, using tax rates enacted or substantively enacted at the end of the reporting period, adjusted for amendments to tax payable with regards to previous years. Deferred tax assets and liabilities and the related deferred income tax expense or recovery are recognized for deferred tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using the enacted or substantively enacted tax rates expected to apply when the asset is realized or the liability settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that substantive enactment occurs. A deferred tax asset is recognized to the extent that it is probable that future taxable income will be available against which the asset can be utilized. To the extent that the Company does not consider it probable that a deferred tax asset will be recovered, the deferred tax asset is reduced. 19

20 Deferred tax assets and liabilities are offset when there is a legally enforceable right to set off current tax assets against current tax liabilities and when they relate to income taxes levied by the same taxation authority and the Company intends to settle its current tax assets and liabilities on a net basis Financial instruments A financial instrument is any contract that gives rise to a financial asset of one party and a financial liability or equity instrument of another party. Financial assets of the Company are comprised of cash, receivables and due from related party. The financial liabilities of the Company are comprised of accounts payable and accrued liabilities, due to related party, earn-out payable and long-term debt. Financial assets and financial liabilities are recognized in the statement of financial position initially at fair value when the Company becomes a party to the contractual provisions of the financial instrument Financial assets Financial assets are classified, at initial recognition, into one of the following categories: fair value through profit or loss; held-to-maturity investments; loans and receivables; available-for-sale financial assets; or derivatives designated as hedging instruments in an effective hedge. Financial assets at fair value through profit or loss ( FVTPL ) include financial assets held for trading, and are classified as such if they are acquired for the purpose of selling or repurchasing in the near term, and those that are designated as such upon initial recognition when doing so results in more relevant information being presented. This category also includes derivative financial instruments entered into by the Company that are not designated as hedging instruments in an effective hedging relationship. Cash is classified into this category. Financial assets are initially and subsequently measured at fair value with the exception of loans and receivables and investments that are held-to-maturity, which are subsequently measured at amortized cost using the effective interest rate method, less impairment. Receivables and due from related party are currently classified in loans and receivables. Subsequent recognition of changes in fair value of financial assets re-measured at each reporting date at fair value depend on their initial classification. Financial assets at fair value through profit or loss are measured at fair value with all gains and losses included in net income in the period in which they arise. Available-for-sale financial assets are measured at fair value with gains and losses included in other comprehensive income until the asset is removed from the consolidated statement of financial position or until impaired. No assets are currently classified as available-forsale financial assets. 20

21 3.15. Intangibles Purchased intangible assets are recognized as assets in accordance with IAS 38, Intangible Assets, where it is probable that the use of the asset will generate future economic benefits and where the cost of the asset can be determined reliably. Intangible assets acquired are initially recognized at cost of purchase and are subsequently carried at cost less accumulated amortization, if applicable, and accumulated impairment losses. The useful lives of intangible assets are assessed as either finite or indefinite. Intangible assets are carried at cost less any accumulated amortisation and any accumulated impairment losses. Customer lists have a useful life not exceeding 5 years. Licenses, domains and trade names have an indefinite useful life, and are tested for impairment annually Impairment of financial assets At each reporting date, the Company assesses whether its financial assets are impaired. Impairment losses are recognized in the consolidated income statement when there is objective evidence that the financial assets are impaired. Financial assets are deemed to be impaired if there is objective evidence of impairment as a result of one or more events that have occurred after the initial recognition of the asset (an incurred loss event ) and that loss event has an impact on the estimated future cash flows of the financial asset(s) that can be reliably estimated De-recognition of financial assets Financial assets are derecognized when the Company s contractual rights to the cash flows from the respective assets have expired or have been transferred and the Company has neither exposure to the risks inherent in those assets nor entitlement to rewards from them Financial liabilities and equity instruments Debt and equity instruments issued by the Company are classified as either financial liabilities or as equity in accordance with the substance of the contractual arrangements and the definitions of a financial liability and an equity instrument. Financial liabilities are classified, at initial recognition, into one of the following categories: fair value through profit or loss; other financial liabilities measured at amortized cost; or derivatives designated as hedging instruments in an effective hedge. Financial liabilities at fair value through profit or loss include financial liabilities held for trading and financial liabilities designated upon initial recognition at fair value through profit or loss. Financial liabilities are classified as held for trading if they are acquired for the purpose of selling in the near term, and those that are designated as such upon initial recognition when doing so results in more relevant information being provided. This category includes derivative financial instruments entered into by the Company that are not designated as hedging instruments in an effective hedging relationship. Otherwise, they are considered as another financial liability. No financial liabilities are currently classified as at fair value through profit or loss. Accounts payable and accrued liabilities, due to related party, earnout payable and long-term debt are currently classified as other liabilities. 21

22 Financial liabilities at fair value through profit or loss are measured at fair value with all gains and losses included in net income in the period in which they arise. Other financial liabilities are initially measured at fair value and subsequently measured at amortized cost using the effective interest rate method. An equity instrument is any contract that evidences a residual interest in the assets of an entity after deducting all of its liabilities. Equity instruments issued by the Company are recognized at the proceeds received, net of direct issue costs and applicable income taxes Foreign currency transactions Foreign currency transactions are translated into the respective companies functional currency using the exchange rates prevailing at the dates of the transaction or valuation where items are re-measured. Foreign denominated monetary assets and liabilities are translated to their respective companies functional currency equivalents using foreign exchange rates prevailing at the financial position reporting date. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at yearend exchange rates of monetary assets and liabilities denominated in foreign currencies are recognized in profit or loss. All conversions from the respective companies functional currencies, to Canadian dollars, the Company s reporting currency, have been calculated utilizing the exchange rate as at or the average exchange rate for the period, as applicable Prior year restatement and re-classifications Restatement During the year management identified transactions that were recognized in the current fiscal year that should have been recorded in the prior year. As a result, the consolidated statement of financial loss and the consolidated statement of financial position for the year ended August 31, 2016 were restated to reflect these transactions. The nature of the transactions and their impact of their correction are described further as follows: (i) (ii) During the fourth quarter of fiscal 2016, the Company incurred legal fees that had not been accrued during the year ended August 31, These amounts were recognized when they were paid which was during the three-month period ended November 30, This resulted in $77,667 being recognized as a reduction of net income for the year ended August 31, 2016 with a corresponding reduction in opening retained earnings on September 1, Management recognized an amount of $146,868 owing to a shareholder through income, when it should have been recognized as an increase in the amount owing to that shareholder in the prior year. The impact of this adjustment resulted in increasing the amounts owing to related parties by $146,868 as at August 31, 2016 with a corresponding reduction in opening retained earnings on September 1, A summary of the combined impact on the consolidated statement of loss and the consolidated statement of cashflows for the period ending August 31, 2016, as well as on the consolidated statement of financial position as at August 31, 2016, arising from the above restatements are below. A third column was not added to the consolidated statement of financial position as at because there was no impact on opening retained earnings to the prior period balance. 22