PharmaCan Capital Corp. (formerly Searchtech Ventures Inc.) Consolidated Financial Statements Year ended December 31, 2014

Transcription

1 PharmaCan Capital Corp. (formerly Searchtech Ventures Inc.) Consolidated Financial Statements Year ended December 31, 2014 Independent Auditors Report has not yet been issued.

2 PharmaCan Capital Corp. (formerly Searchtech Ventures Inc.) Consolidated Financial Statements Year ended December 31, 2014 Contents Independent Auditor's Report 1-2 Consolidated financial statements: Consolidated Statements of Financial Position 3 Consolidated Statements of Comprehensive Loss 4 Consolidated Statements of Changes in Equity 5 Consolidated Statements of Cash Flows Independent Auditors Report has not yet been issued.

3 INDEPENDENT AUDITOR'S REPORT To the Shareholders of PharmaCan Capital Corp. We have audited the accompanying consolidated financial statements of PharmaCan Capital Corp. (formerly Searchtech Ventures Inc.), which comprise the consolidated statements of financial position as at December 31, 2014 and 2013, and the consolidated statements of comprehensive loss, changes in equity, and cash flows for the year ended December 31, 2014 and the period from January 17, 2013 (inception) to December 31, 2013, and a summary of significant accounting policies and other explanatory information. Management's Responsibility 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 financial statements that are free from material misstatement, whether due to fraud or error. Auditor's 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 audits to obtain reasonable assurance about whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor's judgment, including the assessment of the risks of material misstatement of the 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 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 financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. 1

4 Opinion In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of as at December 31, 2014 and 2013, and its financial performance and its cash flows for the year ended December 31, 2014 and the period from January 17, 2013 (inception) to December 31, 2013 in accordance with International Financial Reporting Standards. Emphasis of Matter Without modifying our opinion, we draw attention to Note 1 to the consolidated financial statements which highlights the existence of a material uncertainty relating to conditions that cast significant doubt on PharmaCan Capital Corp.'s ability to continue as a going concern. Mississauga, Ontario April 30, 2015 Chartered Professional Accountants Licensed Public Accountants 2

5 Consolidated Statements of Financial Position As at December 31, 2014 and December 31, 2013 DRAFT Notes Assets Current Cash $ 795,530 $ 7,288 Prepaids and other receivables 46,234 30,000 Biological assets 20,000 - Loans receivable 7 716,288-1,578,052 37,288 Deposit on investment 25,000 - Equity accounted investments 8 2,932,345 1,002,499 Other investments 9 2,500, ,750 Property, plant and equipment 10 1,303,747 - Intangible asset 6 1,611,226 - $ 9,950,460 $ 1,287,537 Liabilities Current Trade payables and other liabilities $ 589,695 $ 202,124 Advances payable 11-50,000 Convertible loans payable , ,000 Commitments 16 Subsequent events , ,124 Shareholders' Equity Share capital 13 13,586,129 1,346,638 Warrants 13(b) 368, ,600 Contributed surplus ,650 35,650 Accumulated deficit (5,437,664) (619,475) The accompanying notes are an integral part of these consolidated financial statements These consolidated financial statements are approved on behalf of the Board of Directors: 9,245, ,413 $ 9,950,460 $ 1,287,537 (Signed) "Paul Rosen" Director (Signed) "Glen Huber" Director Independent Auditors Report has not yet been issued. 3

6 Consolidated Statements of Comprehensive Loss DRAFT Notes Revenue Share of loss from equity accounted investments 8 $ (724,564) $ (195,611) Interest income from loans receivable 59,488 - (665,076) (195,611) Expenses Salary and benefits 15(a) 1,241,347 35,650 General and administration 1,100, ,214 Provision for sales tax recoverable 208,292 - Production costs 37,339 - Depreciation 32,630-2,619, ,864 Loss before transaction costs and listing expense (3,284,777) (619,475) Transaction costs 8(a) (200,000) - Listing expense 5 (1,333,412) - Net loss and comprehensive loss $ (4,818,189) $ (619,475) Weighted average number of outstanding shares, basic and diluted 32,236,211 12,749,481 Net loss per share, basic and diluted $ (0.15) $ (0.05) The accompanying notes are an integral part of these consolidated financial statements Independent Auditors Report has not yet been issued. 4

7 Consolidated Statements of Changes in Equity Notes Number of shares Share capital Warrants Contributed surplus Accumulated deficit Total Balance at January 17, 2013 (incorporation) - $ - $ - $ - $ - $ - Share subscription - January 18, ,682, Legal fees settled in shares 853,560 10, ,000 Share repurchase and cancellation - April 2, 2013 (1,066,950) (5) (5) Shares issued via private placement - May 24, ,322, , ,125 Shares issued via private placement - November 13, ,410,771 1,033, ,033,500 Share issuance costs - (71,018) (71,018) Warrants issued , ,600 Options issued ,650-35,650 Net loss (619,475) (619,475) Balance at December 31, ,201,720 1,346, ,600 35,650 (619,475) 905,413 Shares issued via private placement - April 15, ,735,117 8,952, ,952,001 Shares issued via private placement - July 23, ,221,042 2,549, ,549,999 Conversion of debt - April 23, ,390 15, ,000 Share issuance to satisfy a penalty provision in a previous issuance - July 24, , Shares issued on account of services provided - September 19, ,348 12, ,500 Share issuance in connection with acquisition of In the Zone 6 426, , ,000 Warrants issued 13(b) - (51,150) 172, ,900 Options issued before Qualifying Transaction , ,500 Issuance of shares to former Searchtech shareholders 5 1,686,209 1,830, ,830,050 Issuance of options to former Searchtech option and warrant holders ,000 24,000-78,000 Share repurchase and cancellation - December 18, 2014 (106,695) (25,000) - (97,500) - (122,500) Issuance of options - December 17, , ,000 Share issuance costs (1,533,909) - (1,533,909) Net loss (4,818,189) (4,818,189) Balance at December 31, ,786,562 $ 13,586,129 $ 368,650 $ 728,650 $ (5,437,664) $ 9,245,765 The accompanying notes are an integral part of these consolidated financial statements These draft financial statements are the responsibility of the corporation and are for discussion 5 purposes only. An Independent Auditors Report has not yet been issued.

8 Consolidated Statements of Cash Flows DRAFT Notes Operating activities Net loss $ (4,818,189) $ (619,475) Items not affecting cash: Share of loss from equity accounted investment 724, ,611 Consulting fees settled in warrants 14(c)(i) 74,400 55,800 Advertising costs settled in warrants 14(c)(i) - 31,000 Compensation settled in options 14(c)(ii) 766,500 35,650 Legal fees settled in shares - 10,000 Depreciation 32,630 - Listing expense 1,333,412 - (1,886,683) (291,414) Net changes in non-cash working capital balances Decrease in supplies inventory 1,066 - Decrease (increase) in prepaids and other receivables (10,000) (30,000) Increase in accrued interest receivable (26,538) - Increase in accounts payable and accrued expenses 254, ,124 Repayment of advances to employees 4,846 - Cash flows used in operating activities (1,662,857) (119,290) Investing activities Cash acquired from In the Zone Cash acquired from Searchtech 653,089 - Acquisition of In the Zone (1,321,730) - Equity accounted investments (2,360,160) (1,167,111) Other investment (2,500,090) (240,000) Deposit on investment (25,000) - Increase in loans receivable (1,339,750) - Repayments of loans receivable 650,000 - Purchase of property, plant and equipment (1,113,904) - Cash flows used in investing activities (7,356,992) (1,407,111) Financing activity Proceeds from (repayment of) advances payable (50,000) 50,000 Proceeds from loan payable - 130,000 Proceeds from share issuance 11,502,000 1,407,656 Share repurchase (122,500) - Share issuance costs (1,521,409) (53,967) Cash flows provided by financing activities 9,808,091 1,533,689 Net change in cash 788,241 7,288 Cash - beginning of year 7,288 - Cash - end of year $ 795,530 $ 7,288 The accompanying notes are an integral part of these consolidated financial statements Independent Auditors Report has not yet been issued. 6

9 1. Nature of business and going concern PharmaCan Capital Corp. ("PharmaCan" or the "Company"), was incorporated as Searchtech Ventures Inc. ("Searchtech") under the Business Corporations Act (Ontario) on August 21, 2012 and was classified as a Capital Pool Company as defined pursuant to Policy 2.4 of the TSX Venture Exchange ("TSX-V"). PharmaCan is a publicly traded corporation, with its head office located at 120 Adelaide Street West, Suite 800, Toronto, Ontario, M5H 1T1. The Company's common shares are listed on TSX-V under the trading symbol "MJN". On December 10, 2014, PharmaCan closed its Qualifying Transaction (the "Transaction") with Hortican Inc. ("Hortican"), a company whose business model is to invest in medical marijuana companies in Canada, pursuant to which the shareholders of Hortican completed a reverse takeover of the Company. Immediately prior to the completion of the Transaction, the Company changed its name to PharmaCan Capital Corp. and consolidated its shares on a one for seven (1:7) basis. Following these changes, Hortican amalgamated with Canada Inc., a wholly owned subsidiary of the Company formed solely for the purpose of facilitating the Transaction. Pursuant to the amalgamation, the Company indirectly acquired all of the issued and outstanding shares of Hortican and issued post-consolidation shares of the Company on the basis of approximately post-consolidation shares for each one of Hortican's shares. Hortican warrants, stock options, and convertible debentures are also exchangeable at the same conversion ratio, and the exercise price for such securities will be divided by the conversion ratio. The Company now has 34,786,562 postconsolidation common shares issued and outstanding following completion of the Transaction. Effective upon the closing of the Transaction, the financial year end of the Company was changed from March 31 of each year to December 31 of each year to align the financial years of the Company to that of Hortican. For the purposes of accounting for the Transaction, Hortican is considered the acquirer and the Company, the acquiree. Accordingly, the consolidated financial statements are in the name of PharmaCan Capital Corp. (formerly Searchtech Ventures Inc.), however they are a continuation of the financial statements of Hortican, which was incorporated under the Business Corporations Act (Ontario) on January 17, Additional information on the Transaction is disclosed in Note 5. In the Zone Produce Ltd. ("In the Zone") was incorporated under the Business Corporations Act (British Columbia) on March 15, In the Zone is a licensed producer of medical cannabis pursuant to the provisions of the Marijuana for Medical Purposes Regulations and the Controlled Drugs and Substances Act and its Regulations. Health Canada issued the license to In the Zone on February 26, In the Zone was acquired by Hortican on November 5, Additional information on the transaction is disclosed in Note 6. These financial statements have been prepared with the assumption that the Company will be able to realize its assets and discharge its liabilities in the normal course of business rather than through a process of forced liquidation. The Company's ability to continue in the normal course of operations is dependent on its ability to raise equity financing or thorough the sale of its investments at amounts favourable to the Company. There are no assurances that the Company will be successful in achieving these goals. These circumstances cast substantial doubt on the Company s ability to continue as going concern and ultimately on the appropriateness of the use of the accounting principles applicable to a going concern. The financial statements do not include adjustments to amounts and classifications of assets and liabilities that might be necessary should the Company be unable to continue operations. These consolidated financial statements were approved by the Board of Directors on April 30, Independent Auditors Report has not yet been issued. 7

10 2. Significant accounting policies The principal accounting policies applied to the preparation of these financial statements are set out below: (a) Basis of presentation These consolidated financial statements are presented in Canadian dollars, which is the functional currency of the Company and all subsidiaries. They have been prepared in accordance with International Financial Reporting Standards ("IFRS") as issued by the International Accounting Standards Board ("IASB"), on a historical cost basis. These consolidated financial statements include the accounts of PharmaCan Capital Corp. and its wholly owned subsidiaries, Hortican Inc. and In the Zone Produce Ltd. All intercompany transactions, balances, revenues and expenses have been eliminated. The Company applies the acquisition method to account for business combinations in accordance with IFRS 3 (Notes 5 and 6). Acquisition related costs are expensed as incurred. (b) Financial instruments The Company aggregates its financial instruments into classes based on their nature and characteristics. Management determines the classification when the instruments are initially recognized, which is normally the date of the transaction. All financial assets except those measured at fair value through profit or loss are subject to review for impairment annually and written down when there is evidence of impairment based on specific criteria. The Company's accounting policy for each category is as follows: (i) Fair-value through profit or loss Financial instruments classified as fair value through profit and loss are reported at fair value at each statement of financial position date, and any change in fair value is recognized in the statement of income (loss) in the period during which the change occurs. In these financial statements, cash and investment in warrants of AbCann Medicinals Inc. (Note 9) have been classified as fair value through profit and loss. (ii) Available-for-sale Other investments, which consist of privately held investments are classified in this category as available-forsale. These financial instruments are initially recorded at the fair value at the time of acquisition, represented by the transaction price. Thereafter, at each reporting date, the fair value may be adjusted using one or more of the valuation indicators described below. These consititute level three inputs in accordance with the fair value hierarchy of IFRS 13, as described in Note 19(b). Gains and losses as a result of the valuations are recorded in other comprehensive income, and transaction costs are expensed as incurred. The determination of fair value of the Company's privately held investments is subject to inherent limitations. Financial information for private companies may not be available, or may be unreliable. Use of the valuation approach described below involves uncertainties and management judgments, and any value estimated from these techniques may not be realized or realizable. The Company's management considers specific information about the investee companies, trends in general market conditions, and the share performance of similar publicly traded companies when valuing the Company's privately held investments. Independent Auditors Report has not yet been issued. 8

11 2. Significant accounting policies (continued) The absence of the occurence of any of the following events, any significant change in trends in general market conditions, or any significant change in share performance of comparable publicly traded companies generally indicates that the fair value of the privately held investments has not materially changed. Management considers the following factors to indicate a change in the fair value, or impairment of, a privately held investment, and may adjust the value if: a. there has been significant subsequent equity financing provided by outside investors at a value which differs from the current recorded value of the investee company, in which case the fair value of the investment is adjusted to equal the value at which that financing took place; b. there have been significant corporate, political, legal, or operating events affecting the investee company such that, management believes they will have a material impact on the investee company's prospects and therefore its fair value. In these circumstances, the adjustment to fair value of the investment will be based on management's judgment; c. the investee company is placed into receivership or bankruptcy; d. based on financial information received from the investee company, it is evident that the investee company is unlikely to be able to continue as a going concern; e. receipt or denial by the investee company of medical marijuana licenses from Health Canada, which allow the investee company to initiate or continue operations; and f. management changes by the investee company that the Company's management believes will have an impact on the investee company's ability to achieve its objectives and build value for shareholders. (iii) Held-to-maturity Financial instruments classified as held-to-maturity are financial assets with fixed or determinable payments and fixed maturities that the Company's management has the positive intention and ability to hold to maturity. These assets are initially recorded at fair value and subsequently carried at amortized cost, using the effective interest method. Transaction costs are included in the amount initially recognized. There are no financial instruments that are classified in this category. (iv) Loans and receivables and other financial liabilities Financial instruments classified as loans and receivables and other financial liabilities are carried at amortized cost using the effective interest method. Transaction costs are expensed as incurred. In these financial statements, loans receivable have been classified as loans and receivables. Trade payables and other liabilities, advances payable to employees, and convertible loans payable have been classified as other financial liabilities. Independent Auditors Report has not yet been issued. 9

12 2. Significant accounting policies (continued) (c) Equity accounted investments Investees in which the Company exercises significant influence or joint control are accounted for using the equity method. Significant influence is the power to participate in the financial and operating policy decisions of the investee but does not have control over those policies. Significant influence is presumed if the Company holds between 20% and 50% of the voting rights, unless evidence exists to the contrary. Joint control is the contractually agreed sharing of control over an economic entity where strategic and/or key operating decisions require unanimous decision making. Equity accounting involves the Company recording its share of the investee s net income and equity. The Company's interest in an investee is initially recorded at cost and is subsequently adjusted for the Company's share of changes in net assets of the investee, less any impairment in the value of individual investments. Where the Company transacts with an investee, unrealized profits and losses are eliminated to the extent of the Company's interest in that investee. (d) Biological assets The Company measures biological assets, consisting of medical cannabis plants, at fair value less costs to sell. Agricultural produce, consisting of medical cannabis, is measured at fair value less costs to sell at the point of harvest, which becomes the basis for the cost of finished goods inventory after harvest. Gains and losses arising from changes in fair values less cost to sell during the period are included in the results of operations of the related period. (e) Property, plant and equipment and intangible asset Property, plant, and equipment, leasehold improvements and intangible assets are stated at cost less accumulated amortization. They are amortized on the basis of their useful lives using the following methods and rates: Method Rate Building structure straight-line 15 to 20 years Furniture and equipment straight-line 5 years Computer equipment straight-line 3 years Fencing straight-line 10 years Security equipment straight-line 5 years Production equipment straight-line 7 years Leasehold improvements straight-line 5 to 10 years An asset's residual value, useful life and depreciation method are reviewed at each financial year end and adjusted if appropriate. When parts of an item of property and equipment have different useful lives, they are accounted for as separate items (major components). The Health Canada license purchased through the business acquisition of In the Zone is an intangible asset with indefinite useful life that is not amortized, but is systematically tested for impairment annually in the fourth quarter or earlier if there is an indication of impairment. Inability to renew the license, or a drop in sales or operating profit are some of the indicators of impairment monitored by management. Independent Auditors Report has not yet been issued. 10

13 2. Significant accounting policies (continued) (f) Convertible debt The proceeds received on the issue of the Company's convertible debt are allocated into their liability and equity components. The amount initially attributed to the debt component equals the discounted cash flows using a market rate of interest that would be payable on a similar debt instrument that does not include an option to convert. Subsequently, the debt component is accounted as a financial liability measured at amortized cost until extinguished on conversion or maturity of the bond. The remainder of the proceeds is allocated to the conversion option and is recognized in the "Convertible debt option reserve" within the shareholders' equity, net of income tax effects. For convertible debt with a demand feature, the discounted cash flows are assumed to equal the proceeds of the loan. (g) Provisions In accordance with IAS 37 Provisions, Contingent Liabilities and Contingent Assets, provision for risks and expenses are recognized for probable outflows of resources that can be estimated and that result from present obligations resulting from past events. In the case where a potential obligation resulting from past events exists, but where occurrence of the outflow of resources is not probable or the estimate is not reliable, these contingent liabilities are disclosed in off-balance sheet commitments and litigation. The provisions are measured based on management's best estimates of outcomes on the basis of facts known at the reporting date. (h) Share capital Share capital is presented at the value of the shares issued. Costs related to the issuance of shares are reported in equity, net of tax, as deduction of the issuance proceeds. (i) Foreign exchange translation The financial statements of the Company are presented in Canadian dollars, which is the functional currency. Transactions in foreign currencies are recorded at the exchange rate prevailing at the date of the transaction. At each reporting date, foreign currency denominated monetary assets and liabilities are translated at yearend exchange rates. Exchange differences arising from the transactions are recorded in profit or loss for the period. Exchange differences arising from operating transactions are recorded in operating profit for the period; exchange differences related to financing transactions are recognized in finance income or in equity. (j) Research and development Research costs are expensed as incurred. Development expenditures are capitalized only if development costs can be measured reliably, the product or process is technically and commercially feasible, future economic benefits are probable, and the Company intends to and has sufficient resources to complete development and use or sell the asset. Other development expenditures are recognized in profit and loss as incurred. To date, no development costs have been capitalized. Independent Auditors Report has not yet been issued. 11

14 2. Significant accounting policies (continued) (k) Income taxes The Company accounts for its income taxes using the deferred tax assets and liabilities method. Deferred income tax assets and liabilities are determined based on the difference between the carrying amount and the tax basis of the assets and liabilities. Any change in the net amount of deferred income tax assets and liabilities is included in profit or loss or equity. Deferred income tax assets and liabilities are determined based on enacted or substantively enacted tax rates and laws which are expected to apply to taxable profit for the years in which the assets and liabilities will be recovered or settled. Deferred income tax assets are recognized when it is probable they will be realized. Deferred tax assets and liabilities are not discounted. (l) Share-based compensation Where equity-settled share options are awarded to employees, officers and directors, the fair value of the options at the date of grant is charged to the statement of comprehensive loss/income over the vesting period. Performance vesting conditions are taken into account by adjusting the number of equity instruments expected to vest at each reporting date so that, ultimately, the cumulative amount recognized over the vesting period is based on the number of options that eventually vest. Non-vesting conditions and market vesting conditions are factored into the fair value of the options granted. As long as all other vesting conditions are satisfied, a charge is made irrespective of whether these vesting conditions are satisfied. The cumulative expense is not adjusted for failure to achieve a market vesting condition or where a non-vesting condition is not satisfied. Where the terms and conditions of options are modified before they vest, the increase in the fair value of the options, measured immediately before and after the modification, is also charged to the statement of comprehensive loss/income over the remaining vesting period. Where equity instruments are granted to employees, they are recorded at the fair value of the equity instrument granted at the grant date. The grant date fair value is recognized in comprehensive loss/income over the vesting period, described as the period during which all vesting conditions are to be satisfied. Where equity instruments are granted to non-employees, they are recorded at the fair value of the goods or services received in the statement of comprehensive loss/income. Options or warrants granted related to the issuance of shares are recorded as a reduction of share capital. When the value of goods or services received in exchange for the share-based payment cannot be reliably estimated, the fair value is measured by use of a valuation model. All equity-settled share-based payments are reflected in contributed surplus, until exercised. Upon exercise, shares are issued from treasury and the amount reflected in contributed surplus is credited to share capital, adjusted for any consideration paid. Where a grant of options is cancelled or settled during the vesting period, excluding forfeitures when vesting conditions are not satisfied, the Company immediately accounts for the cancellation as an acceleration of vesting and recognizes the amount that otherwise would have been recognized for services received over the remainder of the vesting period. Any payment made to the employee on the cancellation is accounted for as the repurchase of an equity interest except to the extent the payment exceeds the fair value of the equity instrument granted, measured at the repurchase date. Any such excess is recognized as an expense. Independent Auditors Report has not yet been issued. 12

15 2. Significant accounting policies (continued) (m) Earnings per share The Company presents basic and diluted earnings per share data for its common shares. Basic earnings per share is calculated by dividing the profit or loss attributable to common shareholders of the Company by the weighted average number of common shares outstanding during the period. Diluted earnings per share is determined by adjusting the profit or loss attributable to common shareholders and the weighted average number of common shares outstanding, adjusted for the effects of all potentially dilutive common shares, which comprise warrants and share options issued. During the years ended December 31, 2014 and 2013, all of the outstanding stock options and warrants were anti-dilutive. 3. Estimates and critical judgements by management The preparation of these financial statements in conformity with International Financial Reporting Standards requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the current period. These estimates are reviewed periodically and adjustments are made to income as appropriate in the year they become known. Items for which actual results may differ materially from these estimates are described in the following section. (a) Warrants and options In calculating the value of the warrants and options, key estimates such as the volatility of the Company's share price are used. Due to the lack of sufficient data to estimate expected volatility based on historical volatility of the Company's share price, the expected volatility is estimated at 100%, which is based on the management's knowledge of the medical marijuana industry. (b) Useful lives of property and equipment Depreciation of property and equipment is dependent upon estimates of useful lives, which are determined through 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 the assets. (c) Valuation of biological assets Biological assets, consisting of cannabis plants and agricultural produce consisting of cannabis, are measured at fair value less cost to sell up to the point of harvest. Determination of the fair values of the biological assets and the agricultural produce requires the Company to make assumptions about how market participants assign fair values to these assets. These assumptions primarily relate to the level of effort required to bring the cannabis up to the point of harvest, sales price, risk and expected future yields for the cannabis plant. Independent Auditors Report has not yet been issued. 13

16 3. Estimates and critical judgements by management (continued) (d) Fair value of financial assets available for sale Financial assets available for sale consist of privately held investments. Determination of the fair values of privately held investments requires the Company to make various assumptions about the future prospects of the investees, the economic, legal, and political environment in which the investees operate, and the ability of the investees to obtain financing to support their operations. As a result, any value estimated may not be realized or realizable, and the values may differ from values that would be realized if a ready market existed. 4. New and revised standards and interpretations issued but not yet effective (a) IFRS 9 FINANCIAL INSTRUMENTS IFRS 9 addresses classification and measurement of financial assets and replaces the multiple category and measurement models in IAS 39 for debt instruments with a new mixed measurement model having only two categories: amortized cost and fair value through profit and loss. IFRS 9 also replaces the models for measuring equity instruments and such instruments are either recognized at fair value through profit and loss or at fair value through other comprehensive income. The effective date of this standard is January 1, The Company will adopt this new standard as of its effective date. The Company is currently analyzing the possible impact of this Standard on its financial statements. (b) IFRS 15 REVENUE FROM CONTRACTS WITH CUSTOMERS IFRS 15 was issued by IASB in May 2014 and specifies how and when revenue should be recognized based on a five-step model, which is applied to all contracts with customers. IFRS 15 becomes effective for annual periods beginning on or after January 1, 2017 with early adoption permitted. The Company will adopt this new standard as of its effective date. The Company is currently analyzing the possible impact of this Standard on its financial statements. (c) AMENDMENTS TO IAS 16 AND IAS 41 IAS 16 Property, Plant and Equipment and IAS 41 amends Agriculture to: (a) include "bearer plants" within the scope of IAS 16 rather than IAS 41, allowing such assets to be accounted for as property, plant and equipment and measured upon initial recognition on a cost or revaluation basis; (b) introduce a definition of "bearer plants" as a living plant that is used in the production or supply of agricultural produce, is 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; and (c) clarify that produce growing on bearer plants remains within the scope of IAS 41. These amendments become effective for annual periods beginning on or after January 1, The Company will adopt this new standard as of its effective date. The Company is currently analyzing the possible impact of these amendments on its financial statements. There are no other IFRS pronouncements or amendments thereto that are not yet effective that would be expected to have a material impact on the Company. Independent Auditors Report has not yet been issued. 14

17 5. Reverse acquisition On December 10, 2014, Searchtech completed its Qualifying Transaction, described in Note 1. The transaction is a reverse acquisition of Searchtech and has been accounted for under IFRS 2, Share-based Payments. Accordingly, the transaction has been accounted for at the fair value of the equity instruments granted by the shareholders of Hortican to the shareholders and option and warrant holders of Searchtech. The results of operations of Searchtech are included in the consolidated financial statements of Hortican from the date of the reverse acquisition. The following represents management's estimate of fair value of share-based consideration paid and net assets acquired as a result of this Qualifying Transaction: Fair value of consideration transferred: Fair value of 1,686,209 PharmaCan shares Fair value of 38,571 PharmaCan options Fair value of 78,251 PharmaCan warrants $ 1,830,050 24,000 54,000 1,908,050 Fair value of net assets acquired: Cash Prepaid expenses Accounts payable 653,089 6,234 (84,685) 574,638 Listing expense $ 1,333,412 The fair value of PharmaCan shares and options was determined by reference to the consideration negotiated with the former shareholders of Searchtech following the principles of IFRS 2 - Share-based Payments. The fair value component relating to the aforementioned options and warrants was determined using the Black- Scholes option pricing model (Notes 13 and 14). Independent Auditors Report has not yet been issued. 15

18 6. Acquisition of In the Zone On November 5, 2014, Hortican acquired all issued and outstanding shares of In the Zone, a company headquartered in Armstrong, British Columbia. Consideration for the acquisition included 200,000 common shares of Hortican (issued prior to the Qualifying Transaction described in Note 5), and $1,321,730 in cash. The preliminary purchase price allocation for this acquisition is shown below: Fair value of consideration transferred: Cash $ 1,321,730 Share issuance 490,000 $ 1,811,730 Fair value of net assets acquired: Cash $ 553 Inventory 1,066 Biological assets 20,000 Property and equipment 96,590 Leasehold improvements 125,883 License 1,611,226 Intercompany receivable acquired, eliminated on consolidation 335,293 Accounts payable and accrued liabilities (48,434) Loans payable (330,447) $ 1,811,730 The fair value of share based consideration was determined based on the most recent equity raise completed by Hortican preceding the acquisition. The fair value of each share issued was estimated at $1.15. Due to the complexities in identifying certain intangible assets, such as licenses and intellectual property, and assigning fair values, the Company has yet to finalize its assessment of the purchase price allocation. The allocation of the consideration paid will be adjusted once a valuation of certain intangible assets has been finalized. Management expects to complete the assessment during year end The amount of net loss and comprehensive loss of In the Zone since the acquisition date included in these consolidated financial statements is $72,500. Net loss and comprehensive loss for the combined entity would have been higher by approximately $105,000 if the acquisition had taken place on January 1, Independent Auditors Report has not yet been issued. 16

19 7. Loans receivable (a) Loan receivable from Evergreen Medicinal Supply Inc. $ 264,750 - (b) Loan receivable from Vert/Green Medical Inc. 375,000 - (c) Loan receivable from Peace Naturals Project Inc. 50,000 - Add: Accrued interest Balance receivable within one year Long-term loans receivable 689,750-26, ,288 - (716,288) - $ - $ - (a) (b) (c) The loan is receivable from the Company's investee over which the Company does not exercise significant influence. The loan is repayable on June 9, 2015 and bears interest at 8% per year, calculated and payable annually in advance. The loan is receivable from the Company's investee over which the Company does not exercise significant influence. The loan is repayable on September 20, 2015 and bears interest at 8% per year, calculated and payable semi-annually in arrears. The loan is receivable from the Company's investee over which the Company exercised significant influence. (Note 8(a)) The loan is repayable on March 3, 2015 and bears interest at 10% per year, calculated and payable quarterly in arrears. 8. Equity accounted investments (a) Peace Naturals Project Inc. $ 515,993 $ 1,002,499 (b) Whistler Medical Marijuana Company 2,416,352 - $ 2,932,345 $ 1,002,499 (a) The investment represents 27.3% ( %) ownership in Peace Naturals Project Inc., incorporated in Canada. Peace Naturals Project Inc. is a licensed producer and seller of medical marijuana with operations in Ontario, Canada. Summarized financial information of the investee is as follows: Current assets Non-current assets Current liabilities Non-current liabilities Revenue Loss from continuing operations $ 1,763,129 $ 542,418 6,786, ,195 4,759, , ,446 1,297,427 18,807 (1,954,757) (1,365,585) Independent Auditors Report has not yet been issued. 17

20 8. Equity accounted investments (continued) During the year ended December 31, 2014, the Company paid $200,000 in order to renegotiate the shareholders' agreement of this investee. Reconciliation of the carrying amount of the investment is as follows: Balance - beginning of year $ 1,002,499 $ - Cash consideration - 1,167,110 Warrants issued (Note 14(d)) - 31,000 Company's share of loss (486,506) (195,611) Balance - end of year $ 515,993 $ 1,002,499 (b) The investment represents 21.5% ownership in Whistler Medical Marijuana Company, incorporated in Canada. Whistler Medical Marijuana Company is a licensed producer and seller of medical marijuana with operations in British Columbia, Canada. Summarized financial information of the investee is as follows: Current assets Non-current assets Current liabilities Non-current liabilities Revenue Loss from continuing operations 2014 $ 1,647,071 2,593,869 1,365, $ 418,945 (1,127,519) Reconciliation of the carrying amount of the investment is as follows: Balance - beginning of year (available-for-sale investment) Cash consideration Warrants issued (Note 14(d)) Company's share of income (for 8 months while significant influence was exercised) 2014 $ 247,750 2,360,160 46,500 (238,058) Balance - end of year $ 2,416,352 Independent Auditors Report has not yet been issued. 18

21 9. Other investments Other investments consist of investments in common shares of several investees. These equity instruments do not have a quoted price in an active market. Since these investments were recently acquired, the carrying values approximate their fair values at December 31, Available-for-sale investments Evergreen Medical Supply Inc. Vert Medical - Green Medical Inc. AbCann Medicinals Inc. (i) The Hydropothecary Corporation Whistler Medical Marijuana Company Fair-value through profit and loss investment AbCann Medicinals Inc. - share warrants (i) Less: Deferred gain on acquisition of warrants (ii) $ 300,000 $ - 450,000-1,500, , ,750 2,500, , ,000 - (806,000) $ 2,500,090 $ 247,750 (i) During the year ended December 31, 2014, the Company acquired 3,658,537 units of AbCann Medicinals Inc. for $1,500,090. Each unit consisted of one share and one share purchase warrant. Each warrant entitles the Company to purchase an additional share at $0.62 per share until September 9, (ii) The fair value of the AbCann Medicinals Inc. shares and warrants acquired was calculated to be greater than the purchase price. A gain on initial recognition has not been recognized on the basis that the transaction value was equal to its fair value and will only be recognized to the extent that it arises from a change in the factors considered in the initial valuation. The purchase price of the units was allocated $1,500,090 to the share component, which is considered to be its fair value at the time of purchase. The fair value of the warrant was estimated using the Black Scholes option pricing model with the following assumptions: risk free rate - 1%; volatility - 100%; expected life - 3 years; and dividend yield - Nil%. Given that the fair value of the warrants was not based on Level I inputs, the gain on acquisition of the warrants was deferred. Independent Auditors Report has not yet been issued. 19

22 10. Property, plant and equipment Cost Balance at January 1, 2014 Additions Acquisition (Note 6) Disposals/ Adjustments As at December 31, 2014 Land $ - $ 210,000 $ - $ - $ 210,000 Building structures - 811,125 12, ,405 Furniture and equipment - 26, ,658 Computer equipment - 10,476 9,883-20,359 Fencing - - 2,978-2,978 Security equipment ,945-18,945 Production equipment ,504-52,504 Leasehold improvements - 55, , ,528 $ - $ 1,113,904 $ 222,473 $ - $ 1,336,377 Accumulated amortization Balance at January 1, 2014 Additions Disposals/ Adjustments As at December 31, 2014 Building structures $ - $ 20,423 $ - $ 20,423 Furniture and equipment - 2,666-2,666 Computer equipment - 2,048-2,048 Fencing Security equipment Production equipment Leasehold improvements - 6,132-6,132-32,630-32,630 Net book value 11. Advances payable $ - $ 1,303,747 Advances were payable to an Officer of the Company, were non-interest bearing and unsecured, with no terms of repayment. Independent Auditors Report has not yet been issued. 20

23 12. Convertible loans payable Loan payable to an Officer of the Company $ 100,000 $ 100,000 (a) Loan payable to corporation - 15,000 (b) Loan payable to corporation 7,500 7,500 Loan payable to a Director of the Company 7,500 7,500 $ 115,000 $ 130,000 The loans are non-interest bearing, unsecured and due on demand. The loans are convertible into common shares of the Company at the option of the holder at a price of $0.05 per share. The entire fair market value of these loans was allocated to the debt component. (a) (b) The loan was payable to a corporation whose president is a director of the Company. The conversion feature was exercised during the year ended December 31, 2014, resulting in the issuance of 213,390 common shares. The loan is payable to a corporation that is controlled by an officer of the Company. 13. Share capital and reserves (a) (i) Share capital Common Shares The Company is authorized to issue an unlimited number of common shares. The holders of the common shares are entitled to receive dividends which may be declared from time to time, and are entitled to one vote per share at meetings of the Company. All shares are ranked equally with regards to the Company's residual assets. As at December 31, 2014, 8,108,830 of the Company's shares are held in escrow ( $Nil). The release of these shares is subject to regulatory approval. (ii) Special Shares The Company is authorized to issue an unlimited number of special shares, issuable in series. The special shares may be issued in one or more series and the directors are authorized to fix the number of shares in each series and to determine the designation, right, privileges, restrictions and conditions attached to the shares in each series. No special shares have been issued since the Company's inception. Independent Auditors Report has not yet been issued. 21

24 13. Share capital and reserves (continued) (b) Warrants The following is a summary of changes in warrants: Number of Warrants Amount Balance at January 17, $ - Issuance of warrants 8,663, ,600 Cancellation of warrants (1,066,950) - Balance at December 31, ,596, ,600 Issuance of warrants before Qualifying Transaction 394, ,050 Issuance of warrants to former Searchtech warrant holders 78,251 54,000 Balance at December 31, ,069,703 $ 368,650 As at December 31, 2014, the Company has outstanding warrants as follows: Grant date January 18, 2013 October 1, 2013 December 17, 2013 January 30, 2014 July 7, 2014 Number of warrants Exercise price Expiry 6,615,090 $ Jan ,242 $ Oct-16 53,348 $ Dec ,772 $ Jan-17 78,251 $ Jul-16 8,069,703 $ 0.13 Independent Auditors Report has not yet been issued. 22

25 13. Share capital and reserves (continued) Fair value of the warrants was determined using the Black-Scholes option pricing model. The following inputs were used: Grant Date and Expiry Date Share Price at Grant Date Exercise Price Risk Free Interest Rate Expected Life Volatility Factor Dividend Yield Warrants issued prior to the Qualifying Transaction, adjusted for conversion factor of (Note 1) January 18, 2013 to January 18, 2018 October 1, 2013 to October 1, 2016 December 17, 2013 to December 17, 2016 January 30, 2014 to January 30, 2017 $ $ % 5 years 100% 0% $ 0.23 $ % 3 years 100% 0% $ 0.23 $ % 3 years 100% 0% $ 0.70 $ % 3 years 100% 0% Warrants issued as a result of the Qualifying Transaction (Note 1) July 7, 2014 to July 7, 2016 $ 1.15 $ % 2 years 100% 0% 14. Share-based payments (a) Option Plan Details The Company has an incentive Stock Option Plan ("the Plan") under which non-transferrable options to purchase common shares of the Company may be granted to directors, officers, or service providers of the Company. The terms of the Plan provide that Directors have the right to grant options to acquire common shares of the Company at not less than the selling price of the shares on the day preceding the grant at varying terms. The maximum number of common shares reserved for issuance for options that may be granted under the Plan is 10% of the common shares outstanding. No amounts are paid or payable by the recipient on receipt of the option, and the options granted are not dependent on any performance-based criteria. In accordance with the Plan, the options vest immediately. Independent Auditors Report has not yet been issued. 23

26 14. Share-based payments (continued) The following is a summary of changes in options from January 1, 2014 to December 31, 2014, and outstanding as at December 31, 2014: Grant date 01-Oct Jan Aug Sep Feb Oct Dec-14 Expiry date Weighted average exercise price Exercise Price Opening Balance (adjusted for effects of Qualifying Transaction) Granted (adjusted for effects of Qualifying Transaction) Exercised Closing Balance, Vested and Exercisable 01-Oct-16 $ , , Jan-17 $ , , Aug-17 $ , , Sep-17 $ , , Dec-15 $ ,571-38, Oct-17 $ , , Dec-17 $ , , ,399 1,403,175-1,648,574 $ 0.23 $ 1.06 $ - $ 0.94 (b) Fair Value of Options Issued During the Year The weighted average fair value at grant date of options issued during the period ended December 31, 2014 was $1.00 per option ( $0.31). (i) Options Issued to Directors The fair value at grant date is determined using a Black-Scholes option pricing model that takes into account the exercise price, the term of the options, the impact of dilution, the share price at grant date and expected price volatility of the underlying share, the expected dividend yield and the risk free interest rate for the term of the options. (ii) Options issued to non-employees Options issued to non-employees, are measured based on the fair value of the goods or services received, at the date of receiving those goods or services. If the fair value of the goods or services received cannot be estimated reliably, the options are measured by determining the fair value of the options granted, using a valuation model. Independent Auditors Report has not yet been issued. 24