Condensed Consolidated Interim Financial Statements

Transcription

1 Condensed Consolidated Interim Financial Statements FOR THE THREE AND NINE MONTH PERIODS ENDED SEPTEMBER 30, 2018

2 Condensed Consolidated Interim Statements of Financial Position (Expressed in United States Dollars) September 30, 2018 December 31, 2017 Assets Current Assets Cash and Cash Equivalents $ 24,449,693 $ Accounts Receivable (note 9) 600,000 Prepaid Expenses 254,861 25,304,554 Property, Plant & Equipment (note 10) 57,151,080 Intangible Assets (note 11) 2,217,500 Total Assets $ 84,583,134 $ Liabilities Current Liabilities Accounts Payable & Accrued Liabilities (note 8) $ 142,091 $ 204,666 Promissory note (note 10) 18,000,000 18,142, ,666 Shareholders' equity Share Capital (note 6) 73,311, Contributed Surplus (note 7) 505,146 Deficit (7,375,523) (204,676) 66,441,043 (204,666) Total Liabilities and Shareholders' Equity $ 84,583,134 $ Approved and authorized on behalf of the Board: "Ken Villazor" Ken Villazor, Director "Warner Fong" Warner Fong, Director The accompanying notes are an integral part of these condensed interim consolidated financial statements.

3 Condensed Consolidated Interim Statement of Operations (Expressed in United States Dollars) Three Months Ended September 30, 2018 Nine Months Ended September 30, 2018 Expenses General & Administrative (note 12) $ 1,256,529 2,275,184 Share Based Compensation (note 7) 312, ,146 Loss from Operations 1,568,940 2,780,330 Other Expenses Listing expense (note 5) 3,803,582 3,803,582 Foreign Exchange Loss 209, ,935 Loss for the Period $ (5,581,651) (7,170,847) Basic and diluted loss per share $ (0.04) (0.06) Weighted average number of common shares outstanding 150,486, ,021,205 The accompanying notes are an integral part of these condensed interim consolidated financial statements.

4 Condensed Consolidated Interim Statement of Cash Flows (Expressed in United States Dollars) For the nine month period ended September 30, 2018 Nine Months Ended September 30, 2018 Operating: Loss for the Period $ (7,170,847) Items Not Affecting Cash Share Based Compensation 505,146 Listing expense 3,607,163 Changes in Non Cash Operating Working Capital Accounts Receivable (600,000) Prepaid Expenses (254,861) Accounts Payable and Accrued Liabilities (62,575) (3,975,974) Financing: Proceeds of Issuance of Common Shares, Net of Share Issuance Costs 69,704,247 Investing: Purchase of Property, Plant & Equipment (39,151,808) Purchase of Intangible Assets (2,127,500) (41,278,580) Increase in Cash 24,449,693 Cash & Cash Equivalents, Beginning of Period Cash & Cash Equivalents, End of Period $ 24,449,693 The accompanying notes are an integral part of these condensed interim consolidated financial statements.

5 Condensed Consolidated Interim Statement of Shareholders Equity (Expressed in United States Dollars) For the nine month period ended September 30, 2018 SHARES AMOUNT CONTRIBUTED SURPLUS DEFICIT TOTAL Issued on Incorporation on December 18, $ 10 $ $ $ 10 Net Loss (204,676) (204,676) At December 31, (204,676) (204,666) Issued on Private Placement 168,507,594 70,878,750 70,878,750 Shares Issued as Fees for Private Placement 1,279,810 1,091,107 1,091,107 Share Issuance Costs (2,265,610) (2,265,610) Shares issued to former Theia shareholders on RTO closing (note 5) 2,404,775 3,607,163 3,607,163 Share Based Compensation (note 7) 505, ,146 Net Loss (7,170,847) (7,170,847) At September 30, ,192,279 $73,311,420 $ 505,146 $(7,375,523) $66,441,043 The accompanying notes are an integral part of these condensed interim consolidated financial statements.

6 1) NATURE OF OPERATIONS AND GOING CONCERN Flower One Holdings Inc. (formerly Theia Resources Ltd.) ( Flower One or the "Company') is a Canadian company incorporated on January 9, 2007 under the Business Corporations Act (British Columbia). The Company is listed on the Canadian Securities Exchange ( CSE ) under the symbol FONE and the OTCQB Venture Market in the United States under the symbol "FLOOF". The registered office of the Company is located at 20 Richmond Street, Toronto Ontario, M5C 2R9. The Company, through its wholly owned subsidiaries, is a cannabis cultivator and producer and is licensed for medical and recreational marijuana cultivation and production in the State of Nevada. The Company s 455,000 square foot facility will be used for cannabis cultivation as well as the processing, production and packaging of dry flower, cannabis oils, concentrates and infused products. On September 21, 2018, the Company completed a reverse takeover transaction ( RTO ) whereby CNX Holdings Inc. ( CNX ), a privately held corporation, amalgamated with a wholly owned subsidiary of the Company and the shareholders and option holders of CNX received corresponding securities of the Company on a 1:1 basis. Upon completion of the RTO, the shareholders of CNX obtained control of the consolidated entity. In applying acquisition accounting to a reverse acquisition, CNX was identified as the accounting acquirer, and, accordingly, Flower One is considered to be a continuation of CNX, with the net assets of the Company at the date of the RTO deemed to have been acquired by CNX. There are no comparative figures in these condensed consolidated interim financial statements ( financial statements ) as CNX was not incorporated until December 18, The RTO is further described in Note 5. These financial statements have been prepared on a going concern basis that presumes the realization of assets and discharge of liabilities in the normal course of business. The Company does not currently have a recurring source of revenue and has historically incurred losses. As at September 30, 2018, the Company had working capital of $7,162,463 which consisted primarily of cash, accounts receivable, prepaid expenses and promissory notes. The Company expects to require further funding in the longer term to fund future development, acquisitions and operations.

7 2) BASIS OF PRESENTATION Statement of Compliance These financial statements have been prepared in accordance with International Accounting Standard 34, Interim Financial Reporting ( IAS 34 ) using accounting policies consistent with International Financial Reporting Standards as issued by the International Accounting Standards Board ( IFRS ). These should be read in conjunction with the Company s last annual consolidated financial statements as at and for the year ended December 31, 2017 ( last annual financial statements ). The accounting policies applied by the Company in these condensed consolidated interim financial statements are the same as those applied in the last annual financial statements. These condensed consolidated interim financial statements do not include all of the information required for full annual financial statements. However, selected explanatory notes are included to explain events and transactions that are significant to an understanding of changes in the Company s financial position and performance since the last annual financial statements. On November 29, 2018, the Company s Board of Directors approved these financial statements for issuance. Basis of Measurement These financial statements have been prepared on a historical cost basis. Functional and Presentation Currency These financial statements have been prepared in United States dollars, which is the Company's functional and presentation currency as well as the functional currency of all subsidiaries. Use of Judgements The preparation of these consolidated financial statements in conformity with IFRS requires management to make judgments that affect the application of accounting policies regarding certain types of assets, liabilities, revenues and expenses and estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the consolidated financial statements and reported amounts of expenses recognized during the reporting period. Actual results could differ from those estimates. Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognized in the year in which the estimates are revised and in any future years affected. There were no estimates made in these consolidated financial statements. Critical accounting judgements are accounting policies that have been identified as being complex or involving subjective judgements or assessments. The Company s assessment of its ability to continue as a going concern requires judgements about the Company s ability to execute its strategy by funding future working capital requirements (note 1).

8 3) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Principles of Consolidation These condensed consolidated interim financial statements include the accounts of the Company and its wholly owned subsidiaries. All intercompany balances, transactions, revenues and expenses have been eliminated on consolidation. Property, Plant and Equipment Land, buildings, plant and equipment are recorded at cost, including all expenditures incurred to prepare an asset for its intended use. Repairs and maintenance costs are charged to expense as incurred, except when these repairs significantly extend the life of an asset or result in an operating improvement. In these instances, the portion of these repairs relating to the betterment is capitalized as part of plant and equipment. Depreciation is based on the cost of the asset less residual value. Where an item of plant and equipment is comprised of major components with different useful lives, the components are accounted for as separate items and depreciated separately. Depreciation commences when an asset is available for use. Estimates of remaining useful lives and residual values are reviewed annually. Changes in estimates are accounted for prospectively Construction in progress includes the purchase price and any costs directly attributable to bringing the asset to the location and condition necessary for its intended use. Construction in progress includes advances on long lead items. Construction in progress is not depreciated. Once the asset is complete and available for use, the costs of construction are transferred to the appropriate category of property, plant and equipment, and depreciation commences. Intangible Assets Intangible assets are recorded at cost less accumulated amortization and impairment losses, if any. Intangible assets acquired in a business combination are measured at fair value at the acquisition date. Amortization is provided on a straight line basis over their estimated useful lives, which do not exceed the contractual period, if any. Intangible assets that have indefinite useful lives are not subject to amortization and are tested annually for impairment, or more frequently if events or changes in circumstances indicate that they might be impaired. The estimated useful lives, residual values, and amortization methods are reviewed at each year end, and any changes in estimates are accounted for prospectively. The Nevada state licenses (note 11) are classified as indefinite life intangible assets and are not amortized but are tested for impairment on an annual basis. These licenses do not expire, as such, there is no foreseeable limit to the period over which these assets are expected to generate future cash inflows to the Company.

9 4) DETERMINATION OF FAIR VALUES When applicable, further information about the assumptions made in determining fair values is disclosed in the notes specific to that asset or liability. At September 30, 2018, there were no financial assets and liabilities measured and recognized at fair value on a recurring basis. The fair value of cash, accounts receivable, accounts payable and accrued liabilities and promissory note is not materially different from its carrying value given the short term to maturity. 5) REVERSE TAKEOVER TRANSACTION On September 21, 2018, Theia Resources Ltd., CNX and Flower One Corp. (a wholly owned subsidiary of Theia Resources Ltd.), completed a three cornered amalgamation agreement entered into on June 29, 2018 whereby shareholders and option holders of CNX received corresponding securities of the Company on a 1:1 basis. Immediately preceding the RTO, Theia Resources Ltd. consolidated its share capital (the Consolidation ) on a ten for one basis with each ten pre Consolidation common shares of Theia Resources Ltd. being exchanged for one post Consolidation common share. In accordance with IFRS 3, Business combinations, the substance of the transaction was a reverse takeover of a non operating company. The transaction does not constitute a business combination since Theia Resources Ltd. did not meet the definition of a business under IFRS 3. As a result, the transaction has been accounted for as an asset acquisition with CNX being identified as the acquirer (legal subsidiary) and Theia Resources Ltd. being treated as the accounting subsidiary (legal parent) with the transaction being measured at the fair value of the equity consideration issued to Theia Resources Ltd. shareholders. The net liabilities acquired was the fair value of the net liabilities of Theia Resources Ltd., which on September 21, 2018 was $3,294. On September 21, 2018 Net liabilities acquired Cash $ 1,226 Accounts payable and accrued liabilities (4,520) Net liabilities acquired (3,294) Consideration Fair value of 2,404,775 shares issued by CNX at $1.50 per share 3,607,163 Assumption of loan owed to the Company 193,125 Listing expense $ 3,803,582

10 6) SHARE CAPITAL The Company s authorized share capital consists of an unlimited number of Class A Common Shares, voting, without nominal or par value. During the three and nine month periods ended September 30, 2018, the Company closed private placements of: 33,955,124 common shares at a price of $0.005 per share for gross proceeds of $131, ,044,776 common shares at a price of $0.02 per share for gross proceeds of $1,024, ,805,877 common shares at a price of $0.67 per share for gross proceeds of $26,669, ,150,950 common shares at a price of $1.50 per share for gross proceeds of $33,226,425. 6,550,867 subscription receipts ( SR ) at a price of $1.50 per SR for gross proceeds of $9,826,301 for which each SR was converted to common shares on a 1:1 basis upon closing of the RTO on September 21, The Company paid cash of $1,174,503 and issued 998,323 common shares, with a deemed value of $0.67 per share, and 281,487 common shares, with a deemed value of $1.50 per share, as fees in relation to these private placements. As part of the RTO (note 5), the Company issued 2,404,775 common shares to former shareholders of Theia Resources Ltd. at a deemed price of $1.50 per common share. 7) STOCK OPTIONS The Company has established a stock option plan (the Plan ). Under the Plan, the maximum number of shares reserved for issuance may not exceed 10% of the total number of issued and outstanding common shares and the exercise term of any option granted under the Plan may not exceed ten years. Each option vesting period is determined on a grant by grant basis by the Board of Directors. On March 7, 2018, the Company granted a total of 6,575,000 stock options with fair value of $40,674 to shareholders. These stock options are exercisable at an exercise price of $0.15 (CAD$0.20) per share and may be exercised for five years. Among these options, 2,400,000 options were vested 100% upon the Company s completion of the RTO, the other 4,175,000 were 50% vested upon the Company s completion of the RTO, 25% vested on the date that was six months from the date of the options are granted, and 25% will vest on the date that is twelve months from the date the options were granted. During the three and nine month periods ended September 30, 2018, the Company expensed $10,701 and $36,600, respectively, related to these options.

11 7) STOCK OPTIONS (CONT D) On June 1, 2018, the Company granted a total of 1,340,000 stock options with fair value of $659,915 to shareholders. These stock options are exercisable at an exercise price of $0.67 (CAD$0.85) per share and may be exercised for five years. All options were 50% vested upon the Company s completion of the RTO, 25% will vest on the date that is six months from the date of the options are granted, and 25% will vest on the date that is twelve months from the date the options are granted. During the three and ninemonth periods ended September 30, 2018, the Company expensed $301,710 and $468,546, respectively, related to these options. The fair value of each option grant is calculated using the following assumptions: Expected life year 5 Interest rate % Volatility % Dividend yield % Forfeiture rate % Number of Option Weighted Average Exercise Price (CAD$) Expiry Date Balance, December 31, 2017 $ Granted, on March 7, ,575, March 7, 2023 Granted, on June 1, ,340, June 1, 2023 Balance, September 30, ,915,000 $ 0.31 Exercise Price (CAD$) Outstanding as at September 30, 2018 Exercisable as at September 30, 2018 Number of Options Weighted Average Exercise Price (CAD$) Weighted Average Remaining Contractual Life (years) Number of Options Weighted Average Exercise Price (CAD$) Weighted Average Remaining Contractual Life (years) $ ,400,000 $ ,400,000 $ ,175, ,131, ,340, , ,915,000 $ ,201,250 $

12 8) RELATED PARTY TRANSACTIONS Key management personnel includes the Company s Directors, President & Chief Executive Officer and Chief Financial Officer. The amounts owing to key management personnel of $100,000 were included in accounts payable and accrued liabilities. During the nine months ended September 30, 2018, the Company incurred $223,205 in consulting fees and $102,597 in share based compensation to key management personnel. 9) ACCOUNTS RECEIVABLE During the nine month period ended September 30, 2018, the Company provided an advance of $600,000 to NLV Organics, Inc. ( NLVO ), a third party, which was secured by the assets of NLVO. Subsequent to September 30, 2018, the Company acquired the assets of NLVO and this amount formed part of the consideration paid by the Company (note 13). 10) PROPERTY, PLANT & EQUIPMENT During the nine months ended September 30, 2018, the Company entered a purchase agreement with a Nevada corporation (related to a significant shareholder) ( NevadaCo ) for the purchase of land and buildings at a purchase price of $40,000,000 which will be paid by $22,000,000 in cash and a note payable of $18,000,000 non interest bearing, which is secured by the first charge of the property and due on March 31, The $22,000,000 cash payment includes option payments for the exclusive right to purchase the property and rent for the use of the property for six months until the purchase closing date, the earlier of September 30, 2018 and the date on which the Company purchases the property. On August 30, 2018, the Company paid the final option payment and issued the $18,000,000 note payable to complete the purchase of the property. The Company is currently constructing a cultivation and production facility in North Las Vegas on the property it has entered the purchase agreement with NevadaCo. As at September 30, 2018, $17,089,526 in costs related to the construction of this facility were capitalized as construction in progress and are not amortized. Amortization will commence when construction is complete, and the facility is available for its intended use.

13 11) INTANGIBLE ASSETS In April 2018, the Company paid $2,000,000 for a provisional medical cultivation and medical production licenses in the state of Nevada. The Company received approval of the transfer of the provisional licenses from the state on April 24, During the nine months ended September 30, 2018, these licenses were approved for operational medical and recreational cultivation and medical and recreational production by the state of Nevada. 12) GENERAL & ADMINISTRATIVE EXPENSES Three Months Ended September 30, 2018 Nine Months Ended September 30, 2018 Accounting & Legal $ 198,694 $ 374,478 Wages and salaries 97, ,489 Consulting Service 256, ,517 Insurance 56,647 56,647 Rent 284, ,651 Office, admin and utilities 145, ,332 Travel 200, ,750 Other 16,307 67,320 General & Administrative $ 1,256,529 $ 2,275,184

14 13) SUBSEQUENT EVENTS Acquisition of Losee Property On October 4, 2018, the Company completed the acquisition of land and building located in North Las Vegas, for a cash purchase price of $1,150,000. The building was formerly a retail bank branch with two drivethrough ATMS, and is located within close proximity to the Company s greenhouse. The Company intends to renovate the building to allow for multiple uses, including office space, a strong room and, potentially, retail. Acquisition of NLV Organics, Inc. On October 4, 2018, the Company announced that it had entered into agreements with NLVO Organics, Inc. and related parties ( NLVO ), to purchase a 100% interest in a property in North Las Vegas, Nevada, and all of the business tangible and intangible assets including the business name(s), product brands, inventory, biological assets, five Nevada cannabis licenses, intellectual property and assignable supply contracts associated with the current business of NLVO. As consideration for the purchase of the NLVO property and business, the Company will pay NLVO a total consideration of $27,200,000 consisting of cash of $4,635,650, a vendor note for $14,564,350 and 4,000,000 Common shares of Flower One at a price of $2.00 per Common share, valued at $8,000,000. The Company closed this acquisition on November 9, As of the date of the financial statements, goodwill on the acquisition of NLVO is indeterminable as the valuation of the assets acquired and liabilities assumed is in progress. Stock Option Grant On October 9, 2018, the Company granted a total of 4,375,000 stock options which are exercisable at an exercise price of $2.00 (CAD$2.60) per share and may be exercised for five years.