DRIVING TECHNOLOGY DEVELOPMENT IN MODERN AGRICULTURE AUDITED FINANCIAL STATEMENTS YEAR-END CSX Listed on
Consolidated Financial Statements For the years ended 2017 and 2016 Expressed in Canadian Dollars Contents Independent Auditor s Report 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 6 7-39
Tel: 604 688 5421 Fax: 604 688 5132 www.bdo.ca BDO Canada LLP 600 Cathedral Place 925 West Georgia Street Vancouver BC V6C 3L2 Canada Independent Auditor s Report To the shareholders of Clean Seed Capital Group Ltd. We have audited the accompanying consolidated financial statements of Clean Seed Capital Group Ltd., which comprise the consolidated statements of financial position as at 2017 and 2016, the consolidated statements of 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 Financial Statements Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board, and for such internal control as management determines is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error. 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 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 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 from 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 Clean Seed Capital Group Ltd. as at 2017 and 2016 and its financial performance and its cash flows for the years then ended in accordance with International Financial Reporting Standards. Emphasis of Matter Without qualifying our opinion, we draw attention to Note 2d in the consolidated financial statements, which indicates that the Company incurred accumulated losses of $9,895,548 since inception and is expected to incur further losses in the development of its business. These conditions, along with other matters as set forth in Note 2d, indicate the existence of a material uncertainty that may cast significant doubt upon the Company s ability to continue as a going concern. (signed) BDO CANADA LLP Chartered Professional Accountants Vancouver, BC October 27, 2017 BDO Canada LLP, a Canadian limited liability partnership, is a member of BDO International Limited, a UK company limited by guarantee, and forms part of the international BDO network of independent member firms.
Consolidated Statements of Financial Position (Expressed in Canadian Dollars) Notes 2017 2016 ASSETS Current Assets Cash and cash equivalents 5 $ 262,464 $ 494,427 Receivables 6 35,677 51,977 Prepaid expenses and deposits 7 322,556 347,806 Inventory 8 127,889 11,634 Total current assets 748,586 905,844 Non-Current Assets Intellectual property 9 6,935,122 7,466,484 Property and equipment 10 108,376 150,357 Total non-current assets 7,043,498 7,616,841 TOTAL ASSETS $ 7,792,084 $ 8,522,685 LIABILITIES Current Liabilities Accounts payable 11,12 $ 919,085 $ 350,418 Due to related parties 16b 286,449 184,559 Total current liabilities 1,205,534 534,977 Non-Current Liabilities Loans payable 13 713,839 - TOTAL LIABILITIES 1,919,373 534,977 SHAREHOLDERS' EQUITY Share capital 14 14,018,578 12,805,413 Share-based payment reserve 15b 1,749,681 1,471,626 Deficit (9,895,548) (6,289,331) TOTAL SHAREHOLDERS' EQUITY 5,872,711 7,987,708 TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 7,792,084 $ 8,522,685 Ability to Continue as a Going Concern (Note 2(d)) Commitments and contingencies (Note 17) Subsequent Events (Note 22) Approved on behalf of the Board: /s/ Graeme Lempriere Director /s/ Colin Rush Director The accompanying notes are an integral part of these consolidated financial statements. 3
Consolidated Statements of Comprehensive Loss (Expressed in Canadian Dollars) Year Ended 2017 2016 Sales $ - $ 1,050,000 Cost of Sales - (860,787) Gross Margin - 189,213 Operating expenses Amortization of intellectual property (Note 9) 436,735 56,167 Amortization of property and equipment (Note 10) 36,894 34,560 Development 1,780,827 - Foreign exchange - 22,035 Interest on loans 56,637 14,298 Office and miscellaneous 79,103 126,048 Personnel 511,540 494,988 Premises 83,442 105,606 Professional 140,083 153,137 Share-based compensation (Note 15(b)) 364,055 243,100 Travel and trade shows 116,901 151,693 3,606,217 1,401,632 Net and comprehensive loss for the year $ (3,606,217) $ (1,212,419) Basic and diluted loss per share $ (0.08) $ (0.03) Weighted average number of shares outstanding 45,376,395 41,771,566 The accompanying notes are an integral part of these consolidated financial statements. 4
Consolidated Statements of Changes in Equity (Expressed in Canadian Dollars) Number Share Capital Amount Share-based Payment Reserve Deficit Total Balance, 2015 35,756,388 $ 9,381,531 $ 1,311,883 $ (5,076,912) $ 5,616,502 Units Issued for cash 4,492,000 1,796,800 - - 1,796,800 Share issue costs - (177,805) 37,921 - (139,884) Shares issued for debt settlement 589,528 324,240 - - 324,240 Shares issued upon exercise of share options 353,903 106,171 - - 106,171 Transfer of fair value to share capital upon exercise of share options - 84,253 (84,253) - - Share issuance upon exercise of agents share options 177,637 83,748 - - 83,748 Transfer of fair value to share capital upon exercise of broker warrants - 37,025 (37,025) - - Share issuance upon exercise of warrants 2,598,778 1,169,450 - - 1,169,450 Share-based compensation - - 243,100-243,100 Net loss and comprehensive loss for the year - - - (1,212,419) (1,212,419) Balance, 2016 43,968,234 $ 12,805,413 $ 1,471,626 $ (6,289,331) $ 7,987,708 Shares issued for cash 3,441,669 1,032,501 - - 1,032,501 Share issue costs - (12,586) - - (12,586) Shares issued upon exercise of share options 340,000 107,250 - - 107,250 Transfer of fair value to share capital upon exercise of share options - 86,000 (86,000) - - Share-based compensation - - 364,055-364,055 Net loss and comprehensive loss for the year - - - (3,606,217) (3,606,217) Balance, 2017 47,749,903 $ 14,018,578 $ 1,749,681 $ (9,895,548) $ 5,872,711 The accompanying notes are an integral part of these consolidated financial statements. 5
Consolidated Statements of Cash Flows (Expressed in Canadian Dollars) Year Ended 2017 2016 Cash flows from operating activities Net loss for the year $ (3,606,217) $ (1,212,419) Adjustments for items not affecting cash Amortization of property and equipment 36,894 34,560 Amortization of intellectual property 436,735 56,167 Benefit of government loan treated as a government grant included in development expenses (745,134) - Foreign exchange - 22,035 Write-off of property and equipment included in development expenses 4,300 - Interest accretion and expense on loans payable 56,637 12,264 Share-based compensation 364,055 243,100 Loss on settlement of debt - 23,581 Warranty provision - 6,444 Changes in non-cash working capital items Receivables 16,300 (27,320) Prepaid expenses and deposits (107,918) (335,556) Inventory (116,255) (11,634) Accounts payable 568,666 (72,442) Due to related parties 101,890 81,166 (2,990,047) (1,180,054) Cash flows from financing activities Proceeds from loans payable 1,657,304 - Proceeds from private placements, net cash share issue costs 1,019,916 1,656,916 Proceeds from exercise of options 107,250 106,171 Proceeds from exercise of warrants - 1,074,940 Repayment of notes payable to related party - (90,139) Repayment of technology acquisition payable - (123,572) 2,784,470 2,624,316 Cash flows from investing activities Purchase of property and equipment (26,386) (127,441) Development of intellectual property, net of recoveries - (1,001,362) (26,386) (1,128,803) Increase (decrease) in cash and cash equivalents for the year (231,963) 315,459 Cash and cash equivalents, beginning of year 494,427 178,968 Cash and cash equivalents, end of year $ 262,464 $ 494,427 Supplemental Cash Flow (Note 21) The accompanying notes are an integral part of these consolidated financial statements. 6
For the Year Ended 2017 1. CORPORATE INFORMATION Clean Seed Capital Group Ltd. (the Company ) was incorporated under the British Columbia Business Corporation Act on January 28, 2010. The Company is listed on the TSX Venture Exchange ("TSX-V"), having the symbol CSX.V. The Company s primary business is the production and distribution of CX-6 SMART Seeders and the advancement of its SMART Seeding technology developed from its portfolio of intellectual property. The Company operates in one segment, the agriculture equipment industry. All of the Company s revenues in 2016 was generated in Canada from one customer and all its assets are in Canada. The address of the Company s registered office is Suite 2900, 595 Burrard Street, Vancouver, British Columbia, Canada, V7X 1J5. The address of the Company s principal place of business is 7541 Conway Avenue, Unit 14, Burnaby, British Columbia, V5E 2P7. 2. BASIS OF PREPARATION a) Statement of compliance The consolidated financial statements of the Company for the year ending 2017, including comparatives, has been prepared in accordance with International Financial Reporting Standards ( IFRSs ) as issued by the International Accounting Standards Board ( IASB ). The consolidated financial statements were approved and authorized for issue by the Audit Committee and Board of Directors of the Company on October 27, 2017. b) Basis of measurement These consolidated financial statements have been prepared on a historical cost basis except for financial instruments that are stated at fair value. The consolidated financial statements are presented in Canadian dollars and all values are rounded to the nearest dollar, unless otherwise indicated. c) Use of estimates and judgments The preparation of these consolidated financial statements requires management to make judgments, estimates and assumptions that affect the application of policies and reported amounts of assets, liabilities, revenues and expenses. The estimates and associated assumptions are based on historical experience and various other factors that are believed to be reasonable under the circumstances. They form the basis of making the judgments about carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates. The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognized in the period in which the estimate is revised if the revision affects only that period, or in the period of the revision, and further periods, if the revision affects both current and future periods. Judgments made by management in the application of IFRS that have a significant effect on the financial statements, and estimates with a significant risk of material adjustment in the current and following fiscal years are discussed in Note 4. 7
For the Year Ended 2017 2. BASIS OF PREPARATION (continued) d) Ability to Continue as a Going Concern These consolidated financial statements have been prepared on a going concern basis, which contemplates continuity of normal business activities and the realization of assets and discharge of liabilities in the normal course of business. Prior to commercializing, the Company had been in the development stage by both advancing its intellectual property to increase its technological capability and by developing products from its intellectual property portfolio. During 2016, the Company commercialized its intellectual property by selling its first two Smart Seeders. The Company has never achieved profitable operations and did not record any sales during 2017. During the year, the Company completed a demonstration program with its Canadian distributor, initiated its 2018 CX-6 SMART Seeder order program and has continued development of its CX-6 SMART Seeder for future model years in anticipation of sales orders. The Company s primary asset is its intellectual property portfolio. The underlying value of the intellectual property is dependent upon the Company's ability to i) generate future profitable business operations based upon that intellectual property, and ii) pay its obligations arising from business operations as they come due. While these consolidated financial statements have been prepared on the assumption that the Company is a going concern and will be able to realize its assets and meet its obligations in the normal course of operations, the following conditions and events may cast significant doubt on the validity of that assumption: as at 2017, the Company has an accumulated deficit of $9,895,548; the Company has incurred a loss of $3,606,217 for the year ended 2017; the Company does not have any sales during its 2017 fiscal year; the Company has net cash flows used in operating activities of $2,990,047 for the year ended 2017; the Company has a history of losses from operations and the Company has a net working capital deficit of $456,948. The Company s ability to continue as a going concern is dependent on achieving profitable operations through the sales of its product or management s ability to raise the necessary funding through future equity issuances, debt issuances, asset sales or a combination thereof. There is no assurance that any necessary future financing will be sufficient to sustain operations until such time that the Company can generate sufficiently profitable operations on a continual basis to support its operations. These consolidated financial statements do not include any adjustments to the recoverability and classification of recorded asset amounts and classification of liabilities that might be necessary, should the Company be unable to continue as a going concern. Such adjustments could be material. While these consolidated financial statements have been prepared on the assumption that the Company is a going concern and will be able to realize its assets and meet its obligations in the normal course of operations, these conditions and events may cast significant doubt on the validity of that assumption. e) Subsidiaries In addition to the Company, the consolidated financial statements include its subsidiaries. Subsidiaries are all corporations over which the Company is able, directly or indirectly, to control financial and operating policies, which is the authority usually connected with holding the majority of the voting rights. Subsidiaries are fully consolidated from the date on which the Company acquires control. They are deconsolidated from the date that control by the Company ceases. 8
For the Year Ended 2017 2. BASIS OF PREPARATION (continued) f) Consolidation Principles The subsidiaries of the Company are as follows: Portion of Ownership Interest and Voting Power Held Name of Subsidiary Principal Activity Fiscal Year-End Place of Incorporation and Operation 2017 2016 Clean Seed Agricultural Technologies Ltd. Agriculture Equipment June 30 British Columbia, Canada 100% 100% Seed Sync Systems Ltd. Software Development June 30 British Columbia, Canada 100% 100% Assets, liabilities, revenues and expenses of the subsidiaries are recognized in accordance with the Company s accounting policies. Intercompany transactions are eliminated at consolidation. 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES a) Presentation Currency and Functional Currency The Company s presentation currency is the Canadian dollar. The functional currency of the Company is the Canadian dollar. The functional currency of Clean Seed Agricultural Technologies Ltd. and Seed Sync Systems Ltd. is the Canadian dollar. b) Cash and Cash Equivalents Cash and cash equivalents includes cash on hand, deposits held at call with financial institutions, other short-term, highly liquid investments with original maturities that are readily convertible to known amounts of cash within three months or less and subject to an insignificant risk of change in value. c) Inventory Inventory is valued at the lower of cost or market using the weighted average cost method. Market is current replacement cost (by purchase or by reproduction dependent on the type of inventory). In cases where market exceeds net realizable value (i.e., estimated selling price less reasonably predictable costs of completion and disposal), inventories are stated at net realizable value. Raw materials consumed in the development of prototypes are transferred to Intellectual Property when it is determined future economic benefit exists and those prototypes meet the recognition criteria as an Intangible Asset, otherwise, they are charged to operations as development expense. d) Property and Equipment Recognition and Measurement On initial recognition, property and equipment are valued at cost, being the purchase price and directly attributable cost of acquisition or construction required to bring the asset to the location and condition necessary to be capable of operating in the manner intended by the Company, including appropriate borrowing costs and the estimated present value of any future unavoidable costs of dismantling and removing items. The corresponding liability is recognized within provisions. Property and equipment is subsequently measured at cost less accumulated amortization, less any accumulated impairment losses, with the exception of land which is not depreciated. When parts of an item of property and equipment have different useful lives, they are accounted for as separate items (major components) of property and equipment. 9
For the Year Ended 2017 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) d) Property and Equipment (continued) Subsequent Costs The cost of replacing part of an item of property and equipment is recognized in the carrying amount of the item if it is probable that the future economic benefits embodied within the part will flow to the Company and its costs can be measured reliably. The carrying amount of the replaced part is derecognized. The costs of the day-to-day servicing of property and equipment are recognized in profit or loss as incurred. Major Maintenance and Repairs Subsequent costs are included in the asset s carrying amount or recognized as a separate asset, as appropriate, only when it is probable that future economic benefits associated with the item will flow to the Company and the cost of the item can be measured reliably. All other repairs and maintenance are charged to the profit or loss during the financial period in which they are incurred. Gains and Losses Gains and losses on disposal of an item of property and equipment are determined by comparing the proceeds from disposal with the carrying amount, and are recognized net within other income in profit or loss. Amortization Amortization is recognized in profit or loss and is provided for over the asset s estimated useful life: Leasehold improvements Office furniture and equipment Computer equipment Computer software Shop equipment Production molds Term of the lease 20% declining basis 50% declining basis 50% declining basis 30% declining basis 12.5% declining basis Amortization methods, estimated useful lives and residual values are reviewed at each year-end and adjusted if appropriate. The effect of any changes in estimate is accounted for on a prospective basis. e) Intellectual Property Intellectual property consists of patents, patents pending, prototypes, capital assets used in the development of the intellectual property and the costs related to the development of technologies and, related proprietary knowledge. Intellectual property is recorded at cost and amortized on a straight-line basis once is available for use. Amortization of intellectual property is as follows: Patents and patents pending Development costs the useful life of the patents pending the useful life of the patents pending The Company amortizes intellectual property over 17 years, which represents the remaining life on its patents pending relating to the Smart Seeder technology. The components of the portfolio of intellectual property purchased on the acquisition of Clean Seed Agricultural Technologies Ltd. was integrated into the development of the Smart Seeder and therefore, those components are indistinguishable from the patents pending. Therefore, the value of the intellectual property portfolio is allocated 100% to the patents pending related to the Smart Seeder. f) Impairment of Non-Financial Assets Carrying values of property and equipment are reviewed at each reporting period as to whether indicators of impairment exist. If any indication of impairment exists an estimate of an asset s recoverable amount is calculated. An impairment loss is recognized when the carrying value of an asset or its cash-generating unit exceeds the recoverable amount. A cash-generating unit is the smallest identifiable group of assets that generates cash inflows that are largely independent of the cash inflows from other assets or groups of assets. The recoverable amount of an asset or cash-generating unit is the greater of its value in use and its fair value less costs to sell. 10
For the Year Ended 2017 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) f) Impairment of Non-Financial Assets (continued) Intellectual property when in use is assessed for impairment by areas of interest if facts and circumstances suggest that the carrying amount exceeds the recoverable amount. Intellectual property not available for use will be tested annually for impairment similar to the basis above. This requires an estimation of the recoverable amount of the cash-generating unit. Estimating the recoverable amount requires the Company to make an estimate of fair value less cost to sell or fair value in use, both of which are subject to estimates and judgment. Impairment losses recognized in prior periods are assessed each reporting date for any indications that the loss has decreased or no longer exists. An impairment loss is reversed if there is an indication that there has been a change in the estimates, conditions and or factors used to determine the recoverable amount. The amount of the reversal cannot exceed the carrying amount that would have been determined, net of amortization, had no impairment loss been recognized for the asset in prior periods. g) Revenues Revenues from the sale of products are recognized when: the risks and rewards of ownership have passed to the customer based on the terms of the sales transaction, collection of any amount receivable is probable, evidence of an arrangement exists; and the sales price is fixed or determinable. Ownership transfers to the customer upon shipment and the risk of loss upon damage, theft or destruction of the product is the responsibility of the customer. The only right the Company retains with respect to the product sold is a security interest enabling recovery of the goods in the event of a default on payment, if any amount is receivable. Product sales are payable in full within 30 days of shipment. The terms of sale require that a purchase order be issued before goods are shipped. The dealer may not return equipment once title has transferred. At the time a sale is recognized, the company records estimated future warranty costs. h) Research and Development Costs All research and development costs are expensed when incurred unless they meet specific criteria directly relating to the development of the intellectual property for deferral and amortization. The Company reassesses whether it has met the relevant criteria for deferral and amortization at each reporting date. Development costs deferred are not amortized until completion of the related development project. Amortization begins once the underlying development project is available for use. i) Government grants Government grants are recognized where there is reasonable assurance that the grant will be received and all attached conditions will be complied with. When the grant relates to an expense item, the grant is recognized as a reduction in the relevant expense, over the period necessary to match the grant on a systematic basis to the costs that it is intended to compensate. Where the grant relates to an asset, it reduces the carrying amount of the asset. The grant is then recognized as income over the useful life of a depreciable asset by way of a reduced depreciation charge. j) Provisions Provisions are recorded when a present legal or constructive obligation exists as a result of past events where it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation, and a reliable estimate of the amount of the obligation can be made. 11
For the Year Ended 2017 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) j) Provisions (continued) The amount recognized as a provision is the best estimate of the consideration required to settle the present obligation at the reporting date, taking into account the risks and uncertainties surrounding the obligation and discount rates. Where a provision is measured using the cash flows estimated to settle the present obligation, its carrying amount is the present value of those cash flows discounted for the market discount rate. Over time the discounted liability is increased for the changes in the present value based on the current market discount rates and liability risks. When some or all of the economic benefits required to settle a provision are expected to be recovered from a third party, the receivable is recognized as an asset if it is virtually certain that reimbursement will be received and the amount receivable can be measured reliably. k) Financial Instruments Financial assets are classified into one of four categories: Fair value through profit or loss ( FVTPL ); Held-to-maturity investments ( HTM ); Available for sale ( AFS ); and Loans and receivables. Financial liabilities are classified into one of two categories: FVTPL; and Other financial liabilities. The classification is determined at initial recognition and depends on the nature and purpose of the financial asset. The Company s financial instruments have been identified and classified as follows: Financial Instrument Cash and cash equivalents Accounts payable Due to related parties Loans payable (i) Loans and receivables Classification Loans and receivables Other financial liabilities Other financial liabilities Other financial liabilities These assets are non-derivative financial assets resulting from the delivery of cash and other assets by a lender to a borrower in return for a promise to repay on a specified date or dates, or on demand. They are initially recognized at fair value plus transaction costs that are directly attributable to their acquisition or issue and subsequently carried at amortized cost, using the effective interest rate method, less any impairment losses. Amortized cost is calculated taking into account any discount or premium on acquisition and includes fees that are an integral part of the effective interest rate and transaction costs. Gains and losses are recognized in the profit or loss when the loans and receivables are derecognized or impaired, as well as through the amortization process. (ii) Other financial liabilities Other financial liabilities are all financial liabilities that are not classified as FVTPL. Other financial liabilities are initially recognized at the transaction value and subsequently carried at amortized cost. 12
For the Year Ended 2017 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) k) Financial Instruments (continued) (iii) Effective interest method The effective interest method calculates the amortized cost of a financial instrument and allocates interest income over the corresponding period. The effective interest rate is the rate that discounts estimated future cash receipts over the expected life of the financial instrument, or, where appropriate, a shorter period, to the net carrying amount on initial recognition. (iii) Derecognition of financial assets and financial liabilities A financial asset is derecognized when: the contractual right to the asset s cash flows expire; or if the Company transfers the financial asset and substantially all risks and rewards of ownership to another entity. A financial liability is derecognized when the Company s obligations are discharged, cancelled or they expire. l) Share Capital Share capital represents the amount received on the issuance of shares. Shares issued for consideration other than cash are recorded at their fair value according to quoted market price on the day the shares are issued. Proceeds from the exercise of share options and warrants are recorded as share capital in the amount for which the option or warrant enabled the holder to purchase a share in the Company along with the fair value of the option or warrant at the time of its grant. The proceeds from the issuance of units are allocated between common shares and share purchase warrants based on the residual value method. Under this method, the proceeds are allocated to share capital based on the fair value of the common shares and any residual value is allocated to share purchase warrants. m) Share-Based Payments The Company has a share option plan under which it grants stock options to directors, employees, consultants and service providers. 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 Share-based Payment Reserve over the vesting period, described as the period during which all the vesting conditions are to be satisfied. The Company uses the Black-Scholes option pricing model to estimate the fair value of each stock option granted at the grant date. 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 the market vesting conditions are satisfied. Where the terms and conditions of options are modified before they vest, the increase in fair value of the options, measured immediately before and after the modification, is also charged to the Share-based Payment Reserve over the remaining vesting period. Where equity instruments are granted or issued to non-employees, the Company measures the value of the goods or services received, and the corresponding increase in equity, directly, at the fair value of the goods or services received, unless that fair value cannot be estimated reliably. 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. The expected life used in the model is adjusted, based on management s best estimate, for the effects of non-transferability, exercise restrictions and behavioral considerations. 13
For the Year Ended 2017 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) m) Share-Based Payments (continued) All equity settled share-based payments are reflected in Share-based Payment Reserve, until exercised. Upon exercise, shares are issued from treasury and the amount reflected in Share-based Payment Reserve is credited to Share Capital along with any consideration paid. Costs incurred related to the issuance of shares are recorded as a reduction of share capital. 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 the vesting and recognizes the amount that otherwise would have been recognized for the 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. The Company has no cash settled share-based payment transactions. n) Share Issuance Costs Costs directly identifiable with the raising of share capital financing are charged against share capital. Share issuance costs incurred in advance of share subscriptions are recorded as equity. Share issuance costs related to uncompleted share subscriptions are charged to operations. o) Earnings (Loss) Per Share Basic earnings (loss) per share is computed by dividing the net income (loss) available to common shareholders of the Company by the weighted average number of shares outstanding during the reporting period. Diluted earnings (loss) per common share is computed similar to basic earnings (loss) per share except that the weighted average shares outstanding are increased to include additional shares for the assumed exercise of stock options and warrants, if dilutive. The number of additional shares is calculated by assuming that outstanding stock options and share purchase warrants were exercised and that the proceeds from such exercises were used to acquire common stock at the average market price during the reporting period. When the Company is in a loss position, basic and diluted loss per share will be the same. p) Income Taxes Income tax expense comprises current and deferred tax. Current tax and deferred tax are recognized in net income except to the extent that it relates to a business combination, or items recognized directly in equity or in other comprehensive income (loss). Current income taxes are recognized for the estimated income taxes payable or receivable on taxable income or loss of the current year and any adjustment to income taxes payable in respect of previous years. Current income taxes are determined using tax rates and tax laws that have been enacted or substantively enacted by the year-end date. Deferred tax assets and liabilities are recognized where the carrying amount of an asset or liability differs from its tax base, except for taxable temporary differences arising on the initial recognition of goodwill and temporary differences arising on the initial recognition of an asset or liability in a transaction which is not a business combination and at the time of the transaction, affects neither accounting or taxable income or loss. Recognition of deferred tax assets of unused tax losses, tax credits and deductible temporary differences is restricted to those instances where it is probable that future taxable profit will be available against which the deferred tax asset can be utilized. At the end of each reporting period, the company reassesses unrecognized deferred tax assets. The Company recognizes a previously unrecognized deferred tax asset to the extent that it has become probable that future taxable profit will allow the deferred tax asset to be realized. 14
For the Year Ended 2017 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) q) Future Accounting Pronouncements i. IFRS 2 Share-based Payments ii. iii. iv. The IASB issued amendments to IFRS 2 in relation to classification and measurement of sharebased payment transactions. The amendments address three main areas: the effects of vesting conditions on the measurement of a cash-settled share-based payment transaction, the classification of a share-based payment transaction with net settlement features for withholding tax obligations, and the accounting where a modification to the terms and conditions of a sharebased payment transaction changes its classification from cash-settled to equity-settled. The amendments are effective for annual periods beginning on or after January 1, 2018. Due to the terms of the Company s share-based payments this standard is not expected to impact the consolidated financial statements. IFRS 7 Cash Flow Statement The Company will be required to explain changes in their liabilities arising from financing activities. This includes changes arising from cash flows (eg drawdowns and repayments of borrowings) and non- cash changes such as acquisitions, disposals and accretion of interest and unrealized exchange differences. Changes in financial assets must be included in this disclosure if the cash flows were, or will be, included in cash flows from financing activities. This could be the case, for example, for assets that hedge liabilities arising from financing liabilities. Entities may include changes in other items as part of this disclosure, for example by providing a net debt reconciliation. However, in this case the changes in the other items must be disclosed separately from the changes in liabilities arising from financing activities. The information may be disclosed in tabular format as a reconciliation from opening and closing balances, but a specific format is not mandated. IFRS will be effective for the Company s June 30, 2018 year-end. The Company is currently evaluating the impact this standard is expects the standard will have an impact on cash flow disclosures relating to the loans payable. IFRS 9 Financial Instruments IFRS 9 reflects all phases of the financial instruments project and replaces IAS 39 Financial Instruments: Recognition and Measurement and all previous versions of IFRS 9. The standard introduces new requirements for classification and measurement, impairment, and hedge accounting. IFRS 9 will be effective for the Company s 2019 year-end, with early application permitted. The Company is currently evaluating the impact this standard is expected to have on its consolidated financial statements. IFRS 15 Revenue from Contracts with Customers The standard replaces IAS 18 Revenue and IAS 11 Construction Contracts, and contains a single model that applies to contracts with customers and two approaches to recognizing revenue: at a point in time or over time. The model features a contract-based five-step analysis of transactions to determine whether, how much and when, revenue is recognized. New estimates and judgmental thresholds have been introduced, which may affect the amount and/or timing of revenue recognized. IFRS will be effective for the Company s 2019 year-end. The Company is currently evaluating the impact this standard is expected to have on its consolidated financial statements. 15
For the Year Ended 2017 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) q) Future Accounting Pronouncements (continued) v. IFRS 16 Leases IFRS The new standard will replace IAS 17 Leases and eliminates the classification of leases as either operating or finance leases by the lessee. The treatment of leases by the lessee will require capitalization of all leases resulting in an accounting treatment similar to finance leases under IAS 17 Leases. Exemptions for leases of very low value or short- term leases will be applicable. The new standard will result in an increase in lease assets and liabilities for the lessee. Under the new standard the treatment of all lease expense is aligned in the statement of earnings with depreciation, and an interest component recognized for each lease, in line with finance lease accounting under 17 Leases. IFRS 16 will be effective for the Company s June 30, 2020 year-end. The Company is currently evaluating the impact this standard is expected to have on its consolidated financial statements. 4. CRITICAL ACCOUNTING ESTIMATES AND JUDGMENTS The Company makes estimates and assumptions about the future that affect the reported amounts of assets and liabilities. Estimates and judgments are continually evaluated based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. In the future, actual experience may differ from these estimates and assumptions. The effect of a change in an accounting estimate is recognized prospectively by including it in comprehensive income in the period of the change, if the change affects that period only; in the period of the change and future periods, if the change affects both. Information about critical judgments in applying accounting policies that have the most significant risk of causing material adjustments to the carrying amounts of assets and liabilities recognized in the financial statements within the next financial year are discussed below. Capitalization of Development Costs in Intellectual Property Prior to commercializing its CX-6 SMART Seeder in May 2016, the Company capitalized certain development costs to intellectual property. In determining whether development costs should be capitalized it needed to establish 1) whether completion of the intangible asset is technically feasible 2) whether the intangible asset would generate probable future economic benefits and 3) whether there were adequate technical, financial and other resources to complete the development and to use or sell the intangible asset. The development costs capitalized met the criteria up to the date of commercialization and were capitalized accordingly. Subsequent to commercialization, development costs related to the CX-6 Smart Seeder are recorded as development expenses as incurred. Development costs incurred by the Company since commercialization would have qualified for capitalization prior to commercialization. 16
For the Year Ended 2017 4. CRITICAL ACCOUNTING ESTIMATES AND JUDGMENTS (continued) Impairment of Intellectual Property We review intangible assets available for use at each reporting period to determine whether there is an indication of impairment. An asset may be impaired if there is objective evidence of impairment as a result of one or more events that has occurred after the initial recognition of the asset and that event has an impact on the estimated future cash flows of the asset or fair value less cost to sell. In determining indicators of impairment of intangible assets, we consider external sources of information such as prevailing economic and market conditions including the Company s market value in comparison to its net book value. We also consider internal sources of information such as the historical and expected financial performance of the intangible assets. If an indication of impairment exists, the asset s recoverable amount is estimated. If the carrying amount exceeds the recoverable amount (on a discounted basis), the asset value is written down to the recoverable amount. There are no indications of impairment to the Company s intellectual property. Share-based Payment Transactions The Company measures the cost of equity-settled transactions with employees 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. The Company uses the Black-Scholes option-pricing model to estimate the fair value of options granted and warrants issued as compensation for services. This estimate requires determining the most appropriate inputs for the Black-Scholes model including the expected life of the share option, volatility and dividend yield. As the Company had its initial public offering and listing in September 2011, certain derivative instruments issued or granted have had expected lives longer than the Company s historical share price data. Where there is sufficient historical share price data of the Company to estimate expected future share price volatility, the Company uses its historical share price data. Where there was insufficient historical share price data of the Company from which to estimate expected future share price volatility, the Company estimated expected share price volatility based on the historical share price volatility of comparable entities. The expected life of the share option is based on the full term of the instrument, as there is not reliable evidence, to suggest a more appropriate term. The risk-free interest rate is based on a Canadian treasury instrument whose term is consistent with the expected term of the stock options. We have not paid and do not anticipate paying cash dividends on our shares of common stock in the foreseeable future; therefore, the expected dividend yield is assumed to be zero. See note 15(b) for the assumptions applied. 17
For the Year Ended 2017 4. CRITICAL ACCOUNTING ESTIMATES AND JUDGMENTS (continued) Loans Payable During 2017 the Company entered into two repayable contribution agreements (the Loans ) with different ministries of the Federal Government of Canada. Each Loan is unsecured, bears 0% interest and allows for multiple drawdowns throughout the Loan s eligible contribution period. As each Loan bears no interest, the interest rate of each Loan is below the market rate for a commercial loan with similar terms. The initial fair value of these Loans was determined by using a discounted cash flow analysis. To determine the discounted cash flow, the Company had determine the discount rate to apply. The discount rate selected at initial recognition has a significant impact on the amount recorded for the initial fair value of the Loans. In determining the appropriate discount rate, the Company considered the interest rates of similar long-term debt arrangements, with similar terms. These Loans were issued by the Federal Government of Canada to support innovation and economic development. Each Loan requires repayments starting one year after the end of each project. One Loan has a five-year repayment term and the other Loan has a nine-year repayment term. Accordingly, finding financing arrangements with non-government arm length parties similar terms requires judgement. We determined there was no observable market for the Company to obtain long-term, unsecured borrowing of this nature and management was required to use significant judgment in determining the appropriate discount rate to apply in the fair value calculation of these financial instruments. Management used an average discount rate of 17% based on its analysis of: 1) other companies receiving similar Loans at early commercialization stages; 2) the cost of borrowing for debt instruments of comparable term for companies with a comparable investment grade to the Company and; 3) taking into account the Company s risk factors. Using the discount rate, the difference between the calculated fair value and the face value liability of the financial instrument was $1,000,102. This difference of $1,000,102 reduces the original eligible expenditures proportionately based on how the Company was funded. The difference of $1,000,102 is being accreted as interest over the life of the instruments. We reviewed interest rates incurred by companies with a comparable investment grade and discount rates applied by venture stage companies in comparable circumstances and found they used a range of 8%-30% for unsecured term loans. We considered discount rates in the range of 12% - 22% in ultimately determining that the average discount rate of 17% was most appropriate. If the average discount rate used for the loans had been determined to be higher or lower by 5% (resulting in discount rates of 22% or 12%, respectively), the calculated fair value would have been an estimated $133,243 lower or $181,598 higher, respectively. See note 13 for additional information about the Loans. 5. CASH AND CASH EQUIVALENTS 2017 2016 Cash $ 239,401 $ 340,544 Redeemable Guaranteed Investment Certificates 23,063 153,883 $ 262,464 $ 494,427 18
For the Year Ended 2017 6. RECEIVABLES 2017 2016 Goods and sales tax receivable $ 35,677 $ 51,977 7. PREPAID EXPENSES AND DEPOSITS 2017 2016 Production deposits $ 293,166 $ 326,334 Legal retainer for patent applications 2,273 1,937 Other 27,117 19,535 $ 322,556 $ 347,806 See note 13(a) for discussion regarding the impact of the benefit on loans payable that reduced the cost of certain production deposits included within prepaid expenses and deposits. 8. INVENTORY The Company's inventory consists of raw materials and finished goods inventory. Raw materials consumed in the development of prototypes prior to commercialization of the CX-6 SMART Seeder were capitalized to intellectual property. Raw materials consumed in development activities subsequent to commercialization are recorded as development expense. Raw materials consumed in production of CX-6 SMART Seeders are transferred to working in progress and then finished goods upon completion of production. Finished goods inventory is transferred to cost of goods sold when the inventory is sold. 2017 2016 Raw materials, opening balance $ 11,634 $ - Purchases 232,592 1,178,626 Transferred to finished goods - (777,995) Transferred to intellectual property - (388,997) Consumed in development activities (116,337) - Raw materials, ending balance $ 127,889 $ 11,634 Finished goods, opening balance $ - $ - Transferred from raw materials - 777,995 Finished goods sold - (777,995) Finished goods, ending balance $ - $ - Inventory, ending balance $ 127,889 $ 11,634 19