EX-99.118 119 exhibit99-118.htm EXHIBIT 99.118 Cannex Capital Holdings Inc. - Exhibit 99.118 - Filed by newsfilecorp.com


CANNEX CAPITAL HOLDINGS INC.

CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

 

Expressed in United States Dollars

Unaudited

April 30, 2019

NOTICE OF NO AUDITOR REVIEW OF
CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

The accompanying unaudited condensed consolidated interim financial statements of Cannex Capital Holdings Inc. for the twelve months ended April 30, 2019 have been prepared by the management of the Company and approved by the Company’s audit committee.

The accompanying unaudited condensed consolidated interim financial statements of the Company have been prepared by and are the responsibility of the Company’s management.

The Company’s independent auditor has not performed a review of these condensed consolidated interim financial statements in accordance with standards established by the Canadian Institute of Chartered Professional Accountants for a review of the condensed consolidated interim financial statements by an entity’s auditor.

CANNEX CAPITAL HOLDINGS INC.
Condensed Consolidated Interim Statements of Financial Position
(United States dollars)

    Note     April 30     April 30  
          2019     2018  
          $     $  
                   
ASSETS                  
                   
Current assets                  
     Cash and cash equivalents         10,640,325     11,862,715  
     Accounts receivable   6, 19     2,433,523     1,582,994  
     Notes receivable   8, 19     14,505,619     -  
     Equipment finance receivable   7     255,431     157,084  
     Inventory         351,243     147,705  
     Prepaid expenses         1,064,530     128,798  
Total current assets         29,250,671     13,879,296  
                   
Non-current assets                  
     Prepaid expenses and deposits   10     3,610,773     59,456  
     Equipment finance receivable   7, 19     151,109     370,508  
     Investments   10     1,153,981     2,511,759  
     Property, plant and equipment   11     28,355,806     30,277,769  
Total non-current assets         33,271,669     33,219,492  
                   
Total assets         62,522,340     47,098,788  
                   
LIABILITIES                  
                   
Current liabilities                  
     Accounts payable and accrued liabilities   12, 19     638,944     2,377,155  
     Income taxes payable         114,863     75,000  
     Promissory note due within 12 months   13     -     932,266  
     Convertible promissory note due within 12 months   14     -     1,144,201  
     Derivative liability   14     56,557,142     5,077,000  
Total current liabilities         57,310,949     9,605,622  
                   
Non-current liabilities                  
     Promissory note   13     -     1,603,782  
     Convertible promissory notes   14     14,144,993     3,745,285  
     Deferred income taxes         1,031,295     1,117,295  
Total non-current liabilities         15,176,288     6,466,362  
                   
Total liabilities         72,487,237     16,071,984  
                   
EQUITY (DEFICIENCY)                  
     Share capital - common   15     31,199,258     31,007,807  
     Share capital – Class A   15     1,462,329     1,462,329  
     Reserves   16     14,846,167     3,475,788  
     Deficit         (57,472,651 )   (4,919,120 )
          (9,964,897 )   31,026,804  
                   
Total liabilities and equity (deficiency)         62,522,340     47,098,788  
Commitment (note 20)                  
Events after the reporting period (note 25)                  

On behalf of the directors:

“Leo Gontmakher” Director “Roman Tkachenko” Director
Leo Gontmakher   Roman Tkachenko  

See accompanying notes

- 1 -

CANNEX CAPITAL HOLDINGS INC.
Condensed Consolidated Interim Statements of Comprehensive Loss
(United States dollars)

    Note     Three     Four     Twelve     Seven  
          Months     Months     Months     Months  
          Ended     Ended     Ended     Ended  
          April 30     April 30     April 30     April 30  
          2019     2018     2019     2018  
                               
Product sales   21     1,290,166     997,219     4,434,962     2,241,928  
Cost of sales         (1,201,633 )   (568,043 )   (3,745,836 )   (1,651,426 )
Gross profit         88,533     429,176     689,126     590,502  
Rental income   21     2,514,120     3,058,944     9,500,048     4,698,240  
          2,602,653     3,488,120     10,189,174     5,288,742  
                               
Operating expenses                              
     Accretion   14     580,034     -     1,616,231     -  
     Consulting fees         931,170     71,979     1,954,837     244,106  
     Depreciation   11     500,658     666,548     2,001,088     1,398,025  
     Director fees         28,063     -     141,234     -  
     Foreign exchange         3,680     (250,658 )   (139,451 )   (270,211 )
     General         582,891     82,534     1,465,380     282,570  
     Interest   13, 14     1,087,342     549,335     2,921,483     869,961  
     Investor relations         163,706     114,390     497,928     131,206  
     Legal and professional fees         630,951     105,525     1,850,777     411,853  
     Rent         254,463     65,779     403,327     128,952  
     Share-based compensation   18     2,221,653     3,290,210     4,347,135     3,752,715  
     Shareholder and regulatory         35,741     34,153     116,070     42,442  
     Property taxes         84,555     150,999     446,089     165,354  
     Travel         30,790     55,275     166,521     197,568  
     Wages and salaries   19     487,817     170,710     1,474,968     272,465  
          7,623,514     5,106,779     19,263,617     7,627,006  
                               
Loss before other items         (5,020,861 )   (1,618,659 )   (9,074,443 )   (2,338,264 )
                               
Other income                              
     Change in fair value of derivative liabilities   14     (42,600,000 )   (488,000 )   (40,639,000 )   (488,000 )
     Listing expense         -     (1,671,184 )   -     (1,671,184 )
     Loss on loan settlement   14     -     -     (2,514,000 )   -  
     Impairment of investments   10     (755,103 )   -     (755,103 )   -  
     Interest income         168,274     68,908     390,015     68,908  
Loss before income taxes         (48,207,690 )   (3,708,935 )   (52,592,531 )   (4,428,540 )
Income taxes                              
     Current         173,000     (75,000 )   (47,000 )   (75,000 )
     Deferred         21,000     802,635     86,000     802,635  
          194,000     727,635     39,000     727,635  
                               
Loss for the period         (48,013,690 )   (2,981,300 )   (52,553,531 )   (3,700,905 )
Translation gain         391,479     (387,223 )   850,861     (348,809 )
Comprehensive loss for the period         (47,622,211 )   (3,368,523 )   (51,702,670 )   (4,049,714 )
Basic and diluted loss per share   23     (0.26 )   (0.02 )   (0.29 )   (0.03 )
Weighted average number of shares outstanding, basic and diluted   23     184,015,904     153,582,011     183,787,568     128,941,519  

See accompanying notes

- 2 -

CANNEX CAPITAL HOLDINGS INC.
Condensed Consolidated Interim Statements of Cash Flow
(United States dollars)

    Note     Twelve Months Ended     Seven Months Ended  
          April 30     April 30  
          2019     2018  
                   
                   
Operating activities                  
Loss for the period         (52,553,531 )   (3,700,905 )
Items not requiring cash:                  
       Accretion   14     1,616,231     -  
       Depreciation   11     2,001,088     1,398,025  
       Share-based compensation   18     4,347,135     3,752,715  
       Interest income         (253,825 )   -  
       Interest expense         2,921,483     869,961  
       Listing expense         -     1,671,184  
       Unrealized exchange loss (gain)         (168,688 )   -  
       Change in fair value of derivative liabilities   14     40,639,000     488,000  
       Impairment of investments         755,103     -  
       Loss on sale of equipment         -     141  
       Deferred income taxes         (86,000 )   -  
Changes in working capital:                  
       Accounts receivables         (850,817 )   (1,307,963 )
       Inventory         (203,538 )   (40,691 )
       Prepaid expense         (940,145 )   252,677  
       Accounts payable         (1,014,786 )   226,034  
       Taxes payable         39,863     (727,635 )
       Unearned revenue         -     (44,972 )
                   
     Net cash generated from (used in) operations         (3,751,427 )   2,836,571  
                   
Investing activities                  
     Cash acquired from acquisitions         -     4,907  
     Deposits         (3,551,317 )   (26,330 )
     Purchase of property, plant and equipment   11     (79,125 )   (974,129 )
     Proceeds on sale of property, plant and equipment         -     13,000  
     Loan advances         (14,505,619 )   (527,592 )
     Investments   10     (2,918,062 )   (2,500,000 )
     Realization of investments   10     3,500,000     -  
     Interest income         135,058     -  
     Repayment of notes receivable         121,052     -  
                   
     Net cash generated from (used in) investing activities         (17,298,013 )   (4,010,144 )
                   
Financing activities                  
     Issuance of common shares for cash, net of issuance costs         -     35,834,264  
     Revolving loan advances   11     -     (3,333,880 )
     Revolving loan proceeds         -     257,173  
     Convertible promissory note repayments   14     (6,496,522 )   -  
     Convertible promissory note advances         32,000,000     -  
     Convertible promissory note costs         (738,900 )   -  
     Loan proceeds         -     230,000  
     Loan repayments   13     (2,536,048 )   (19,383,803 )
     Interest paid   13, 14     (1,991,026 )   (490,322 )
                   
     Net cash generated by (used in) financing activities         20,237,504     13,113,432  
                   
Effect of exchange rate movements on cash         (410,455 )   (356,184 )
                   
Change in cash and cash equivalents         (1,222,391 )   11,583,675  
Cash and cash equivalents, beginning of period         11,862,716     279,040  
Cash and cash equivalents, end of period         10,640,325     11,862,715  
Cash and cash equivalents comprise                  
     Cash         6,170,386     11,583,675  
     Cash equivalents         4,469,939     279,040  
          10,640,325     11,862,715  

Supplemental disclosure with respect to cash flow (note 24)
See accompanying notes

- 3 -

CANNEX CAPITAL HOLDINGS INC.
Condensed Consolidated Interim Statements of Equity (Deficiency)
(United States dollars)

                                Share sub-     Members’     Reserves     Deficit     Total  
                                scriptions     equity                    
  Note     Number of Shares     Share capital     received                          
                                                           
        Common     Class A     Common     Class A                                
                    $     $     $     $     $     $     $  
                                                           
September 30, 2017       35,710,411     -     413,764     -     188,800     1,885,477     (9,272 )   (1,218,215 )   1,260,554  
                                                           
Loans converted to equity 15     -     -     -     -     -     892,265     -     -     892,265  
Private placements, net of share issue costs       97,783,651     -     2,003,375     -     (188,800 )   -     -     -     1,814,575  
Reverse takeover of Arco       2,000,003     -     1,558,802     -     -     -     -     -     1,558,802  
Reverse take-over amalgamation 15     (96,521,734 )   96,521,734     (7,717,612 )   1,462,329     -     (2,777,742 )   -     -     (9,033,025 )
Private placement as part of RTO, net of issue costs 15     48,219,872     -     34,749,478     -     -     -     -     -     34,749,478  
Agent warrants issued 15     -     -     -     -     -     -     554,933     -     554,933  
Share-based compensation       -     -     -     -     -     -     3,278,936     -     3,278,936  
Foreign currency translation loss       -     -     -     -     -     -     (348,809 )   -     (348,809 )
Loss for the period       -     -     -     -     -     -     -     (3,700,905 )   (3,700,905 )
                                                           
April 30, 2018       87,192,203     96,521,734     31,007,807     1,462,329     -     -     3,475,788     (4,919,120 )   31,026,804  
                                                           
Share issue costs       -     -     (672,040 )   -     -     -     -     -     (672,040 )
Options exercised 18     300,000     -     410,859     -     -     -     (184,615 )   -     226,244  
Warrants exercised 19     212,500     -     237,961     -     -     -     -     -     237,961  
Exercise of agent warrants 19     200,000     -     214,671     -     -     -     (64,656 )   -     150,015  
Fair value of warrants issued 19     -     -     -     -     -     -     6,746,654     -     6,746,654  
Share-based compensation 18     -     -     -     -     -     -     4,347,135     -     4,347,135  
Foreign currency translation loss       -     -     -     -     -     -     525,861     -     525,861  
Loss for the period       -     -     -     -     -     -     -     (52,553,531 )   (52,553,531 )
                                                           
April 30, 2019       87,904,704     96,521,734     31,199,258     1,462,329     -     -     14,846,167     (57,472,651 )   (9,964,897 )

See accompanying notes

- 4 -


CANNEX CAPITAL HOLDINGS INC.
Notes to the Condensed Consolidated Interim Financial Statements
For the Twelve Months Ended April 30, 2019
(United States dollars)

1.

Corporate Information

Cannex Capital Holdings Inc. (“Cannex” or the “Company”) was incorporated as Atomic Minerals Ltd. on March 13, 2006 pursuant to the provisions of the British Columbia Business Corporations Act and was previously listed on the NEX board of the TSX Venture Exchange (the “Exchange”).

On March 13, 2018, Cannex Capital Group Inc. (the “Cannex Group”) and its security holders (the “Cannex Group Security holders”) completed an amalgamation with Arco Resources Corp. (“Arco”), a public company listed on the NEX board of the Exchange pursuant to which the Cannex Group Security holders transferred all of their common shares of Cannex Group in exchange for common shares of Arco on a 1:1 ratio. The transaction resulted in the former Cannex Group Security holders obtaining control the resulting issuer, and therefore constituted a reverse takeover (the “RTO Amalgamation”) under the policies of the Exchange.

Concurrently with the RTO Amalgamation Cannex Group completed the acquisition of 100% of the membership units of BrightLeaf, LLC (“BrightLeaf”), an entity under common control with Cannex Group, for cash of $22,532,608, the issuance of convertible promissory notes of $9,033,025 (note 14) and the assumed debts of $4,434,370. Prior to the acquisition BrightLeaf debt of $892,265 was converted to equity of BrightLeaf.

The ongoing entity, being the combined operations of Cannex Group and BrightLeaf, has adopted the name Cannex Capital Holdings Inc. Cannex has been identified for accounting purposes as the acquirer, and accordingly the entity is considered to be a continuation of Cannex and the net assets of Arco at the date of the RTO Amalgamation are deemed to have been acquired by Cannex. The comparative figures are those of Cannex and BrightLeaf prior to the RTO Amalgamation.

In connection with the RTO Amalgamation, Cannex delisted its common shares from the NEX and relisted on the Canadian Securities Exchange and completed a private placement, net of issuance costs, for $34,749,478. The Company’s common shares resumed trading on the Canadian Securities Exchange (the “CSE”) under the symbol “CNNX” on March 14, 2018.

The Company leases real estate and sells supplies to cannabis producers and is seeking to expand through investments in cannabis growers, processors and retailers. The head office and principal address of the Company is 1241 Alberni Street, Vancouver, British Columbia, V6E 4R4.

- 5 -


CANNEX CAPITAL HOLDINGS INC.
Notes to the Condensed Consolidated Interim Financial Statements
For the Twelve Months Ended April 30, 2019
(United States dollars)

2.

Basis of Presentation


  a)

Change of year end

     
 

Cannex Group had a September 30 year end but, in conjunction with the RTO Amalgamation, elected to change its year end to April 30. In April 2019, Cannex extended its year end to July 2019, thereby creating a 15-month fiscal 2019 period. The comparative statements of comprehensive income (loss), equity, and cash flow are for the four- and seven-month periods ended April 30, 2018.

     
  b)

Statement of compliance

     
 

These condensed consolidated interim financial statements for the twelve months ended April 30, 2019 have been prepared in accordance with IAS 34 – Interim Financial Reporting and should be read in conjunction with the Company’s April 30, 2018 audited financial statements which were prepared in accordance with International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board (“IASB”).

     
 

The Company’s audit committee approved the release of these condensed consolidated interim financial statements on June 26, 2019.

     
  c)

Basis of measurement

     
 

These condensed consolidated interim financial statements have been prepared on a historical cost basis, except for certain financial instruments, which are measured at fair value, as explained in the significant accounting policies set out in the Company’s April 30, 2018 audited financial statements. The condensed consolidated interim financial statements are presented in United States dollars. The functional currency of the parent company, Cannex, is the Canadian dollar (“C$”) and the functional currency of its subsidiary companies is the United States dollar (“$”).

     
 

The preparation of financial statements in compliance with IFRS requires management to make certain critical accounting estimates. It also requires management to exercise judgment in applying the Company’s accounting policies. The areas involving a higher degree of judgment or complexity, or areas where assumptions and estimates are significant to the financial statements are disclosed in note 4.

- 6 -


CANNEX CAPITAL HOLDINGS INC.
Notes to the Condensed Consolidated Interim Financial Statements
For the Twelve Months Ended April 30, 2019
(United States dollars)

2.

Basis of Presentation (continued)


  d)

Basis of consolidation

     
 

The condensed consolidated interim financial statements comprise the financial statements of the Company and its wholly-owned subsidiaries. Subsidiaries consist of entities over which the Company is exposed to, or has rights to, variable returns as well as the ability to affect these returns through the power to direct the relevant activities of the entity. To the extent that subsidiaries provide services that relate to the Company’s activities, they are fully consolidated from the date control is transferred and are deconsolidated from the date control ceases. All intercompany balances and transactions have been eliminated.

     
 

Cannex’s principal subsidiaries are:


  Entity Ownership Principal Activity
    Percentage  
       
  BrightLeaf Development LLC (“BrightLeaf”) 100% Real estate holding
  Real Estate Properties LLC (“REP”) 100% Real estate holding
  Fuller Hill Development Co LLC (“Fuller”) 100% Leaseholds
  Ag-Grow Imports LLC (“Ag-Grow”) 100% Sale of supplies
  Cannex Capital Group Inc. 100% Holding
  Cannex Holdings (Nevada) Inc. (“Cannex USA”) 100% Holding
  Cannex Holdings (California) Inc. 100% Holding

The financial statements of the subsidiaries are prepared for the same reporting period as the parent company, using consistent accounting policies.

- 7 -


CANNEX CAPITAL HOLDINGS INC.
Notes to the Condensed Consolidated Interim Financial Statements
For the Twelve Months Ended April 30, 2019
(United States dollars)

2.

Basis of Presentation (continued)

     
e)

Going concern

     

These condensed consolidated interim financial statements have been prepared on a going concern basis which assumes that the Company will be able to continue its operations for at least the next twelve months and will be able to realize its assets and discharge its liabilities in the normal course of business.

     

The Company indirectly derives its revenues from the cannabis industry in certain states of the United States, which industry is illegal under United States federal law. The Company is not directly engaged in the manufacture, importation, possession, use, sale or distribution of cannabis in the recreational cannabis marketplace in either Canada or the United States, nor is the Company directly engaged in the manufacture, importation, possession, use, sale or distribution of cannabis in the medical cannabis marketplace in Canada or the United States.

     

More than half of the states in the United States have enacted legislation to regulate the sale and use of medical cannabis without limits on tetrahydrocannabinol (“THC”), while other states have regulated the sale and use of medical and adult-use cannabis with strict limits on the levels of THC. Notwithstanding the permissive regulatory environment of adult-use recreational and medical cannabis at the state level, cannabis continues to be categorized as a controlled substance under the Controlled Substances Act in the United States and as such, cannabis-related practices or activities, including without limitation, the manufacture, importation, possession, use or distribution of cannabis are illegal under United States federal law. Strict compliance with state laws with respect to cannabis will neither absolve the Company of liability under United States federal law, nor provide a defense to any federal proceeding which may be brought against the Company. Any such proceedings brought against the Company may adversely affect the Company’s operations and financial performance.

- 8 -


CANNEX CAPITAL HOLDINGS INC.
Notes to the Condensed Consolidated Interim Financial Statements
For the Twelve Months Ended April 30, 2019
(United States dollars)

3.

Adoption of New Accounting Pronouncements and Recent Developments


Certain pronouncements, issued by the IASB or the IFRS Interpretations Committee, were adopted during the period, or were mandatory for the Company’s fiscal periods beginning on or after May 1, 2018 or are required to be adopted in future periods.

New standards adopted during the period ended April 30, 2019

  a)

IFRS 9 – Financial Instruments

     
 

On May 1, 2018, the Company adopted the new accounting standard IFRS 9. IFRS 9 includes revised guidance on the classification and measurement of financial instruments, including a new expected credit loss model for calculating impairment on financial assets, and new general hedge accounting requirements. Most of the requirements in IAS 39 for classification and measurement of financial liabilities were carried forward in IFRS 9, so the Company’s accounting policy with respect to financial liabilities is unchanged.

     
 

As a result of the adoption of this standard, the Company has changed its accounting policy for financial assets retrospectively, for assets that were recognized at the date of application. The change did not impact the carrying value of any financial assets on the transition date.

     
 

The following are new accounting policies for financial assets under IFRS 9.

     
 

Financial assets

     
 

1. Classification and measurement

     
 

The Company classifies its financial assets in the following categories: at fair value through profit or loss (“FVTPL”), at fair value through other comprehensive income (“FVTOCI”) or at amortized cost. The classification depends on the purpose for which the financial assets were acquired. Management determines the classification of its financial assets at initial recognition.

     
 

The classification of debt instruments is driven by the business model for managing the financial assets and their contractual cash flow characteristics. Debt instruments are measured at amortized cost if the business model is to hold the instrument for collection of contractual cash flows and those cash flows are solely principal and interest. If the business model is not to hold the debt instrument, it is classified as FVTPL. Financial assets with embedded derivatives are considered in their entirety when determining whether their cash flows are solely payments of principal and interest. Equity instruments that are held for trading (including all equity derivative instruments) are classified as FVTPL, for other equity instruments, on the day of acquisition the Company can make an irrevocable election (on an instrument by-instrument basis) to designate them as at FVTOCI.

- 9 -


CANNEX CAPITAL HOLDINGS INC.
Notes to the Condensed Consolidated Interim Financial Statements
For the Twelve Months Ended April 30, 2019
(United States dollars)

3.

Adoption of New Accounting Pronouncements and Recent Developments (continued)

Financial assets

1. Classification and measurement

i) Financial assets at FVTPL

Financial assets carried at FVTPL are initially recorded at fair value and transaction costs are expensed in the statement of profit or loss. Realized and unrealized gains and losses arising from changes in the fair value of the financial asset held at FVTPL are included in the statement of profit or loss in the period in which they arise. Derivatives are also categorized as FVTPL unless they are designated as hedges.

ii) Financial assets at FVTOCI

Investments in equity instruments at FVTOCI are initially recognized at fair value plus transaction costs. Subsequently they are measured at fair value, with gains and losses arising from changes in fair value recognized in other comprehensive income. There is no subsequent reclassification of fair value gains and losses to profit or loss following the derecognition of the investment.

iii) Financial assets at amortized cost

Financial assets at amortized cost are initially recognized at fair value and subsequently carried at amortized cost less any impairment. They are classified as current assets or non-current assets based on their maturity date.

2. Impairment of financial assets at amortized cost

The Company recognizes a loss allowance for expected credit losses on financial assets that are measured at amortized cost. At each reporting date, the loss allowance for the financial asset is measured at an amount equal to the lifetime expected credit losses if the credit risk on the financial asset has increased significantly since initial recognition. If at the reporting date, the financial asset has not increased significantly since initial recognition, the loss allowance is measured for the financial asset at an amount equal to twelve month expected credit losses. For trade receivables the Company applies the simplified approach to providing for expected credit losses, which allows the use of a lifetime expected loss provision. Impairment losses on financial assets carried at amortized cost are reversed in subsequent periods if the amount of the loss decreases and the decrease can be objectively related to an event occurring after the impairment was recognized.

- 10 -


CANNEX CAPITAL HOLDINGS INC.
Notes to the Condensed Consolidated Interim Financial Statements
For the Twelve Months Ended April 30, 2019
(United States dollars)

3.

Adoption of New Accounting Pronouncements and Recent Developments (continued)

Financial assets

3. Derecognition of financial assets

Financial assets are derecognized when they mature or are sold, and substantially all the risks and rewards of ownership have been transferred. Gains and losses on derecognition of financial assets classified as FVTPL or amortized cost are recognized in the income statement. Gains or losses on financial assets classified as FVTOCI remain within accumulated other comprehensive income. The Company completed an assessment of its financial instruments as at January 1, 2018. The following table shows the original classification under IAS 39 and the new classification under IFRS 9:

    Original New
    classification on classification on
    IAS 39 IFRS 9
       
  Financial assets    
       
  Cash Amortized cost Amortized cost
  Trade receivables Amortized cost Amortized cost
       
  Financial liabilities    
       
  Accounts payable and accrued liabilities Amortized cost Amortized cost
  Short term loans and interest payable Amortized cost Amortized cost
  Due to related parties and interest payable Amortized cost Amortized cost
  Liabilities on derivatives FVTPL FVTPL

 

Derivative financial instruments

     
 

Derivatives are recognized initially at fair value on the date the related contract is entered into. Subsequent to initial recognition, derivatives are remeasured at their fair value. The method of recognizing any resulting gain or loss depends on whether the derivative is designated as a hedging instrument and, if so, the nature of the item being hedged. Changes in the fair value of any derivative instruments that do not qualify for hedge accounting are recognized immediately in the statement of profit or loss.

     
  b)

IFRS 15 – Revenue from Contracts with Customers

     
 

On May 1, 2018, the Company adopted the new accounting standard IFRS 15 to all contracts using the modified retrospective approach. The Company has concluded that there is no significant impact resulting from the application of the new revenue standard on its consolidated financial statements. Under the new revenue standard, the Company’s revenue continues to be recognised when products are delivered to the customer, which is also the moment when control of the products is transferred, and when there is no unfulfilled obligation that could affect the customer’s acceptance of the products. Delivery occurs when the products have been shipped to the specific location, the risks of loss have been transferred to the customer and the customer has accepted the products in accordance with the sales contract.

- 11 -


CANNEX CAPITAL HOLDINGS INC.
Notes to the Condensed Consolidated Interim Financial Statements
For the Twelve Months Ended April 30, 2019
(United States dollars)

3.

Adoption of New Accounting Pronouncements and Recent Developments (continued)

   

New standards, interpretations and amendments not yet effective


  c)

IFRS – Leases

   

 

 

IFRS 16 - Leases specifies how to recognize, measure, present and disclose leases. The standard provides a single lessee accounting model, requiring that lessees recognize assets and liabilities for all leases unless the lease term is 12 months or less or the underlying asset has an insignificant value. Lessors continue to classify leases as operating or finance, with IFRS 16’s approach to lessor accounting substantially unchanged from its predecessor, IAS 17. IFRS 16 was issued in January 2016 and will be applicable to the Company’s fiscal period beginning August 1, 2019, although early adoption is permitted. The Company does not intend to early adopt this standard and is currently evaluating the impact of adopting this standard on the consolidated financial statements. The Company expects that it will recognize additional assets and liabilities as a result of the leasing arrangements currently entered or to be entered by its subsidiaries. The full extent of the impact of adoption of the standard has not yet been determined and management will continue to assess the impact as fiscal approaches.

   

 

  d)

IFRIC 23

   

 

 

This standard clarifies how to apply the recognition and measurement requirements in IAS 12 when there is uncertainty over income tax treatments. It is effective for annual periods beginning on or after January 1, 2019, with early adoption permitted. The Company does not expect that the adoption of this standard will have a material effect on the Company’s consolidated financial statements.

There are no other pending IFRSs or IFRIC interpretations that are expected to be relevant to the Company’s financial statements.

- 12 -


CANNEX CAPITAL HOLDINGS INC.
Notes to the Condensed Consolidated Interim Financial Statements
For the Twelve Months Ended April 30, 2019
(United States dollars)

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. 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, or 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 adjustment to the carrying amounts of assets and liabilities recognized in the financial statements within the next financial year are the same as those applied to the Company’s April 30, 2018 audited financial statements.

The Company makes critical judgments in the determination of property, plant and equipment, inventory, share-based compensation, fair value of financial instruments and impairment.

- 13 -


CANNEX CAPITAL HOLDINGS INC.
Notes to the Condensed Consolidated Interim Financial Statements
For the Twelve Months Ended April 30, 2019
(United States dollars)

5.

Capital Management

The Company’s primary objectives, when managing its capital, are to maintain adequate levels of funding to support the operations of the Company and to maintain corporate and administrative functions. The Company defines capital as revolving loans, promissory notes, convertible notes and equity, consisting of the issued units of the Company. The capital structure of the Company is managed to provide sufficient funding for planned operating activities of the Company. Funds are primarily secured through a combination of equity capital raised by way of private placements and debt. There can be no assurances that the Company will be able to continue raising equity capital and debt in this manner.

The Company invests all capital that is surplus to its immediate needs in short-term, liquid and highly rated financial instruments, such as cash and other short-term deposits, which are all held with financial institutions.

There were no changes to the Company’s approach to capital management during the period ended April 30, 2019 from the period ended April 30, 2018. The Company is not subject to any externally imposed capital requirements.

6.

Accounts Receivable

      April 30     April 30  
      2019     2018  
       $   $  
               
  Trade accounts receivable   2,227,945     1,515,887  
  Allowance for doubtful debts   -     -  
  Net trade accounts receivable   2,227,945     1,515,887  
  Other receivables   205,578     67,107  
      2,433,523     1,582,994  

As at April 30, 2019, two customers accounted for 100% (April 30, 2018 – 86%) of total accounts receivable (note 21).

- 14 -


CANNEX CAPITAL HOLDINGS INC.
Notes to the Condensed Consolidated Interim Financial Statements
For the Twelve Months Ended April 30, 2019
(United States dollars)

7.

Equipment Finance Receivable

       $  
  September 30, 2017   -  
  Notes receivable   530,178  
  Interest   690  
  Repayments (principal and interest)   (3,276 )
  April 30, 2018   527,592  
  Interest   28,359  
  Repayments (principal and interest)   (149,411 )
  April 30, 2019   406,540  

      April 30     April 30  
      2019     2018  
      $     $  
               
  Financial statement presentation:            
     Current   255,431     157,084  
     Non-current   151,109     370,508  
      406,540     527,592  

In February 2018 and April 2018, the Company issued notes receivable for a total of $530,178 to a related party. The notes bear interest at 5.5% per year and are repayable in 48 instalments aggregating $12,451 per month.

- 15 -


CANNEX CAPITAL HOLDINGS INC.
Notes to the Condensed Consolidated Interim Financial Statements
For the Twelve Months Ended April 30, 2019
(United States dollars)

8.

Transaction with 4Front Holdings

In December 2018, the Company entered into a binding letter agreement to acquire the membership interests of 4Front Holdings, LLC, (“4Front”) an U.S.-based cannabis company which owns, manages, or controls or services cannabis licenses in Illinois, Massachusetts, Pennsylvania, and Maryland, in addition to having license applications in other U.S. states.

In March 2019, the Company signed a definitive agreement with 4Front with respect to the business combination whereby the former securityholders of Cannex and 4Front will become securityholders in the combined company (the “Resulting Issuer”). Cannex and 4Front are arm’s length parties.

In April 2019, at a special meeting of securityholders of the Company, securityholders voted in favour of the business combination (the “Transaction”) with 4Front. The CSE has conditionally approved the Resulting Issuer for listing, and lifted the trading halt on April 29, 2019. Trading will continue as Cannex until the Transaction has been completed, at which time the CSE will issue a bulletin announcing the listing of 4Front Ventures Corp.

Pursuant to the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (the “HSR Act”), as amended, Cannex and 4Front were required to file a pre-Transaction notification to federal antitrust authorities and must observe a waiting period before completing the Transaction. As part of the HSR Act review process, Cannex and 4Front received a request for additional information (the "Second Request") from the US Department of Justice Antitrust Division on April 18, 2019. The Second Request extends the HSR Act waiting period for up to 30 days after Cannex and 4Front have each substantially complied with the Second Request. Cannex and 4Front are working to substantially comply with the Second Request as quickly as feasible. Based on other recent business combinations within the cannabis space, numerous larger competitors of the combined companies in North America, and limited geographic and business overlap of the companies, both Cannex and 4Front believe that the Transaction does not raise substantial competitive concerns, and that it will enhance competition in nascent markets.

Closing of the Transaction remains subject to resolving the Second Request, final regulatory approval, and other customary completion conditions. Upon receipt of such regulatory approval and satisfaction or waiver of all other completion conditions, Cannex and 4Front will make an application to the Supreme Court of British Columbia for the final order in respect of the Transaction.

      April 30     April 30  
      2019     2018  
      $     $  
               
  Notes receivable:            
  Advance to 4Front   13,136,190     -  
  Loans receivable   1,369,429     -  
      14,505,619     -  

- 16 -


CANNEX CAPITAL HOLDINGS INC.
Notes to the Condensed Consolidated Interim Financial Statements
For the Twelve Months Ended April 30, 2019
(United States dollars)

9.

Transaction with Pure Ratios

In February 2019, the Company signed a binding letter agreement to acquire 100% of Pure Ratio Holdings, Inc. (“Pure Ratios”), in a cash and stock transaction. Pursuant to the proposed transaction, the Company will pay Pure Ratios’ shareholders total consideration of up to $2,000,000 in cash, 3,500,000 common shares, $2,500,000 of contingent cash consideration and the assumption of $500,000 of Pure Ratios’ existing debt. Upon closing of the transaction, Cannex will pay the Pure Ratios’ shareholders $1,400,000 in cash with an additional $100,000 per month for six months for total cash consideration of $2,000,000 and will issue 3,500,000 common shares. All shares issued in the proposed transaction will be subject to a statutory Canadian hold period of four months and a day from the date of issuance. The transaction is subject to a number of conditions, including but not limited to, final due diligence by the respective parties, execution of a definitive acquisition agreement which shall supersede the letter agreement, receipt of applicable corporate approvals, and other regulatory and governmental approval. There can be no assurance that the transaction will be completed as proposed or at all.

In June 2019, the Company closed the transaction with Pure Ratios (note 25).

- 17 -


CANNEX CAPITAL HOLDINGS INC.
Notes to the Condensed Consolidated Interim Financial Statements
For the Twelve Months Ended April 30, 2019
(United States dollars)

10.

Investments

In the period ended April 30, 2019, the Company completed investments into certain emerging companies. In the periods covered by these financial statements, the Company did not exert significant influence over the operations or outcomes of these entities.

      April 30     April 30  
      2019     2018  
       $     $  
               
  Ametrine Wellness dba Jetty Extracts (“Jetty”) promissory notes.   -     2,511,759  
               
  Soma Group Holdings Inc. (“Soma’) common shares.   755,703     -  
               
  Impairment of investment in Soma.   (755,703 )   -  
               
  LemonHaze, Inc. common shares.   150,000     -  
               
  Pure Ratios convertible promissory note. Subsequent to April 30, 2019, the Company acquired 100% control of Pure Ratios. See note 25.   403,981     -  
               
  HelloMe Inc. (“HelloMe”) common shares.   500,000     -  
               
  Retail Education Tools, Inc. (“RET”) common shares.   100,000     -  
               
      1,153,981     2,511,759  

- 18 -


CANNEX CAPITAL HOLDINGS INC.
Notes to the Condensed Consolidated Interim Financial Statements
For the Twelve Months Ended April 30, 2019
(United States dollars)

10.

Investments (continued)

Deposits

The Company had prepaid expenses and deposits for securing leases and operating licenses in developing markets.

Jetty Promissory Note

In April 2018, the Company subscribed for a promissory note with Jetty, a company which holds a 99.99% membership interest in Jetty Marketing, LLC a 50% membership interest in Jetty MindTricks, LLC, and a 5% membership interest in 57th Avenue LLC. Jetty is a California-based processor and distributor of cannabis products.

The Company advanced $3,500,000 to Jetty under a convertible promissory note secured by the assets of Jetty and bearing interest at 8% annually, due on maturity. The promissory note was due on October 10, 2020 but Jetty elected to repay the note early and the Company received full payment of principal and interest in October 2018.

The option to settle the promissory notes in common shares of Jetty represented an embedded derivative in the form of a call option to the Company. Jetty was a private company and its shares could not be reliably valued using any market-derived indicators. Accordingly, the derivative asset was initially recognized by comparing a similar instrument without the conversion option and discounting the fair value of the host contract with the non-convertible instrument interest rate, which the Company estimates would be 15%.

      Convertible note     Derivative     Total  
      receivable     asset        
      $     $     $  
                     
  September 30, 2017   -     -     -  
                     
  Advance   2,067,000     433,000     2,500,000  
  Interest   11,759     -     11,759  
                     
  April 30, 2018   2,078,759     433,000     2,511,759  
                     
  Advance   849,000     151,000     1,000,000  
  Interest   106,029     -     106,029  
  Repayment   (3,033,788 )   (584,000 )   (3,617,788 )
                     
  April 30, 2019   -     -     -  

- 19 -


CANNEX CAPITAL HOLDINGS INC.
Notes to the Condensed Consolidated Interim Financial Statements
For the Twelve Months Ended April 30, 2019
(United States dollars)

10.

Investments (continued)

   

Soma

   

In October 2018, the Company completed a $755,103 equity investment into Soma, a New-Zealand based private cannabis start-up. The Company is not able to exert significant influence over the operations of Soma.

   

At April 30, 2019, the Company undertook a review of its investments and concluded that there was considerable uncertainty regarding the business prospects for Soma. Accordingly, the Company fully impaired the carrying value of its investment at that date and recognized an impairment provision of $755,103.


      $  
  April 30, 2018   -  
  Investment   755,103  
  Impairment   (755,103 )
  April 30, 2019   -  

LemonHaze

In January 2019, the Company completed a $150,000 investment into LemonHaze, Inc., a Washington based private cannabis event company.

      $  
  April 30, 2018   -  
  Investment   150,000  
  April 30, 2019   150,000  

- 20 -


CANNEX CAPITAL HOLDINGS INC.
Notes to the Condensed Consolidated Interim Financial Statements
For the Twelve Months Ended April 30, 2019
(United States dollars)

10.

Investments (continued)

   

HelloMe Inc.

   

In March 2019, the Company made a $500,000 investment into HelloMe, a California-based company focused on products in the beauty and wellness industry.


      $  
  April 30, 2018   -  
  Investment   500,000  
  April 30, 2019   500,000  

Retail Education Tools, Inc.

In April 2019, the Company made a $100,000 investment into RET, a Washington-based start-up application company focused on marketing tools for emerging cannabis companies.

      $  
  April 30, 2018   -  
  Investment   100,000  
  April 30, 2019   100,000  

- 21 -


CANNEX CAPITAL HOLDINGS INC.
Notes to the Condensed Consolidated Interim Financial Statements
For the Twelve Months Ended April 30, 2019
(United States dollars)

11.

Property, Plant and Equipment


      Land     Buildings     Leasehold     Equipment and     Total  
                  Improvements     Fixtures        
      $     $     $     $     $  
  Cost                              
                                 
  At April 30, 2018   1,000,000     3,919,453     26,167,255     1,209,082     32,295,790  
                                 
  Purchases   -     -     132,260     (53,135 )   79,125  
  Disposal   -     -     -     (29,114 )   (29,114 )
                                 
  At April 30, 2019   1,000,000     3,919,453     26,299,515     1,126,833     32,345,801  
                                 
  Accumulated depreciation                              
                                 
  At April 30, 2018   -     106,838     1,727,837     183,346     2,018,021  
                                 
  Depreciation expense   -     102,564     1,713,398     185,126     2,001,088  
  Disposal   -     -     -     (29,114 )   (29,114 )
                                 
  At April 30, 2019   -     209,402     3,441,235     339,358     3,989,995  
                                 
  Net book value                              
                                 
  At April 30, 2018   1,000,000     3,812,615     24,439,418     1,025,736     30,277,769  
  At April 30, 2019   1,000,000     3,710,051     22,858,280     787,475     28,355,806  

12.

Accounts Payable and Accrued Liabilities


      April 30     April 30  
      2019     2018  
      $     $  
               
  Trade accounts payable   638,944     2,016,867  
  Accrued liabilities   -     311,640  
  Sales taxes   -     48,648  
  Accounts payable and accrued liabilities   638,944     2,377,155  

- 22 -


CANNEX CAPITAL HOLDINGS INC.
Notes to the Condensed Consolidated Interim Financial Statements
For the Twelve Months Ended April 30, 2019
(United States dollars)

13.

Promissory Note

      April 30     April 30  
      2019     2018  
      $     $  
               
  Financial statement presentation:            
     Current liabilities   -     932,266  
     Non-current liabilities   -     1,603,782  
      -     2,536,048  

The note bore interest at 8.5% annually, with monthly payments of $82,066 including interest. This promissory note paid in full in October 2018.

      $  
  September 30, 2017   22,473,586  
  Advances   230,000  
  Converted to equity   (768,000 )
  Interest   381,429  
  Repayments (principal and interest)   (19,780,967 )
  April 30, 2018   2,536,048  
  Interest   52,526  
  Repayments (principal and interest)   (2,588,574 )
  April 30, 2019   -  

- 23 -


CANNEX CAPITAL HOLDINGS INC.
Notes to the Condensed Consolidated Interim Financial Statements
For the Twelve Months Ended April 30, 2019
(United States dollars)

14.

Convertible Promissory Note

      April 30, 2019     April 30, 2018  
      Convertible     Derivative     Convertible     Derivative  
      promissory notes     liability     promissory notes     liability  
                           
  RTO amalgamation   -     -     4,889,486     5,077,000  
  Gotham Green Partners   14,144,994     56,557,142     -     -  
      14,144,994     56,557,142     4,889,486     5,077,000  

RTO Amalgamation

On March 13, 2018, the Company entered into convertible promissory notes for $9,033,025 as part of the RTO Amalgamation. The convertible promissory notes were secured by the units of BrightLeaf and pay 12% interest, calculated and paid monthly, and mature on March 15, 2020. The notes were convertible into common shares of the Company at the option of the subscriber at any time until maturity at a price of C$1.00 per common share. The Company was to make monthly payments equal to the lesser of (1) interest for the previous month; and (2) 50% of the distributable cash of BrightLeaf, with distributable cash defined as cash received by BrightLeaf minus payments to lenders, cash expenses and expenditures and cash reserves. If the Company failed to make payments on time, the interest rate increased to 18% until the default remedied, and an additional 50% late payment fee charged.

The Company received a waiver from the holders of the notes described above, allowing it to defer required payments until August 2018 with no penalty. The Company requested this waiver as an accommodation to allow it to instead completely pay down a trade payable, which was interest bearing at 12% per year. As of August 2018, the trade payable was completely paid down, and the first required payment to the holders of the notes described above has been made.

The Company used the residual value method to allocate the principal amount between the liability and option components of the convertible promissory notes. The option component of the convertible promissory notes is a derivative liability as the ultimate number of common shares to be issued varies with the foreign exchange rate between United States and Canadian dollars. At the end of each reporting period, the Company revalues the derivative liability, that is the conversion option, by using the Black-Scholes option pricing model with the following assumptions :

  April 30 April 30
  2019 2018
     
Annualized share price volatility 80% 100%
Risk-free interest rate 2.07% 2.11%
Expected lives 1.6 years 1.9 years
Dividend yield 0.0% 0.0%

- 24 -


CANNEX CAPITAL HOLDINGS INC.
Notes to the Condensed Consolidated Interim Financial Statements
For the Twelve Months Ended April 30, 2019
(United States dollars)

14.

Convertible Promissory Note (continued)

   

On April 30, 2018, the fair value of the derivative liability was estimated at $5,077,000. At April 30, 2019, the Company estimated the fair value of the derivative liability to be $nil, with the result that the Company recorded a gain on the change in fair value of the derivative liability in the period ended April 30, 2019 of $3,772,000. During the period ended April 30, 2019, the Company recognized accretion of $770,000 representing the difference between the fair value of the convertible promissory note financing cost and nominal interest at 12%.


      Convertible     Derivative     Total  
      promissory note     liability        
     
$
    $     $  
  April 30, 2018   4,889,486     5,077,000     9,966,486  
  Accretion   770,000     -     770,000  
  Interest   639,740     -     639,740  
  Payments   (6,299,226 )   (1,305,000 )   (7,604,226 )
  Change in fair value of derivative   -     (3,772,000 )   (3,772,000 )
  April 30, 2019   -     -     -  

      April 30     April 30  
      2019     2018  
      $     $  
               
  Financial statement presentation:            
     Current liabilities   -     1,144,201  
     Non-current liabilities   -     3,745,285  
      -     4,889,486  

- 25 -


CANNEX CAPITAL HOLDINGS INC.
Notes to the Condensed Consolidated Interim Financial Statements
For the Twelve Months Ended April 30, 2019
(United States dollars)

14.

Convertible Promissory Note (continued)

   

Gotham Green Partners

   

In November 2018, the Company closed a $32,000,000 secured debt financing with Gotham Green Partners LLC (“GGP”). The use of proceeds was the repayment of all other existing indebtedness of the Company totaling approximately $9,400,000, general corporate purposes, and working capital. At April 30, 2019 the payable due, with accrued interest, under the terms of the GGP promissory note agreement, and before consideration of transaction costs and the derivative liability, was $27,449,152 (note 21).

   

The Company used the residual value method to allocate the principal amount between the liability and option components of the convertible promissory notes. The option component of the convertible promissory notes is a derivative liability as the ultimate number of common shares to be issued varies with the foreign exchange rate between United States and Canadian dollars. At the end of each reporting period, the Company revalues the derivative liability, that is the conversion option, by using the Black-Scholes option pricing model with the following assumptions:


  April 30 April 30
  2019 2018
     
Annualized share price volatility 102% N/A
Risk-free interest rate 2.07% N/A
Expected lives 2.8 years N/A
Dividend yield 0.0% 0.0%

- 26 -


CANNEX CAPITAL HOLDINGS INC.
Notes to the Condensed Consolidated Interim Financial Statements
For the Twelve Months Ended April 30, 2019
(United States dollars)

14.

Convertible Promissory Note (continued)

   

At April 30, 2018, the Company estimated the fair value of the derivative liability to be $15,855,000, with the result that the Company recorded a change in fair value of the derivative liability in the period ended April 30, 2019 of $44,411,000. During the period ended April 30, 2019, the Company recognized accretion of $846,232 representing the difference between the fair value of the convertible promissory note financing cost and nominal interest at 13.5%.


      Convertible     Derivative   Total  
      promissory note     liability      
      $      $   $  
                   
  April 30, 2018   -     -   -  
  Promissory note proceeds   16,145,000     15,855,000   32,000,000  
  Transaction costs   (3,776,695 )   (3,708,858 ) (7,485,553 )
  Accretion   846,232     -   846,232  
  Interest   1,860,914     -   1,860,914  
  Payments   (930,458 )   -   (930,458 )
  Change in fair value of derivative   -     44,411,000   44,411,000  
  April 30, 2019   14,144,993     56,557,142   70,702,135  

      April 30     April 30  
      2019     2018  
      $     $  
               
  Financial statement presentation:            
     Non-current liabilities   14,144,993     -  
      14,144,993     -  

- 27 -


CANNEX CAPITAL HOLDINGS INC.
Notes to the Condensed Consolidated Interim Financial Statements
For the Twelve Months Ended April 30, 2019
(United States dollars)

15.

Share Capital and Members' Capital

Authorized capital

Unlimited number of common shares without par value; and

Unlimited Class A shares without par value.

The holders of the Class A shares are entitled to receive notice of and to attend all meetings of the shareholders or holders of Class A shares and to one vote per Class A share at any meeting of the shareholders of the Company provided that the holders of the Class A shares are not entitled to vote for the election or removal of the directors of the Company. Class A holders are entitled to receive dividends as and when declared by the board if also paid to holders of common shares. In the event of the liquidation, dissolution or winding-up of the Company, whether voluntary or involuntary, holders of Class A shares are entitled to share rateably, together with holders of common shares, in such assets of the Company as are available for distribution.

Each Class A share shall be convertible into one common share, without payment of additional consideration, at the option of the holder thereof as follows:

  a)

at any time that is not a restricted period;

     
  b)

if the Company determines that it has ceased to be a “foreign issuer” (see below), as such term is defined in Rule 902(e) of the US Securities Act, and has notified the holders of the Class A shares of such determination;

     
  c)

if there is an offer to purchase the common shares which must be made by reason of applicable securities legislation or the rules or policies of a stock exchange to all or substantially all of the holders of common shares any of whom are in, or whose last address as shown on the books of the Issuer is in, a province or territory of Canada to which the relevant requirement applies.

For these purposes, a “Restricted Period” means any time at which the board of directors of the Company reasonably believes that the Company is a “Domestic Issuer” under applicable United States securities laws – being a U.S. issuer or a non-U.S. issuer that has a majority (50.1% or more) of its outstanding voting securities held by U.S. residents and either the majority of the executive officers or directors are U.S. citizens or residents, a majority of the assets of the issuer are located in the U.S., or the business of the issuer is administered principally in the U.S. – or would become a Domestic Issuer as a result of the issuance of common shares upon the conversion of a Class A share.

In addition, each Class A share may be converted into one common share at any time and from time to time at the option of the Company upon notice to the holder.

- 28 -


CANNEX CAPITAL HOLDINGS INC.
Notes to the Condensed Consolidated Interim Financial Statements
For the Twelve Months Ended April 30, 2019
(United States dollars)

15.

Share Capital and Members’ Capital (continued)

   

Issued capital

   

87,904,704 common shares

   

96,521,734 Class A shares

   

During the period ended April 30, 2019, the Company issued 212,500 common shares on the exercise of warrants, 200,000 common shares on the exercise of agents warrants and 300,000 common shares on the exercise of options.

   

During the period ending April 30, 2018, Cannex Group issued 12,933,571 common shares at a price of C$0.005 for gross proceeds of C$64,668 ($51,734), and 22,776,840 common shares at a price of C$0.02 per share for gross proceeds of C$455,537 ($364,430). Of these shares, 22,450,411 were issued to members of BrightLeaf.

   

During the period ended April 30, 2018, members contributed net cash of $1,808,381 (cash contributions of $2,293,380 and cash distributed of $499,999). Certain members loans totalling $1,706,120 were converted to members’ equity (note 12).

- 29 -


CANNEX CAPITAL HOLDINGS INC.
Notes to the Condensed Consolidated Interim Financial Statements
For the Twelve Months Ended April 30, 2019
(United States dollars)

16.

Reserves

Reserves comprise the fair value of stock option grants and warrants prior to exercise and cumulative unrealized gains and losses on foreign exchange.

      Warrants     Share-based     Foreign     Total  
            compensation     currency        
            reserve     translation        
                  reserve        
      $     $     $     $  
                           
  April 30, 2018   554,933     3,278,936     (358,081 )   3,475,788  
                           
  Foreign currency translation reserve   -     -     525,861     525,861  
  Share-based compensation   6,746,654     4,347,135     -     11,093,789  
  Fair value of options and warrants exercised   -     (249,271 )   -     (249,271 )
                           
  April 30, 2019   7,301,587     7,376,800     167,780     14,846,167  

17.

Warrants

      Financing Warrants     Broker Warrants  
      Warrants     Weighted     Warrants     Weighted  
      Outstanding     Average     Outstanding     Average  
            Exercise           Exercise Price  
            Price              
            C$           C$  
                           
  At April 30, 2018   24,109,936     1.50     1,554,321     1.00  
  Issued   13,521,328     1.64     -     -  
  Exercised   (212,500 )   -     (200,000 )   -  
  At April 30, 2019   37,418,764     1.53     1,354,321     1.00  

At April 30, 2019, warrants were outstanding enabling holders to acquire common shares or units as follows:

Number of Financing Number of Broker Exercise Expiry Date
Warrants Warrants Price  
    C$  
       
23,897,436 - 1.50 March 12, 2020
- 1,354,321 1.00 March 12, 2020
13,521,328 - 1.64 November 21, 2021
       
37,418,764 1,354,321    

- 30 -


CANNEX CAPITAL HOLDINGS INC.
Notes to the Condensed Consolidated Interim Financial Statements
For the Twelve Months Ended April 30, 2019
(United States dollars)
18.

Share-Based Compensation


Cannex’s board of directors has adopted rolling stock option plans under which the Company is authorized to grant options to directors, employees and consultants to acquire up to 10% of the issued and outstanding common shares and 10% of the issued and outstanding Class A shares. The exercise price of each option is based on the market price of the Company’s stock for a period preceding the date of grant. The options can be granted for a maximum term of ten years and vest as determined by the board of directors. The Company’s shares trade in Canadian dollars and options granted to date have been denominated in Canadian funds. The Company’s practice is to issue share options with a term of five years that vest in increments over a two-year period.

Option Grants

In February 2019, the Company granted 200,000 options to an IR provider. The grant date fair value of the options was C$0.80. These options were exercised at C$1.00 per share in April 2019.

In October 2018, the Company granted 1,975,000 options to directors, employees and consultants of the Company. The grant-date fair value of the options was C$0.55. The options are exercisable at C$1.00 per share until October 2023.

In December 2017, the Company granted 11,650,000 options to directors, employees and consultants of the Company. The grant-date fair value of the options was C$0.75. The options are exercisable at C$1.00 per share until December 2022. Options granted to directors, employees and consultants vest in three equal tranches: March 13, 2018; March 13, 2019 and March 13, 2020. Options granted for investor relations vested in four equal tranches on June 13, 2018, September 13, 2018, December 13, 2018 and March 13, 2019.

A summary of stock option activity to April 30, 2019 follows:

    Stock Options     Weighted Average  
    Outstanding     Exercise Price  
          C$  
             
September 30, 2017   -     -  
             
Granted   11,650,000     1.00  
Forfeited   (250,000 )   1.00  
             
April 30, 2018   11,400,000     1.00  
             
Granted   2,175,000     1.00  
Exercised   (300,000 )   1.00  
Forfeited   (150,000 )   1.00  
             
April 30, 2019   13,125,000     1.00  

During the period ended April 30, 2019, the Company recognized share-based compensation of $4,347,135 (April 30, 2018 - $3,752,715) in connection with stock options issued

- 31 -


CANNEX CAPITAL HOLDINGS INC.
Notes to the Condensed Consolidated Interim Financial Statements
For the Twelve Months Ended April 30, 2019
(United States dollars)

18.

Share-Based Compensation (continued)

   

At April 30, 2019, the Company had outstanding and exercisable stock options as follows:


      Outstanding Options     Exercisable Options  
  Exercise Price   Number     Weighted     Weighted     Number     Weighted  
            Average     Average           Average  
            Remaining     Exercise           Exercise  
            Life     Price           Price  
  C$               C$           C$  
                                 
  $1.00   13,125,000     3.8 years     1.00     8,075,000     1.00  
                                 

The Company employed the Black-Scholes option-pricing model using the following weighted average assumptions to determine share-based compensation:

  2018 2017
     
Annualized share price volatility 96% 100%
Risk-free interest rate 2.0% 2.0%
Expected option lives 4.8 years 4.75 years
Dividend yield 0.0% 0.0%

- 32 -


CANNEX CAPITAL HOLDINGS INC.
Notes to the Condensed Consolidated Interim Financial Statements
For the Twelve Months Ended April 30, 2019
(United States dollars)
19.

Related Party Transactions


The Company considers key management personnel to be those persons determined as having authority and responsibility for planning, directing and controlling the activities of the Company. Key management includes the Company’s board of directors and executive officers.

Key management personnel compensation was:

      Three     Four     Twelve     Seven months  
      months ended     months ended     months ended     ended  
      April 30     April 30     April 30     April 30  
      2019     2018     2019     2018  
      $     $     $   $  
                           
  Wages and short-term employee benefits   161,577     58,556     346,820     105,326  
  Management fees   696,014     144,686     1,734,056     160,290  
  Directors’ fees   28,063     -     141,234     -  
  Share-based compensation (note 21)   324,221     2,139,660     1,782,836     2,659,689  
      1,209,875     2,342,902     4,004,946     2,925,305  
                           
  Included in management fees above are amount paid to companies controlled by related parties:                
  •      A company controlled by the Company’s CEO   23,007     39,010     92,028     46,812  
  •      A company controlled by the Company’s former CFO   -     39,010     46,014     46,812  
  •      A company controlled by the Company’s COO   200,000     66,666     500,000     66,666  
  •      A company controlled by a director   450,000     -     1,050,000     -  
      673,007     144,686     1,688,042     160,290  

Short-term employee benefits were paid or accrued directly to employees and directors of the Company.

Share-based compensation comprised the fair value of incentive stock options awarded to directors and officers.

At April 30, 2019, the Company owed $nil (April 30, 2018 - $9,283,194) to related parties on account of convertible promissory notes and derivative liabilities (note 14).

- 33 -


CANNEX CAPITAL HOLDINGS INC.
Notes to the Condensed Consolidated Interim Financial Statements
For the Twelve Months Ended April 30, 2019
(United States dollars)

19.

Related Party Transactions (continued)

   

During the period ended April 30, 2019, the Company generated product sales of $4,434,962 (April 30, 2018 - $2,106,794) and rental income of $6,530,048 (April 30, 2018 - $3,498,420) from a company owned by an individual holding 2,037,658 common shares and 12,015,565 Class A shares (see note 20).

   

During the period ended April 30, 2019, the Company generated product sales of $nil (April 30, 2018 - $78,830) and rental income of $2,970,000 (April 30, 2018 - $1,200,000) from a company owned by a member of the board of the Company (see note 20).

   

In the period ended April 30, 2019, the Company paid or accrued interest of $592,013 (April 30, 2018 - $699,657) to related parties.

   

As at April 30, 2019, $nil (April 30, 2018 - $63,343) is owing to related parties on account of compensation and expenses incurred.

   

As at April 30, 2019, $2,146,334 (April 30, 2018 - $1,365,887) of the Company’s trade receivables were due from companies controlled by related parties.

   

As at April 30, 2019, $nil (April 30, 2018 - $527,592) of equipment finance receivable is due from companies controlled by related parties.

   

As at April 30, 2019, the Company paid management fees of $1,050,000 (April 30, 2018 - $nil) to a company owned by a member of the board of the Company.


20.

Commitment

The Company has entered into a commercial property lease with a remaining life of 4.1 years, with a five-year renewal option. The future minimum rental payments under the lease at April 30, 2019 were:

Periods ending July 31   $  
       
2019   63,750  
2020   255,000  
2021   255,000  
2022   255,000  
2023   212,500  
    1,041,250  

- 34 -


CANNEX CAPITAL HOLDINGS INC.
Notes to the Condensed Consolidated Interim Financial Statements
For the Twelve Months Ended April 30, 2019
(United States dollars)

21.

Segment Reporting

As at April 30, 2019, the Company had three reportable segments: (1) real estate; (2) supplies; and (3) corporate. Operating segments are aggregated and organized by the nature of the product and service provided.

  Three months ended April 30, 2019   Real Estate     Supplies     Corporate     Total  
      $     $     $     $  
                           
  Revenue from external customers   2,514,120     1,290,166     -     3,804,286  
                           
  Depreciation   500,376     -     281     500,657  
                           
  Interest expense   -     -     1,087,343     1,087,343  
                           
  Share-based compensation   -     -     2,221,653     2,221,653  
                           
  Income (loss) before income taxes   1,857,661     52,706     (50,118,057 )   (48,207,690 )
                           
  Income taxes   (369,000 )   (11,000 )   574,000     194,000  
                           
  Capital expenditures   26,240     -     -     26,240  
                           
  Total assets   30,168,667     1,010,387     31,343,286     62,522,340  

- 35 -


CANNEX CAPITAL HOLDINGS INC.
Notes to the Condensed Consolidated Interim Financial Statements
For the Twelve Months Ended April 30, 2019
(United States dollars)

21.

Segment Reporting (continued)


  Four months ended April 30, 2018   Real Estate     Supplies     Corporate     Total  
      $     $     $     $  
                           
  Revenue from external customers   3,058,944     997,219     -     4,056,163  
                           
  Cost of sales   -     568,043     -     568,043  
                           
  Depreciation   666,548     -     25     666,548  
                           
  Interest expense   103,872     -     445,464     549,336  
                           
  Interdivisional transactions   (693,531 )   693,531     -     -  
                           
  Income (loss) before income taxes   2,155,946     356,398     (6,192,139 )   (3,679,795 )
                           
  Share-based compensation   -     -     3,290,210     3,290,210  
                           
  Income taxes   518,295     30,000     (124,000 )   424,29 5  
                           
  Capital expenditures   585,966     -     -     585,966  
                           
  Total assets   30,600,925     1,530,842     14,967,021     47,098,788  

- 36 -


CANNEX CAPITAL HOLDINGS INC.
Notes to the Condensed Consolidated Interim Financial Statements
For the Twelve Months Ended April 30, 2019
(United States dollars)

21.

Segment Reporting (continued)


  Twelve months ended April 30, 2019   Real Estate     Supplies     Corporate     Total  
      $     $     $     $  
                           
  Revenue from external customers   9,500,048     4,434,962     -     13,935,010  
                           
  Depreciation   2,000,502     -     586     2,001,088  
                           
  Interest expense   100,828           2,820,655     2,921,483  
                           
  Share-based compensation   -     -     4,347,135     4,347,135  
                           
  Income (loss) before income taxes   6,702,857     500,567     (59,795,955 )   (52,592,531 )
                           
  Income taxes   (1,322,000 )   (105,000 )   1,466,000     39,000  
                           
  Capital expenditures   79,125     -     -     79,125  
                           
  Total assets   30,168,667     1,010,386     31,343,287     62,522,340  

- 37 -


CANNEX CAPITAL HOLDINGS INC.
Notes to the Condensed Consolidated Interim Financial Statements
For the Twelve Months Ended April 30, 2019
(United States dollars)

21.

Segment Reporting (continued)


  Seven months ended April 30, 2018   Real Estate     Supplies     Corporate     Total  
      $     $     $     $  
                           
  Revenue from external customers   4,698,240     2,241,928     -     6,940,168  
                           
  Cost of sales   -     -     -     -  
                           
  Depreciation   1,398,000     -     25     1,398,025  
                           
  Interest expense   404,036     19,012     446,913     896,961  
                           
  Interdivisional transactions   (64,500 )   64,500     -     -  
                           
  Income (loss) before income taxes   2,486,790     446,315     (7,361,645 )   (4,428,540 )
                           
  Share-based compensation   -     -     3,752,715     3,752,715  
                           
  Income taxes   (633,635 )   30,000     (124,000 )   (727,635 )
                           
  Capital expenditures   974,129     -     -     974,129  
                           
  Total assets   30,600,925     1,530,842     14,967,021     47,098,788  

* Does not include capitalized interest of $57,284

- 38 -


CANNEX CAPITAL HOLDINGS INC.
Notes to the Condensed Consolidated Interim Financial Statements
For the Twelve Months Ended April 30, 2019
(United States dollars)

21.

Segment Reporting (continued)

   

The geographical location of assets is as follows:


      April 30     April 30  
      2019     2018  
      $   $  
               
  US   57,540,685     35,268,206  
  Canada   4,981,655     11,830,582  
  Total assets   62,522,340     47,098,788  

All of the Company’s long-lived assets are located in the United States. All revenues were generated in the United States.

The following customers represented more than 10% of sales (see note 19):

      April 30, 2019     April 30, 2018  
      Amount     %     Amount     %  
      $           $        
                           
  Customer A   6,530,048     69     5,605,034     81  
  Customer B   2,970,000     31     -     -  

- 39 -


CANNEX CAPITAL HOLDINGS INC.
Notes to the Condensed Consolidated Interim Financial Statements
For the Twelve Months Ended April 30, 2019
(United States dollars)

22.

Financial Risk Management

The Company’s activities expose it to a variety of financial risks, including foreign exchange risk, interest rate risk, commodity price risk, credit risk and liquidity risk. The Company does not have a practice of trading derivatives.

Fair Values

There were no changes in level 1, 2, or 3 financial instruments during the period ended April 30, 2019.

Foreign Exchange Risk

The Company’s activities are primarily undertaken in the United States but the parent company is located in Canada and the Company is exposed to changes in exchange rate between the US and Canadian dollars.

As at April 30, 2019 with other variables unchanged, a 10% increase (decrease) in the Canadian dollar would decrease (increase) net earnings by approximately $333,400. Exposure to the Canadian dollar on financial instruments is as follows:

Balance at April 30, 2019   $  
       
Cash and cash equivalents   4,572,477  
Receivables   205,577  
Accounts payable and accrued liabilities   (303,302 )

Balance at April 30, 2018   $  
       
Cash and cash equivalents   245,412  
Receivables   67,107  
Accounts payable and accrued liabilities   (1,043,507 )

Interest Rate Risk

The Company’s interest rate risk mainly arises from the interest rate impact on cash and cash equivalents. Cash earns interest based on market interest rates. The Company’s revolving loans and promissory notes have fixed interest rates and are not exposed to interest rate risk until maturity.

- 40 -


CANNEX CAPITAL HOLDINGS INC.
Notes to the Condensed Consolidated Interim Financial Statements
For the Twelve Months Ended April 30, 2019
(United States dollars)

22.

Financial Risk Management (continued)

   

Credit Risk

   

Credit risk arises from the non-performance by counterparties of contractual financial obligations. The Company’s credit risk arises primarily with respect to its cash and cash equivalents and trade receivables.

   

The Company manages credit risk by holding cash with large reputable financial institutions and trading with recognized creditworthy third parties. In addition, receivable balances are monitored on an on-going basis with the result that the Company’s exposure to bad debt is not significant.

   

The Company also manages its credit risk by investing its cash only in obligations of Canada and the United States or its respective agencies, obligations of enterprises sponsored by any of the above governments; bankers’ acceptances purchased in the secondary market and having received the highest credit rating from a recognized rating agency in Canada or the United States, with a term of less than 180 days; and bank term deposits and bearer deposit notes, with a term of less than 180 days.

   

The Company’s maximum exposure to credit risk at the reporting date is the carrying value of cash and trade receivables.

   

Liquidity Risk

   

The Company manages liquidity risk by maintaining adequate cash balances. If necessary, it may raise funds through the issuance of debt, equity, or monetization of non-core assets. To ensure that there is sufficient capital to meet obligations, the Company continuously monitors and reviews actual and forecasted cash flows and matches the maturity profile of financial assets to development, capital and operating needs.


  April 30, 2019   Less than three     Three to 12     One to five     Total  
      months     months     years        
      $     $     $     $  
                           
  Accounts payable and accrued liabilities   638,944     -     -     638,944  
  Convertible promissory notes (note 14)   268,045     32,930,457     8,346,118     41,544,620  
      906,989     32,930,457     8,346,118     42,183,564  

Fair Value

The fair value of the Company’s financial assets and financial liabilities, other than a convertible note receivable and convertible promissory notes, approximate the carrying value due to the short-term maturities of the instruments and for long-term promissory notes, notes receivable, a market rate of interest.

- 41 -


CANNEX CAPITAL HOLDINGS INC.
Notes to the Condensed Consolidated Interim Financial Statements
For the Twelve Months Ended April 30, 2019
(United States dollars)

23.

Loss Per Share

      Three months     Four     Twelve     Seven  
      ended     months ended     months ended     months ended  
      April 30     April 30     April 30     April 30  
      2019     2018     2019     2018  
                           
  Loss for the period $  (48,013,690 )   (2,981,300 ) $  (52,553,531 )   (3,700,905 )
  Weighted average number of common shares outstanding   184,015,904     153,582,011     183,787,568     128,941,519  
  Loss per share, basic and diluted ($ per share)   (0.26 )   (0.02 )   (0.29 )   (0.03 )

For the purpose of determining loss per share, common shares and Class A shares are treated as participating on an equal basis.

Diluted loss per share for the periods ended April 30, 2019 and April 30. 2018 are the same as basic loss per share. At April 30, 2019, the exercise of the 8,075,000 share options (April 30, 2018 – 3,700,000) and 38,773,085 warrants (April 30, 2018 – 25,762,21) would be anti-dilutive.

24.

Supplemental Disclosure With Respect to Cash Flows

During the period ended April 30, 2019 the Company incurred the following non-cash transactions:

  • Paid $nil in income taxes.
     
  • Recorded a non-cash loss of $755,103 on an impairment of investment (note 10).
     
  • Recorded a change in fair value of a derivative liability of $44,411,000 (note 14).

During the period ended April 30, 2018 the Company incurred the following non-cash transactions:

  • Paid $nil in income taxes.
     
  • Converted promissory notes of $1,706,120 into equity.

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CANNEX CAPITAL HOLDINGS INC.
Notes to the Condensed Consolidated Interim Financial Statements
For the Twelve Months Ended April 30, 2019
(United States dollars)

25.

Events After the Reporting Period

In June 2019, the Company closed its previously announced acquisition of Pure Ratios in a cash and stock transaction. Cannex will pay Pure Ratios’ shareholders consideration of $1,000,000 cash, 3,500,000 common shares Cannex common stock, and assumption and/or repayment of up to $500,000 debt. The Company issued 3,500,655 common shares in connection with the closing of the Pure Ratios transaction. Additionally, Cannex will provide $1,000,000 growth capital to Pure Ratios, of which $500,000 has already been provided by a secured convertible promissory note prior to closing. Upon the satisfaction of certain sales targets by Pure Ratios within one year of closing, Cannex will pay Pure Ratios’ shareholders up to an additional $1,000,000 in cash, and upon the satisfaction of certain sales targets two years from closing Cannex will issue up to 1,271,186 Cannex common shares. This transaction is not a “significant transaction” under applicable securities regulations and CSE policies.

In June 2019, the Company granted 3,330,000 options to directors, employees and consultants of the Company. The options are exercisable at C$1.50 per share until June 2024.

In June 2019, the Company granted 800,000 options to a director and officer of the Company. The options are exercisable at C$1.50 per share until June 2024.

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