CubicFarm Systems Corp. Consolidated Financial Statements

For The Transition Year Ended December 31, 2020

KPMG LLP Chartered Professional Accountants PO Box 10426 777 Dunsmuir Street Vancouver BC V7Y 1K3 Canada

Telephone (604) 691-3000 (604) 691-3031 Fax Internet www.kpmg.ca

INDEPENDENT AUDITORS' REPORT

To the Shareholders of CubicFarm Systems Corp.,

Opinion

We have audited the accompanying consolidated financial statements of CubicFarm Systems Corp. (the Company), which comprise:

the consolidated statement of financial position as at December 31, 2020;
the consolidated statement of loss and comprehensive loss for the six month period then ended;
the consolidated statement of changes in equity for the six month period then ended;
the consolidated statement of cash flows for the six month period then ended; $\blacksquare$
and notes to the consolidated financial statements, including a summary of significant accounting policies

(Hereinafter referred to as the "financial statements").

In our opinion, the accompanying financial statements present fairly, in all material respects, the consolidated financial position of the Company as at December 31, 2020 and its consolidated financial performance and its consolidated cash flows for the six month period then ended in accordance with International Financial Reporting Standards (IFRS).

Basis for Opinion

We conducted our audit in accordance with Canadian generally accepted auditing standards. Our responsibilities under those standards are further described in the "Auditors' Responsibilities for the Audit of the Financial Statements" section of our auditors' report.

We are independent of the Company in accordance with the ethical requirements that are relevant to our audit of the financial statements in Canada and we have fulfilled our other ethical responsibilities in accordance with these requirements.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.

Material uncertainty Related to Going Concern

We draw attention to Note 2 in the financial statements, which indicates that for the six months period ended December 31, 2020 the Company has generated a net loss and as at December 31, 2020 had an accumulated deficit.

As stated in Note 2 in the financial statements, these events or conditions, along with other matters as set forth in Note 2 in the financial statements, indicate that a material uncertainty exists that may cast significant doubt on the Company's ability to continue as a going concern.

Our opinion is not modified in respect of this matter

Other Matter - Comparative Information

The financial statements for the year ended June 30, 2020 were audited by another auditor who expressed an unmodified opinion on those financial statements on October 28, 2020.

Other Information

Management is responsible for the other information. Other information comprises:

the information included in Management's Discussion and Analysis filed with the relevant Canadian Securities Commissions.
The information, other than the financial statements and the auditors' report thereon, included in the Annual Information Form filed with the relevant Canadian Securities Commissions.

Our opinion on the financial statements does not cover the other information and we do not and will not express any form of assurance conclusion thereon.

In connection with our audit of the financial statements, our responsibility is to read the other information identified above and, in doing so, consider whether the other information is materially inconsistent with the financial statements or our knowledge obtained in the audit and remain alert for indications that the other information appears to be materially misstated.

We obtained the information included in Management's Discussion and Analysis and the Annual Information Form filed with the relevant Canadian Securities Commissions as at the date of this auditors' report. If, based on the work we have performed on this other information, we conclude that there is a material misstatement of this other information, we are required to report that fact in the auditors' report.

We have nothing to report in this regard.

Responsibilities of Management and Those Charged with Governance for the Financial Statements

Management is responsible for the preparation and fair presentation of the financial statements in accordance with International Financial Reporting Standards, and for such internal control as management determines is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error.

In preparing the financial statements, management is responsible for assessing the Company's ability to continue as a going concern, disclosing as applicable, matters related to going concern and using

the going concern basis of accounting unless management either intends to liquidate the Company or to cease operations, or has no realistic alternative but to do so.

Those charged with governance are responsible for overseeing the Company's financial reporting process.

Auditors' Responsibilities for the Audit of the Financial Statements

Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditors' report that includes our opinion.

Reasonable assurance is a high level of assurance but is not a guarantee that an audit conducted in accordance with Canadian generally accepted auditing standards will always detect a material misstatement when it exists.

Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of the financial statements.

As part of an audit in accordance with Canadian generally accepted auditing standards, we exercise professional judgement and maintain professional skepticism throughout the audit.

We also:

Identify and assess the risks of material misstatement of the financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion.

The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control.

Obtain an understanding of internal control relevant to the audit 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 Company's internal control.
Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by management.
Conclude on the appropriateness of management's use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Company's ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditors' report to the related disclosures in the financial statements or, if such disclosures

are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditors' report. However, future events or conditions may cause the Company to cease to continue as a going concern.

Evaluate the overall presentation, structure and content of the financial statements, including the $\ddot{\phantom{1}}$ disclosures, and whether the financial statements represent the underlying transactions and events in a manner that achieves fair representation.
Communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit.
Provide those charged with governance with a statement that we have complied with relevant ethical requirements regarding independence, and communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, related safeguards.
Obtain sufficient appropriate audit evidence regarding the financial information of the entities or $\blacksquare$ business activities within the group Entity to express an opinion on the financial statements. We are responsible for the direction, supervision and performance of the group audit. We remain solely responsible for our audit opinion

$kPm6$ $10P$

Chartered Professional Accountants

The engagement partner on the audit resulting in this auditors' report is Rehan Wallani.

Vancouver, Canada April 30, 2021

December 31, 2020

Independent Auditor's Report

Financial Statements

Notes to the Consolidated Financial Statements	to 42
Consolidated Statements of Cash Flows
Consolidated Statements of Changes in Equity
Consolidated Statements of Loss and Comprehensive Loss
Consolidated Statements of Financial Position

CubicFarm Systems Corp.
Consolidated Statements of Financial Position

(Expressed in Canadian dollars)

	Notes	December 31, 2020	June 30, 2020
		\$	\$
Assets
Current
Cash and cash equivalents		16,206,535	3,604,412
Trade and other receivables	7	1,338,265	2,186,568
Inventory	8	4,866,641	2,702,344
Prepaid expenses and deposits	9	1,356,376	1,622,799
		23,767,817	10,116,123
Non-current
Goodwill	6	1,920,826	1,834,755
Property, plant and equipment	10	2,256,814	2,596,770
Investment in associates	11	20	21
Intangible assets	12 13	5,032,905	5,090,972
Right-of-use assets		1,758,473	1,501,966
		10,969,038	11,024,484
Total assets		34,736,855	21,140,607
Liabilities
Current
Trade and other payables	14	1,465,666	1,298,599
Earn-out payable	6	1,165,953	290,915
Customer deposits	15	4,955,509	1,709,666
Lease liability	13	409,122	170,558
Loans payable	16	335,615	60,531
Warranty provision	17	191,342	251,100
Non-current		8,523,207	3,781,369

Lease liability	13	1,164,197	1,219,084
Restoration provision	13	131,446	132,267
Loans payable	16	1,699,220	204,590
Derivative liability	16	1,002,128
Deferred tax liability	6		345,035
Earn-out payable	6	477,080	1,073,841
Total liabilities		12,997,278	6,756,186
Equity
Share capital	21	49,040,308	31,825,583
Shares issuable			270,778
Equity reserves		2,959,756	2,376,484
Accumulated other comprehensive income		(65, 151)	(18, 651)
(Deficit)		(30, 195, 336)	(20,069,773)
Total equity		21,739,577	14,384,421

Total liabilities and equity		34,736,855	21.140.607

Approved on behalf of the Board

(s) Dave Dinesen

Director

(s) Daniel Burns

Director

The accompanying notes are an integral part of these consolidated financial statements.

CubicFarm Systems Corp.
Consolidated Statements of Loss and Comprehensive Loss

(Expressed in Canadian dollars)

		For the Six months ended	For the Twelve months ended
	Notes	December 31, 2020	June 30, 2020
		\$
Revenue
Systems		477,084	4,658,839
Services		26,766	56,469
Consumables		120,924	452,180
		624,774	5,167,488
Cost of sales	18	1,564,021	3,493,631
Gross margin		(939, 247)	1,673,857
General and administrative expenses	18	5,630,856	7,210,810
Selling expenses	18	745,390	1,055,419
Research & development	18	2,355,931	2,247,362
Impairment of investment in associate	11,18		614,364

		8,732,177	11,127,955
Loss before other income (expense)		(9,671,424)	(9,454,098)
Finance income		18,169	110,708
Finance expense		(137, 972)	(3,072)
Accretion charge	13,16	(61, 848)	(22, 797)
Net Finance Costs		(181, 651)	84,839
Other income (expense)
Other income	19	595,964	310,595
Fair value change for earn-out payable	6	(367, 977)	101,544
Foreign exchange gain (loss)		(74, 906)	(140, 223)
Change in fair value of derivative liability	16	(406, 416)
Gain (loss) on disposal of property, plant, and equipment		(1, 213)
Gain (loss) on investment in associate	11		(311,908)
Public listing			(36, 676)
Provision for expected credit loss		(340, 232)	(881, 977)
		(776, 431)	(873, 806)
Loss before income taxes		(10, 447, 855)	(10, 327, 904)
Income taxes	26	322,292	235,803
Net Loss for the period		(10, 125, 563)	(10,092,101)
Other comprehensive loss
Items that may be reclassified to profit or loss:
Foreign currency translation loss		(46, 500)	(18, 651)
Total comprehensive loss		(10, 172, 063)	(10, 110, 752)

Basic & Diluted loss per share Weighted average number of shares outstanding	27	\$ (0.08) 119,842,276	\$ (0.11) 92,326,900

The accompanying notes are an integral part of these consolidated financial statements.

CubicFarm Systems Corp.
Consolidated Statements of Changes in Equity

(Expressed in Canadian dollars)

	Notes	No of Shares #	Common Share capital \$	Preferred Share capital S	Equity Reserves	Accumulated other Comprehensive Income \$	Shares Issuable \$	Deficit \$	Total equity £.
Balance, June 30, 2019		84,179,714	22,740,341	$\blacksquare$	1,411,110	$\blacksquare$	$\sim$	(9,977,672)	14,173,779
Net loss for the period		٠			$\sim$			(10,092,101)	(10,092,101)
Exercise of stock options	21	238,000	84,266	$\sim$	(39,046)				45,220
Issuance of shares, net of share issuance costs	21	21,897,301	5,149,790		$\sim$				5,149,790
Issuance of share for acquisition of Hydrogreen	21	10,000,000	3,851,186				270,778		4,121,964
Foreign currency translation						(18, 651)			(18, 651)
Share-based payments	22	$\blacksquare$			1,004,420				1,004,420
Balance, June 30, 2020		116,315,015	31,825,583	$\sim$	2,376,484	(18, 651)	270,778	(20,069,773)	14,384,421
Net loss for the period		$\blacksquare$	$\blacksquare$	ä.	$\mathbf{r}$			(10, 125, 563)	(10, 125, 563)
Exercise of stock options	21	577,999	220,831	$\blacksquare$	(98, 944)				121,887
Issuance of shares, net of share issuance costs	21	19,884,677	16,637,045					$\sim$	16,637,045
Issuance of share for acquisition of Hydrogreen	21	926,845	356,849			$\blacksquare$	(270, 778)		86,071
Foreign currency translation		$\sim$				(46, 500)		$\blacksquare$	(46, 500)
Share-based payments	22	$\sim$			682,216	$\blacksquare$	$\sim$		682,216
Balance, December 31, 2020		137,704,536	49.040.308	÷.	2,959,756	(65, 151)	$\bullet$	(30, 195, 336)	21,739,577

The accompanying notes are an integral part of these consolidated financial statements.

$\overline{3}$

CubicFarm Systems Corp.
Consolidated Statements of Cash Flows

(Expressed in Canadian dollars)

		For the Six months ended	For the Twelve months ended
	Notes	December 31, 2020	June 30, 2020
		\$	\$
Cash provided by (used for) the following activities
Operating activities
Net loss for the period		(10, 125, 563)	(10,092,101)
Depreciation - property, plant and equipment	10	275,338	468.674
Depreciation - right-of-use asset		245,246	88,557
Impairment of investment in associate			614,364
Amortization	12	58,352	101,006
Loss on disposal of property, plant and equipment		183,865
Provision for expected credit loss		340,232	881,977
Foreign exchange		74,906	(43, 287)
Interest expense		137,972	3,072
Accretion charges		61,848	22,797
Interest income		(18, 169)	(110, 708)
Deferred tax recovery		(322, 292)
Change in fair value of earnout payable		367,977
Share-based payments	22	682,216	1,004,420
Release of restricted cash			310,000
Loss on investment in associate			311,908
Change in fair value of derivative liability		406,416
Warranty provision			89,189
Funds used in operations Changes in non-cash working capital:		(7,631,656)	(6,350,132)
Trade and other receivables		1,397,092	(1,686,462)
Contract assets		(605, 279)
Inventories		(2, 164, 297)	(1,951,736)
Prepaid expenses and deposits		266,423	76,249
Trade and other payables		177,218	38,838
Customer deposits		3,101,804	(570, 639)
Warranty provision		(59, 758)	(226, 738)
Cash used for operating activities		(5,518,453)	(10,670,621)
Interest paid		(127, 356)	(3,072)
		5,817	86,003
Interest received		(5,639,993)	(10, 587, 689)
Net cash used for operating activities Investing activities
Purchases of property, plant, and equipment	10	(130, 898)	(457, 481)
Loans to associates		(351, 615)	(534, 142)
Loss on investment in associate			(110, 620)
Net cash used for investing activities		(482, 513)	(1, 102, 243)
Financing activities
Issuance of shares	21	16,637,045	5,149,790
Exercise of stock options	21	121,887	45,220
Lease payments	13	(365, 452)	(91, 410)
Proceeds from loans payable		2,339,517	265,121
Net cash from financing activities		18,732,997	5,368,721
Increase (decrease) in cash and cash equivalents		12,610,491	(6,321,211)
Effect of movements in exchange rates on cash held		(8,368)	24,636
Cash and cash equivalents, beginning of period		3,604,412	9,900,987

Cash and cash equivalents, end of period		16,206,535	3,604,412

The accompanying notes are an integral part of these consolidated financial statements.

$1.$ Reporting entity

CubicFarm Systems Corp. (the "Company") was incorporated under the Business Corporations Act of British Columbia on October 8, 2015. The Company is domiciled in Canada and its principal address is 19951 80A Avenue, Unit 353, Langley, BC. V2Y 0E2.

The Company listed its common shares on the TSXV as a Tier 1 issuer in July 2019. The Company's common shares trade on the TSXV in Canada under the symbol "CUB".

The Company is an agriculture technology and vertical farming company that develops, employs, and sells modular growing systems with patented and patent-pending technologies (the "System") to provide high-quality, predictable crop yields for farms around the world. In addition, the Company leverages its technology by operating its own facility in Pitt Meadows, British Columbia. On January 1, 2020, the Company completed the acquisition of all of the issued and outstanding shares of Hydrogreen Inc., (formerly named CubicFeed Systems U.S. Corp.), see Note 6, a manufacturer of fully automated hydroponic growing systems that produce live, green animal feed prioritizing animal health and performance.

The outbreak of the novel strain of coronavirus, specifically identified as "COVID-19", has resulted in governments worldwide enacting emergency measures to combat the spread of the virus. These measures, which include the implementation of travel bans, self-imposed quarantine periods and social distancing, have caused material disruption to businesses globally resulting in an economic slowdown. Global equity markets have experienced significant volatility and weakness. Governments and central banks have reacted with significant monetary and fiscal interventions designed to stabilize economic conditions. The duration and impact of the COVID-19 outbreak is unknown currently, as is the efficacy of the government and central bank interventions. As of December 31, 2020, the Company has not observed any material impairments of its assets or a significant change in the fair value of assets due to the COVID-19 pandemic. Due to the rapid developments and uncertainty surrounding COVID-19 it is not possible to predict the impact it will have on the Company's business, financial position, and operating results in the future. It is possible that estimates in the Company's financial statements will change in the near term as a result of COVID-19 and the affect of any such changes could be material, which could result in, among other things, impairment of long-lived assets including intangibles and goodwill. The Company is closely monitoring the impact of COVID-19 on all aspects of its business.

$2.$ Going concern

To date, the Company has financed its operations primarily through share issuances. The development of modular growing systems and animal feed system as well as its production process involve significant financial risks, including the ability of the Company to develop and penetrate new markets, obtain additional financing as required, achieve profitable production and the ability for the Company to be able to successfully assert its intellectual property rights and protect against patent infringement.

The Company incurred a total comprehensive loss of \$10,172,063 for the year ended December 31, 2020 (Year ended June 30, 2020 - \$10,110,752) and has accumulated a deficit of \$30,195,336 at December 31, 2020. As at December 31, 2020, the company has working capital of \$15,244,610 compared with \$6,334,754 as at June 30, 2020.

The losses and deficits indicate a material uncertainty that may cast significant doubt about the Company's ability as a going concern. Despite the material uncertainty, these consolidated financial statements have been prepared on the basis that the Company will continue as a going concern, as management believes that the Company will be able to raise sufficient capital to meet its obligations as and when they come due. The going concern basis of accounting assumes that the Company will be able to meet its commitments, continue operations and realize its assets and discharge its liabilities in the normal course of business.

These consolidated financial statements do not include any adjustments or disclosures that may result. If the going concern assumptions were not found to be appropriate for these consolidated financial instruments, adjustments might be necessary in the carrying values of assets and liabilities, the statement of consolidated financial position classifications and the reported expenses. Such adjustment could be material.

3. Basis of presentation

These consolidated financial statements for the year ended December 31, 2020 and June 30, 2020 have been prepared in accordance with International Financial Reporting Standard (IFRS).

The Board of Directors approved these consolidated financial statements on April 30, 2021.

Prior period reclassification

Certain prior period amounts on the Consolidated Statements of Loss and Comprehensive Loss have been reclassified for consistency with the current year presentation. These reclassifications had no effect on the reported results of operations.

Basis of measurement

These consolidated financial statements have been prepared on a going concern and historical cost basis except as permitted by IFRS and as otherwise indicated within these notes.

Change in year-end

During the six months ended December 31, 2020, the Company changed its financial year-end to December 31, from June 30 in order to align the financial year-ends of the Company and all its subsidiaries, as well as with its peers. The Company's transition period is the six months ended December 31, 2020 with the comparative period being the twelve months ended June 30, 2020.

Basis of consolidation

These consolidated financial statements include the accounts of the Company and its subsidiaries with intercompany balances and transactions eliminated upon consolidation. The principal subsidiaries of the Company and associates to which it is a party were as follows at December 31, 2020.

Subsidiary name	Location	Interest	Classification and accounting	Principal activity
			method
CubicFarm Manufacturing Corp.	BC. Canada	100%	Subsidiary; Consolidation method	Manufacture of cubic farming systems
CubicFarm Innovation Corp.	BC. Canada	100%	Subsidiary; Consolidation method	Research on new technologies for cubic farming systems
CubicFarm Produce Corp.	BC. Canada	100%	Subsidiary; Consolidation method	Growth and sale of lettuce, microgreens, and other products
CubicFarm Services Corp.	BC. Canada	100%	Subsidiary; Consolidation method	Purchase of materials for growth and sale of seeds, substrates and other nutrients used in agricultural companies
CubicFarm Capital Corp.	BC. Canada	100%	Subsidiary; Consolidation method	Holding company
Swiss Leaf Farms Ltd.	AB, Canada	50%	Associate, Equity method	Growth and sale of lettuce, microgreens, and other products
CubicFarm Systems U.S. Corp.	DE. USA	100%	Subsidiary; Consolidation method	Holding company
Hydrogreen Inc.	SD, USA	100%	Subsidiary; Consolidation method	Manufacture and sale of animal feed systems
1241876 B.C. Ltd.	BC, Canada	20%	Associate, Equity method	Growth and sale of lettuce, microgreens, and other products
Systems (Shanghai) CubicFarm Corp.	Shanghai, China	100%	Subsidiary, Consolidation method	Research on new technologies for cubic farming systems

4. Significant accounting policies

Cash and cash equivalents

Cash and cash equivalents include cash held at financial institutions and highly liquid investments with the ability to be converted into cash within 90 days or less of their acquisition date.

Contract assets

Contract assets primarily relate to the Company's rights to consideration for goods or services provided but not billed at the reporting date. Contract assets are transferred to Trade receivables when the rights become unconditional. This usually occurs when the Company issues an invoice to the customer.

Inventory

Inventories are valued at the lower of cost and net realizable value. Cost is determined by the weighted average method. Cost comprises all costs of purchases, cost of conversion and other costs incurred in bringing inventories to their present location and condition. Net realizable value is the estimated selling price in the ordinary course of business, less estimated cost of completion and selling costs.

Business combinations

The Company accounts for business combinations using the acquisition method when control is transferred to the Company. The consideration transferred in the acquisition is generally measured at fair value, as are the identifiable net assets acquired. Goodwill represents the excess of the purchase price paid for the acquisition of the subsidiaries over the fair value of the net assets acquired. Following initial recognition, goodwill is recognized at cost less any accumulated impairment losses. Any gain on bargain purchase is recognized immediately in the profit or loss. Transaction costs are expensed as incurred, except if related to the issuance of debt or equity securities. The consideration transferred does not include amounts relating to the settlement of pre-existing relationships. Such amounts are generally recognized in profit or loss. Any contingent consideration is measured at fair value at the date of acquisition. If an obligation to pay contingent consideration that meets the definition of a financial instrument is classified as equity, then it is not remeasured, and settlement is accounted for within equity. Otherwise, other contingent consideration is remeasured at fair value at each reporting date and subsequent changes in the fair value of the contingent consideration are recognized in the profit or loss.

Business combinations require judgement and estimates to be made at the date of acquisition in relation to determining assets and liabilities fair values and the allocation of the purchase consideration over the fair value of the assets and liabilities and the determination of a bargain purchase gain on acquisition, if any. The information necessary to measure the fair values as at the acquisition date of assets acquired and liabilities assumed requires management to make certain judgements and estimates about future events, including but not limited to estimates of future earnings, future operating costs and capital expenditures, and discount rates. Changes to the provisional measurements of assets and liabilities acquired may be retrospectively adjusted when new information is obtained until the final measurements are determined.

Property, plant, and equipment

Property, plant, and equipment is stated at cost less accumulated depreciation and impairment losses. Cost includes expenditures that are directly attributable to the acquisition of the asset. All assets having limited useful lives are depreciated using either the declining balance method or the straight-line method over their estimated useful lives. Internally constructed assets are depreciated from the time an asset is available for use.

The methods of depreciation and depreciation rates applicable to each class of asset during the current and comparative period are as follows:

	Method	Rate
Production equipment (containers)	Straight line	10 years
Other production equipment (non-containers)	Straight line	3 years
Other equipment	Declining balance	15%
Leasehold improvements	Straight line	5 years
Furniture and fixtures	Declining balance	20%
Computer equipment	Declining balance	30%

Intangible assets

Intangible assets are recorded at cost less accumulated amortization and any impairment losses. Intangible assets acquired in a business combination are measured at fair value at the acquisition date. Amortization of definite life intangible assets is calculated on a straight-line or per unit basis, as per the following:

Patents - 13 to 16 years

Development costs - 500 units

Intellectual property - 1,000 units

The estimated useful lives, residual values and amortization methods are reviewed annually and any changes in estimates are accounted for prospectively. Intangible assets with an indefinite life or not yet available for use are not subject to amortization.

Impairment of long-lived assets

The Company assesses, at each reporting date, whether there is an indication that an asset may be impaired. If any indication exists, or when annual impairment testing for an asset is required, the Company estimates the asset's recoverable amount. An asset's recoverable amount is the higher of an asset's or cash generating unit's ("CGUs") fair value less costs of disposal and its value in use.

A CGU is defined under IAS36 as the smallest identifiable group of assets that generates cash inflows that are largely independent of the cash inflows from other groups of assets. The Company generates cash inflows under two CGUs: Canada (Fresh) and U.S.A. (Feed).

The recoverable amount is determined for an individual asset, unless the asset does not generate cash inflows that are largely independent of those from other assets or groups of assets. When the carrying amount of an asset or CGU exceeds its recoverable amount, the asset or CGU is considered impaired and is written down to its recoverable amount. Impairment losses are recognized in the Consolidated Statements of Loss and Comprehensive Loss.

In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. In determining fair value less costs of disposal, recent market transactions are taken into account. If no such transactions can be identified, an appropriate valuation model is used.

The Company bases its impairment calculation on most recent budgets and forecasts, which are prepared separately for each of the Company's CGUs to which the individual assets are allocated.

For assets excluding goodwill, an assessment is made at each reporting date to determine whether there is an indication that previously recognized impairment losses no longer exist or have decreased. If such indication exists, the Company estimates the asset's or CGUs recoverable amount. A previously recognized impairment loss is reversed only if there has been a change in the assumptions used to determine the asset's recoverable amount since the last impairment loss was recognized. The reversal is limited so that the carrying amount of the asset does not exceed its recoverable amount, nor exceed the carrying amount that would have been determined, net of depreciation, had no impairment loss been recognized for the asset in prior years. Such reversal is recognized in the Consolidated Statements of Loss and Comprehensive Loss unless the asset is carried at a revalued amount, in which case, the reversal is treated as a revaluation increase.

Goodwill is tested for impairment annually and when circumstances indicate that the carrying value may be impaired. Impairment is determined for goodwill by assessing the recoverable amount of each CGU to which the goodwill relates. When the recoverable amount of the CGU is less than its carrying amount, an impairment loss is recognized. Impairment losses relating to goodwill are not reversible.

Intangible assets with indefinite useful lives are tested for impairment annually, as appropriate, and when circumstances indicate that the carrying value may be impaired.

Leases

The Company applies a single recognition and measurement approach for all leases, except for short-term leases (with terms of less than 12 months) and leases of low-value assets. The Company recognizes right-of-use assets representing the right to use the underlying asset and lease liabilities representing its obligation to make lease payments.

The right-of-use asset is initially measured at cost, which comprises the initial amount of the lease liability adjusted for any lease payments made at or before commencement date, plus any initial direct costs incurred less any lease incentives received. The right-of-use asset is subsequently depreciated using the straight-line method from commencement date to the earlier of the end of the useful life of the right-of-use asset or the end of the lease term. The estimated useful lives of rightof-use assets are determined on the same basis as those of property, plant, and equipment. In addition, the right-of-use asset is periodically reduced by impairment losses, if any, and adjusted for certain remeasurements of the lease liability.

The lease liability is initially measured at the present value of lease payments that are not paid at the commencement date, discounted using the interest rate implicit in the lease or, if that rate cannot be readily determined, the Company's incremental borrowing rate. Generally, the Company uses its incremental borrowing rate as the discount rate. The lease liability is subsequently increased to reflect the accretion of interest and reduced for the lease payments made.

The Company applies the short-term lease recognition exemption to its short-term leases (i.e., those leases that have a lease term of 12 months or less from the commencement date and do not contain a purchase option), as well as any assets that are considered to be low value. Lease payments on short-term leases and leases of low-value assets are recognized as an expense on a straight-line basis over the lease term.

Revenue from contracts with customers

IFRS 15 Revenue from contracts with customers provides a single model that applies to contracts with customers and two approaches to recognizing revenue: at a point in time or over time. This model features a contract based five step analysis of transactions to determine whether, how much and when revenue is recognized, as shown below:

(i) Identify the contract(s) with the customer
(ii) Identify the performance obligations in the contract(s)
(iii) Determine the transaction price
(iv) Allocate the transaction price to the identified performance obligations
(v) Recognize revenue when the identified performance obligations are satisfied

The Company recognizes revenue from the sale of goods when it transfers the risks and control to the customer, which generally occurs upon delivery or transfer of title. Revenue from services is recognized when the related service is provided, and proper completion sign off is obtained from the customer. The Company recognizes license and subscription over the period covered by the license or subscription.

Revenue for bill and hold arrangements is recognized when performance obligations under the terms of a contract with a customer are satisfied, which is upon the transfer of risk and control of the contracted product. The company employs bill and hold arrangements for some of the customers where the customer is billed for the product, that are ready for delivery, but the company does not ship the product to the customer until a later date - control typically transfers when the product is ready for physical transfer to the customer, and the Company has satisfied the performance obligation. In these sales transactions, the Company fulfils its obligations and bills the customer for the work performed but does not ship the goods until a later date. These transactions are designed this way at the request of the customer and are typically due to the customer's lack of available storage space for the product, or due to delays in the customer's construction schedules.

Customer deposits

Customer deposits consist of funds paid by customers for systems based on the sales agreement. The customer may cancel the order prior to shipping of the equipment, subject to the following restocking fees. If the customer cancels the order before the manufacturing of the equipment has commenced, the customer shall pay a restocking fee of 10% of the purchase price. If the customer cancels the order thereafter but prior to shipping of the equipment, the customer shall pay a restocking fee of 20% of the purchase price. The order shall not be cancellable after shipping of the equipment. These are accounted as current liabilities in the Statements of Financial Position.

Income tax & deferred tax

Taxation on the profit or loss for the year comprises of current and deferred tax. Taxation is recognized in profit or loss except to the extent that the tax arises from a transaction or even which is recognized either in other comprehensive income or directly in equity, or a business combination.

Current tax is the expected tax payable on the taxable income for the year using rates enacted or substantially enacted at the year end and includes any adjustments to tax payable in respect of previous years.

Deferred income taxes are calculated using the liability method on temporary differences between the carrying amounts of assets and liabilities and their tax bases. Deferred tax is not provided on the initial recognition of goodwill or on the initial recognition of an asset or liability unless the related transaction is a business combination or affects tax or accounting profit.

Where an asset has no deductible or depreciable amount for income tax purposes but has a deductible amount on sale or abandonment for capital gains purposes, the amount is included in the determination of temporary differences.

Deferred tax assets and liabilities are calculated at tax rates that are expected to apply to their respective period of realization, provided they are enacted or substantially enacted by the end of the reporting period.

Deferred tax assets are recognized to the extent that it is probable that they will be able to be utilized against future taxable income. Deferred tax assets are reviewed at each statement of financial position and adjusted to the extent that it is no longer probable that the related tax benefit will be realized.

Any changes in deferred tax assets or liabilities are recognized as part of tax expense or income in profit or loss, except where thev relate to items that are recognized in other comprehensive income (loss) or directly in equity in which case the related deferred tax is also recognized in other comprehensive income (loss) or equity, respectively.

Foreign currency translation

These consolidated financial statements are presented in Canadian dollars, which is the functional currency of the Company and each of its subsidiaries except for CubicFarm Systems U.S. Corp and Hydrogreen Inc. for which it is the US dollar. All financial information presented in Canadian dollars has been rounded to the nearest dollar.

Foreign currency transactions are translated into Canadian dollars at exchange rates in effect on the date of the transactions. Monetary assets and liabilities denominated in foreign currencies are translated to Canadian Dollars at the foreign exchange rate applicable at each reporting period. Realized and unrealized exchange gains and losses are recognized in the Consolidated Statements of Loss and Comprehensive Loss.

Non-monetary assets and liabilities that are measured in terms of historical cost in foreign currency are translated using the exchange rate at the date of transaction. Foreign currency gains and losses are reported on a net basis.

Foreign exchange gains or losses arising from a monetary item receivable from or payable to a foreign operation, the settlement of which is neither planned nor likely to occur in the foreseeable future and which in substance is considered to form part of the net investment in the foreign operation, are recognized in other comprehensive income in the translation reserve. Also, conversion of the foreign subsidiary into Canadian dollars is recognized in other comprehensive income in the translation reserve.

Share based compensation

The Company operates an employee stock option plan. Share based payments to employees are measured at the fair value of the instruments issued and amortized over the relevant vesting periods. Share based payments to non-employees are measured at the fair value of goods or services received or the fair value of the equity instruments issued if it is determined the fair value of the goods or services cannot be reliably measured and are recorded at the date the goods or services are received. The fair value of options is determined using a Black Scholes option pricing model. The number of shares and options expected to vest is reviewed and adjusted at the end of each reporting period such that the amount recognized for services received as consideration for the equity instruments granted shall be based on the number of equity instruments that eventually vest.

Financial instruments

Financial assets

The Company uses a single approach to determine whether a financial asset is classified and measured at amortized cost or at fair value. The classification and measurement of financial assets is based on the Company's business models for managing its financial assets and whether the contractual cash flows represent solely payments of principal and interest ("SPPI"). Financial assets are initially measured at fair value and are subsequently measured at either (i) amortized cost; (ii) fair value through other comprehensive income, or (iii) at fair value through profit and loss.

(i) Amortized cost:

Financial assets classified and measured at amortized cost are those assets that are held within a business model whose objective is to hold financial assets in order to collect contractual cash flows, and the contractual terms of the financial asset give rise to cash flows that are SPPI. Financial assets classified at amortized cost are measured using the effective interest method.

(ii) Fair value through other comprehensive income ("FVTOCI"):

Financial assets classified and measured at FVTOCI are those assets that are held within a business model whose objective is achieved by both collecting contractual cash flows and selling financial assets, and the contractual terms of the financial asset give rise to cash flows that are SPPI. The classification includes certain equity instruments where an irrevocable election was made to classify the equity instruments as FVTOCI. Equity investments require a designation, on an instrumentby-instrument basis, between recording both unrealized and realized gains and losses either through (i) other comprehensive income ("OCI") with no recycling to profit and loss or (ii) profit and loss.

(iii) Fair value through profit or loss ("FVTPL"):

Financial assets classified and measured at FVTPL are those assets that do not meet the criteria to be classified at amortized cost or at FVTOCI. This category includes debt instruments whose cash flow characteristics are not SPPI or are not held within a business model whose objective is either to collect contractual cash flows and sell the financial asset, and equity instruments not classified at FVTOCI.

Financial liabilities

Loans are initially recognized at fair value, net of transaction costs incurred. Loans are subsequently measured at amortized cost. Any difference between the proceeds (net of transaction costs) and the redemption amount is recognized in profit or loss over the period of the borrowings using the effective interest method. Loans are derecognized from the consolidated statement of financial position when the obligation specified in the contract is discharged, cancelled, or expired. The difference between the carrying amount of a financial liability that has been extinguished or transferred to another party and the consideration paid, including any non-cash assets transferred or liabilities assumed, is recognized in profit or loss as finance costs. Loans are classified as current liabilities unless the Company has an unconditional right to defer settlement of the liability for at least 12 months after the reporting period.

Financial liabilities also include derivative financial instruments that are entered into by the Company that are not designated as hedging instruments as defined by IFRS 9. Embedded derivatives are classified as held for trading and any gains and losses are recognized through the Consolidated Statements of Loss and Comprehensive Loss.

$\boldsymbol{4}$ . Significant accounting policies (continued)

An embedded derivative is separated from its host contract and accounted for separately as a stand-alone derivative if:

The economic characteristics and risks of the embedded derivative are not closely related to the economic $(i)$ characteristics and risks of the host;
$(ii)$ A separate instrument with the same terms as the embedded derivative would meet the definition of the derivative; and
$(iii)$ The hybrid contract is not measured at fair value with changes in fair value recognized in profit or loss.

The Business Development Bank ("BDC") loan contains a prepayment option and variable loan bonus that is based on consolidated enterprise value. The Company determined the embedded derivative should be accounted separate from the host contract and is measured at fair value through profit and loss. The fair value of the embedded derivative as at December 31, 2020 was \$1,002,129. The residual amount is recognized as a financial liability and subsequently measured at amortized cost.

Impairment of financial assets

The company recognizes an allowance for expected credit losses ("ECLs") for all debt instruments not held at fair value through profit or loss. ECLs are based on the difference between the contractual cash flows due in accordance with the contact and all the cash flows that the company expects to receive, discounted at an approximation of the original effective interest rate. The expected cash flows will include cash flows from the sale of collateral held or other credit enhancements that are integral to the contractual terms.

The Company considers a financial asset in default when contractual payments are 120 days past due. However, in certain cases, the Company may also consider a financial asset to be in default when internal or external information indicates that the company is unlikely to receive the outstanding contractual amounts in full before considering any credit enhancements held by the company. A financial asset is fully impaired when there is no reasonable expectation of recovering the contractual cash flows.

The Company recognizes expected credit losses for trade receivables based on the simplified approach under IFRS 9. The simplified approach to the recognition of expected losses does not require the Company to track the changes in credit risk; rather, the Company recognizes a loss allowance based on lifetime expected credit losses at each reporting date from the date of the trade receivable.

Evidence of impairment may include indications that a debtor or a group of debtors is experiencing significant financial difficulty, default or delinguency in interest or principal payments, the probability that they will enter bankruptcy or other financial reorganization and where observable data indicates that there is a measurable decrease in the estimated future cash flows, such as changes in arrears or economic conditions that correlate with defaults. Trade receivables are reviewed qualitatively on a case-by-case basis to determine whether they need to be impaired.

Finance and investment income (expense) and interest expense

Finance income comprises of interest and other income on funds invested. Interest income is recognized as it accrues in the Consolidated Statements of Loss and Comprehensive Loss, using the effective interest method.

Interest Expense includes interest payments (cash) on borrowings and the accretion expenses (non-cash) on debt and leases. Borrowing costs are recognized in Consolidated Statements of Loss and Comprehensive Loss using the effective interest method.

$\boldsymbol{4}$ . Significant accounting policies (continued)

Loss per share

The Company calculates basic loss per share by dividing the loss for the year by the weighted average number of common shares outstanding during the year. It calculates diluted loss per share in a similar manner to include common shares potentially issuable from the assumed exercise of stock options and other instruments, if dilutive. In the Company's case, these potential issuances are "anti-dilutive" as they would decrease the loss per share; consequently, the amounts calculated for basic and diluted loss per share are the same.

Related party transactions

Parties are related if one party has the ability, directly or indirectly, to control the other party or exercise significant influence over the other party in making financial and operating decisions. Parties are also considered to be related if they are subject to common control; related parties may be individuals or corporate entities. A transaction is a related party transaction when there is a transfer of resources or obligations between related parties.

Government grants

Effective January 1, 2020, the Company adopted the IAS 20, Accounting for Government Grants and Disclosure of Government Assistance. The Company accounts for government grants when there is reasonable assurance that the entity will comply with any conditions attached to the grant and the grant will be received. The grant is recognized as income over the period necessary to match them with the related costs, for which they are intended to compensate, on a systematic basis. Non-monetary grants, such as land or other resources, are usually accounted for at fair value. A grant receivable as compensation for costs already incurred or for immediate financial support, with no future related costs, is recognized as income in the period in which it is receivable. A grant relating to assets is reported by deducting grant from the asset's carrying amount. A grant relating to income is separately reported as 'other income' or deducted from the related expense. If a grant becomes repayable, it will be treated as a change in estimate. Where the original grant relates to income, its repayment will be applied first against any related unamortized deferred credit, and any excess is dealt with as an expense. Where the original grant relates to an asset, its repayment will be treated as increasing the carrying amount of the asset or reducing the deferred income balance. The cumulative depreciation which would have been charged had the grant not been received is charged as an expense.

5. Significant estimates, assumptions, and judgments

In the process of applying the Company's accounting policies, management has made the following estimates, assumptions, and judgments, which have the most significant effect on the amounts recognized in the Consolidated Financial Statements:

Going concern

Determining if the Company has the ability to continue as a going concern is dependent on its ability to secure debt and equity financing and to achieve profitable operations. Certain judgments are made when determining if and when the Company will secure debt and equity financing, and achieve profitable operations.

Business combinations

In determining the allocation of the purchase price in a business combination, estimates including market based and appraisal values are used.

Useful lives of intangible assets

Amortization of finite life intangible assets is dependent upon estimates of useful lives which are determined through the exercise of judgment. The estimated useful life and amortization method are reviewed at the end of each reporting year, with the effect of any changes in estimate being accounted for on a prospective basis.

5. Significant estimates, assumptions, and judgments (continued)

Impairment of goodwill and intangible assets

Determining whether an impairment has occurred requires the valuation of the respective CGUs, which management estimates using a discounted cash flow method. When available and as appropriate, management uses comparative market multiples to corroborate discounted cash flow results. In applying this methodology, management relies on a number of factors, including actual operating results, future business plans, discount rates, economic projections and market data.

Fair value of financial instruments

When the fair values of financial assets and financial liabilities recorded in the Consolidated Statements of Financial Position cannot be measured based on quoted prices in active markets, their fair value is measured using valuation techniques such as the discounted cash flow (DCF) model. The inputs to these models, such as discount rates and future cash flows, require a degree of judgment. Changes in assumptions relating to these factors could affect the reported fair value of financial instruments.

Provision for expected credit losses

The valuation of allowances for uncollectable trade receivables requires assumptions including estimated credit losses based on the Company's knowledge of the financial conditions of its customers, historical experience, and general economic conditions. At each reporting date, the historical observed default rates are updated and changes in the forward-looking estimates are analyzed. The assessment of the correlation between historical observed default rates, forecast economic conditions and expected credit losses is a significant estimate. The Company's historical credit loss experience and forecast of economic conditions may also not be representative of customer's actual default in the future.

Adoption of new accounting standards

Conceptual framework

In March 2018, the IASB issued the revised Conceptual Framework for Financial Reporting which assists entities in developing accounting policies when no IFRS Standard applies to a particular transaction and helps stakeholders to more fully understand the standards. The revised conceptual framework includes the following clarifications and updates: (i) a new chapter on measurement; (ii) guidance on reporting financial performance; (iii) improved definitions and guidance, particularly for the definition of a liability; and (iv) clarifications on important items such as the role of stewardship, prudence and measurement uncertainty in financial reporting. The revised conceptual framework is effective for annual reporting periods beginning on or after January 1, 2020 and is applicable to the Company starting January 1, 2020. The adoption of this new standard did not have any impact on the amounts recognized in the Company's Consolidated Financial Statements.

Definition of material

In October 2018, the IASB issued Definition of Material (Amendments to IAS 1 and 8) to clarify the definition of 'material' and to align the definition used in the Conceptual Framework and the standards themselves. The amendments are effective for annual reporting periods beginning on or after January 1, 2020 and are applicable to the Company starting January 1, 2020. The adoption of this new standard did not have any impact on the amounts recognized in the Company's Consolidated Financial Statements.

Definition of a business

In October 2018, the IASB issued Definition of a Business (Amendments to IFRS 3) which: (i) clarifies that to be considered a business, an acquired set of activities and assets must include, at a minimum, an input and a substantive process that together significantly contribute to the ability to create outputs; (ii) narrows the definition of a business and of outputs by focusing on goods and services provided to customers; and (iii) removes certain assessments and adds guidance and illustrative examples. The amendment is effective for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after January 1, 2020 and to asset acquisitions that occur on

5. Significant estimates, assumptions, and judgments (continued)

or after the beginning of that period. The adoption of this standard has not had a material impact on the Company's Consolidated Financial Statements.

6. Business combination

On January 1, 2020, the Company completed the acquisition of 100% of the issued and outstanding shares of Hydrogreen Inc., ("HydroGreen") a private US based company and a manufacturer of fully automated hydroponic growing systems that produces live, green animal feed, prioritizing animal health and performance.

The acquisition of HydroGreen, enables the Company to expand in the automated controlled-environment-agriculture space. The combination of both CubicFarms and HydroGreen technologies allows the Company to address both fresh produce and animal feed markets and leverage the learning and assets of both companies.

The Company completed the acquisition of HydroGreen on January 1, 2020. The Acquisition was completed by way of a reverse triangular merger of CubicFeed Systems U.S. Corp., a wholly owned subsidiary of the Company, and HydroGreen, resulting in HydroGreen being renamed to "CubicFeed Systems U.S. Corp" and becoming an indirect and wholly owned subsidiary of the Company. The new CubicFarms subsidiary was subsequently re-named Hydrogreen Inc.

Under the terms of the merger agreement, holders of HydroGreen shares ("HydroGreen Shareholders") received 10,000,000 common shares of CubicFarms on the closing date, with a maximum of another 1,000,000 shares to be issued on the six-month anniversary of closing, subject to any set-off relating to indemnification (the "Consideration Shares").

The Company has determined that this transaction represented a business combination with CubicFarm Systems Corp. identified as the acquirer. The total consideration as of January 1, 2020 was estimated to be USD\$4,248,661 $(CAD$5,519,437)$

The Company began consolidating the operating results, cash flows and net assets of Hydrogreen Inc. from January 1, 2020 onwards. Acquisition-related costs of \$222,187 were expensed during the year ended June 30, 2020 and were presented as transaction costs.

The following table summarizes the consideration paid as part of the purchase price:

Consideration	Shares Issued / Issuable	Consideration USD	Consideration CAD
Fair value estimate of CubicFarm Systems Corp. share consideration	10,000,000	\$2,964,275	\$3,851,186
Holdback shares	1.000.000	\$208.472	\$270,778
Earn-out payments (a)		\$1,075,914	\$1,397,473
Total Consideration		\$4,248,661	\$5,519,437

a) The acquisition provided for contingent consideration made up of earn-out payments which the Company recognized at the acquisition date at its fair value of USD\$1,075,914. The contingent consideration is based on conditional earn-out payments based on aggregate gross revenue of HydroGreen in the 5 years subsequent to closing date. The main assumption used in the determination of fair value is the assumed revenue growth rate of HydroGreen. The earn out payment is based on revenue exceeding certain limits with a period of five years:

$6.$ Business combination (continued)

Aggregate gross revenue, Greater than (USD)	Payment (USD)
\$1,000,000	\$250,000
\$2,000,000	\$300,000
\$5,000,000	\$500,000
\$10,000,000	\$450,000

The following table summarizes the allocation of the purchase price of the identifiable assets and liabilities based on their estimated fair values as at the date of the acquisition:

	USD	CAD
Total purchase consideration paid for HydroGreen	\$4,248,661	\$5,519,437
Property and Equipment	\$124,250	\$161,383
Right of use assets	\$174.135	\$226,179
Intangibles – intellectual property	\$3,190,220	\$4,143,681
Goodwill	\$1.411.824	\$1.834.755
Deferred Tax Liability	\$(426,078)	\$(553,419)
Lease liability	\$(164, 455)	\$(213,606)
Restoration Provision	\$(9,680)	\$(12,573)
Loan payable	\$(51,555)	\$(66,963)
Fair value of net assets acquired	\$4,248,661	\$5,519,437

Holdback shares

The Company has concluded that the holdback shares are classified as a component of equity, recognized initially at fair value with no remeasurement, and subsequent settlement to be accounted for within equity. The fair value of the holdback shares was determined by discounting the share price of the Company as at the acquisition date.

Earn-out payments

The earn-out liability represents future payments by the Company of up to US\$1.5 million over five years, that are contingent on the achievement of certain revenue targets. The fair value of contingent consideration liabilities is based on the estimated future financial performance of the acquired business. The estimated earnout consideration was fair valued by assessing the probabilities of achieving these milestones and discounting the revenue cash flow over the life of the payment period of five years and recognized as at the acquisition date of Hydrogreen Inc. The fair value of the contingent consideration liabilities is measured each reporting period at the estimated fair value, with the change in fair value recognized in the statement of loss and comprehensive loss. The Earn-out payments are based on unobservable inputs and considered a level 3 measurement.

6. Business combination (continued)

The continuity for Earn-out payments is as follows:

	December 31 2020	June 30 2020
	\$
Opening balance	1,364,756
Fair Value on acquisition of Hydrogreen Inc.		1,397,473
Foreign exchange	(89,700)	68,827
Fair Value change during the year	367,977	(101, 544)
Ending balance	1,643,033	1,364,756
Comprised of:
Current Earn-out payments	1,165,953	290,915
Non-Current Earn-out payments	477,080	1.073.841

Goodwill represents the excess of the purchase price paid for the acquisition of the subsidiaries over the fair value of the net assets acquired.

The continuity for Goodwill is as follows:

	December 31 2020	June 30 2020
	S
Opening balance	1.834.755
Goodwill on acquisition of Hydrogreen Inc.	۰	1,834,755
Foreign exchange adjustment	86.071	$\blacksquare$
	1,920,826	1,834,755

The addition of goodwill for the year ended June 30, 2020 is from the acquisition of Hydrogreen on January 1, 2020.

The recoverable amount of the Company's cash generating units (CGU) was based on a value in use calculation which uses cash flow projections based on financial budgets covering a five-year period with average compounded growth rate of 58.9% and terminal multiplier of 4.0 at after tax discount rate of 17%. If cash flow projections decreased 50%, the carrying amount would exceed the recoverable amount by \$3,710,801. If cash flow projections decreased 25% and the terminal multiplier was 2.0, the carrying amount would exceed the recoverable amount by \$1,309,333.

The continuity for Deferred Tax Liability is as follows:

	December 31, 2020	June 30, 2020

Opening balance	345,035	$\blacksquare$
On Acquisition of Hydrogreen	$\sim$	553,419
Deferred Tax Recovery	(322, 292)	(235, 803)
Foreign exchange	(22, 743)	27,418
Closing balance	$\blacksquare$	345,035

$7.$ Trade and other receivables

Current:	December 31, 2020	June 30, 2020
	\$
Trade accounts receivable ¹	880,185	2,461,080
Less: Provision for expected credit loss	(538, 212)	(457, 927)
Note receivable ²	437.190	434,142
Less: Provision for loss on short term receivable (Note receivable & Interest receivable)	(437, 190)	(434,142)
Sales tax receivable	193,013	80,896
Other receivable ³	803,279	102,519
	1,338,265	2,186,568

Non-Current:	December 31, 2020	June 30, 2020

Note receivable ²	418,016	205,874
Interest receivable ²	49.409	37.057
Less: Provision for loss on long term receivable (Note receivable & Interest receivable)	(467, 425)	(242, 931)

Aging

The aging of trade receivable at December 31, 2020 & provision for expected credit loss is summarized as follows:

	December 31, 2020	June 30, 2020
Current or under 60 days	262,696	1,820,310
Past due 61 to 90 days	3.923	127.261
Past due more than 90 days	613.566	513.508
	880,185	2,461,080

Continuity for provision for expected credit loss on trade account receivable

	Six Months Ended	Twelve Months Ended
	December 31, 2020	June 30, 2020
Opening	457.927	50,845
Addition during the year	80,285	407.082
Amount Collected	$\blacksquare$
Closing balance	538,212	457.927

¹ Related party Trade accounts receivable is disclosed in Note 20

² All Notes receivable and Interest receivable is due from related party Swiss Leaf Farms Ltd., which is an associate of the Company.

³Other Receivable consists of a government grant receivable amounting to \$198,000 and contract assets amounting to \$605,279. Contract assets occur when recognized revenue for the customer is higher than the amount the customer has been invoiced.

For the six months ended December 31, 2020, bad debt of \$340,232 was recognized as expected credit losses and recorded under Other income (expense) (June 30,2020 - \$881,977). The amount of \$99,391 was provided for allowance for bad debt related to Swiss Leaf Farms Ltd and Artex Feed Solutions Ltd. for the year ended December 31, 2020 apart from \$227,542 for promissory notes for Swiss Leaf Farms Ltd.

$8.$ Inventory

	December 31, 2020	June 30, 2020
	\$
Systems	3,720,794	1,712,972
Work in progress	1,115,836	948,812
Seeds and other supplies	19.536	31,565
Packaging and other	10.475	8,994
	4,866,641	2,702,344

Systems are containers on hand and available for sale by the Company. The net realizable value of inventory as of December 31, 2020 and June 30, 2020 are higher than the cost. Accordingly, the Company has reported the inventory at cost in the Consolidated Statement of Financial Position. Inventory in the value of \$486,796 has been recognized as Cost of Sales in the Consolidated Statement of Loss and Comprehensive Loss (June 30 2020 \$2,913,937).

$9_-$ Prepaid expenses and deposits

	December 31, 2020	June 30, 2020

Deposits for Systems inventory (i)	1,087,092	1,498,086
Prepaid expenses and deposits, other	269.284	124.713
	1,356,376	1.622.799

In general, the Company is required to pay 100% of deposit for containers. Such containers are shipped upon the $(i)$ purchase being paid in full.

$10₁$ Property, plant, and equipment

	Production equipment	Other Production Equipment	Leasehold Improvements	Furniture and fixtures	Other equipment	Construction In Progress	Computer equipment	Total
Cost	\$	\$	\$	\$	\$	\$	\$	\$
Balance June 30, 2020	1,534,779	599,483	308,300	30,279	363,985	320,278	183,901	3,341,005
Additions			15,188	41,864	39,130		34,716	130,898
Transfer					137,626	(137.626)
Disposal						(182, 652)	(4, 559)	(187, 211)
Foreign
exchange			(9, 354)	(62)	(2,024)		(1580)	(13,020)
adjustment
Balance
December 31,	1,534,779	599,483	314,134	72,081	538,717		212,478	3,271,672
2020
Accumulated Depreciation	\$	\$	\$	\$	\$	\$	\$	\$
Balance June 30, 2020	197.944	309.218	73.533	7,531	101.408		54,601	744,235
Depreciation	76,739	99,914	40,802	9.713	25,815		22,356	275,338
Disposal							(1,846)	(1,846)
Foreign
exchange			(2, 426)	(219)	(224)			(2,869)
adjustment
Balance
December 31,	274,683	409,132	111,909	17,025	126,999		75,111	1,014,858
2020
book Net
value,	1,260,096	190,351	202,225	55,056	411,718		137,367	2,256,814
December 31, 2020

December 31, 2020

June 30, 2020

$10₁$ Property, plant, and equipment (Continued)

	Production equipment	Other Production Equipment	Leasehold Improvements	Furniture and fixtures	Other equipment	Construction In Progress	Computer equipment	Total
Cost	\$	\$	\$	\$	\$	\$	\$	s
Balance June 30, 2019	1,534,779	599,483	165,980	23,529	302,595	677,780	104,351	3,408,497
Additions			142,320	6,750	61,390	167,471	79,550	457,481
Transfer						(524, 973)		(524, 973)
Balance June 30, 2020	1,534,779	599,483	308,300	30,279	363,985	320,278	183,901	3,341,005
Accumulated Depreciation	\$	\$	\$	\$	\$	\$	\$	\$
Balance June 30, 2019	71,096	109,390	16,598	2,353	60,486		15,638	275,561
Depreciation	126,848	199,828	56,935	5,178	40,922		38,963	468,674
Transfer
June 30, 2020	197,944	309,218	73,533	7,531	101,408		54,601	744,235
Net book value, June 30, 2020	1,336,835	290,265	234,767	22,748	262,577	320,278	129,300	2,596,770

There was a transfer of Construction in Progress amounting to \$137,626 to other equipment during the year and \$182,652 to research and development. The expenses for research and development were for expansion of the research and development facility that was ultimately abandoned during the six months ended December 31, 2020.

$11.$ Investment in associates

The Company owns 50% of the common shares of Swiss Leaf Farms Ltd. Swiss Leaf is a farming operation in Alberta committed to growing fresh, clean, pesticide free produce.

Total Swiss Leaf investment is as following:

Period	Amount of Investment
Before year ended June 30, 2020	1,054,197
Twelve months June 30, 2020	434,142
Six month ended December 31, 2020	215.190
Total	1,703,529

The Company started with a contribution of \$1,054,197 in total, which consisted of \$120 in share capital and the balance of \$1,054,077 in a shareholder loan before year ended June 30, 2020. The Company provided an additional \$434,142 in shareholder loans to Swiss Leaf during twelve months ended June 30, 2020 and \$215,190 in six months ended December 31, 2020. The carrying amount of the investment at December 31, 2020 was determined to be \$Nil (June 30, 2020 - \$Nil)

$11.$ Investment in associates (Continued)

due to 100% expected credit loss applied. The Swiss Leaf equipment is currently being upgraded and the Company continues to work with Swiss Leaf on produce research and development.

Summarized Financial Info for Swiss Leaf is as follows:

	December 31, 2020	June 30, 2020
Cash & cash equivalent	16,529	(2,982)
Current assets	167,115	136,659
Non-current assets	1.934.646	1,934,646
Current liabilities	44,654	50,695
Non-current liabilities	2,707,232	2,540,154
Revenue	207,258	203,663
Loss during the period	(126,635)	(339, 213)

The Company has significant influence over Swiss Leaf but not control based on an assessment made by management as per IFRS 10, and therefore the investment has been accounted for by the equity method and was initially recorded at cost. The carrying amount was then adjusted to recognize the Company's share of the net income or loss in Swiss Leaf after the acquisition. The carrying amount of the investment has been reduced to zero. The Company has not incurred legal or constructive obligations or made payments on behalf of the associate; therefore, the Company has not recognized any additional losses

The Company owned 50% of Artex Feed Solutions Ltd. (Artex). The Company had significant influence over Artex but not control based on an assessment made by management as per IFRS 10, and therefore the investment was accounted for by the equity method and was initially recorded at cost. During the six months ended December 31, 2020, the Company provided an additional shareholder loan amounting to \$136,425. On November 16, 2020 Artex was dissolved and the carrying amount of the investment and loan at December 31, 2020 was determined to be \$Nil (June 30, 2020 - \$Nil) due to 100% expected credit loss applied.

Total Artex investment is as following:

Period	Amount of Investment
Twelve Months June 30, 2020	100.000
Six month ended December 31, 2020	136,425
Total	236,425

The Company owns 20% of 1241876 B.C. Ltd which is a joint venture ("JV") with Pacific Maple Enterprise Group Ltd "PME" and Canada High-Tech Investment Group Co. Ltd "CHTI". The Company contributed \$20 in share capital. 1241876 B.C. Ltd. was incorporated on February 24, 2020. The joint venture has been accounted for by the equity method and as such was initially recognized at cost. The carrying amount is adjusted to recognize the Company's share of the net income or loss 1241876 B.C. Ltd after the acquisition. There is a commitment to provide a \$342,857 shareholder loan as per the shareholder agreement; however, the condition of this loan which is the timing to advance has not been met. On December 31, 2020, the investment in 1241876 B.C. Ltd has a carrying amount of \$20 (June 30, 2019 - \$Nil). There have been no transactions since incorporation.

For the year ended June 30, 2020, there was a loss on investment in associates amounting to \$311,908 and impairment amounting to \$614,364.

$12.$ Intangible assets

				December 31, 2020
	Patent	Development Assets	Intellectual Property	Total
Cost
Balance June 30, 2020	50,000	1.136.810	4,143,683	5,330,493
Additions
Disposals
Balance December 31, 2020	50,000	1,136,810	4,143,683	5,330,493
Accumulated depreciation
Balance June 30, 2020	10.080	225,088	4,351	239,519
Depreciation	1,717	52,293	4,342	58.352
Disposals
Foreign exchange adjustment			(283)	(283)
Balance December 31, 2020	11,797	277,381	8,410	297,588
Net book value, December 31, 2020	38,203	859,429	4,135,273	5,032,905

June 30, 2020

	Patent	Development Assets	Intellectual Property	Total
Cost
Balance June 30, 2019	50,000	1,136,810		1,186,810
Additions			4,143,681	4,143,681
Disposals
Balance June 30, 2020	50,000	1,136,810	4,143,681	5,330,491
Accumulated Depreciation			S
Balance June 30, 2019	6.645	131,870		138,515
Amortization	3,435	93,218	4,351	101,004
Disposals
Balance June 30, 2020	10,080	225,088	4,351	239,519
Net book value, June 30, 2020	39,920	911,722	4.139,330	5,090,972

$13.$ Leases

			December 31, 2020
Lease Liability	Canada	United States	Total
Balance as at June 30, 2020	70,400	1,319,242	1,389,642
Addition during the period	588,744		588,744
Payments	(249,433)	(116, 019)	(365,452)
Accretion expense	5.760	39,864	45.624
Foreign exchange adjustment		(85, 239)	(85, 239)
Ending	415,471	1,157,848	1,573,319
Current	(257,313)	(151, 809)	(409,122)
Long term	158,158	1,006,039	1,164,197

$13₁$ Leases (Continued)

			June 30, 2020
Lease Liability	Canada	United States	Total
Balance as at July 1, 2019		$\blacksquare$
Adoption of IFRS 16	79.974		79.974
Additions during the year		1,389,612	1,389,612
Payments	(10,000)	(81, 409)	(91, 409)
Accretion expense	426	20,781	21,207
Foreign exchange adjustment		(9,741)	(9,741)
Ending	70,400	1,319,242	1,389,642
Current	(8,927)	(161,631)	(170,558)
Long term	61,473	1,157,611	1,219,084

			December 31, 2020
Right of Use Asset	Canada	United States	Total
Balance as at June 30, 2020	163,806	1,338,160	1,501,966
Addition during the period	588.745	$\blacksquare$	588,745
Depreciation	(152, 044)	(93,202)	(245,246)
Foreign exchange adjustment	COL	(86,992)	(86.992)
Ending	600,507	1,157,966	1,758,473

December 31, 2020

	Total
Cost	2,086,842
Less: accumulated depreciation	(328.369)
Net Book Value	1.758,473

			June 30, 2020
Right of Use Asset	Canada	United States	Total
Balance as at July 1, 2019	$\overline{\phantom{a}}$	$\overline{\phantom{0}}$
Adoption of IFRS 16	184.268		184.268
Additions during the year	$\overline{\phantom{0}}$	1,415,996	1,415996
Depreciation	(20, 462)	(68,095)	(88, 557)
Foreign exchange adjustment	$\overline{\phantom{0}}$	(9,741)	(9,741)
Ending	163,806	1,338,160	1,501,966
			June 30, 2020

	Total
Cost	1,590,523
Less: accumulated depreciation	(88.557)
Net Book Value	1,501,966

$13.$ Leases (Continued)

			December 31, 2020
Restoration Provision	Canada	United States	Total
Balance as at June 30, 2020	105.723	26.544	132.267
Addition during the period	Ξ
Accretion	720	211	931
Foreign exchange adjustment	$\blacksquare$	(1.752)	(1,752)
Ending	106,443	25,003	131,446

			June 30, 2020
Restoration Provision	Canada	United States	Total
Balance as at July 1, 2019		$\blacksquare$
Adoption of IFRS 16	104.294	$\blacksquare$	104,294
Addition during the period		26.924	26,924
Accretion	1.429	161	1.590
Foreign exchange adjustment		(541)	(541)
Ending	105.723	26.544	132.267

The lessor of the research and development facility in Canada is a related party to the Company as it is affiliated with key management personnel of the Company. The amounts related to Bevo Farms Ltd. are a Lease Liability of \$65,859 and Right of use asset of \$153,492 as at December 31, 2020 (June 30, 2020 Lease liability \$70,400 and Right of use asset \$158,649).

$14.$ Trade and other payables

Trade and other payables consist of:

	December 31, 2020	June 30, 2020
	5
Trade payables 1	860,730	978,860
WCB payable	8.446	8.726
Sales and payroll tax payable	83,118	27.322
Accrued expenses	513,372	283,691
Ending balance	1,465,666	1.298.599

¹ Related party Trade payables is disclosed in Note 20.

$15.$ Customer deposits

Customer deposits consist of funds paid by customers for systems based on the sales agreement. The customer may cancel the order prior to shipping of the equipment, subject to the following restocking fees. If the customer cancels the order before the manufacturing of the equipment has commenced, the customer shall pay a restocking fee of 10% of the purchase price. If the customer cancels the order thereafter but prior to shipping of the equipment, the customer shall pay a restocking fee of 20% of the purchase price. The order shall not be cancellable after shipping of the equipment. During the year ended June 30, 2020, a deposit from one of the customers was forfeited which was included in revenue amounting to \$350,936.

There are no external restrictions on the use of these deposits.

$15₁$ Customer deposits (continued)

	December 31, 2020	June 30, 2020
	\$	s
Opening balance	1,709,666	2,280,305
Additions	3,577,870	2,182,070
Recognized into revenue	(332,027)	(2,399,097)
Deposit forfeited, recognized as revenue		(350, 936)
Foreign exchange adjustment		(2,674)
Ending balance	4,955,509	1,709,666

Out of the balance of customer deposits \$1,709,666 is the amount of customer deposits that was received more than twelve months ago.

$16.$ Loans payable

The Company received an interest free loan of \$40,000 for COVID-19 relief from the Bank of Montreal. \$10,000 of the loan is forgiven if repaid by December 31, 2022 and was recognized in other income as of December 31, 2020. If not repaid, the loan may be extended from January 1, 2023 to December 31, 2025. The Hydrogreen subsidiary also received a COVID19 relief loan of US\$112,731 from First Premier Bank, which bears interest of 1% and is payable in 18 installments starting December 6, 2020 through May 6, 2022. The conditions for loan forgiveness were met by the Company as of December 31, 2020, and \$150,383 was recognized in other income. Hydrogreen also has an Agriculture Loan obtained from South Dakota Value Added Finance Authority ("VAFA") for 45% of HydroGreen's Patent cost, which is due five years from the date of the final disbursement of loan proceeds. The loan is interest free if paid before the due date and 12% per annum if not paid when due or if the Company is in default of the terms and conditions of the loan. Currently the Company is in compliance with the loan agreement. The Company granted VAFA a first priority security interest in the feasibility study for the project proposed in the loan application and any accompanying reports, documents or other information.

	December 31, 2020	June 30, 2020

Opening balance agriculture interest free loans	70.258	73,141
Foreign exchange adjustment	4,380	(2,883)
Ending balance agriculture interest free loans	74.638	70,258
Less: current portion	$\blacksquare$
Non-current portion	74,638	70.258

$16.$ Loans payable (continued)

	December 31, 2020	June 30, 2020
	\$	S
Opening balance government relief loans	194,863
Addition during the year		194,863
Loan forgiven transferred to other income	(160,383)
Foreign exchange adjustment	(4, 480)
Ending balance government relief loans	30,000	194,863
Less: current portion		(60, 531)
Non-current portion	30,000	134,332

Business loan

On July 20,2020, the Company signed an agreement with the Business Development Bank of Canada ("BDC") for a loan up to \$5,000,000. The interest is payable monthly and is currently at a fixed rate of 10% which is set at a base rate of 4.9% plus a variance of 5.1% per year. The variance will be decreased by 1% for the remaining terms once the Company is able to complete two consecutive fiscal quarters with positive consolidated earnings before interest, taxes, depreciation, and amortization ("EBITDA") results. On August 28, 2020, the Company received the first tranche payment of \$2,500,000. The second tranche of \$2,500,000 will be provided by BDC when the stipulated conditions in the agreement are met by the Company. Commencing six months after July 10, 2020, the Company shall pay BDC a non-refundable standby fee calculated at a rate of 6.00% per annum on the portion of the loan which has not been advanced or cancelled. The Principal amount of loan is payable in monthly installments of \$50,000 commencing on July 15, 2021 and continuing up to the maturity date of July 15, 2025 on which one balloon payment of \$2,650,000 is required.

The loan may be prepaid at any time for all or part of the outstanding principal plus all interest and any other fees that are applicable plus the prepayment bonus which consists of an interest differential charge and prepayment indemnity. The prepayment option is considered to be an embedded derivative with a fair value of nil at the date of issuance and at December 31, 2020. In addition to the scheduled payments, principal of the Financing shall be reimbursed by way of annual payments representing 30% of Excess Available Funds as determined at the end of the last fiscal year to the maximum of \$700K for each annual payment (Annual ECFS limit" payable on Sept 15 each year commencing in September 2021 (ECFS date). For greater certainty, any such annual payment is payable only if Excess Available funds as determined at the end of the last fiscal year, is a positive figure. The loan is secured by general security agreement granting a general and continuing security interest in all present and after acquired personal property without limiting the foregoing, on all present and future assets related to intellectual property including, without limitation, patents, trademarks, domain names, source codes, licenses, and any other forms of intellectual property of the Company. This security interest shall rank in first position with respect to the Intellectual Property but subordinated in rank to any other security granted i) on receivable and inventory ii) previously to financial institutions except intellectual property and iii) on specific assets in connection with the financing of equipment needed by the Company.

There is also a provision for payment of a variable loan bonus equal to 5% of consolidated enterprise value of up to \$33 million and 1% of consolidated enterprise value above \$33 million in the event of maturity or payment of loan or occurrence of any other events stipulated in the loan agreement.

$16.$ Loan payable (continued)

The consolidated enterprise value of the Company is determined as highest of the following:

5 x Earnings Before Interest, Taxes, Depreciation, and Amortization ("EBITDA") for the last financial year prior i) to the bonus event:
5 x average EBITDA for the last two most recent financial years prior to the bonus event; $\mathsf{ii}$
Market valuation on the stock exchange the Company is listed at the time of payout; iii)
0.5 x consolidated audited annual gross sales of the Company for the last financial year prior to the bonus $iv)$ event; or;
0.5 x average consolidated audited annual gross sales of the Company for the last two most recent financial $V)$ year prior to the bonus event.

The initial fair value of the embedded derivative liability related to the variable bonus was estimated to be \$595,712 and the residual amount of proceeds of \$1,904,288 was allocated to the loan. As at December 31, 2020 the variable loan bonus had a fair value of \$1,002,128 and the Company recognized a \$406,416 loss on the change in fair value of derivative liability

Business loan continuity

	December 31, 2020	June 30, 2020
	⊅	ъ
Loan payable - Initial recognition (July 20, 2020)	1,904,288
Accretion	15,293
Accrued interest	10,616
Loan payable - end of period	1,930,197
Less: current	(335, 615)	÷
Non-current portion	1,594,582

Continuity for all the loans

	December 31, 2020	June 30, 2020

Opening Balance	265.121	73.141
Addition	1,904,288	194.863
Loan forgiven transferred to other income – Note 18	(160, 383)
Accretion	15.293
Accrued interest	10,616
Foreign exchange adjustment	(100)	(2,883)
Ending balance	2,034,835	265,121
Less: current portion	(335, 615)	(60, 531)
Non-current portion	1,699,220	204.590

$16.$ Loan payable (continued)

Derivative liability

	December 31, 2020	June 30, 2020

Opening Balance	$\sim$	$\blacksquare$
Derivative liability – Initial recognition (July 20, 2020)	595,712
Change in fair value of derivative liability	406.416
Ending Balance	1,002,128

$17₁$ Warranty provision

	December 31, 2020	June 30, 2020

Opening balance	251,100	388,649
Additions	$\blacksquare$	89.190
Fulfillment	(59.758)	(226, 739)
Ending balance	191,342	251,100

$18.$ Total expenses by nature

The table shows expenses of the company by nature.

	Six Months Ended December 31, 2020	Twelve Months Ended June 30, 2020

Depreciation and amortization	578.936	658,237
Consulting and professional fees	1,712,871	2,669,992
Salary, wages, and benefits	3.764.380	4.332.292
Share based payments	682.216	1,004,420
Other expenses	3,557,795	5.956.645
Total expenses by nature	10,296,198	14,621,586

$19₁$ Other income

Other income of the Company consists of government grants received by the Company, loan forgiveness of \$10,000 for COVID-19 relief from the Bank of Montreal, and loan forgiveness of \$150,383 for the COVID-19 relief from First Premier Bank.

Government grants relate to the Canada Emergency Wage Subsidy amounts from the Canadian government related to the decrease in revenue as a result of COVID-19. The subsidy is to cover part of the employee wages, retroactive to March 15, 2020. This subsidy also enables the Company to re-hire workers, help prevent further job losses, and return to normal operations. There are no unfulfilled conditions and contingencies attached to the grants.

$19.$ Other income (continued)

	Six Months Ended December 31, 2020	Twelve Months Ended June 30, 2020

Loan forgiveness income	160.383	$\sim$
Government Grants	435.581	310,595
Total	595,964	310,595

20. Related party transactions

All transactions with related parties have occurred in the normal course of operations at the exchange amount agreed between the parties. All amounts are unsecured, non-interest bearing and have no specific terms of settlement, unless otherwise noted. Related parties including the members of Board of Directors and Key management personnel, as well as close family members and enterprises that are controlled by these individuals and shareholders.

Transactions with related party Bevo Farms Ltd., that is affiliated with an officer and director of the Company.

	Six Months Ended December 31, 2020	Twelve Months Ended June 30, 2020

Short term leases	31,561	$\blacksquare$
Lease payments	5,000	10,000
Office expenses	37,570
Lease liability	65,859	70,400

Key management compensation

Key management of the Company are members of the board of directors and other key management personnel of the company. The company paid and/or accrued the following compensation to key management during the reporting periods:

	Six Months Ended December 31, 2020	Twelve Months Ended June 30, 2020

Wages and Salaries	472,500	953,287
Consulting fees	508,694	401.977
Share-based compensation	445.154	851,982
Total	1,426,348	2,207,246

20. Related party transactions (Continued)

All the related party balances as at year end:

Zenabis Global Inc. and Bevo Farms Ltd. are related parties of the Company as they are affiliated with certain officers and directors that have significant influence over the Company. Swiss Leaf Farms Ltd. is a related party as it is an associate of the Company.

	As at December 31, 2020	As at June 30, 2020
	S	S
Accounts Receivable:
Zenabis	8,001
Total Accounts Receivable	8,001
Accounts Payable:
Bevo farms	12,034	4,716
Swiss leaf farms	11,360	6,759
Total Accounts Payable	23,394	11,475

$21.$ Share Capital

The Company has an authorized share capital consisting of: (i) an unlimited number of Common Shares without par value or special rights or restrictions attached; (ii) an unlimited number of Class A Preferred Shares without par value and with certain rights and restrictions attached; and (iii) an unlimited number of Class B Preferred Shares without par value and with certain rights and restrictions attached. As of December 31, 2020, the Company has no Class A Preferred Shares or Class B Preferred shares issued and outstanding (June 30, 2020 - Nil).

	Number of common shares	Impact on share capital
	#	S
Balance June 30, 2019	84,179,714	22,740,341
Issuance of shares (i), (ii), (iii)	31.897.301	9,000,976
Options exercised (iv)	238,000	45,220
Transfer from equity reserves		39,046
Balance June 30, 2020	116,315,015	31,825,583
Issuance of shares (v)	19,884,677	16.637.045
Holdback shares adjustment(vi)	926,845	356,849
Options exercised (iv)	577,999	121,886
Transfer from equity reserves		98,944
Balance December 31, 2020	137.704.536	49.040.308

Financing arrangement with Nu Skin 158,171 common shares @ \$0.9471 per share. $\mathbf{i}$

Issue of 10,000,000 shares to Hydrogreen Inc. acquisition @ \$0.3851 per share. $\mathsf{ii}$

$21.$ Share Capital (Continued)

iii) Financing arrangement with Ospraie 21,739,130 common shares $@$ \$0.23 per share.
iv) Options exercised by option holders at average price of \$0.21 per share.
v) Financing arrangement with Harry DeWit, institutional investors, and some key management employees of the Company at average price of \$0.8367 per share. Share issuance costs of \$899,853 were accounted for as a deduction from equity.
vi) Issue of 926,845 holdback shares to Hydrogreen Inc. acquisition @0.3851 per share.

On January 28, 2019 the Company completed a private placement with Nu Skin, pursuant to the investment agreement, Nu Skin has the pre-emptive right to participate in future equity financings of the Company to maintain its pro rata ownership of the Company up to a maximum 12.9% ownership interest. This right is available to Nu Skin for as long as it owns not less than 8% of the Company's shares.

$22.$ Stock options

The Company has an ownership-based compensation plan ("Option Plan") for key management personnel, employees and vendors of the Company. The compensation plan as approved by the shareholders provides the key management personnel and employees with the option to purchase ordinary shares at an exercise price as listed below.

Each share option converts into one ordinary share of the Company on exercise. No amounts are paid or payable by the recipient on receipt of the option. The options carry neither right to dividends nor voting rights. Options may be exercised at any time from the date of vesting to the date of their expiry.

The number of the options granted is calculated in accordance with the various employee and contractor arrangements. The formula rewards key management personnel and certain contractors to the extent of the Company's and individual/contractor achievement against qualitative and/or quantitative criteria from including some of the following financial and customer service measures:

Improvement in EBITDA
Shipment of Cubic Systems
Meeting sales targets $\bullet$
Years of service with the Company.

All options are to be settled by physical delivery of shares.

Share purchase options continuity schedule:

	Number of share purchase options	Weighted average exercise price
		\$
Balance June 30, 2019	29,655,766	0.45
Granted	3,790,000	0.63
Exercised	(238,000)	0.19
Cancelled	(2,572,000)	0.86
Balance June 30, 2020	30,635,766	0.44
Granted	50,000	0.78
Exercised	(577, 999)	0.21
Cancelled	(940,000)	0.83
Forfeited	(411, 667)	0.24
Expired	(300,000)	1.00
Balance December 31, 2020	28,456,100	0.43

22. Stock options (continued)

During the period ended December 31, 2020, the weighted average price of share when options were exercised was \$0.85 (June 30, 2020 - \$0.75).

Share purchase options outstanding at December 31, 2020:

Grant date - Expiry date	Options Outstanding (#)	Contractual life of options - years	Exercise price	Options Exercisable $(#)$
May 3, 2017 – April 1, 2027	14.130.096	10	0.19	5.434.624
November 1, 2017 - January 30, 2023	2,474,670	5	0.19	1,359,400
March 20, 2018 - March 30, 2023	268,334	5	0.19	199,334
July 15, 2018 - July 15, 2023	7,238,000	5	0.83	1,805,400
June 18, 2019 – December 15, 2023	605,000	5	1	385,000
September 03, 2019 - September 02, 2024	10.000	5	0.68	2,000
November 30, 2019 - December 30, 2024	50,000	5	1	50,000
December 02, 2019 - December 01, 2024	10.000	5	0.39	3,333
June 17, 2020 - June 18, 2025	3,620,000	5	0.63	1,206,667
November 18, 2020 - February 16, 2023	50,000	2	0.78
Total share purchase options	28,456,100			10,445,758

The fair value of the share purchase options granted during the year ended December 31, 2020 was calculated using the Black-Scholes option valuation model at the grant date, with the following weighted average assumptions.

	Year Ended June 30, 2020	Year Ended December 31, 2020
Share price volatility	113%	171%
Expected dividend yield	\$nil	Snil
Employee forfeiture rate	20%	20%
Board of Directors forfeiture rate	25%	25%
Risk free interest rate	1 47% & 1 49%	0.26%

The details of share-based compensation ("SBC") is as follows:

December 31, 2020	Twelve Months Ended June 30, 2020

200.937	25,882
481,279	978,538
682,216	1.004.420
	Six Months Ended

23. Operating segments

IFRS 8 Operating Segments defines that an operating segment as a component of an entity:

(a) that engages in business activities from which it may earn revenues and incur expenses (including revenues and expenses relating to transactions with other components of the same entity).

(b) whose operating results are regularly reviewed by the entity's Chief Executive Officer to make decisions about resources to be allocated to the segment and assess its performance, and

(c)for which discrete financial information is available.

For management purposes, the Company is organized into divisions based on its products and services and these are comprised of two separate reportable segments: Fresh, for leafy greens and other crops, and Feed, for livestock feed. The Fresh division includes the head office function. The entire Fresh division operates in Canada and the entire Feed division operates in the United States.

Six months ended December 31, 2020.

	Fresh	Feed	Total

Revenue	486,678	138,096	624,774
Gross Margin	(966, 051)	26,804	(939, 247)
Net Loss	(8, 165, 584)	(1,959,979)	(10,125,563)
Total Assets	27,975,387	6,761,468	34,736,855

Year ended June 30, 2020.

	Fresh	Feed	Total

Revenue	5,006,231	161,257	5,167,488
Gross Margin	1.642.804	31,053	1,673,857
Net Loss	(9, 147, 824)	(944, 277)	(10,092,101)
Total Assets	12.916.209	8,224,398	21,140,607

24. Capital management

The Company's objective when managing capital is to safeguard the Company's ability to continue as a going concern, so that it can continue to provide returns for shareholders and benefits for other stakeholders; to provide an adequate return to shareholders by pricing products and services commensurately with the level of risk.

The Company sets the amount of capital in proportion to risk and manages the capital structure and makes adjustment to it considering changes to economic conditions and the risk characteristics of the underlying assets. In order to maintain or adjust the capital structure, the Company may adjust the amount of dividends paid to shareholders, return capital to shareholders, issue new shares, or sell assets to reduce debt.

The Company monitors capital based on the net equity. Net equity is calculated as total assets less total liabilities.

24. Capital management (continued)

During the period, the Company's strategy, which was unchanged from the prior year, was to maintain net equity at a positive amount. The net equity at December 31, 2020 and June 30, 2020 was as follows:

	December 31, 2020	June 30, 2020
	S	S
Total Assets	34,736,855	21,140,607
Total Liabilities	(12, 997, 278)	(6,756,186)
Net Equity	21,739,577	14,384,421

25 Financial instruments

The Company classifies its fair value measurements with the following fair value hierarchy:

Level 1-Unadjusted quoted prices at the measurement date for identical assets or liabilities in active market.

Level 2 - Observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets and liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.

Level 3 – Unobservable inputs which are supported by little or no market activity.

The carrying value of the Company's cash & cash equivalents, trade and other receivables and trade and other payables approximate fair value due to their immediate and short-term nature.

The earnout payable is measured at fair value based on unobservable inputs and is considered a Level 3 financial instrument. The determination of the fair value is primarily driven by the Company's expectations of HydroGreen achieving certain revenue targets. The expected related cash flows were discounted to derive the fair value of the earnout payable. As at December 31, 2020, the discount rate was estimated to be 17% (June 30, 2020 - 24%). If the discount rate decreased by 5%, the estimated fair value of the earnout payable would increase by approximately \$70,018 (June 30, 2020 -\$120,710). If the discount rate increased by 5%, the estimated fair value of the earnout payable would decrease by approximately \$64,502 (June 30, 2020 - \$101,902).

The fair value of the Company's Loans payable is the carrying value discounted at the effective interest rate. As at December 31, 2020 the fair value of the Loans payable was \$1,990,278 and the carrying value was \$2,034,835. As at June 30, 2020 the fair value of the Loans payable was \$194,853 and the carrying amount was \$265,121.

The derivative liability is measured at fair value based on unobservable inputs and is considered a Level 3 financial instrument. The determination of the fair value is primarily driven by the Company's expected earnings before interest, taxes, depreciation, and interest ("EBITDA") in 2024. The expected related cash flows were discounted to derive the fair value of the derivative liability. As at December 31, 2020, the discount rate was estimated to be 47% (June 30, 2020 - Nil). If 2024 EBITDA changed by 25%, the estimated fair value of the derivative liability would increase or decrease by approximately \$191,219 (June 30, 2020 - \$Nil). If discount rates decreased by 5%, the estimated fair value of the derivative liability would increase by approximately \$167,232. If discount rates increased by 5%, the estimated fair value of the derivative liability would decrease by approximately \$138,870 (June 30, 2020 - \$Nil).

There has been no change between levels during the year.

25. Financial instruments (continued)

The fair values of the Company's financial instruments are outlined below:

As at December 31, 2020
	Amortized Cost FVTPL			Fair Value
Asset (Liability)			Level 2	Level 3
Cash and cash equivalents		16,206,535
Trade and other Receivables		1,338,265
Trade and other payables		(1,465,666)
Earn out payable	(1,643,033)			(1,643,033)
Loans payable		(2,034,835)	(1,990,278)
Derivative liability	(1,002,128)			(1,002,128)
		As at June 30, 2020
	FVTPL	Amortized Cost		Fair Value
Asset (Liability)			Level 2	Level 3
Cash and cash equivalents		3,604,412
Trade and other Receivables		2,186,568
Trade and other payables		(1, 298, 598)
Earn out payable	(1,364,756)			(1,364,756)
Loans payable		(265, 121)	(194,853)

The continuity for the Earn out payable is presented in Note 6.

The continuity for the Derivative liability is presented in Note 16.

The Company is exposed to certain risks relating to its financial instruments. The Company does not use derivative financial instruments to manage these risk exposures. As at December 31, 2020 the primary risks relating to the use of financial instruments were as follows:

Credit risk

Credit risk is the risk that one party to a financial instrument will cause a financial loss for the other party by failing to discharge any obligations. The Company's cash and receivables are exposed to credit risk. The Company reduces its credit risk on cash by placing these instruments with institutions of high credit worthiness and the loans and advances will be secured by the assets of the Company which mitigates the credit risk. The Company performs regular credit assessments on its customers and associates and provides allowances for potentially uncollectible accounts receivables from customers and receivables from associates. As at December 31, 2020, one customer accounted for 29% of the trade accounts receivable and the Company has no issues for collection for it. The Company performs regular credit assessments on its customers and associates and provides allowances for potentially uncollectible accounts receivable and associates.

25. Financial instruments (continued)

Liquidity risk

Liquidity risk is the risk that the Company will not be able to meets it financial obligations as they fall due. The Company manages its liquidity risk by forecasting cash flows from operations and anticipating any investing and financing activities.

Management and the Board of Directors are actively involved in the review, planning and approval of significant expenditures and commitments. Accounts payable and accrued liabilities generally have contractual maturities of less than 30 days and are subject to normal trade terms.

Management is continuing efforts to increase sales and attract additional equity and capital investors to continue R&D activities, and, from the other side, implement effective cost control measures to maintain adequate levels of working capital.

At December 31, 2020 and June 30, 2020, the Company has financial liabilities which are due on a fiscal year basis as follows:

As at December 31, 2020	< 1 Year	1-5 Years	5+ Years	Total
	\$	\$	\$	\$
Trade and other payables	1.465.666	$\blacksquare$	$\blacksquare$	1,465,666
Earn-out payable	1,336,860	572,940	$\blacksquare$	1,909,800
Lease liability	514.988	841.952	678.434	2,035,374
Loans payable	648.534	3,601,336	$\blacksquare$	4,249,870
Derivative liability		5,575,533	$\blacksquare$	5,575,533
Total	3,966,048	10,591,761	678.434	15,236,243

As at June 30, 2020	< 1 Year	1-5 Years	5+ Years	Total
	\$	\$	\$	S
Trade and other Payables	1,298,599	$\sim$	$\blacksquare$	1,298,599
Earn-Out Payable	340.692	1.703.461	$\blacksquare$	2.044,153
Lease Payable	253.813	810,837	738.700	1,803,350
Loans payable	٠	262.315	۰	262,315
Total	1,893,104	2,776,613	738,700	5,408,417

25. Financial instruments (continued)

Market risk

Market risk is the risk that changes in market prices, such as foreign exchange rates and interest rates, will affect the Company's (loss) income or the fair value of its financial instruments. The market risk is analysed further below:

Interest rate risk

Interest rate risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market interest rates. Financial assets and liabilities with variable interest rates expose the Company to cash flow interest rate risk. The Company does not hold any financial liabilities with variable interest rates. The Company does maintain bank accounts which earn interest at variable rates, but it does not believe it is currently subject to any significant interest rate risk.

Foreign currency risk

The Company enters into transactions denominated in US dollars for which the related revenues, expenses, accounts receivable, and accounts payable balances are subject to exchange rate fluctuations. As at December 31, 2020, the following items are denominated in US dollars:

	December 31, 2020	June 30, 2020
	\$	S
Cash	3,616,464	93,424
Trade and other receivables	1,251,269	1,446,332
Trade and other payables	(432, 742)	(313,060)
Customer deposits	(524, 941)	(243, 883)
Earn-out payable	(1,290,475)	(1,001,457)
Loans payable	(58, 622)	(165, 194)
Net exposure	2,560,954	(183, 838)

Foreign currency risk is the risk that the fair value of future cash flows of a financial instrument will fluctuate because of changes in foreign exchange rates. The Company has not made any special arrangements to reduce the related currency risk.

A 10% increase in the US dollar exchange rate would decrease the Company's net loss by approximately \$256,000. A 10% decrease in the exchange rate would increase net loss by the same amount.

26. Deferred tax assets and liability

Tax note for the year ended December 31, 2020

A reconciliation between the effective tax rate on losses from continuing operations and the statutory tax rate is as follows:

	December 31, 2020	June 30, 2020
	\$	\$
Loss before income tax	(10, 447, 885)	(10, 327, 904)
Statutory tax rate	27%	27%
Expected income tax (recovery)	(2,820,921)	(2,788,534)
Increase (decrease) in income tax recovery resulting from:
Non-deductible items	49,812	258,259
Share based compensation	184,198	271,194
Change in deferred tax assets not recognized	2,350,566	1,636,153
Financing fees recorded directly in equity	(68, 934)
Changes in estimates	(148, 656)	322,309
Difference in tax rates in in foreign jurisdictions	136,458	69,686
Tax effect of foreign exchange and other	(4, 815)	(4,869)
Total income tax expense (recovery)	\$ (322, 292)	\$ (235, 803)

Current Income taxes	3,305	3,923
Deferred income taxes (recovery)	(325, 597)	(239, 727)
Total income tax expense recovery	\$ (322, 292)	\$ (235,803)

Deferred taxes reflect the tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and their corresponding values for tax purposes. Deferred tax assets (liabilities) at December 31, 2020 and June 30, 2020 are comprised of the following:

	December 31, 2020	June 30, 2020
	\$	จ
Non-capital losses carryforward	1,172,625	1,098,779
Property, plant, and equipment	(95, 161)	(170, 231)
Intangible assets	(672, 154)	(948, 342)
Right of use asset net of lease liability	(405, 310)	(325,241)
Net deferred tax asset (liability)		(345,035)

26. Deferred tax assets and liability (continued)

The unrecognized deductible temporary difference at December 31, 2020 and June 30, 2020 are comprised of the following:

		December 31, 2020	June 30, 2020
		\$	\$
Non-capital losses		22,391,658	16,932,035
Promissory note and investment in associate		1,469,231	2,193,664
Share issuance and financing costs		1.029.241	735,658
Trade and other receivables		383.527	50,845
Fixed assets and Intangibles		244,917
Warranty provision		191.342	255,394
Lease liabilities and restoration provision		1,704,765	1,495,381
Other		10,000	19,960
Total unrecognized deductible temporary differences	\$.	27,424,681	21,682,937

The Company has non-capital loss carry forwards of approximately \$22,356,510 (2019 - \$14,219,005) which may be carried forward to apply against future year income tax for Canadian income tax purposes, subject to the final determination by taxation authorities, expiring in the following years:

Canadian
EXPIRY	December 31, 2020	June 30, 2020
2034	73,753
2035	838,250	$\blacksquare$
2036	1,491,182	837,745
2037	6,474,453	1,343,598
2038	9,606	5,237,830
2039	6,697,770	6,799,832
2040	6,771,496	۰
TOTAL	22,356,510	14,219,005

The Company has net operating loss carry forwards of approximately CAD \$5,346,802 in the United States which can be applied to reduce future US taxable income which have an unlimited expiry period.

27. Earnings per share

Basic earnings per share

Basic earnings per share amounts are calculated by dividing net profit for the year attributable to ordinary equity holders of the parent by the weighted average number of ordinary shares outstanding during the year.

27. Earnings per share (continued)

Diluted earnings per share

Diluted earnings per share amounts are calculated by dividing the net profit attributable to ordinary equity holders of the parent (after adjusting for interest on the convertible preference shares) by the weighted average number of ordinary shares outstanding during the year adjusting for the effect of dilutive convertible preferred shares and share options. The earnings used in the calculation for all diluted earnings per share measures are the same as those for the equivalent basic earnings per shares measures, as outlined below. The weighted average numbers of ordinary shares for the purposes of diluted earnings per share reconciles to the weighted average number of ordinary shares used in the calculation of basic earnings per share as follows:

At year end diluted earnings per share is reported at the same value as basic earnings per share due to the anti-dilutive effect as the company is in a loss position.

	Six Months Ended December 31, 2020	Twelve Months Ended June 30, 2020
	\$	\$
Numerator:
Net loss for the year	(10, 125, 563)	(10,092,101)
Denominator:
Weighted-average basic shares outstanding	119,842,276	92,326,900
Effect of dilutive securities (nil due to anti-dilutive nature)
Weighted-average diluted shares	119,842,276	92,326,900
Basic earnings (loss) per share	(0.08)	(0.11)
Diluted earnings (loss) per share	(0.08)	(0.11)

28. Subsequent events

On April 5, 2021, the Company announced that pursuant to a non-brokered private placement, Burnett Land & Livestock Ltd., (Burnett) has agreed to purchase 1,464,622 common shares of the Company at a purchase price of CA\$1.29 per common share for gross proceeds of US\$1,500,000 (approximately CA\$1,886,427).

On April 29, 2021, the Company amended its loan with BDC Capital Inc. The amendment includes cancelling the second \$2,500,000 tranche and adjusting the principal instalments to 47 monthly instalments of \$25,000 commencing July 15, 2021, with a balloon payment of \$1,325,000 payable on June 15, 2025. The variable loan bonus was also replaced with a fixed bonus of \$425,000, consisting of \$225,000 in cash and \$200,000 in common shares. The payment of the fixed bonus will take place as early as possible, and no later than 10 days after the filing of the Company's December 31, 2020 financial statements.

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CubicFarm Systems Corp. — Audit Report / Information 2020

47769_rns_2021-04-30_e6e62f34-ba7d-4a0a-a279-6eeeec6be6c2.pdf

CubicFarm Systems Corp. Consolidated Financial Statements

INDEPENDENT AUDITORS' REPORT

Opinion

Basis for Opinion

Material uncertainty Related to Going Concern

Other Matter - Comparative Information

Other Information

Responsibilities of Management and Those Charged with Governance for the Financial Statements

Auditors' Responsibilities for the Audit of the Financial Statements

Page

Independent Auditor's Report

Financial Statements

Approved on behalf of the Board

CubicFarm Systems Corp.Consolidated Statements of Changes in Equity

CubicFarm Systems Corp.Consolidated Statements of Cash Flows

$1.$ Reporting entity

$2.$ Going concern

3. Basis of presentation

Prior period reclassification

Basis of measurement

Change in year-end

Basis of consolidation

4. Significant accounting policies

Cash and cash equivalents

Contract assets

Inventory

Business combinations

Property, plant, and equipment

Intangible assets

Impairment of long-lived assets

Leases

Revenue from contracts with customers

Customer deposits

Income tax & deferred tax

Foreign currency translation

Share based compensation

Financial instruments

Financial assets

(i) Amortized cost:

Financial liabilities

$\boldsymbol{4}$ . Significant accounting policies (continued)

Impairment of financial assets

Finance and investment income (expense) and interest expense

$\boldsymbol{4}$ . Significant accounting policies (continued)

Loss per share

Related party transactions

Government grants

5. Significant estimates, assumptions, and judgments

Going concern

Business combinations

Useful lives of intangible assets

5. Significant estimates, assumptions, and judgments (continued)

Impairment of goodwill and intangible assets

Fair value of financial instruments

Provision for expected credit losses

Adoption of new accounting standards

Conceptual framework

Definition of material

Definition of a business

5. Significant estimates, assumptions, and judgments (continued)

6. Business combination

$6.$ Business combination (continued)

Holdback shares

Earn-out payments

6. Business combination (continued)

$7.$ Trade and other receivables

Aging

Continuity for provision for expected credit loss on trade account receivable

$8.$ Inventory

$9-$ Prepaid expenses and deposits

$101$ Property, plant, and equipment

$101$ Property, plant, and equipment (Continued)

$11.$ Investment in associates

$11.$ Investment in associates (Continued)

$12.$ Intangible assets

June 30, 2020

$13.$ Leases

CubicFarm Systems Corp. Audit Report / Information 2020

CubicFarm Systems Corp.
Consolidated Statements of Changes in Equity

CubicFarm Systems Corp.
Consolidated Statements of Cash Flows

$9_-$ Prepaid expenses and deposits

$10₁$ Property, plant, and equipment

$10₁$ Property, plant, and equipment (Continued)

$13₁$ Leases (Continued)

$15₁$ Customer deposits (continued)

$17₁$ Warranty provision

$19₁$ Other income