EcoSynthetix Inc. — Audit Report / Information 2020

Mar 3, 2021

EcoSynthetix Inc.

Consolidated Financial Statements December 31, 2020 and December 31, 2019 (expressed in US dollars)

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Independent auditor’s report

To the Shareholders of EcoSynthetix Inc.

Our opinion

In our opinion, the accompanying consolidated financial statements present fairly, in all material respects, the financial position of EcoSynthetix Inc. and its subsidiaries (together, the Company) as at December 31, 2020 and 2019, and its financial performance and its cash flows for the years then ended in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board (IFRS).

What we have audited

The Company’s consolidated financial statements comprise:

• the consolidated balance sheets as at December 31, 2020 and 2019;

• the consolidated statements of operations and comprehensive loss for the years then ended;

• the consolidated statements of shareholders’ equity for the years then ended;

• the consolidated statements of cash flows for the years then ended; and

• the notes to the consolidated financial statements, which include significant accounting policies and other explanatory information.

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 Auditor’s responsibilities for the audit of the consolidated financial statements section of our report.

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

Independence

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

Key audit matters

Key audit matters are those matters that, in our professional judgment, were of most significance in our audit of the consolidated financial statements for the year ended December 31, 2020. These matters were addressed in the context of our audit of the consolidated financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters.

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PricewaterhouseCoopers LLP 200 Apple Mill Road, Vaughan, Ontario, Canada L4K 0J8 T: +1 905 326 6800, F: +1 905 326 5339

“PwC” refers to PricewaterhouseCoopers LLP, an Ontario limited liability partnership.

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Key audit matter

Impairment assessment of property, plant and equipment (PP&E)

Refer to note 2 - summary of significant accounting policies, note 3 - COVID 19 and note 10, property, plant and equipment to the consolidated financial statements.

As at December 31, 2020, the total net book value of PP&E amounted to $5.6 million. Property, plant and equipment are assessed for impairment indicators at the end of each reporting period or when events or changes in circumstances indicate the carrying amounts may not be recoverable. When indicators of impairment are identified, an impairment test is performed at the level of the cash generating unit (CGU). The Company has determined that it has a single CGU, assessed as the entity as a whole, due to the interdependence of the Company’s assets and liabilities in generating cash inflows. An impairment loss is recognized for the amount by which the CGU’s carrying amount exceeds its recoverable amount.

Management assessed that an indicator of impairment was present related to the COVID-19 pandemic, which has caused the global demand for paper products to decrease and has caused a decrease in the pricing of petroleum related products which resulted in a higher than anticipated loss from operations. Management performed an impairment test and determined that the recoverable amount of the Company was higher than the carrying amount and has not recognized an impairment loss during the period. The recoverable amount of the Company was based on the fair value less cost to sell method (FVLCS method) whereby the recoverable amount of each asset and liability of the Company was determined. In determining the recoverable amounts of the machinery and equipment, which amount to $4.4 million of the PP&E, management used an independent third party appraiser. The third party appraiser used the market approach in determining the recoverable amounts of the machinery and equipment whereby recent market data pertaining to the individual assets, or comparable assets, was used. Market data includes recent sales of assets, or comparable assets, within the last 12 months from new and used dealers. The third party appraiser

How our audit addressed the key audit matter

Our approach to addressing this matter involved the following procedures, among others:

● Professionals with specialized skill and knowledge in the field of valuation assisted in evaluating the reasonableness of the recoverable amounts of machinery and equipment by developing an independent point estimate for a sample of machinery and equipment assets using the market approach. In determining these recoverable amounts, professionals with specialized skill and knowledge in the field of valuation: (i) used recent market data pertaining to the individual assets, or comparable assets, which included recent sales of assets, or comparable assets, within the last 12 months from new and used dealers and (ii) considered market usage for same or comparable assets in other industries as well as disposal costs.

• Compared the independent point estimate to management’s estimate based on the third party appraisal to evaluate the reasonableness of management’s estimate.

• Tested the underlying data used in developing the independent point estimate.

• Tested the disclosures made in the consolidated financial statements with regard to the impairment assessment of PP&E for the CGU.

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further considered market usage for same or comparable assets in other industries as well as disposal costs. All other assets and liabilities were assessed using Level 1 and Level 2 fair value inputs. Management applies significant judgment in the determination of the recoverable amounts of machinery and equipment, due to the specialized nature of the assets.

We considered this a key audit matter due to the significant audit effort and subjectivity in applying audit procedures to test significant judgment applied by management in determining the recoverable amounts of the machinery and equipment. We were also assisted by professionals with specialized skill and knowledge in the field of valuation.

Other information

Management is responsible for the other information. The other information comprises the Management’s Discussion and Analysis.

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

In connection with our audit of the consolidated 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 consolidated financial statements or our knowledge obtained in the audit, or otherwise appears to be materially misstated.

If, based on the work we have performed, we conclude that there is a material misstatement of this other information, we are required to report that fact. We have nothing to report in this regard.

Responsibilities of management and those charged with governance for the consolidated financial statements

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

In preparing the consolidated 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.

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

Auditor’s responsibilities for the audit of the consolidated financial statements

Our objectives are to obtain reasonable assurance about whether the consolidated financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s 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 these consolidated financial statements.

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

• Identify and assess the risks of material misstatement of the consolidated 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 auditor’s report to the related disclosures in the consolidated 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 auditor’s 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 consolidated financial statements, including the disclosures, and whether the consolidated financial statements represent the underlying transactions and events in a manner that achieves fair presentation.

• Obtain sufficient appropriate audit evidence regarding the financial information of the entities or business activities within the Company to express an opinion on the consolidated financial statements. We are responsible for the direction, supervision and performance of the group audit. We remain solely responsible for our audit opinion.

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We 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.

We also provide those charged with governance with a statement that we have complied with relevant ethical requirements regarding independence, and to communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, related safeguards.

From the matters communicated with those charged with governance, we determine those matters that were of most significance in the audit of the consolidated financial statements of the current period and are therefore the key audit matters. We describe these matters in our auditor’s report unless law or regulation precludes public disclosure about the matter or when, in extremely rare circumstances, we determine that a matter should not be communicated in our report because the adverse consequences of doing so would reasonably be expected to outweigh the public interest benefits of such communication.

The engagement partner on the audit resulting in this independent auditor’s report is Jennifer Psutka.

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Chartered Professional Accountants, Licensed Public Accountants

Toronto, Ontario March 2, 2021

EcoSynthetix Inc. Consolidated Balance Sheets

As at December 31, 2020 and December 31, 2019

(expressed in US dollars)

Assets Current assets Cash Short-term investments (note 6) Accounts receivable (note 7) Inventory (note 8) Government grants receivable (note 9) Prepaid expenses Non-current assets Property, plant and equipment (note 10) Total assets Liabilities Current liabilities Trade accounts payable and accrued liabilities (note 11) Non-current liabilities Lease liability (note 12) Total liabilities Shareholders’ Equity Common shares(note 15) Contributed surplus Accumulated deficit Total shareholders’ equity Total liabilities and shareholders’ equity	2020 2019 16,637,161 7,975,713 25,344,575 35,720,548 1,794,594 1,824,581 2,134,389 2,268,961 122,218 114,956 69,633 75,973
	46,102,570 47,980,732 5,620,805 6,729,371
	51,723,375 54,710,103
	1,179,097 1,360,568 1,072,287 1,176,643
	2,251,384 2,537,211
	490,259,923 490,590,406 10,383,334 10,351,658 (451,171,266) (448,769,172)
	49,471,991 52,172,892
	51,723,375 54,710,103

Approved by the Board of Directors

(signed) (signed) Paul Lucas, Chairman Jeff MacDonald, Chief Executive Officer

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

EcoSynthetix Inc. Consolidated Statements of Operations and Comprehensive Loss For the years ended December 31, 2020 and December 31, 2019

(expressed in US dollars) Net sales Cost of sales Gross profit on sales Expenses Selling, general and administrative Research and development Loss from operations Interest income Net loss and comprehensive loss Basic and diluted loss per common share(note 20) Weighted average number of common shares outstanding	2020 2019 13,662,711 18,446,922 10,924,338 14,417,197
	2,738,373 4,029,725
	4,333,649 4,849,977 1,412,315 1,742,452
	5,745,964 6,592,429
	(3,007,591) (2,562,704) 605,497 1,108,646
	(2,402,094) (1,454,058)
	(0.04) (0.02)
	57,196,584 58,297,045

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

EcoSynthetix Inc. Consolidated Statements of Shareholders’ Equity For the years ended December 31, 2020 and December 31, 2019

(expressed in US dollars)

Balance – December 31, 2018 Share-based compensation (note 14) Common share options exercised (note 15) Restricted share units converted Common shares repurchased Net loss and comprehensive loss Balance – December 31, 2019 Share-based compensation (note 14) Common share options exercised (note 15) Restricted share units converted Common shares repurchased Net loss and comprehensive loss Balance – December 31, 2020	Common Shares Contributed Surplus 491,618,125 9,798,803 - 784,623 327,661 (111,841) 119,927 (119,927) (1,475,307) - - -	Accumulated Deficit Total (447,315,114) 54,101,814 - 784,623 - 215,820 - - - (1,475,307) (1,454,058) (1,454,058)
	490,590,406 10,351,658 - 783,822 1,514,052 (639,465) 112,681 (112,681) (1,957,216) - - -	(448,769,172) 52,172,892 - 783,822 - 874,587 - - - (1,957,216) (2,402,094) (2,402,094)
	490,259,923 10,383,334	(451,171,266) 49,471,991

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

EcoSynthetix Inc. Consolidated Statements of Cash Flows For the years ended December 31, 2020 and December 31, 2019

(expressed in US dollars)

Cash provided by (used in) Operating activities Net loss and comprehensive loss Items not affecting cash Depreciation Share-based compensation (note 14) Other Changes in non-cash working capital Accounts receivable Inventory Government grants receivable (note 9) Prepaid expenses Trade accounts payable and accrued liabilities Interest on short-term investments Interest received on short-term investments Accrued interest on short-term investments Investing activities Purchase of property, plant and equipment (note 10) Receipts on mature short-term investments (note 6) Purchase of short-term investments (note 6) Financing activities Principal payments made on lease liability (note 12) Common shares repurchased (note 15) Exercise of common share options (note 15) Effect of exchange rate changes on cash Change in cash during the year Cash – Beginning of year Cash – End of year	2020 2019 (2,402,094) (1,454,058) 1,439,504 1,381,061 783,822 784,623 (87,486) 65,527 184,998 523,041 152,390 458,881 (7,262) 25,044 6,340 23,585 (219,409) (1,016,944) 1,037,522 892,733 (661,549) (977,881)
	226,776 705,612
	(248,146) (458,172) 75,000,000 30,000,000 (65,000,000) (35,000,000)
	9,751,854 (5,458,172)
	(192,989) (187,427) (1,957,216) (1,475,307) 719,576 215,820
	(1,430,629) (1,446,914)
	113,447 (32,155)
	8,661,448 (6,231,629) 7,975,713 14,207,342
	16,637,161 7,975,713

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

EcoSynthetix Inc. Notes to Consolidated Financial Statements December 31, 2020 and December 31, 2019

(expressed in US dollars, unless otherwise noted)

1 Business operations

EcoSynthetix Inc. (EcoSynthetix or the Company) is engaged in the development and commercialization of environmentally friendly, bio-based technologies as replacement solutions for synthetic, petrochemical-based adhesives and other related products in the Americas, Europe, Middle East and Africa (EMEA) and Asia Pacific. EcoSynthetix is incorporated and domiciled in Canada. The address of its registered office is 3365 Mainway, Burlington, Ontario, Canada.

2 Summary of significant accounting policies

Statement of compliance

These consolidated financial statements have been authorized for issuance by the Board of Directors of the Company on March 2, 2021.

Basis of preparation

The consolidated financial statements have been prepared under International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB), using the historical cost convention.

Use of estimates and judgments

The preparation of consolidated financial statements in accordance with IFRS requires management to make judgments, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets, liabilities, income and expenses. These estimates are based on management’s best knowledge of current events and actions that the Company may undertake in the future. Actual results could differ from those estimates.

Significant estimates made by the Company include estimates of useful lives of property, plant and equipment, share-based compensation, allowances for expected credit losses (ACL), provisions for inventory that are carried in excess of net realizable value and the realizability of deferred income tax assets.

Property, plant and equipment are tested for impairment at the end of each reporting period or when events or changes in circumstances indicate the carrying amounts may not be recoverable. The Company applies significant judgment in the determination of the recoverable amount of machinery and equipment, due to the specialized nature of the assets. For the purpose of measuring recoverable amounts, assets are grouped at the lowest levels for which there are separately identifiable cash in-flows (cash-generating units or CGUs). The recoverable amount is the higher of an asset’s fair value less costs to sell and value in use (which is the present value of the expected future cash flows of the relevant asset or CGU). An impairment loss is recognized for the amount by which the asset’s carrying amount exceeds its recoverable amount. Non-financial assets that have been impaired previously are reviewed for possible reversal of impairment at each reporting date.

The Company has determined it has a single CGU, assessed as the entity as a whole, due to the interdependence of the Company’s assets and liabilities in generating cash inflows.

(1)

EcoSynthetix Inc. Notes to Consolidated Financial Statements December 31, 2020 and December 31, 2019

(expressed in US dollars, unless otherwise noted)

Basis of consolidation

The consolidated financial statements of the Company consolidate the accounts of EcoSynthetix and all of its subsidiaries. All intercompany transactions, balances and unrealized gains and losses from intercompany transactions are eliminated on consolidation.

Subsidiaries are all entities wholly owned and controlled by the Company and include the following entities:

• EcoSynthetix Ltd.

• EcoSynthetix Corporation

• EcoSynthetix B.V.

Foreign currency translation

• i) Functional and presentation currency

Items included in the financial statements of each consolidated entity in the Company’s consolidated financial statements are measured using the currency of the primary economic environment in which the entity operates (the functional currency). The consolidated financial statements are presented in US dollars, which is the Company’s reporting currency.

• ii) Transactions and balances

Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the transactions. Foreign currency exchange gains and losses resulting from the settlement of foreign currency transactions and from the translation at year-end exchange rates of monetary assets and liabilities denominated in currencies other than the Company’s functional currency are recognized in the consolidated statements of operations and comprehensive loss.

Cash

Cash consists of deposits held with banks.

Financial instruments

Financial assets and financial liabilities are recognized when the Company becomes a party to the contractual provisions of the financial instrument. Financial assets are derecognized when the rights to receive cash flows from the financial assets have expired or have been transferred and the Company has transferred substantially all risks and rewards of ownership. Financial assets and financial liabilities are offset and the net amount is reported in the consolidated balance sheets when there is a legally enforceable right to offset the recognized amounts and there is an intention to settle on a net basis, or to realize the financial asset and settle the financial liability simultaneously.

(2)

EcoSynthetix Inc. Notes to Consolidated Financial Statements December 31, 2020 and December 31, 2019

(expressed in US dollars, unless otherwise noted)

The Company determines the classification of financial assets and liabilities at initial recognition. The Company’s financial assets are classified into one of the following three categories:

• Amortized cost – If the financial asset is 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 on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding (held to collect).

• Fair value through other comprehensive income (FVOCI) – If the financial asset is 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 on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding.

• Fair value through profit or loss (FVPL) – A financial asset is measured at FVPL unless it is measured at amortized cost or through other comprehensive income.

The Company’s financial assets measured at amortized cost include cash, short-term investments, accounts receivable and government grants receivable. The Company does not have any financial assets measured at FVOCI or FVPL. The Company’s financial liabilities, trade accounts payable and accrued liabilities and lease liability are measured at amortized cost. Financial assets and liabilities included in this category are initially recognized at fair value (net of transaction costs, if applicable) and are subsequently measured at amortized cost using the effective interest rate method less allowances for losses.

A financial asset is derecognized when its contractual right to the cash flows that compose the financial asset expire or substantially all the risks and rewards of the asset are transferred. A financial liability is derecognized when the obligation under the liability is discharged, cancelled or expired. Gains and losses on derecognition are recognized in net income (loss). If a financial instrument is modified and does not result in derecognition, the gross carrying value of the financial instrument is revised and the modification gain or loss is recognized in net income (loss).

The Company applies a simplified approach to measure an ACL where the loss allowance is always equal to lifetime expected credit losses (ECL). The Company assesses whether there has been a significant increase in credit risk since initial recognition of a financial asset and both the ECL and ACL measurement at each reporting date. Increases or decreases in the ACL are recognized as impairment gains and losses in net income (loss).

Inventory

Inventory is valued at the lower of cost, determined on a first-in, first-out basis, and net realizable value. Inventory costs include the costs of material, contract manufacturing costs, variable overhead and an allocation of fixed manufacturing overhead, including depreciation based on normal production volumes. Net realizable value is the estimated selling price less applicable selling expenses.

(3)

EcoSynthetix Inc. Notes to Consolidated Financial Statements December 31, 2020 and December 31, 2019

(expressed in US dollars, unless otherwise noted)

Property, plant and equipment

Property, plant and equipment are stated at cost less accumulated depreciation and accumulated impairment losses. Cost includes expenditures that are directly attributable to the acquisition of the asset. Subsequent costs are included in the asset’s carrying amount or recognized as a separate asset, as appropriate, only when it is probable that future economic benefits associated with the item will flow to the Company and the cost can be measured reliably. The carrying amount of a replaced asset is derecognized when replaced. Repairs and maintenance costs are charged to the consolidated statements of operations and comprehensive loss during the year in which they are incurred.

Depreciation is calculated on a straight-line method to reduce the cost of the asset to its residual value over its estimated useful life. The depreciation period applicable to each category of property, plant and equipment is as follows:

Leasehold improvements remaining lease term Computer hardware 3 years Machinery and equipment 2 – 15 years

Useful lives and residual values are reviewed and adjusted, if appropriate, at the end of each reporting period.

An asset’s carrying amount is written down immediately to its recoverable amount if the asset’s carrying amount is greater than its estimated recoverable amount. Gains and losses on disposals of property, plant and equipment are determined by comparing the proceeds with the carrying amount of the asset and are included as part of other gains and losses in the consolidated statements of operations and comprehensive loss.

Leases

The Company assesses whether a contract is, or contains, a lease. A contract is, or contains, a lease if the contract conveys the right to control the use of an identified asset for a period in exchange for consideration. To assess whether a contract conveys the right to control the use of an identified asset, the Company assesses whether:

• the contract involves the use of an identified asset. This may be specified explicitly or implicitly and should be physically distinct or represent substantially all the capacity of a physically distinct asset. If the supplier has a substantive substitution right, then the asset is not identified; and

• the Company has the right to direct the use of the asset. The Company has the right when it has the decision-making rights that are most relevant to changing how and for what purpose the asset is used. In rare cases where the decision about how and for what purpose the asset is used is predetermined, the Company has the right to direct the use of the asset if either:

• the Company has the right to operate the asset; or

• the Company designed the asset in a way that predetermines how and for what purpose it will be used.

(4)

EcoSynthetix Inc. Notes to Consolidated Financial Statements December 31, 2020 and December 31, 2019

(expressed in US dollars, unless otherwise noted)

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 the commencement date, plus any initial direct costs incurred and an estimate of costs to dismantle and remove the underlying asset or to restore the underlying asset or the site on which it is located, less any lease incentives received. The right-of-use asset is subsequently depreciated using the straight-line method from the commencement date to the earlier of the end of the useful life or the end of the lease term. The estimated useful lives of right-of-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 the lease payments that are not paid at the commencement date, discounted using the interest implicit in the lease or, if that rate cannot be readily determined, the Company’s incremental borrowing rate. The Company uses its incremental borrowing rate as the discount rate. Lease payments include fixed payments, variable payments, amounts expected to be payable under a residual guarantee and payments under a purchase option, extension option and termination penalties if the Company is reasonably certain it will exercise those options or terminate the lease early.

The lease liability is measured at amortized cost using the effective interest method. It is remeasured when there is a change in future lease payments arising from a change in an index or rate, if there is a change in the Company’s estimate of the amount expected to be payable under a residual value guarantee, or if the Company changes its assessment of whether it will exercise a purchase, extension or termination option.

When the lease liability is remeasured in this way, a corresponding adjustment is made to the carrying amount of the right-of-use asset or is recorded in profit or loss if the carrying amount of the right-of-use asset has been reduced to zero.

Provisions

Provisions are recognized when the Company has a present legal or constructive obligation as a result of past events, it is more likely than not that an outflow of resources will be required to settle the obligation, and the amount can be reliably estimated. Provisions are measured at management’s best estimate of the expenditure required to settle the obligation at the end of the reporting period and are discounted to present value where the effect is material. The Company performs evaluations to identify onerous contracts and, where applicable, records provisions for such contracts.

Research and product development costs

Expenditures during the research phase are expensed as incurred. Expenditures during the development phase are expensed as incurred, unless it is probable that future economic benefits that are attributable to the asset will flow to the Company and the cost of the asset can be measured reliably. No development costs have been capitalized to date.

Government grants

Government grants include government funding for research and product development. Research and product development funding is recognized when there is reasonable assurance the Company has complied with the

(5)

EcoSynthetix Inc. Notes to Consolidated Financial Statements December 31, 2020 and December 31, 2019

(expressed in US dollars, unless otherwise noted)

conditions attached to the funding arrangement and is recognized as the applicable costs are incurred. Research and product development funding is presented as a reduction in research and product development expenses, unless it is for the reimbursement of an asset, in which case it is accounted for as a reduction in the carrying amount of the applicable asset. Government grants also include grants awarded for the purposes of providing immediate financial support to the Company as compensation for expenses or losses incurred. Upon qualification of a grant to provide immediate financial support, the awarded grant is recognized as a reduction in selling, general and administrative and or research and development expenditures.

Revenue recognition

Revenue is recognized when the Company has satisfied its performance obligation as set out in the contract with the customer, the contract has commercial substance and it is probable that the Company will collect the consideration it is entitled to on performance of its obligations in the contract.

These criteria are met when transfer of control of goods has occurred, which is generally on shipment or delivery of goods to the customer, where they have legal title to and possession of the goods, and are therefore able to use and obtain substantially all of the benefits of the goods.

Revenue is measured as the transaction price that is allocated to the performance obligation as stipulated in the contract with the customer. Historical experience is used to estimate and provide for discounts and returns. Costs to fulfill or obtain contracts are not directly attributable to specific contracts or are not recoverable and are expensed as incurred.

Cost of sales and gross profit

Gross profit is derived from net sales, less cost of sales. Cost of sales includes raw material costs, contract manufacturing costs, freight costs and depreciation related to manufacturing equipment. Raw materials consist of the costs of natural feedstock and process chemicals.

Share capital

Common shares are classified as equity. The Company has classified all outstanding exchangeable shares of its subsidiaries as issued and outstanding of the parent company.

Share-based compensation

• Long-term incentive program (LTIP)

The Company’s LTIP is a variable element of compensation that will allow executive officers and certain senior managers to be recognized and rewarded for their sustained contributions to the Company’s financial performance and growth. The Company’s long-term incentive program is composed of share options (SOs) and restricted share units (RSUs), each of which may be subject to performance and time based vesting conditions.

(6)

EcoSynthetix Inc. Notes to Consolidated Financial Statements December 31, 2020 and December 31, 2019

(expressed in US dollars, unless otherwise noted)

SOs provide a right, but not an obligation, to purchase common shares of the Company at a stated price for a given period of time, subject to time based vesting conditions. The issuance of SOs is governed by the 2011 plan, which allows for the grant of SOs to the Company’s employees, directors, senior officers and consultants with vesting of those SOs subject to the terms of the plan and the optionees’ continued employment with the Company. Each tranche of a SO award is considered a separate award with its own vesting period and is recorded at fair value on the date of grant. The fair value of each tranche is measured at the date of grant using the Black-Scholes option pricing model. Compensation expense is recognized over the tranche’s vesting period based on the number of awards expected to vest by increasing contributed surplus. The number of awards expected to vest is reviewed periodically with any impact being recognized in the consolidated statements of operations and comprehensive loss. Any contribution paid by an employee or director on the exercise of SOs is credited to common shares with any previously recognized compensation expense.

The restricted share unit plan (RSU Plan) provides that restricted share unit awards (the RSUs) may be granted by a committee that administers the RSU Plan to full-time employees, officers and eligible contractors of the Company or an affiliate in a calendar year as a bonus for services rendered to the Company as determined at the sole discretion of the Board. The number of RSUs awarded will be credited to the participants’ accounts effective on the grant date of the RSUs. Each RSU entitles the holder to receive common shares issued from the treasury of the Company. RSUs awarded cliff vest at the end of a three-year vesting period subject to continued employment with the Company. Compensation cost is calculated on a straight-line basis over the vesting period with a corresponding increase to contributed surplus. Forfeitures are estimated at the grant date and are revised to reflect a change in expected or actual forfeitures.

• SOs and RSUs with Performance Conditions

Upon recommendation of the Compensation Committee, the Board my impose both performance and time based vesting conditions on SOs and RSUs. SOs and RSUs that contain performance and time based vesting conditions vest at a rate of 33.33% per year following the date of grant subject to the achievement of certain performance conditions. The Board establishes a minimum level of performance below which no vesting will occur at the time of the grant. SOs and RSUs with performance and time based vesting conditions can only be settled in common shares issued from treasury. In the event that performance exceeds targeted performance conditions for a particular year, 33.33% of the SO or RSUs will vest in that year. The Board may, at its discretion at the time of grant or after, accelerate the vesting schedule to beyond one third of the grant in a year actual performance exceeds the LTIP target; however, in no event can the cumulative vesting exceed 100%. The Company has estimated the length of the expected vesting period at the grant date based on the most likely outcome of the performance conditions. The fair values of SOs and RSUs with performance and time based vesting conditions are recorded over the expected vesting period, subject to management’s estimate of the achievement of the performance conditions. The fair values of the SOs and RSUs are recognized as compensation expense over the vesting period with a corresponding increase to contributed surplus.

The Company has estimated the length of expected vesting period at the grant date based on the most likely outcome of the performance conditions. The Company will revise its estimate of the length of the vesting period, if necessary, if subsequent information indicates that the length of the vesting period differs

(7)

EcoSynthetix Inc. Notes to Consolidated Financial Statements December 31, 2020 and December 31, 2019

(expressed in US dollars, unless otherwise noted)

from previous estimates and any change to compensation cost will be recognized in the period in which the revised estimate is made with a corresponding change to contributed surplus. Forfeitures are estimated at the grant date and are revised to reflect a change in expected or actual forfeitures.

All SOs that contain performance and time based vesting conditions have an expiry between seven and ten years from the grant date. The exercise price is determined based on the average closing price of common shares on the Toronto Stock Exchange (TSX) five trading days immediately prior to the date as of which fair value is determined.

• Deferred Share Units (DSUs)

The deferred share unit plan (DSU Plan) provides for awards of DSUs to non-employee directors of the Company. Under the DSU Plan, non-executive directors may receive a grant of DSUs in satisfaction of their annual retainer. Each DSU is equivalent to one common share and vests on a quarterly vesting schedule, with 25% of each award vesting each consecutive quarter. DSUs must be retained until the director leaves the Board, at which time the DSUs will be settled through common shares. In the event dividends are declared and paid, additional DSUs would be credited to reflect dividends paid on common shares. The number of DSUs to be awarded is determined based on the average closing price of the common shares on the TSX five trading days immediately prior to the date fair value is determined.

The fair values of the DSUs are recognized as compensation expense over the vesting period with a corresponding increase to contributed surplus.

Income taxes

Income taxes comprise current and deferred income taxes. Income taxes are recognized in the consolidated statements of operations and comprehensive loss, except to the extent that they relate to items recognized directly in shareholders’ equity, in which case the income taxes are also recognized directly in shareholders’ equity.

Current income taxes are the expected income taxes payable on the taxable income for the year, using income tax rates enacted or substantively enacted, at the end of the reporting period, and any adjustment to income taxes payable in respect of previous years.

In general, deferred income taxes are recognized in respect of temporary differences arising between the income tax bases of assets and liabilities and their carrying amounts in the consolidated financial statements. Deferred income taxes are determined on a non-discounted basis using income tax rates and laws that have been enacted or substantively enacted at the consolidated balance sheet dates and are expected to apply when the deferred income tax asset or liability is settled. Deferred income tax assets are recognized to the extent that it is probable that the assets can be recovered.

Deferred income taxes are provided on temporary differences arising on investments in subsidiaries and associates, except, in the case of subsidiaries, where the timing of the reversal of the temporary difference is controlled by the Company and it is probable that the temporary difference will not reverse in the foreseeable future. Deferred income tax assets and liabilities are presented as non-current.

(8)

EcoSynthetix Inc. Notes to Consolidated Financial Statements December 31, 2020 and December 31, 2019

(expressed in US dollars, unless otherwise noted)

Loss per share

Basic loss per common share is calculated based on the weighted average number of common shares outstanding for the year. Diluted loss per common share is calculated using the weighted average number of common shares outstanding for the year for basic net loss per common share plus the weighted average number of potential dilutive common shares that would have been outstanding during the year had potentially all common shares been issued at the beginning of the year or when the underlying share options or warrants were granted, if later, unless they were anti-dilutive.

New and amended accounting standards adopted

During the year ended December 31, 2020, the Company adopted the below amended accounting standards under IFRS. The amended standards do not have any impact on the amounts recognized in prior and current periods and are not expected to significantly affect future periods.

• Definition of Material – Amendments to IAS 1 and IAS 8

• Definition of a Business – Amendments to IFRS 3

• Interest Rate Benchmark Reform – Amendments to IFRS 7, IFRS 9 and IAS 39

• Revised Conceptual Framework for Financial Reporting

3 COVID-19

The recent outbreak of the novel coronavirus (COVID-19 and its variants), which has been declared by the World Health Organization to be a “pandemic”, has spread across the globe and is impacting worldwide economic activity. The governments of many countries, states, cities and other geographic regions have taken preventative or protective actions, such as imposing restrictions on travel and business operations and temporary closures of businesses. In addition, numerous other businesses have temporarily closed voluntarily. Such actions are creating disruption in global supply chains, increasing rates of unemployment and adversely impacting many industries.

During the year ended December 31, 2020, the impact of COVID-19 has caused both the global demand for paper products to decrease and a decrease in the pricing of petroleum-related products with which the Company’s products compete. This has resulted in reduced sales volume, lower pricing and reduced gross profit for the Company. COVID-19 has also caused a decline in interest rates reducing interest income earned on cash and short-term investments. During the year ended December 31, 2020 the Company applied for and received government assistance under the Canadian Emergency Wage Subsidy (CEWS) program and the Canadian Emergency Rent Subsidy (CERS) program. There are no other direct impacts on the operating results of the Company or the consolidated financial statements. Given the dynamic nature of this outbreak, the extent to which the COVID-19 virus impacts the Company’s operational results and financial performance will depend on future developments, which remain highly uncertain and cannot be accurately predicted at this time, including the duration, scope and severity of the pandemic, the actions taken to contain or mitigate its impact, and the direct and indirect economic effects of the pandemic and related containment measures, among others.

(9)

EcoSynthetix Inc. Notes to Consolidated Financial Statements December 31, 2020 and December 31, 2019

(expressed in US dollars, unless otherwise noted)

COVID-19 and impairment of property, plant and equipment

During the year ended December 31, 2020, the Company assessed that an indicator of impairment was present due to the adverse change in the economic conditions in the market in which the Company operates. The indicator is related to the COVID-19 pandemic, which has caused the global demand for paper products to decrease and has caused a decrease in the pricing of petroleum related products, which resulted in a higher than anticipated loss from operations.

The Company performed an impairment test and determined that the recoverable amount of its CGU was higher than the carrying amount and has not recognized an impairment loss during the period. The recoverable amount was calculated as the fair value less cost to sell (FVLCS) of the Company whereby the recoverable amount of each asset and liability of the Company was determined. The Company is considered to be one CGU consistent with the accounting policy described in note 2. As part of the Company’s assessment of the FVLCS of the CGU, the Company used an independent third party appraiser to determine the fair value of machinery and equipment, which represents the majority of property, plant and equipment. The appraiser used the market approach in determining the recoverable amount of the machinery and equipment whereby recent market data pertaining to the individual assets, or comparable assets, was used. Market data includes recent sales or listings of the assets, or comparable assets, within the last 12 months from new and used dealers. The appraisal further considered market usage for same or comparable assets in other industries as well as disposal costs. All other assets and liabilities were assessed using Level 1 and Level 2 fair value inputs. Level 1 are fair value measurements derived from quoted prices (unadjusted) in active markets for identical financial instruments and Level 2 are fair value measurements derived from inputs other than quoted prices included in Level 1 that are observable for the financial instrument or asset either directly (i.e., as prices) or indirectly (i.e., derived from prices).

4 Risk management and financial instruments

The Company has classified its financial instruments into one of the following categories: amortized cost, FVOCI and FVPL.

The Company’s financial instruments were classified as follows at December 31, 2020:

Cash Short-term investments Accounts receivable Government grants receivable Trade accounts payable and accrued liabilities Lease liability	Amortized cost 16,637,161 25,344,575 1,794,594 122,218 (1,179,097) (1,072,287)	FVOCI - - - - - -	FVPL - - - - - -	Total 16,637,161 25,344,575 1,794,594 122,218 (1,179,097) (1,072,287)
	41,647,164	-	-	41,647,164

The Company’s financial instruments were classified as follows at December 31, 2019:

(10)

EcoSynthetix Inc. Notes to Consolidated Financial Statements December 31, 2020 and December 31, 2019

(expressed in US dollars, unless otherwise noted)

Cash Short-term investments Accounts receivable Government grants receivable Trade accounts payable and accrued liabilities Lease liability	Amortized Cost 7,975,713 35,720,548 1,824,581 114,956 (1,360,568) (1,176,643)	FVOCI - - - - - -	FVPL - - - - - -	Total 7,975,713 35,720,548 1,824,581 114,956 (1,360,568) (1,176,643)
	43,098,587	-	-	43,098,587

The carrying amount of financial assets and financial liabilities at amortized cost approximates their fair values.

Liquidity risk

Liquidity risk is the risk the Company will encounter difficulty in meeting its financial obligations associated with financial liabilities that are settled by delivering cash or another financial asset. The Company is exposed to liquidity risk as it continues to have net cash outflows. The Company’s approach to managing liquidity risk is to ensure it will have sufficient liquidity to meet liabilities when due. The Company achieves this by maintaining sufficient cash. The Company monitors its financial position on a monthly basis and updates its expected use of cash resources based on the latest available data. The Company’s trade accounts payable and accrued liabilities will be paid within the next 12 months.

Credit risk

Credit risk arises from the potential that a counterparty will fail to perform its obligations. The Company is exposed to credit risk from customers. As at December 31, 2020, the Company’s three largest customers accounted for 64% (2019 – two customers at 56%) of trade accounts receivable. In order to minimize the risk of loss for accounts receivable, the Company’s extension of credit to customers involves a review and approval by senior management. The majority of the Company’s sales are invoiced with payment terms up to 60 days. The Company’s objective is to minimize its exposure to credit risk from customers in order to prevent losses on financial assets by performing regular monitoring of overdue balances and to provide an ACL.

The Company’s trade accounts receivable have a carrying amount of $1,532,603 at December 31, 2020 (2019 – $1,610,427), representing the maximum exposure to credit risk of those financial assets, exclusive of the ACL. The Company’s exposure to credit risk for trade accounts receivable by geographic area at December 31 was as follows:

Americas EMEA Asia Pacific	2020 % 2019 % 39 44 20 12 41 44
	100 100

(11)

EcoSynthetix Inc. Notes to Consolidated Financial Statements December 31, 2020 and December 31, 2019

(expressed in US dollars, unless otherwise noted)

The Company may also have credit risk relating to cash, which it manages by dealing with large chartered banks. The Company’s objective is to minimize its exposure to credit risk in order to prevent losses on financial assets by placing its investments in lower risk deposits of these chartered banks. The Company’s cash carrying amount is $16,637,161 as at December 31, 2020 (2019 – $7,975,713), representing the maximum exposure to credit risk of these financial assets. Approximately 96% (2019 – 93%) of the Company’s cash at December 31, 2020 was held with one financial institution. The Company’s exposure to credit risk relating to cash segmented by geographic area at December 31 was as follows:

Canada United States of America The Netherlands	2020 % 2019 % 96.3 93.1 2.2 4.3 1.5 2.6
	100.0 100.0

The Company may also have credit risk relating to short-term investments, which it manages by dealing with a large chartered Canadian bank which has a credit rating of A or higher on it’s long-term deposits and shortterm debt per the S&P and whose deposits are insurded by the Canada Deposit Insurance Corporation. The Company’s short-term investment carrying amount is $25,344,575 as at December 31, 2020 (2019 – $35,720,548), representing the maximum exposure to credit risk of these financial assets.

Foreign currency risk

Foreign currency risk arises because of fluctuations in foreign currency exchange rates. The Company conducts a portion of its business activities in currencies other than the functional currency of the parent company (US dollars). This primarily includes Canadian dollar and euro denominated transactions. The Company’s objective in managing its foreign currency risk is to minimize its net exposure to foreign currency cash flows by converting foreign denominated financial assets into US dollars to the extent practical to match the obligations of its financial liabilities. Financial assets and financial liabilities denominated in foreign currencies will be affected by changes in the exchange rate between the functional currency and these foreign currencies. This primarily includes cash, accounts receivable, government grants receivable, trade accounts payable and accrued liabilities and lease liability, which are denominated in foreign currencies. The Company realized foreign currency exchange losses in the year ended December 31, 2020 of $55,965 (2019 –$60,171). The Company has unrealized foreign exchange gains in the year ended December 31, 2020 of $48,333 (2019 – $29,626).

If a shift in the Canadian dollar relative to the US dollar of 10% were to occur, the foreign currency exchange gain or loss on the net financial asset or liability would be $7,650 (2019 – $36,779) and this amount would be recorded in the consolidated statements of operations and comprehensive loss.

If a shift in the euro relative to the US dollar of 10% were to occur, the exchange gain or loss on the net financial asset or liability would be $29,101 (2019 – $30,431).

(12)

EcoSynthetix Inc. Notes to Consolidated Financial Statements December 31, 2020 and December 31, 2019

(expressed in US dollars, unless otherwise noted)

Interest rate risk

Interest rate risk arises because of the fluctuation in market interest rates. The Company’s objective in managing interest rate risk is to maximize the return on its cash. The Company is subject to interest rate risk on its cash. If a shift in interest rates of 10% were to occur, the impact on the consolidated statements of operations and comprehensive loss for the year would be a nominal gain or loss (2019 – $14,402). The Company is not subject to interest rate risk on its fixed rate short-term investments.

5 Capital management

The Company’s objective in managing capital is to ensure sufficient liquidity to pursue its growth strategy and fund research and product development, while at the same time taking a conservative approach toward financial leverage and management of financial risk. The Company’s capital is composed of total shareholders’ equity. The total capital at December 31, 2020 is $49,471,991 (2019 – $52,172,892). The Company’s primary uses of capital are financing operations, non-cash working capital and capital expenditures. The Company currently funds these requirements from existing cash resources. The Company’s objectives when managing capital are to ensure the Company will continue to have enough liquidity so that it can provide its products and services to its customers and returns to its shareholders. The Company monitors its capital on the basis of the adequacy of its cash resources to fund its business plan. In order to maximize the capacity to finance the Company’s ongoing growth, the Company does not currently pay a dividend to holders of its common shares.

6 Short-term investments

During the year ended December 31, 2020, the Company purchased $65,000,000 of short-term investment certificates maturing between July 2020 and January 2021 at annual interest rates between 0.12% and 2.35%. All short-term investments are held with one large chartered Canadian bank. The carrying value of the shortterm investments includes accrued interest and is recorded at amortized cost using the effective interest method.

During the year ended December 31, 2019, the Company purchased $35,000,000 of short-term investment certificates maturing in January 2020 at an annual interest rate between 2.8% and 3%. All short-term investments are held with one large chartered Canadian bank. The carrying value of the short-term investments includes accrued interest and is recorded at amortized cost using the effective interest method.

Short-term investment certificates Term deposits	2020 2019 15,322,520 25,671,233 10,022,055 10,049,315
	25,344,575 35,720,548

(13)

EcoSynthetix Inc. Notes to Consolidated Financial Statements December 31, 2020 and December 31, 2019

(expressed in US dollars, unless otherwise noted)

7 Accounts receivable

	2020	2019
Trade accounts receivable	1,532,603	1,610,427
Commodity taxes receivable and other	261,991	214,154
	1,794,594	1,824,581
The aging of trade accounts receivable at each reporting date was as follows:
	2020	2019
Current	1,462,768	1,454,186
Past due 1–30 days	69,835	156,241
Past due 31–60 days	-	-
Past due 61–90 days	-	-
Past due greater than 91 days	-	-
	1,532,603	1,610,427

Included in commodity taxes receivable and other is a receivable of $155,011 relating to the exercise of common share options by key management personnel. The share options were exercised on December 31, 2020 and the balance was fully settled on January 4th, 2021.

8 Inventory

Raw materials Finished goods	2020 2019 457,054 321,702 1,677,335 1,947,259
	2,134,389 2,268,961

The Company has a recorded provision of $18,871 (2019 – $14,222) against finished goods and raw materials inventory.

Inventories recognized as an expense during the year amounted to $9,090,803 (2019 – $11,699,058).

9 Government grants

The Company has a funding agreement of up to CA$2,072,207 with Bioindustrial Innovation Canada, which is funded by the Federal Government. The investment was provided to develop new green resins for adhesive binders in wood products and covers reimbursement of eligible expenditures from April 2018 to April 2023. The investment is non-repayable unless the Company defaults on conditions contained in the funding agreement. The Company has met the conditions of the investment in fiscal 2020 and 2019 and has accordingly recognized $139,254 (2019 – $154,076) in its operating results. During the year ended December 31, 2019, the Company collected cash of $240,034 (2019 – $183,732) relating to claims under the investment.

(14)

EcoSynthetix Inc. Notes to Consolidated Financial Statements December 31, 2020 and December 31, 2019

(expressed in US dollars, unless otherwise noted)

During the year ended December 31, 2020, the Company recognized claims under the CEWS program in the amount of $415,560, of which $318,629 is included as a reduction in selling, general and administrative expenses and $96,931 as a reduction in research and development expenses. The subsidy is provided by the Government of Canada and is a non-repayable wage subsidy on eligible remuneration paid, with subsidy rates varying depending on the amount of revenue decline during the period.

During the year December 31, 2020, the Company recognized claims under the CERS program in the amount of $35,375, of which $5,306 is included as a reduction in selling, general and administrative expenses and $30,069 as a reduction in research and development expenses. The subsidy is provided by the Government of Canada and is a non-repayable subsidy on commercial rent payments, with subsidy rates varying depending on the amount of revenue decline during the period.

10 Property, plant and equipment

The composition of the net carrying amount of the Company’s property, plant and equipment is presented in the following table:

Cost January 1, 2019 Additions IFRS 16 implementation December 31, 2019 Additions Disposals December 31, 2020 Accumulated depreciation January 1, 2019 Depreciation expense December 31, 2019 Depreciation expense Disposals December 31, 2020 Net carrying amount December 31, 2019 December 31, 2020	Machinery and equipment 15,845,199 379,485 -	Leasehold improvements Right-of use asset 828,005 - - - - 1,561,149	Computer hardware Total 90,091 16,763,295 - 379,485 - 1,561,149
	16,224,684 248,146 (394,402)	828,005 1,561,149 - 100,610 - -	90,091 18,703,929 - 348,756 - (394,402)
	16,078,428	828,005 1,661,759	90,091 18,658,283
	(9,688,632) (1,145,458)	(828,005) - - (222,372)	(71,760) (10,588,397) (18,331) (1,386,161)
	(10,834,090) (1,216,991) 394,402	(828,005) (222,372) - (240,331) - -	(90,091) (11,974,558) - (1,457,322) - 394,402
	(11,656,679)	(828,005) (462,703)	(90,091) (13,037,478)
	5,390,594	- 1,338,777	- 6,729,371
	4,421,749	- 1,199,056	- 5,620,805

The Company invested $248,146 (2019 – $379,485) in capital asset additions for the year ended December 31, 2020. The additions primarily relate to machinery and equipment for production. There were $nil capital asset additions included in trade accounts payable and accrued liabilities as at December 31, 2020 (2019 – $nil).

(15)

EcoSynthetix Inc. Notes to Consolidated Financial Statements December 31, 2020 and December 31, 2019

(expressed in US dollars, unless otherwise noted)

During the year ended December 31, 2020, a change in lease rates on the Company’s existing right-of-use-asset caused a change in contractual cash outflows over the remaining term of the lease. The change resulted in an increase in the right-of-use asset and corresponding lease liability of $100,610.

During the year ended December 31, 2020, depreciation expense of $813,713 (2019 – $769,672) has been charged to cost of goods sold, $625,791 (2019 – $611,389) has been charged to research and development, and depreciation expense of $17,818 was capitalized into inventory (2019 – capitalized into inventory $5,100).

11 Trade accounts payable and accrued liabilities

Trade accounts payable Short-term lease liability Accrued liabilities	2020 2019 560,329 536,023 238,707 200,769 380,061 623,776
	1,179,097 1,360,568

12 Lease liability

The Company has one right-of-use asset under property, plant and equipment and corresponding lease liability for the lease associated with the Company’s corporate headquarters located in the Centre of Innovation in Burlington, Ontario. The lease liability is measured at amortized cost by discounting the lease payments over the remaining term of the lease at the Company’s incremental borrowing rate of 6.2%.

Lease liability Short-term Long-term	2020 2019 238,707 200,769 1,072,287 1,176,643
	1,310,994 1,377,412

During the year ended December 31, 2020, total cash payments of $268,344 (2019 – $269,600) were made on the lease liability. Cash payments include interest expense of $75,355 (2019 – $82,173) that is recognized in net interest income on the consolidated statements of operations and comprehensive loss and principal payments of $192,989 (2019 – $187,427).

13 Key management compensation

Key management personnel includes those individuals having authority and responsibility for planning, directing and controlling the activities of the Company directly or indirectly. Key management personnel includes the directors, chief executive officer, chief financial officer and other key members of the executive

(16)

EcoSynthetix Inc. Notes to Consolidated Financial Statements December 31, 2020 and December 31, 2019

(expressed in US dollars, unless otherwise noted)

team. The compensation paid or payable to key management personnel for employee services is shown below:

Salaries and other short-term employee benefits Share-based payments	2020 2019 1,223,305 1,240,492 737,446 712,039
	1,960,751 1,952,531

14 Share-based compensation

At December 31, 2020, the Company had outstanding SOs to purchase 4,202,439 common shares of the Company. The SOs expire at various dates through March 3, 2027.

Outstanding–December 31, 2018 Share options granted Share options forfeitures Share options exercised Outstanding–December 31, 2019 Share options granted Share options forfeitures Share options exercised Outstanding–December 31, 2020	Number of share options outstanding Weighted average exercise price (CA$) 4,435,493 1.72 858,826 2.21 (277,836) 2.16 (235,839) 1.23 4,780,644 1.80 36,000 2.46 (50,899) 6.16 (563,306) 2.05 4,202,439 1.72

The weighted average contractual life of the outstanding SOs at December 31, 2020 is 2.82 years (2019 – 3.46 years). The total number of SOs exercisable at December 31, 2020 is 3,710,602 (2019 – 3,924,227), which have a weighted average exercise price of CA$1.64 (2019 – CA$1.71) per share.

(17)

EcoSynthetix Inc. Notes to Consolidated Financial Statements December 31, 2020 and December 31, 2019

(expressed in US dollars, unless otherwise noted)

Range of exercise prices $0.01–$0.50 $0.51–$1.00 $1.00–$1.50 $1.50–$2.00 $2.00–$2.50 $2.50–$3.00 $3.00–$3.50 $3.50–$4.00 $4.00–$4.50 $4.50–$5.00 $5.00–$5.50 $5.50–$6.00 $6.00–$6.50 $6.50–$7.00 $7.00–$7.50	Number of share options outstanding
	2020 2019 - - - - 2,343,317 2,547,159 723,085 723,085 642,164 633,981 334,924 667,924 142,449 157,348 - - - - - - 16,500 17,500 - - - - - - - 33,647
	4,202,439 4,780,644

For the years ended December 31, the Company determined the fair values of SOs using the Black-Scholes option pricing model with the following assumptions for SO grants:

	2020	2019
Expected dividend yield	-%	-%
Risk-free interest rate	0.66%	1.67% to 1.76%
Expected share option life (in years)	6	5 to 6
Volatility	51.5%	49% to 55%

The aggregate fair value of SOs granted during the year is CA$42,840 (2019 – CA$899,010). The weighted average fair value of the SOs is CA$1.19 (2019 – CA$0.86) per share. During the fiscal year ended December 31, 2020, the Company recognized a share-based compensation expense of $338,200 (2019 –$387,856) related to SOs with a corresponding increase in contributed surplus.

For the year ended December 31, 2020, expected volatility is based on a review of historical volatilities for the Company.

The expected SO life is based on the employees’ historical exercise behaviour.

The risk-free interest rate used for each grant is equal to the Canadian treasury bill rates in effect at the date of grant for instruments with a term similar to the expected life of the related SO.

a) Share options (SOs)

As at December 31, 2020, SOs to acquire an aggregate 4,202,439 (2019 – 4,780,644) common shares were outstanding. During the current fiscal year, the Company issued 36,000 (2019 – 858,826) SOs and

(18)

EcoSynthetix Inc. Notes to Consolidated Financial Statements December 31, 2020 and December 31, 2019

(expressed in US dollars, unless otherwise noted)

563,306 (2019 – 235,839) common shares were issued pursuant to the exercise of SOs. As of December 31, 2020, 3,710,602 (2019 – 3,924,227) SOs are fully vested and the remaining 491,837 (2019 – 856,417) have time based vesting conditions. For the year ended December 31, 2020, the Company recognized sharebased compensation expense of $338,200 (2019 – $387,856) relating to SOs.

b) Restricted share units (RSUs)

As at December 31, 2020, RSUs to acquire an aggregate 583,019 (2019 – 702,998) common shares were outstanding. 348,019 (2019 – 401,332) of the RSUs contain performance based and time based vesting criteria and 235,000 (2019 – 301,666) have time based vesting conditions. During the current fiscal year, the Company did not issue any RSUs (2019 – 256,393), 53,313 (2019 – 18,994) RSUs expired and 66,666 RSUs (2019 – 124,234) were converted into common shares. For the year ended December 31, 2020, the Company recognized share-based compensation expense of $203,846 (2019 – $151,706) related to RSUs.

c) Deferred share units (DSUs)

As at December 31, 2020, DSUs to acquire an aggregate 724,127 (2019 – 545,752) common shares were outstanding. During the fiscal year ended December 31, 2020, 178,375 DSUs (2019 – 128,458) were issued to non-employee Directors of the Company. During the fiscal year ended December 31, 2020, the Company recognized share-based compensation expense of $241,776 (2019 – $245,061) related to DSUs with a corresponding increase in contributed surplus.

15 Common shares

The authorized share capital of the Company consists of an unlimited number of common shares.

Balance–December 31, 2018 Common share options exercised Restricted share units converted Common shares repurchased Balance–December 31, 2019 Common share options exercised Restricted share units converted Common shares repurchased Balance–December 31, 2020	Number of common shares Share capital 58,252,736 491,618,125 235,839 327,661 124,234 119,927 (710,368) (1,475,307)
	57,902,441 490,590,406 563,306 1,514,052 66,666 112,681 (1,392,000) (1,957,216)
	57,140,413 490,259,923

Share exchange

During the year ended December 31, 2019, the Company held a normal course issuer bid (the Bid) to repurchase a certain number of its outstanding common shares through the facilities of the TSX. The Company repurchased and cancelled 1,392,000 (2019 – 710,368) common shares for total consideration of $1,957,216 (2019 – $1,475,307).

(19)

EcoSynthetix Inc. Notes to Consolidated Financial Statements December 31, 2020 and December 31, 2019

(expressed in US dollars, unless otherwise noted)

16 Income taxes

The difference between income tax expense and the income taxes as computed based on the statutory rate is as follows:

Net loss before income taxes Income tax benefit at statutory rate Cost (benefit) resulting from Research and development credit Deferred income tax assets expired Change in tax rate Deferred income tax assets not recognized and other	2020 2019 (2,402,094) (1,454,058)
	(636,555) (385,325) (48,758) (65,213) 11,664 10,264 - 269,862 673,649 170,412
	- -

The reduction of the corporation tax rate in the Netherlands from 19% in 2019 to 15% in 2021, on income under €200,000, and 25% in 2019 to 21.7% in 2021, on income greater than €200,000, was substantively enacted on September 17, 2019 and will be effective from January 1, 2021. As a result, the relevant deferred tax balances in the Netherlands were remeasured for the year ended December 31, 2019. The impact of the change in tax rate in the Netherlands is a reduction in tax assets of $269,862.

Estimated temporary differences in the timing of recognition of expenses for accounting and income tax purposes at December 31 result in deferred income taxes as follows:

Estimated deferred income tax assets attributable to Net operating loss carry-forwards Research and development credits Other deferred income tax assets Deferred income tax assets Deferred income tax assets not recognized and other Net deferred income tax assets	2020 2019 24,120,518 24,282,819 3,064,763 2,971,913 3,327,948 3,075,988
	30,513,229 30,330,720 (30,513,229) (30,330,720)
	- -

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EcoSynthetix Inc. Notes to Consolidated Financial Statements December 31, 2020 and December 31, 2019

(expressed in US dollars, unless otherwise noted)

The estimated net operating loss carry-forwards and estimated research and development credits expire as follows:

2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 2034 2035 2036 2037 2038 2039 2040	United States of America Net operating loss carry- forwards Research and development credits 2,564,511 55,822 1,338,594 52,731 1,321,285 44,965 1,532,264 46,333 1,629,456 47,245 1,562,856 41,905 2,011,361 35,351 2,717,038 69,118 2,854,334 63,226 1,207,399 96,302 3,927,982 - 1,127,104 - 10,855,248 - 1,333,972 - 1,058,892 - 1,275,377 - - - - - - - - -	United States of America Net operating loss carry- forwards Research and development credits 2,564,511 55,822 1,338,594 52,731 1,321,285 44,965 1,532,264 46,333 1,629,456 47,245 1,562,856 41,905 2,011,361 35,351 2,717,038 69,118 2,854,334 63,226 1,207,399 96,302 3,927,982 - 1,127,104 - 10,855,248 - 1,333,972 - 1,058,892 - 1,275,377 - - - - - - - - -	Canada and the Netherlands		Canada
	Net operating loss carry- forwards 2,564,511 1,338,594 1,321,285 1,532,264 1,629,456 1,562,856 2,011,361 2,717,038 2,854,334 1,207,399 3,927,982 1,127,104 10,855,248 1,333,972 1,058,892 1,275,377 - - - -		Net operating loss carry- forwards 1,203,373 392,136 2,210,845 496,031 253,729 873,038 24,889 2,352 - - 18 3,103,445 7,676,921 11,423,888 17,519,362 6,845,257 - 7,696,210 2,398,337 -		Research and development credits - - - - - - - - - 42,638 342,128 540,116 632,163 552,637 366,094 192,380 209,886 96,331 93,811 59,094
	38,317,673	552,998	62,119,831		3,127,278

17 Commitments

During the normal course of operations, the Company may enter into feedstock contracts to secure raw material availability over a 12-month period based on market pricing at the time of purchase. At December 31, 2020, the Company was committed to purchases of feedstock of approximately $2,051,242. In addition to feedstock, over the next 12 months, the Company is also committed to purchasing $541,558 of other raw material and production related costs through the normal course of operations as well as $91,670 of property, plant and equipment relating to production. There are no other commitments beyond the next 12-month period.

18 Segmented information and enterprise wide disclosures

Operating segments

The Company operates in one operating segment and generates revenue primarily from its biopolymer nanosphere technology platform. The operating segment is reported in a manner consistent with the internal

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EcoSynthetix Inc. Notes to Consolidated Financial Statements December 31, 2020 and December 31, 2019

(expressed in US dollars, unless otherwise noted)

reporting provided to the chief operating decision-maker (CODM). The chief executive officer has authority for resource allocation and assessment of the Company’s performance and is, therefore, the CODM.

Sales by geographic location

Revenue is recognized when the transfer of control of goods has occurred, which is generally on shipment or delivery of goods to the customer.

The Company is domiciled in Canada. During the year ended December 31, 2020, revenue from external customers located in Canada was $2,502,013 (2019 – $3,183,517). The total revenue from external customers in the following regions is as follows:

Americas EMEA Asia Pacific	2020 2019 6,961,956 9,349,936 3,081,508 4,135,353 3,619,247 4,961,633
	13,662,711 18,446,922

The revenue has been assigned to each jurisdiction, based on the location of the customer. In situations where a sale is made through a reseller, revenue associated with that sale is attributed to the geographic region of the end customer. During the year ended December 31, 2020, revenue attributable to individual countries representing greater than 10% of total revenues included United States, Japan, Canada and Germany, which represented 26%, 25%, 18% and 15%, respectively.

During the year ended December 31, 2019, revenue attributable to individual countries representing greater than 10% of total revenues included United States, Japan, Canada and Germany, which represented 27%, 26%, 17% and 14%, respectively.

Sales to major customers

The Company derives a significant portion of its revenues from certain customers. Three customers represented 25%, 18% and 12%, respectively, of total revenue for the year ended December 31, 2020 (2019 – three customers represented 26%, 17% and 16%, respectively). The concentrations listed do not necessarily apply to the same customer year over year.

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EcoSynthetix Inc. Notes to Consolidated Financial Statements December 31, 2020 and December 31, 2019

(expressed in US dollars, unless otherwise noted)

Property, plant and equipment

The Company’s property, plant and equipment, reported at their net carrying amount, are located in the following countries:

Canada United States of America The Netherlands	2020 2019 1,846,820 2,326,050 1,792,891 2,129,048 1,981,094 2,274,273
	5,620,805 6,729,371

19 Expenses by nature

Additional information on the nature of amounts included in cost of sales, selling, general and administrative and research and development is as follows:

	2020	2019
Wages and salaries, including benefits	3,044,264	3,092,295
Share-based compensation	783,822	784,623
Government grants	(590,190)	(154,076)
Depreciation	1,439,504	1,381,061
Foreign exchange loss (gain)	7,632	(89,797)

Foreign exchange gains and losses represent the revaluation of monetary assets and liabilities denominated in foreign currencies. The change in foreign exchange revaluation gains and losses is primarily due to foreign exchange rate fluctuations between the US dollar (the Company’s functional currency) and foreign currencies and the related impact on the net monetary position in those respective currencies. The foreign exchange loss for the year ended December 31, 2020 primarily relates to monetary assets and liabilities denominated in Canadian dollars.

20 Loss per share

Basic loss per share is calculated by dividing the profit attributable to equity holders of the Company by the weighted average number of common shares in issue during the year.

Diluted loss per share is equivalent to basic loss per share, as the consideration of potentially dilutive securities would be anti-dilutive.

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