Nexe Innovations Inc. — Audit Report / Information 2021

Sep 30, 2021

To the Shareholders of NEXE Innovations Inc.:

Opinion

We have audited the consolidated financial statements of NEXE Innovations Inc. and its subsidiaries (the "Company"), which comprise the consolidated statements of financial position as at May 31, 2021 and May 31, 2020, and the consolidated statements of loss, other comprehensive loss, changes in equity and cash flows for the years then ended, and notes to the consolidated financial statements, including a summary of significant accounting policies.

In our opinion, the accompanying consolidated financial statements present fairly, in all material respects, the consolidated financial position of the Company as at May 31, 2021 and May 31, 2020, and its consolidated financial performance and its consolidated cash flows for the years then ended in accordance with International Financial Reporting Standards.

Basis for Opinion

We conducted our audits 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 are independent of the Company in accordance with the ethical requirements that are relevant to our audits of the consolidated 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.

Other Information

Management is responsible for the other information. The other information comprises 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 audits of the consolidated financial statements, our responsibility is to read the other information and, in doing so, consider whether the other information is materially inconsistent with the consolidated financial statements or our knowledge obtained in the audits or otherwise appears to be materially misstated. We obtained Management's Discussion and Analysis prior to the date of this auditor's 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. 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 International Financial Reporting Standards, 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.

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.

We communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audits and significant audit findings, including any significant deficiencies in internal control that we identify during our audits.

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.

The engagement partner on the audit resulting in this independent auditor's report is Ronald D. Miller.

Vancouver, British Columbia

September 29, 2021 Chartered Professional Accountants

Consolidated Statements of Financial Position

For the Year Ended May 31, 2021 (Expressed in Canadian Dollars)

	Note	May 31, 2021	May 31, 2020
ASSETS
Current Assets
Cash and cash equivalents		\$ 50,526,731 \$	3,311,463
Term deposits	4	40,000	14,000
Trade and other receivables		603,385	274,718
Due from related parties	13	-	32
Prepaid expenses, deposits, and supplies	5	2,199,738	931
Total current assets		\$ 53,369,854 \$	3,601,144
Non-current assets
Prepaid expenses		133,492	761,260
Plant and equipment	6	\$ 3,442,123 \$	2,585,563
Right-of-use assets	7	651,151	-
Intangible assets	8	78,980	1,694,740
Total non-current assets		\$ 4,305,746 \$	5,041,563
Total assets		\$ 57,675,600	\$ 8,642,707
LIABILITIES
Current Liabilities
Trade and other payables		\$ 1,516,954 \$	664,793
Bank overdraft		804,611	-
Deferred Government grant liability		1,000,000	-
Due to related parties	13	18,586	15,074
Current portion of lease liability	7	27,929	-
Current portion of Government loan payable	9	\$ 500,004	\$ 208,335
Total current liabilities		\$ 3,868,084	\$ 888,202
Non-current liabilities
Lease liability	7	514,719	-
Government loan payable	9	956,224	1,254,214
Total non-current liabilities		1,470,943	1,254,214
Total liabilities		5,339,027	2,142,416
Shareholder's equity
Share capital	11	\$ 66,677,433	\$ 11,141,565
Share option reserve	12	819,819	836,639
Contributed surplus	12	7,907,900	411,678
Deficit		(23,068,579)	(5,889,591)
Total equity		\$ 52,336,573	\$ 6,500,291
Total liabilities and shareholders' equity		\$ 57,675,600	\$ 8,642,707

Nature of operations (note 1)

Approved and authorized for issue by the Board of Directors on September 29, 2021:

"Darren Footz"	"Killian Ruby"
Director	Director

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

Consolidated Statements of Loss and Other Comprehensive Loss For the Year Ended May 31, 2021 (Expressed in Canadian Dollars)

	Note	May 31, 2021	May 31, 2020
Operating expenses
Administrative	\$	835,869	\$ 252,282
Advertising and media		492,314	45,883
Advisory fees		153,376	40,000
Consulting fees		1,858,458	51,856
Depreciation	6	253,331	234,860
Digital advertising and marketing		1,560,691	13,980
Interest	9	289,601	192,704
Management fees	13	775,824	184,000
Market and investor relations		1,571,779	82,013
Professional fees		666,961	234,159
Research and development		666,725	46,839
Salaries and benefits	13	718,756	121,349
Share-based compensation	12	660,645	332,103
Transfer agent and filing fees		70,013	-
Travel and promotion		90,163	73,740
Warrant-based compensation		1,715,475	-
Total operating expenses	\$	12,379,981	\$ 1,905,768
Operating loss before other items	\$	12,379,981	\$ 1,905,768
Other items
Foreign exchange (gain)	\$	(8,232)	\$ -
Grants		-	(8,898)
Impairment – intangibles	8	1,615,760	-
Impairment – plant and equipment	6	505,432	-
Interest and other income		(13,202)	(42,406)
Listing expense	3	2,614,701	-
	\$	4,714,459	\$ (51,304)
Loss before discontinued operations	\$	17,094,440	\$ 1,854,464
Loss from discontinued operations	\$	84,548 \$	333,139
Loss and other comprehensive loss	\$	17,178,988	\$ 2,187,603
Basic and diluted loss per share	\$	0.37 \$	0.12
Weighted average shares outstanding		46,496,414	18,182,004

(The accompanying notes are an integral part to these consolidated financial statements)

Consolidated Statements of Changes in Shareholders' Equity For the Year Ended May 31, 2021 (Expressed in Canadian Dollars)

	Number of Common Shares	Common Share Capital	Number of Preferred Shares	Preferred Share Capital	Share Option Reserve	Contributed Surplus	Accumulated Deficit	Total Equity
Balance – May 31, 2019	18,182,004	\$ 23,715	16,000,044	\$ 7,757,708	\$ 504,536	\$ (516,699)	\$ (3,701,988)	\$ 4,067,272
Share issued for private placement, net of costs	-	-	6,791,207	3,360,142	-	928,377	-	4,288,519
Share-based compensation	-	-	-	-	332,103	-	-	332,103
Net loss for the year ended May 31, 2020	-	-	-	-	-	-	(2,187,603)	(2,187,603)
Balance – May 31, 2020	18,182,004	\$ 23,715	22,791,251	\$ 11,117,850	\$ 836,639	\$ 411,678	\$ (5,889,591)	\$ 6,500,291
Shares issued from financings, net of cost	35,175,703	\$ 36,233,603	980,227	\$ 591,557	\$ -	\$ 9,162,090	\$ -	\$ 45,987,250
Shares issued as fees from financings	93,750	75,000	-	-	-	-	-	75,000
Shares issued on conversion of preferred shares	25,855,396	12,116,542	(24,397,839)	(12,116,542)	-	-	-	-
Shares issued on exercise of warrants	12,027,420	15,327,018	-	-	-	(4,736,876)	-	10,590,142
Shares issued to former Whatcom shareholders on RTO	4,000,000	3,200,000	-	-	-	-	-	3,200,000
Shares issued for services	-	-	626,361	407,135	-	-	-	407,135
Shares issued on exercise of options	1,294,401	1,057,087	-	-	(651,964)	-	-	405,123
Share-based compensation	-	-	-	-	635,144	-	-	635,144
Fair value of underwriter warrants issued	-	(1,355,532)	-	-	-	1,355,532	-	-
Fair value of performance warrants issued	-	-	-	-	-	1,715,476	-	1,715,476
Net loss for the year ended May 31, 2021	-	-	-	-	-	-	(17,178,988)	(17,178,988)
Balance – May 31, 2021	96,628,674	\$ 66,677,433	-	\$ -	\$ 819,819	\$ 7,907,900	\$ (23,068,579)	\$ 52,336,573

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

Consolidated Statements of Cash Flows

For the Year Ended May 31, 2021 (Expressed in Canadian Dollars)

	May 31, 2021	May 31, 2020
Cash flows from operating activities
Net loss for the period	\$ (17,178,988)	\$ (2,187,603)
Items not affecting cash:
Shares issued for consulting fees	847,851
Warrant-based compensation	1,715,475	-
Depreciation	244,065	454,056
Impairment - intangibles	1,615,760	-
Impairment - plant and equipment	505,432	-
Interest	202,065	-
Listing expense (shares issued)	2,614,701	-
Share-based compensation	660,645	332,103
Write-down of subsidiary	-	103,094
	\$ (8,772,994)	\$ (1,298,350)
Change in non-cash working capital balances
Decrease (increase) in other receivables	\$ (328,667)	\$ (12,170)
Decrease (increase) in prepaids expenses, deposits, and supplies	(2,198,807)	(759,941)
Decrease (increase) in due from related parties	32	-
Increase (decrease) in trade and other payables	852,160	415,729
Increase (decrease) in bank indebtedness	-	(94,688)
Increase (decrease) in due to related parties	3,513	-
Net cash used in operating activities	\$ (10,444,763)	\$ (1,749,420)
Cash flows from investing activities
Purchase of plant and equipment Investment in intangible assets	\$ (1,615,322) -	\$ (40,520) (482,273)
Purchase of term deposit	(26,000)
Decrease (increase) in non-current prepaid expenses	627,768	-
Net cash used from investing activities	\$ (1,013,554)	\$ (522,793)
Cash flows from financial activities
Payments on lease liabilities	\$ (160,929)	\$ -
Proceeds from exercise of warrants	10,997,277	-
Proceeds from exercise of options	405,123	-
Proceeds from issuance of share capital	45,255,551	4,288,519
Proceeds from government grant	1,000,000	-
Proceeds from Whatcom Capital	580,287	-
Proceeds/(Repayment) from government loan	(208,335)	580,590
Bank overdraft	804,611	-
Redemption of term deposit	-	714,567
Net cash provided from financing activities	\$ 58,673,585	\$ 5,583,676
Net change in cash during the year	47,215,268	3,311,463
Cash, beginning of year	3,311,463	-
Cash and cash equivalents - May 31, 2021	\$ 50,526,731	\$ 3,311,463

(The accompanying notes are an integral part to these consolidated financial statements)

1. NATURE OF OPERATIONS

Whatcom Capital Corp. ("Whatcom") was incorporated pursuant to the Business Corporations Act (British Columbia) on September 19, 2019. Whatcom subsequently completed an initial public offering as a Capital Pool Company and listed its common shares on the TSX Venture Exchange (the "Exchange") on June 4, 2020. On December 15, 2020, Whatcom completed its qualifying transaction (the "Transaction") with Nexe Innovations Inc. ("Privco"). The Company's registered and records office is located at #1200 – 750 West Pender Street, Vancouver, British Columbia V6C 2T8 and its head office is located at #109 – 19353 22nd Avenue, Surrey, British Columbia V3Z 3S6.

In conjunction with closing of the Transaction, Whatcom completed a share consolidation on the basis of two and one-half pre-consolidation common shares of Whatcom which were exchanged for one post-consolidation common share of Whatcom (the "Consolidation"). Each holder of Privco common shares received one (1) post-Consolidation common share of Whatcom (a "Resulting Issuer Share") for each Privco common share held, each holder of Privco Class A Preferred Shares, Series A ("Series A Shares") received one (1) Resulting Issuer Share for each Series A Share held, each holder of Privco Class A Preferred Shares, Series A Preferred ("Series A Preferred Shares") received one (1) Resulting Issuer Share for each Series A Preferred Share held, and each holder of Privco Class A Preferred Shares, Series 1 ("Series 1 Shares") received one and one-half (1.5) Resulting Issuer Shares for each Series 1 Share held.

All outstanding convertible securities of Privco, including Privco share purchase warrants and Privco stock options were exchanged for or replaced with convertible securities of the Resulting Issuer based on a 1:1 ratio and on the same economic terms and conditions as previously issued. Upon completion of the Transaction, Privco became a wholly owned subsidiary of the Company, and the Company changed its name to "NEXE Innovations Inc.". The combined entity (the "Resulting Issuer") is a Tier 2 "technology" issuer on the Exchange.

Operations

These consolidated financial statements have been prepared assuming the Company will continue on a goingconcern basis. The Company has incurred losses since its inception and the ability of the Company to continue depends upon its ability to raise adequate financing and to commence profitable operations.

The Company has predominately experienced operating losses and negative operating cash flows; operations of the Company having been primarily funded by the issuance of share capital. The Company expects to incur further losses in the development of its business. Management has estimated that the Company has sufficient financing to complete current work plans with the closing of the recent financing. While the Company has been successful in the past at raising funds, there can be no assurance that it will be able to do so in the future.

These consolidated financial statements do not reflect adjustments that would be necessary if the going concern assumption were not appropriate. If the going concern basis was not appropriate for these consolidated financial statements, then adjustments to the carrying values of assets and liabilities would be necessary.

Discontinued Operations

In prior year, the Company divested its 70% interest in Granville Island Packaging Ltd. ("GI") which was held by Scepter Industries Inc. Management concluded that the Company's focus had shifted, and the distribution arm was no longer required.

COVID-19 Pandemic

On March 11, 2020, the World Health Organization declared COVID-19 a global pandemic. This contagious disease outbreak and any related adverse public health developments, has already adversely affected workforces, economies, and financial markets globally, leading to an economic downturn. The Company has established key guidelines and procedures related to security and access controls, health screening, isolation and quarantine, and facility infrastructure, maintenance, and cleaning, to ensure that its workplace practices are in line with local government recommendations and requirements, as well as compliant with the appropriate standards of safety, health, wellness and required workplace readiness. The Company continues to monitor key suppliers to prevent service disruptions or significant impacts in the delivery of services or goods from its suppliers.

As a result of the pandemic, the Company has experienced supply chain disruptions, particularly with machinery, human resource constraints, deterioration of consumer demand and market volatility. Although global market conditions may have affected market conditions and consumer spending patterns, the Company remains well placed to grow revenues through product innovations. The Company has reviewed its exposure from other emerging business risks but has not identified any other risks that could significantly impact the estimates used in the determination of plant and equipment, lease liability, and intangible assets that may have a significant impact on the Company's financial performance.

2. SIGNIFICANT ACCOUNTING POLICIES

(a) Basis of presentation

Statement of compliance

These consolidated financial statements, including comparatives have been prepared in accordance with International Financial Reporting Standards ("IFRS") as issued by the International Accounting Standards Board ("IASB") and Interpretations issued by the International Financial Reporting Interpretations Committee ("IFRIC").

(b) Basis of measurement

These consolidated financial statements have been prepared on a historical cost basis except for certain financial instruments which are measured at their fair value. In addition, these consolidated financial statements have been prepared using the accrual basis of accounting except for cash flow information.

(c) Functional and presentation currency

These consolidated financial statements are presented in Canadian dollars, which is the Company's functional and reporting currency.

Foreign currency transactions

Transactions in foreign currencies are translated to the respective functional currencies of the Company and its subsidiary at the exchange rate in effect at the transaction date. Monetary assets and liabilities denominated in other than the functional currency are translated at the exchange rates in effect at the financial position date. The resulting exchange gains and losses are recognized in statements of loss and other comprehensive loss. Nonmonetary assets and liabilities denominated in other than the functional currency that are measured at fair value are translated to the functional currency at the exchange rate at the date that the fair value is determined. Nonmonetary items that are measured in terms of historical cost in other than the functional currency are translated using the exchange rate at the date of transaction.

(d) Principles of consolidation

These consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries, NEXE Technology Corp. (formerly GCup Technology Corp.), G-Pak Holdings Ltd. and Xoma Operations Inc.

Subsidiaries are entities controlled by the Company. The Company controls an entity when it is exposed to, or has rights to, variable returns from its involvement with the entity and has the ability to affect those returns through its power over the entity. The financial statements of the subsidiary are included in the consolidated financial statements from the date that control commences until the date that control ceases.

All significant inter-company balances and transactions between the Company and its subsidiaries have been eliminated in preparing the consolidated financial statements.

(e) Use of estimates and judgments

The preparation of these consolidated financial statements in conformity with IFRS requires management to make judgments and estimates and form assumptions that affect the application of accounting policies and the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses for the periods reported. The estimates and associated assumptions are based on historical experience and various other factors that are considered to be relevant. Actual results may differ from these estimates.

Estimates and underlying assumptions are reviewed on an ongoing basis and may change if new information becomes available. Revisions to accounting estimates are recognized in the period in which the estimates are revised and in any future periods affected

The critical judgments that the Company's management has made in the process of applying the Company's accounting policies that have the most significant effect on the amounts recognized in the consolidated financial statements are as follows:

Going concern

The determination if the Company has the ability to continue as a going concern is dependent on its ability to achieve profitable operations. There is an assumption that the Company will be able to realize its assets and discharge its liabilities in the normal course of business rather than through a process of forced liquidation. Certain judgements are made by management when determining if and when the Company will achieve profitable operations.

The Company, currently, has not earned significant revenues and is considered to be in the development stage. The Company's operations are funded from equity financings as well as financial support from various federal government programs which are dependent upon many external factors. The Company believes that, based on forecasts and the ability to reduce expenditures if required, it will be able to continue as a going concern for the foreseeable future. While the Company has been successful in securing financings in the past there can be no assurance that it will be able to do so in the future, if required.

(Expressed in Canadian Dollars)

Key sources of estimation uncertainty

Significant assumptions about the future and other sources of estimation uncertainty that management has made at the statements of the financial position date, that could result in a material adjustment to the carrying amounts of assets and liabilities, in the event that actual results differ from assumptions made, relate to, but are not limited to, the following:

Leases

The Company exercises judgment when contracts are entered into that may give rise to a right-of-use asset that would be accounted for as a lease. Judgment is required in determining the appropriate lease term on a lease-bylease basis. The Company considers all facts and circumstances that create an economic incentive to exercise a renewal option or to not exercise a termination option at inception and over the term of the lease, including investments in major leaseholds, operating performance, and changed circumstances. The periods covered by renewal or termination options are only included in the lease term if the Company is reasonably certain to exercise that option. Changes in the economic environment may impact the assessment of the lease term and any changes in the estimate of lease terms may have a material impact on the Company's consolidated statements of financial position.

The critical assumptions and estimates used in determining the present value of future lease payments require the Company to estimate the incremental borrowing rate specific to each leased asset or portfolio of leased assets. Management determines the incremental borrowing rate of each leased asset or portfolio of leased assets by incorporating the Company's creditworthiness, the security, term, and value of the underlying leased asset, and the economic environment in which the leased asset operates. The incremental borrowing rates are subject to change mainly due to macroeconomic changes in the environment.

Impairment of non-financial assets (plant and equipment, intangible assets, and right-of-use assets)

Management is required to use judgment in determining the grouping of assets to identify their cash generating units ("CGUs") for the purposes of testing non-financial assets for impairment.

In determining the recoverable amount of the CGUs, various estimates are employed. The Company determines value-in-use by using estimates including projected future revenues, margins, costs, and capital investment consistent with strategic plans presented to the Board of Directors and key management. Discount rates are consistent with external industry information reflecting the risk associated with the Company and its cash flows.

Depreciation

Equipment is depreciated based on the estimated useful life less their estimated residual value. Significant assumptions are involved in the determination of useful life and residual values and no assurance can be given that actual useful lives and residual values will not differ significantly from current assumptions. Actual useful life and residual values may vary depending on a number of factors including internal technical evaluation, physical condition of the assets and experience with similar assets. Changes to these estimates may affect the carrying value of equipment, net loss, and comprehensive loss in future periods.

Current and deferred taxes

Accounting for income taxes is a complex process requiring management to interpret frequently changing laws and regulations and make judgments relating to the application of tax law, the estimated timing of temporary difference reversals, and the estimated realization of tax assets. The Company recognizes the deferred tax benefit related to deferred tax assets to the extent recovery is probable. Assessing the recoverability of deferred tax assets requires management to make significant estimates of future taxable profit. In addition, future changes in tax laws could limit the ability of the Company to obtain tax deductions in the future periods. To the extent that future cash flows and taxable income differ significantly from estimates, the ability of the Company to realize the net deferred tax assets recorded at the reporting date could be impacted. In addition, all tax filings are subject to subsequent government audits and potential reassessment. These interpretations, judgments and changes related to them impact current and deferred tax provisions, deferred tax assets and liabilities and results of operations.

Share-based payments

The Company has an incentive stock option plan for employees, consultants, directors, and officers. Services received and the corresponding increase in equity, are measured by reference to the fair value of the equity instruments at the date of grant, excluding the impact of any non-market vesting conditions. The fair value of share options is estimated by using the Black-Scholes valuation model on the date of stock option grant based on certain assumptions. Those assumptions are described in the note below and include, among others, expected volatility, expected life and number expected to vest.

Warrant-based payments

The Company has an incentive performance warrants plan for key employees, consultants and advisors and are granted when certain key milestones that are aligned with the financial and business success of the Company are achieved. The fair value of the performance warrants is estimated by using the Black-Scholes valuation model on the date the performance warrants are granted based on certain assumptions. Those assumptions are described in the note below and include, among others, expected volatility and expected life.

Government loan payable

The determination of fair value of the interest-free government loan is based on a number of assumptions, including contractual future cashflow and discount rate.

(f) Cash and cash equivalents

Cash and cash equivalents consist of cash, and highly liquid instruments that are readily convertible to cash with a maturity of three months or less at the time of issuance, are readily convertible to known amounts of cash, which are subject to insignificant risk of changes in value to be cash equivalents.

(g) Plant and equipment

Plant and equipment are stated at cost less accumulated depreciation and any accumulated impairment losses. The cost of equipment includes the acquisition cost and any direct costs to bring the asset into productive use at its intended location.

Depreciation

Depreciation is calculated on a declining balance and straight-line basis over the equipment's estimated useful lives. Depreciation methods and useful lives are reviewed at each reporting date and adjusted, if appropriate.

Computer equipment	55%
Furniture and equipment	20%
Machinery	10 years
Manufacturing facility	20 years
Software	100%
Leasehold Improvement	5 years

Plant and equipment are written down to the net recoverable value when management determines there has been a change in circumstances which indicates its carrying amount may not be recoverable. Any gain or loss on disposal of an item of plant and equipment is recognized in the statements of loss and comprehensive loss within the period of disposal.

Government loan benefit related to assets is reduced from the carrying value of the asset being acquired and amortized over 10 years.

(h) Intangible assets

Intangible assets comprise patents of design and formulation of single-serve coffee pods. Patents are measured on initial recognition at cost. Following initial recognition, patents are carried at cost less any accumulated amortization and accumulated impairment losses. The useful lives of patents are assessed at 20 years and will be amortized when commercial production commences.

Amortization is recorded over the period of expected future benefit and is recognized in the consolidated statement of loss and comprehensive loss. Intangible assets are derecognized upon disposal or when no future economic benefits are expected to arise from the continued use of the assets. Any gain or loss arising on disposal of the assets, determined as the difference between the net disposal proceeds and the carrying amount of the assets, is recognized in the statements of loss and other comprehensive loss.

Intellectual property is recorded at cost and amortization is recorded over the useful life of the asset. Intellectual property such as trade secrets or ideas are not recorded on the statements of financial position as they have no directly associated costs or clear value.

Trademarks, copyrights, and patents have associated costs and are capitalized as assets. In the event, that a realistic market price for certain forms of intellectual property is hard to determine, an industry expert must perform an in-depth valuation study to determine a reasonable market price for intellectual property.

(i) Financial instruments

At initial recognition, the Company classifies its financial instruments in the following categories depending on the purpose for which the instruments were acquired:

Financial assets

Financial assets that are held for collection of contractual cash flows that represent solely payments of principal and interest are measured at amortized cost. This includes trade and other receivables. Financial assets are initially recognized at fair value plus transaction costs, adjusted for any expected credit loss. Subsequently, receivables are measured at amortized cost using the effective interest method adjusted for expected credit losses. For financial assets, the Company applies the simplified expected credit loss approach, which requires expected lifetime losses to be recognized from initial recognition of the trade receivables.

Financial liabilities

Financial liabilities include trade payables and other liabilities, bank indebtedness, loans payable, bank loan payable and accrued interest are recorded at fair value on initial recognition. Subsequently, financial liabilities are measured at amortized cost using the effective interest method.

(j) Impairment of non-financial assets

The carrying amounts of the Company's non-financial assets are reviewed at each reporting date to determine whether there is any indication of impairment. If any such indication exists, the recoverable amount is estimated by reference to the higher of the value in use and fair value less costs to sell.

Fair value less costs to sell is defined as the estimated price that would be received on the sale of the asset in an orderly transaction between market participants at the measurement date.

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. For the purposes of impairment testing, assets that cannot be tested individually are grouped together into the smallest group of assets that generates cash inflows from continuing use that are largely independent of the cash inflows of other groups of assets.

An impairment loss is recognized if the carrying amount of an asset or group of assets exceeds the estimated recoverable amount. Impairment losses are recognized in the statements of loss and other comprehensive loss. When impairment subsequently reverses, the carrying amount of the asset is increased to the revised estimated recoverable amount, but to an amount that does not exceed the carrying amount that would have been determined had no impairment loss been recognized for the asset in prior years. A reversal of an impairment loss is recognized immediately in statements of loss or other comprehensive loss.

(k) Provisions

Provisions for legal or constructive obligations are recognized when the Company has a present legal or constructive obligation that has arisen as a result of a past event and it is probable that a future outflow of resources will be required to settle the obligation, provided that a reliable estimate can be made of the amount of the obligation. Provisions are measured at the present value of the expenditures expected to be required to settle the obligation using a pre-tax discount rate that reflects current market assessments of the time value of money and the risk specific to the obligation. The increase in the provision due to passage of time is recognized as interest expense.

(l) Government loan payable

Government loans are recognized at their fair value where there is a reasonable assurance that the grants will be received, and the Company will comply with all attached conditions.

The benefit of the loans from government at a below-market interest rate is measured and recognized as the difference between the initial carrying value of the loans determined using the effective interest method and the proceeds received. The benefit amount will be amortized over the repayment period of the loans.

(m) Share-based payments

The grant date fair value of share-based payment awards granted to employees, officers, directors, or consultants is recognized as share-based compensation expense, with a corresponding increase in equity, over the period that the employees unconditionally become entitled to the awards. The amount recognized as an expense is adjusted to reflect the number of awards for which the related service and non-market vesting conditions are expected to be met, such that the amount ultimately recognized as an expense is based on the number of awards that do meet the related service and non-market performance conditions at the vesting date.

Where equity instruments are granted to parties other than employees, they are recorded by reference to the fair value of the services received. If the fair value of the services received cannot be reliably estimated, the Company measures the services received by reference to the fair value of the equity instruments granted, measured at the date the counterparty renders service.

All equity-settled share-based payments are reflected in share option reserve in the event of options and other share issuances are reflected in contributed surplus, unless exercised. Upon exercise, shares are issued from treasury and the amount reflected in share option reserve or contributed surplus is credited to share capital, adjusted for any consideration paid.

(n) Share capital

The Company's common shares are classified as equity instruments. Incremental costs directly attributable to the issuance of common shares are shown in equity as a deduction from the proceeds of issuance.

Proceeds from unit placements are allocated between shares and warrants issued according to their relative fair value. The relative fair value of the share component is credited to share capital and the relative fair value of the warrant component is credited to reserves. Upon exercise of warrants, consideration paid by the warrant holder together with the amount previously recognized in reserves is recorded as an increase to share capital. Upon expiration of warrants, the amount applicable to warrants expired is recorded as an increase to share capital.

(o) Loss per share

Basic loss per share is computed using the weighted average number of common shares outstanding during the period. The treasury stock method is used for the calculation of diluted loss per share, whereby all "in the money" stock options and share purchase warrants are assumed to have been exercised at the beginning of the period and the proceeds from their exercise are assumed to have been used to purchase common shares at the average market price during the period. When a loss is incurred during the period, basic and diluted loss per share is the same as the exercise of stock options and share purchase warrants is considered to be anti-dilutive.

(p) Income taxes

The Company follows the asset and liability method of accounting for income tax. Income tax expense comprises current and deferred tax. Income tax expense is recognized in the consolidated statements of loss and other comprehensive loss except to the extent that it relates to items recognized directly in equity, in which case it is recognized in equity.

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

Deferred tax is recognized on temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. Deferred tax is not recognized on the initial recognition of assets or liabilities in a transaction that is not a business combination, nor is it recognized for taxable temporary differences arising on the initial recognition of goodwill. Deferred tax is measured at the tax rates that are expected to be applied to temporary differences when they reverse, based on the laws that have been enacted or substantively enacted by the reporting date. Deferred tax assets and liabilities are offset if there is a legally enforceable right to offset, and they relate to income taxes levied by the same tax authority on the same taxable entity, or on different tax entities, but they intend to settle current tax liabilities and assets on a net basis, or their tax assets and liabilities will be realized simultaneously.

A deferred tax asset is recognized to the extent that it is probable that future taxable profits will be available against which the temporary difference can be utilized. Deferred tax assets are reviewed at each reporting date and are reduced to the extent that it is no longer probable that the related tax benefit will be realized.

(q) Leases

The Company assesses at inception of a contract, whether the 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 of time in exchange for consideration.

To assess whether a contract conveys the right to control the use of an identified asset for a period of time, the Company assesses whether the customer has the following through the period of use:

• The right to obtain substantially all of the economic benefits from use of the identified asset; and
• the right to direct the use of the identified asset.

Where the Company is a lessee in a contract that contains a lease component, the Company allocates the consideration in the contract to each lease component on the basis of the relative stand-alone price of the lease component and the aggregate stand-alone price of the non-lease components.

At the lease commencement date, the Company recognizes a right-of-use asset and a lease liability. The right-ofuse asset is initially measured at cost. The cost of the right-of-use asset is comprised of the initial amount of the lease liability, any lease payments made at or before the commencement date less any lease incentives received, initial direct costs incurred by the Company, and an estimate of the costs to be incurred by the Company in dismantling and removing the underlying asset and restoring the site on which it is located or restoring the underlying asset to the condition required by the terms and conditions of the lease.

After the commencement date, the Company measures all right-of-use assets by applying the cost model, whereby the right-of-use asset is measured at cost less accumulated depreciation and impairment losses and adjusted for any remeasurement of the lease liability. The right-of-use assets are depreciated using the straightline method from the commencement date to the end of the lease term or the end of the useful life of the rightof-use asset. The estimated useful life of the right-of-use assets are determined on the same basis as those of plant and equipment. The determination of the depreciation period is dependent on whether the Company expects that the ownership of the underlying asset will transfer to the Company by the end of the lease term.

The lease liability is initially measured at the present value of the lease payments not paid at the lease commencement date, discounted using the interest rate implicit in the lease or the Company's incremental borrowing rate if the interest rate implicit in the lease cannot be readily determined. The lease payments included in the measurement of the lease liability comprise of fixed payments (including in-substance fixed payments) less any lease incentives receivable, variable lease payments that depend on an index or rate, and amounts expected to be payable by the Company under a residual value guarantee. After the commencement date, the Company measures the lease liability at amortized cost using the effective interest method.

The Company remeasures the lease liability when there is a change in the lease term, a change in the Company's estimate of amounts expected to be payable under a residual value guarantee, or a change in future lease payments resulting from a change in an index or a rate used to determine those payments. On remeasurement of the lease liability, a corresponding adjustment is made to the carrying amount of the right-of-use asset or is recorded in the statements of loss and other comprehensive loss if the carrying amount of the right-of-use asset has been reduced to zero.

The Company determines its incremental borrowing rate by obtaining interest rates from external financing sources.

(r) Other comprehensive income (loss)

Other comprehensive income (loss) is the change in the Company's net assets that results from transactions, events, and circumstances from sources other than the Company's shareholders and includes items that would not normally be included in net income (loss) such as unrealized gains or losses on available-for-sale investments and translation gains or losses on translation of foreign operations to the presentation currency of the Company.

(s) Accounting standards issued but not yet effective

A number of new standards, and amendments to standards and interpretations are not yet effective for the year ended May 31, 2021 and have not been early adopted in preparing these consolidated financial statements. These new standards, and amendments to standards and interpretations are either not applicable or are not expected to have a significant impact on the Company's consolidated financial statements. A summary of future IFRS amendments is as follows:

Classification of Liabilities as Current or Non-current (Amendments to IAS1)

On January 23, 2020, the IASB issued amendments to IAS 1 Presentation of Financial Statements, to clarify the classification of liabilities as current or non-current. On July 15, 2020, the IASB issued an amendment to defer the effective date by one year. The amendments removed the requirement for a right to defer settlement or roll over of a liability for at least twelve months to be unconditional to classify such liability as a non-current liability. Instead, such a right must have substance and exist at the end of the reporting period.

The amendments are effective for annual periods beginning on or after January 1, 2023. Early adoption is permitted.

Property, Plant and Equipment – Proceeds before Intended Use (Amendments of IAS 16)

On May 14, 2020, the IASB issued Property, Plant and Equipment - proceeds before intended use (Amendments to IAS 16). The amendments clarify that proceeds from selling items before the related item of Plant and Equipment is available for use should be recognized in the statements of loss and other comprehensive loss, together with the cost of producing those items.

The amendments are effective for annual periods beginning on or after January 1, 2022. Early adoption is permitted.

Annual Improvements to IFRS Standards – 2018 to 2020

On May 14, 2020, the IASB issued Annual Improvements to IFRS Standards – 2018 to 2020 IFRS 9 Financial Instruments – Clarifies which fees are included for the purpose of performing the "10 percent test" for derecognition of financial liabilities.

IFRS 16 Leases – Removes the illustration of payments from the lessor relating to leasehold improvements. The amendments are effective for annual periods beginning on or after January 1, 22. Early adoption is permitted.

Interest Rate Benchmark Reform – Phase 2 (Amendments to IFRS 9, IAS 39, IFRS 7, IFRS 4 and IFRS 16)

On August 27, 2020, the IASB finalized its response to the ongoing reform of inter-bank offered rates and other interest rate benchmarks by issuing a package of amendments to IFRS Standards.

3. REVERSE TAKEOVER TRANSACTION with WHATCOM CAPITAL CORP.

Whatcom Capital Corp. ("Whatcom") completed an initial public offering as a Capital Pool Company and listed its common shares on the TSX Venture Exchange (the "Exchange") on June 4, 2020. On December 15, 2020, Whatcom completed its qualifying transaction (the "Transaction") with Nexe Innovations Inc. ("Privco").

In conjunction with closing of the Transaction, Whatcom completed a share consolidation on the basis of two and one-half pre-consolidation common shares of Whatcom which were exchanged for one post-consolidation common share of Whatcom (the "Consolidation"). Each holder of Privco common shares received one (1) post-Consolidation common share of Whatcom (a "Resulting Issuer Share") for each Privco common share held, each holder of Privco Class A Preferred Shares, Series A ("Series A Shares") received one (1) Resulting Issuer Share for each Series A Share held, each holder of Privco Class A Preferred Shares, Series A Preferred ("Series A Preferred Shares") received one (1) Resulting Issuer Share for each Series A Preferred Share held, and each holder of Privco Class A Preferred Shares, Series 1 ("Series 1 Shares") received one and one-half (1.5) Resulting Issuer Shares for each Series 1 Share held.

All outstanding convertible securities of Privco, including Privco share purchase warrants and Privco stock options were exchanged for or replaced with convertible securities of the Resulting Issuer based on a 1:1 ratio and on the same economic terms and conditions as previously issued. Upon completion of the Transaction, Privco became a wholly owned subsidiary of the Company, and the Company changed its name to "NEXE Innovations Inc.".

The Transaction was measured at the fair value of the shares that NEXE would have had to issue to shareholders of Whatcom to give shareholders of Whatcom the same percentage equity interest in the combined entity that results from the reverse takeover had it taken the legal form of NEXE acquiring Whatcom. The fair value of the common shares was determined to be \$0.80 based on the concurrent NEXE Private Placement and was considered as a significant estimate and judgement.

A breakdown of the net assets acquired regarding Whatcom and the respective listing expense follows:

	On December 15, 2020
Net assets acquired
Cash	580,287
Other current assets	10,012
Accrued liabilities	(5,000)
Net assets acquired	\$ 585,299
Consideration
Fair value of 4,000,000 shares of NEXE at \$0.80 per share	\$ 3,200,000
Listing expense	\$ 2,614,701

4. TERM DEPOSITS

The term deposits are short-term GICs held with a Canadian bank that revolve until withdrawn, and act as collateral for the Company's corporate credit cards.

5. PREPAID EXPENSES, DEPOSITS AND SUPPLIES

A breakdown of prepaid expenses, deposits and supplies for the years ended May 31, 2021, and 2020 were as follows:

	May 31, 2021	May 31, 2020
Prepaid expenses	\$ 1,563,376	\$ 931
Deposits	314,819	-
Supplies	321,543	-
Total prepaid expenses, deposits, and supplies	\$ 2,199,738	\$ 931

Prepaid expenses and deposits predominantly included commitments for the procurement of manufacturing equipment, warehouse space lease, insurance, research, and public relations work. Supplies was comprised of raw materials primarily for the manufacturing process for single-serve coffee pods.

Notes to the Consolidated Financial Statements

For the Year Ended May 31, 2021 (Expressed in Canadian Dollars)

6. PLANT AND EQUIPMENT

A breakdown of plant and equipment for the years ended May 31, 2021, and 2020 follows:

	Computer Equipment	Furniture and		Building Improvement	Manufacturing Facility		Government Loan Benefit
		Equipment	Machinery			Land		Total
Net book value at May 31, 2020	\$ 2,126	\$ 611,046	\$ 989,082	\$ 49,156	\$ 1,760,025	\$ 341,270	\$ (1,167,143)	\$ 2,585,562
Additions	8,282	41,870	1,451,273	113,899	-	-	-	1,615,324
Depreciation	(3,447)	(126,396)	(171,473)	(10,760)	(88,001)	-	146,746	(253,331)
Impairment	(760)	(57,519)	(247,859)	(16,637)	(182,657)	-	-	(505,432)
Net book value – May 31, 2021	6,201	469,001	2,021,023	135,658	1,489,367	341,270	(1,020,397)	3,442,123
Consisting of:
Cost	14,549	907,732	2,772,768	170,476	2,025,185	341,270	(1,409,113)	4,822,867
Accumulated depreciation	(7,588)	(381,212)	(503,886)	(18,181)	(353,161)	-	388,716	(875,312)
Impairment	(760)	(57,519)	(247,859)	(16,637)	(182,657)	-	-	(505,432)
	\$ 6,201	\$ 469,001	\$ 2,021,023	\$ 135,658	\$ 1,489,367	\$ 341,270	\$ (1,020,397)	\$3,442,123
Net book value at May 31, 2019	\$ 944	\$ 741,708	\$ 1,185,505	\$ 43,055	\$ 1,844,221	\$ 341,270	\$ (964,760)	\$ 3,191,943
Additions	2,347	12,143	5,339	18,691	-	-	(332,504)	(293,984)
Disposition of subsidiaries	-	(7,182)	(62,487)	(7,868)	-	-	-	(77,537)
Depreciation	(1,165)	(135,622)	(139,276)	(4,723)	(84,196)	-	130,121	(234,860)
Net book value – May 31, 2020	2,126	611,046	989,082	49,156	1,760,025	341,270	(1,167,143)	2,585,562
Consisting of:
Cost	6,268	865,862	1,321,495	56,577	2,025,185	341,270	(1,409,113)	3,207,545
Accumulated depreciation	(4,142)	(254,815)	(332,413)	(7,421)	(265,160)	-	241,969	(621,983)
	\$ 2,126	\$ 611,046	\$ 989,082	\$ 49,156	\$ 1,760,025	\$ 341,270	\$ (1,167,143)	\$ 2,585,562

The carrying amounts of items in plant and equipment with a finite life were reviewed for impairment at the end of each reporting period. If there are indicators of impairment, an evaluation is undertaken to determine whether the carrying amounts are in excess of their recoverable amounts. Such reviews are undertaken on an asset-by-asset basis, except where assets do not generate cash flows independent of other assets, in which case the assets are grouped together into the smallest group of assets that generate independent cash inflows and then a review is undertaken at the cashgenerating unit level. An independent assessment was conducted by a third party, and it was determined that the assets had a fair value of \$4,121,250, after selling costs of 12.5%, and with a net book value of \$4,626,682, an impairment of \$505,432 was required to be recorded.

Notes to the Consolidated Financial Statements For the Year Ended May 31, 2021

(Expressed in Canadian Dollars)

7. RIGHT-OF-USE ASSETS

A breakdown of the right-of-use assets, which comprised a warehouse building, for the years ended May 31, 2021, and 2020 follows:

May 31,	May 31,
2021	2020
\$ -	\$ -
696,846	-
\$ 696,846	-
\$ -	\$ -
(45,695)	-
(45,695)	-
\$ 651,151	\$ -

Lease liabilities

A continuity schedule for the years ended May 31, 2021, and 2020 follows:

Lease liability - May 31, 2021	\$ 542,647
Interest Expense	6,730
Payments	(160,929)
Additions	696,846
Lease liability - May 31, 2020	\$ -
Interest expense	-
Payments	-
Additions	-
Lease liability - May 31, 2019	\$ -

As of May 31, 2021, the current lease liability of the warehouse building is \$27,928 (2020 - \$nil) and the non-current lease liability is 514,719 (2020 - \$nil). Total future minimum lease payments (net of any sub-lease arrangements) under the contract are as follows: Within 1 year - \$155,851; 2 to 4 years – each \$157,500; and the remaining - \$170,625.

8. INTANGIBLE ASSETS

In the past, development costs were recognized as intangible assets when the Company demonstrated:

• The technical feasibility of completing the intangible asset so that the asset will be available for use or sale;
• Its intention to complete and its ability and intention to use or sell the asset;
• How the asset will generate future economic benefits;
• The availability of resources to complete the asset; and
• The ability to measure reliably the expenditure during development.

In assessing value in use, the estimated future cash flows were 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. When the Company reviewed the assets for impairment, it was determined that it had limited historical results to rely on and the projected revenues, particularly three to five years in the future, were difficult to quantify. After an analysis, the Company wrote down the intangible asset to reflect its ongoing assessment of the intangible assets future benefit.

A continuity schedule for patents for the years ended May 31, 2021, and 2020 follows:

Patents - May 31, 2021	\$ 78,980
Additions	-
Patents - May 31, 2020	\$ 78,980
Additions	34,880
Patents - May 31, 2019	\$ 44,100

A continuity schedule for intellectual property for the years ended May 31, 2021, and 2020 follows:

Intellectual property - May 31, 2021	\$ -
Impairment	(1,615,760)
Additions	-
Intellectual property - May 31, 2020	\$ 1,615,760
Additions	447,393
Intellectual property - May 31, 2019	\$ 1,168,367

9. GOVERNMENT LOAN

During the year ended May 31, 2017, the Company was approved to receive up to \$2,500,000 of loans from Western Economic Diversification Canada. The project costs include, but are not limited to, the following:

• Equipment costs
• Production materials
• Salaries for employees who devoted time to the project
• Travel costs
• Contractors and professional fees
• Production testing costs
• Manufacturing facility leasehold improvement costs

The Company drew down its final tranche of the loan during the year ended May 31, 2020, in the amount of \$580,590. The Company is required to make monthly repayments of \$41,667, which were to commence August 1, 2020, however an extension for repayment was granted to January 1, 2021, and maturity was extended to December 1, 2025.

As at May 31, 2021, the current portion of the loan repayable is \$500,004 and has been recorded in the current liabilities section of the consolidated statements of financial position. Therefore, the loan, at inception, was considered as an interest free loan and the difference between the fair value of the loan and the principal was credited against plant and equipment.

Government loan – May 31, 2021	\$ 1,456,228
Gain on modification	(87,536)
Repayment	(208,385)
Accretion	289,601
Government loan – May 31, 2020	\$ 1,462,548
Grant portion	(332,504)
Accretion	217,533
Loan received	580,590
Government loan – May 31, 2019	\$ 996,929

A continuity schedule for the years ended May 31, 2021, and 2020 follows:

10. GOVERNMENT GRANTS

On April 21, 2020, the Company signed an agreement with the Department of Natural Resources, Innovative Solutions Canada to commence a project to develop a fully compostable coffee pod that meets the required dimensions required for Nespresso coffee makers using plant-based polymers and, or wood fibre composites, in return for the Company to receive a \$1,000,000 grant. Payments were made to the Company in four equal payments of \$250,000 - June, September, and October 2020 and January 2021.

The Company is expected to submit a detailed report to the Department of Natural Resources, Innovative Solutions Canada by May 31, 2022, outlining its activities and how they have contributed to the achievement of the objectives, benefits, and key performance measures of the project. Since the project continues to be a work-in-progress, the Company has recorded a deferred liability of \$1,000,000 at May 31, 2021 (2020 - \$nil).

11. SHARE CAPITAL

Authorized:

Common Shares: unlimited without par value

Issued and outstanding:

As at May 31, 2021, the Company had 96,628,674 issued and outstanding (May 31, 2020: 18,182,004) common shares after the bought deal financing and conversion of all other classes of shares namely Class A, Series 1 shares, Class A, Series A, and Class A Series A preferred shares.

Share transactions for the year ended May 31, 2021

During the year-ended May 31, 2021, the Company issued the following common shares: 35,269,453 common shares from financings for proceeds, net of share issuance costs, of \$45,987,250; 25,855,396 common shares for proceeds of \$12,116,542 from the conversion of preferred shares; 12,027,420 common shares from the exercise of warrants for proceeds of \$10,590,142; and 1,294,401 common shares from the exercise of options for proceeds of \$405,123.

Share transactions for the year ended May 31, 2020

During the year ended May 31, 2020, the Company issued 6,791,207 units at a price of \$0.65 per unit, raising gross proceeds of \$4,414,285. Each unit is comprised of one Class A Series A preferred share and one share purchase warrant, with each warrant exercisable into one preferred share of the Company at a price of \$1.10 per share for a period of two years from the issuance date. In connection with the financing, the Company paid cash issuance costs of \$125,766 and issued a total of 332,052 brokers' warrants, with a fair value of \$75,711, exercisable under the same terms of the warrants.

12. WARRANTS AND STOCK OPTIONS

Warrants

Continuity schedule of the Company's share purchase warrants issued and outstanding for the year-ended May 31, 2021, and 2020, was as follows:

		May 31, 2020
	Number of warrants	Weighted average exercise price	Number of warrants	Weighted average exercise price
Outstanding, beginning of year	7,311,425	\$ 1.10	187,866	\$ 1.10
Issued	23,301,971	1.47	7,123,559	1.08
Exercised	(12,027,420)	(0.88)	-	-
Cancelled	(20,000)	1.10
Outstanding, end of year	18,565,976	\$ 1.71	7,311,425	\$ 1.08

The weighted average remaining life of warrants outstanding as at May 31, 2021, is 0.8 years (2020 - 1.9 years).

The Company received monies in advance of \$50,000 (2020 - \$nil) during the year ended May 31, 2021, regarding a warrants exercise and are recorded in trade and other payables.

The following assumptions were used for the Black-Scholes valuation of warrants issued during the period ended May 31, 2021, and 2020:

	May 31,	May 31,
	2021	2020
Risk-free interest rate	0.20% to 1.61%	1.06%
Expected life of warrants	1 - 2 years	2 years
Share price	\$0.65 - \$2.50	\$0.65
Annualized volatility	100% - 115%	62.89%
Dividend rate	0.00%	0.00%

Valuation based on assumptions:
Fair value per warrants granted	\$0.48 to \$0.61	\$0.13 to \$0.23

For the Year Ended May 31, 2021

(Expressed in Canadian Dollars)

Stock options

Continuity schedule of the Company's stock options issued and outstanding for the year-ended May 31, 2021, and 2020, was as follows:

		May 31, 2021		May 31, 2020
	Number of options	Weighted average exercise price	Number of options	Weighted average exercise price
Outstanding, beginning of year	4,294,020	\$ 0.51	2,285,492	\$ 0.38
Granted	1,510,000	0.67	2,370,000	0.63
Exercised	(1,294,401)	0.31	-	-
Forfeited/cancelled	(250,000)	0.65	(361,472)	0.50
Outstanding, end of year	4,259,619	\$ 0.61	4,294,020	\$ 0.55

As at May 31, 2021, the following stock options were outstanding and exercisable with an average remaining life of 2.68 years (2020 - 2.31 years):

Exercise price (\$)	Number of options outstanding	Expiry date	Number of options vested and exercisable
\$ 0.28	355,859	Oct 2, 2025	355,859
\$ 0.53	1,183,760	From Mar 11, 2022 to Jun 1, 2024	793,135
\$ 0.65	2,120,000	From Oct 10, 2024 to Jul 1, 2025	479,892
\$ 0.80	600,000	Dec 15, 2025	-
\$ 0.61	4,259,619		1,628,886

The following assumptions were used for the Black-Scholes valuation of stock options granted during the period ended May 31, 2021, and 2020:

	May 31,	May 31,
	2021	2020
Risk-free interest rate	0.37% to 0.45%	0.56% to 1.60%
Expected life of options	5 years	6 years
Share price	\$0.65 - \$0.80	\$0.53 to \$0.65
Annualized volatility	100% - 105%	60.0%
Dividend rate	0.00%	0.00%
Valuation based on assumptions:

Fair value per options granted	\$0.32 to \$0.40	\$0.35 to \$0.39

13. RELATED PARTY TRANSACTIONS

The related party transactions are in the normal course of operations and have been valued in these consolidated financial statements at the exchange amount, which is the amount of consideration established and agreed to by the related parties. Amounts due to or from related parties are non-interest bearing, unsecured and due on demand. Related party transactions not disclosed elsewhere in these consolidated financial statements are listed below.

• (a) For the year ended May 31, 2021, the Company incurred salary and benefits expenses of \$227,463 (2020 \$75,869), \$262,000 (2020 - \$77,000) in management fees, of which \$225,000 was a success bonus, to the CEO of the Company and to a company controlled by the CEO of the Company. In addition, the Company incurred home office expenses of \$22,500 (2020 - \$nil) and lower than market rent expenses of \$13,800 (2020 - \$nil) regarding a condo owned by the CEO for one of the Company's key staff to a company controlled by the CEO of the Company. Total paid was \$525,763 (2020 - \$152,869). As May 31, 2021, \$15,074 (2020 - \$15,074) was owed to the CEO of the Company which is included in due to related parties.
• (b) For the year ended May 31, 2021, the Company incurred management fees of \$475,000 (2020 \$107,000), which included a success bonus of \$225,000 (2020 – \$nil), and home office expenses of \$21,000 (2020 - \$nil) to a company controlled by the President of the Company. Total paid was \$496,000 (2020 - \$107,000). As at May 31, 2021, \$3,150 (2020 - \$nil) was owed to the President of the Company which is included in due to related parties.
• (c) For the year ended May 31, 2021, the Company recorded salary and benefits expenses of \$9,113 (2020 \$nil) to the Chief Financial Officer of the Company. As at May 31, 2021, \$363 (2020 - \$nil) was owed to the Chief Financial Officer of the Company which is included in due to related parties.
• (d) For the year ended May 31, 2021, the Company incurred consulting fees of \$126,775 (2020 \$35,000), which included a bonus of \$18,775 (2020 - \$nil) to a company controlled by the former Chief Financial Officer of the Company.
• (e) For the year ended May 31, 2021, the Company incurred consulting fees of \$61,000 (2020 \$46,452) to John LaGourgue, the former President of the Company.
• (f) For the year-end May 31, 2021, the Company recognized \$273,287 (2020 \$137,739) as share-based compensation for stock options to directors and officers of the Company.

Key management personnel compensation

Key management personnel includes the Company's directors and key employees consisting of the Chairman of the Board, the Chief Executive Officer, the President, and the Chief Financial Officer and Corporate Secretary.

Compensation summary for the years ended May 31, 2021, and 2020 was as follows:

	May 31, 2021	May 31, 2020
Compensation of directions
Share-based compensation	\$ 64,665	\$ -
	\$ 64,665	\$ -
Compensation of key management personnel
Salaries, consulting fees and short-term benefits (1)	\$ 1,218,651	\$ 341,322
Share-based compensation	208,622	137,739
	\$ 1,427,273	\$ 456,174

(1) - Salaries, consulting fees and short-term benefits are included in salaries and benefits; management fees; and advisory fees; and consulting fees.

14. FINANCIAL INSTRUMENTS and RISK MANAGEMENT

Fair value of financial instruments

Fair value

The Company classifies its financial instruments measured at fair value at one of three levels according to the relative reliability of the inputs used to estimate the fair value in the fair value hierarchy.

• Level 1 Unadjusted quoted prices in active markets for identical assets or liabilities.
• Level 2 Inputs other than quoted prices that are observable for the asset or liability either directly or indirectly.
• Level 3 Inputs that are not based on observable market data. The Company has no financial instruments classified in Level 3.

In evaluating fair value information, considerable judgment is required to interpret the market data used to develop the estimates. The use of different market assumptions and different valuation techniques may have a material effect on the estimated fair value amounts. Accordingly, the estimates of fair value presented herein may not be indicative of the amounts that could be realized in a current market exchange.

The following tables present the carrying amounts and fair values of the Company's financial assets and liabilities, including their levels within the fair value hierarchy. Fair value information for financial assets and financial liabilities not measured at fair value is not presented if the carrying amount is a reasonable approximation of fair value.

	Fair value
	through profit	Amortized		Fair Value
May 31, 2021	and loss	cost	Level 1	Level 2	Level 3	Total
Financial assets
Cash and cash equivalents	\$ -	\$ 50,526,731	\$ 50,526,731	\$ -	\$ -	\$ 50,526,731
Term deposits	-	40,000	40,000	-	-	40,000
Trade and other receivables	-	603,385	-	603,385	-	603,385
	\$ -	\$ 51,170,116	\$ 50,566,731	\$ 603,385	\$ -	\$ 51,170,116
Financial Liabilities
Trade and other payables	-	1,516,954	1,516,954	-	-	1,516,954
Bank overdraft	-	804,611	804,611	-	-	804,611
Deferred Government grant liability	-	1,000,000	-	1,000,000	-	1,000,000
Due to related parties	-	18,587	18,587	-	-	18,587
Government loan payable	-	1,456,228	-	1,456,228	-	1,456,228
	\$ -	\$ 4,796,380	\$ 2,340,152	\$ 2,456,228	\$ -	\$ 4,796,380

	Fair value
May 30, 2020	through profit and loss		Amortized cost		Level 1		Fair value Level 2		Level 3		Total
Financial assets
Cash and cash equivalents	\$ -	\$	3,311,463	\$	3,311,463	\$	-	\$	-	\$	3,311,463
Term deposits	-		14,000		14,000		-		-		14,000
Trade and other receivables	-		274,718		-		274,718		-		274,718
Due from related parties	-		32		32		-		-		-
	\$ -	\$	3,600,181	\$	3,325,463	\$	274,718	\$	-	\$	3,600,181
Financial Liabilities
Trade and other payables	-		664,793		644,793		-		-		664,793
Deferred Government grant liability	-		-		-		-		-		-
Due to related parties	-		15,074		15,074		-		-		15,074
Government loan payable	-		1,462,549				1,462,549		-		1,462,549
	\$ -	\$	2,142,416	\$	679,867	\$	1,462,549	\$	-	\$	2,142,416

Financial risk management

The risks associated with financial instruments and the policies on how to mitigate these risks are set out below. Management monitors these exposures to ensure appropriate measures are implemented on a timely and effective manner.

Credit risk

Credit risk is the risk of financial loss to the Company if a counterparty to a financial instrument fails to meet its contractual obligations. The Company's cash and cash equivalents, term deposits, and other receivables, and due from related parties are subject to credit risk for a maximum of the amount shown on the consolidated statements of financial position. The Company limits its exposure to credit risk on cash and cash equivalents by depositing only with reputable financial institutions and limits its exposure to credit risk on other receivables by only working with large and well-funded organizations. The carrying amount of financial assets represents the maximum credit exposure. Management believes that the Company is subject to minimal credit risk.

Liquidity risk

Liquidity risk is the risk that the Company will not be able to meet its financial obligations as they fall due. The purpose of liquidity risk management is to maintain a sufficient amount of cash and cash equivalents to meet its liquidity requirements at any point in time. The Company uses cash to settle its financial obligations as they become due, with trade payables coming due on standard commercial terms.

The Company's objective is to have sufficient liquidity to meet its liabilities when due. The Company monitors its cash balances and cash flows generated from operations to meet its requirements. It has sufficient cash and cash equivalents and an unused bank overdraft, if needed, to meet the obligations in the following table below:

					2021
	Less than 1 year	1 to 3 years	4 to 5 years	Over 5 years	Total
Trade and other payables	\$ 1,516,954	\$ -	\$ -	\$ -	\$ 1,516,954
Due to related parties	18,587	-	-	-	18,587
Gov't loan payable	500,004	1,500,012	291,649	-	2,291,665
Long-term lease liabilities	155,851	472,500	170,625	-	798,976
					2020
	Less than 1 year	1 to 3 years	4 to 5 years	Over 5 years	Total
Trade and other payables	\$ 664,793	\$ -	\$ -	\$ -	\$ 644,793
Due to related parties	15,074	-	-	-	15,074
Gov't loan payable	208,335	1,500,012	791,653	-	2,500,000

Interest rate risk

Interest rate risk is the risk that the fair value or the future cash flows of a financial instrument will fluctuate because of changes in market interest rates. The Company is only subject to interest rate risk on its cash and term deposits in the bank and there is unlikely to be a material impact on net income (loss) as the bank deposits are short term.

Foreign Exchange Rate Risk

Foreign exchange risk is the risk that the Company's financial instruments will fluctuate in value as a result of movements in foreign exchange rates. The Company is not exposed to any significant foreign exchange rate risk.

15. CAPITAL RISK MANAGEMENT

The Company's primary objective when managing capital is to maintain sufficient resources and raise funding to support current and long-term operating needs. The ability to continue as a going concern is essential to the Company's goal of providing returns to shareholders and other stakeholders. The capital structure of the Company consists of shareholders' equity. The Company manages its capital structure and makes adjustments, based on the level of funds available to the Company to manage its operations and in light of economic conditions. The Company balances its overall capital through new share issuances or by undertaking other activities as deemed appropriate in the circumstances. The Company is not subject to externally imposed capital requirements. There have been no significant changes in the Company's approach to capital management during the year. These objectives and strategies are reviewed on a continuous basis.

16. SEGMENT DISCLOSURES

The Company operates in one reporting segment. All of the Company's assets are located in Canada.

17. INCOME TAXES

The following table reconciles the expected income tax expense (recovery) at the Canadian statutory income tax rates to the amounts recognized in the consolidated statements of operations and comprehensive loss for the years ended May 31, 2021 and 2020:

	Year Ended May	Year Ended May
	31, 2021	31, 2020
Net loss before tax	\$ (17,178,988)	\$ (2,187,600)
Statutory tax rate	27%	27%
Expected tax recovery	(4,638,327)	(590,652)
Non-deductible items	1,394,066	92,141
Change in estimates	-	(11,415)
Other	15,650	-
Debt forgiveness	-	60,092
Foreign exchange	28,305	-
Share issuance costs	(360,237)	(54,399)
Change in deferred tax assets not recognized	3,560,543	504,233
Total tax expense (recovery)	\$ -	\$ -

The significant components of the Company's deferred tax assets that have not been included on the consolidated statement of financial position are as follows:

	2021	2020
Deferred tax assets (liabilities)
Government loan payable	\$ (280,112)	\$ (280,112)
Plant and equipment	(17,683)	-
ROU Asset	(175,811)	-
Low interest government loan – WINN benefit	280,112	280,112
Non-capital loss carryforwards	193,493	-
Net deferred tax assets	\$ -	\$ -

Deferred taxes reflect the tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and their tax values. The unrecognized deductible temporary differences as at May 31, 2021 and 2020 are as follows:

	2021	2020
Non-capital loss carryforwards	\$ 13,321,262	\$ 3,999,026
Share issuance costs	1,188,254	161,945
Property and equipment	1,704,327	919,252
Intangible assets	1,615,760	-
Lease liability	542,647	-
Low interest government loan – WINN benefit	129,691	129,691
Eligible capital property	450	450
Unrecognized deductible temporary differences \$	18,502,391	\$ 5,210,364

The Company has non-capital loss carryforwards of approximately \$13,321,262 (2020: \$3,999,026) which may be carried forward to apply against future income for Canadian tax purposes, subject to the final determination by taxation authorities, expiring in the following years:

EXPIRY	2021	2020
2035	\$ 7,435	\$ 64,519
2036	100,386	308,120
2037	310,807	697,140
2038	638,876	638,876
2039	822,924	822,924
2040	7,590,038	1,467,437
2040	3,850,795	-
TOTAL	\$ 13,321,262	\$ 3,999,026

18. COMMITMENTS

The Company has committed to procuring production equipment that totaled €1,793,000 and US\$592,045, respectively, of which payments of €610,000 and US\$288,146, respectively, were made, with the remaining balances owed of €1,163,000 and US\$303,898 respectively, totaling approximately \$2.1 million as at May 31, 2021. The transactions were recorded in prepaid expenses, deposits, and supplies. The equipment is expected to be delivered in calendar Q4 2021 with remaining payments due on delivery.

The Company has entered into an agreement for leased premises commencing February 1, 2021 and ending on February 28, 2026. Total future minimum lease payments (net of any sub-lease arrangements) under the contract are as follows: Within 1 year - \$155,851; 2 to 4 years – each \$157,500; and the remaining - \$170,625.

Subsequent to year-end, the Company committed to acquiring 7 Nespresso and K-cup machines for €5,045,000 (approximately \$7.5 million) from an Italian manufacturer.

19. CONTINGENCIES

The Company is party to legal proceedings and has determined that each such proceeding constitutes a routine matter incidental to the business it conducts and that the ultimate disposition of the proceedings, it is anticipated will not have a material effect on its statements of loss or comprehensive loss, statements of financial position, or statements of cash flows.

The Company has two breach of contract cases that it is currently being defended and management believes that these claims are without merit.

On August 23, 2018, a third party brought an action against G-PAK Holdings Ltd. (Nexe Innovations Inc.). The Company has defended the claim on the basis that the work was done by the third party was defective.

No provision for these claims was recorded as of May 31, 2021 as management believes they are without merit.