Tarku Resources Ltd. — Audit Report / Information 2021

Oct 1, 2021

ORION NUTRACEUTICALS INC.

CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED MAY 31, 2021 AND 2020

Expressed in Canadian Dollars

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INDEPENDENT AUDITOR'S REPORT

To the Shareholders of Orion Nutraceuticals Inc.

Opinion

We have audited the consolidated financial statements of Orion Nutraceuticals Inc. (the “Company”), which comprise the consolidated statements of financial position as at May 31, 2021 and 2020, and the consolidated statements of loss and comprehensive loss, changes in shareholders’ equity (deficit) and cash flows for the years then ended, and notes to the consolidated financial statements, including a summary of significant accounting policies (collectively referred to as the “financial statements”).

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

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 Financial Statements section of our report. We are independent of the Company in accordance with the ethical requirements that are relevant to our audit of the financial statements in Canada, and we have fulfilled our other ethical responsibilities in accordance with these requirements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.

Material Uncertainty Related to Going Concern

We draw attention to Note 1 to the financial statements, which describes matters and conditions that indicate the existence of a material uncertainty that may cast significant doubt about the Company’s ability to continue as a going concern. Our opinion is not modified in respect of this matter.

Other Information

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

Our opinion on the 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 financial statements, our responsibility is to read the other information identified above and, in doing so, consider whether the other information is materially inconsistent with the financial statements or our knowledge obtained in the audit, 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, 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 Financial Statements

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

In preparing the financial statements, management is responsible for assessing the Company's ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless management either intends to liquidate the Company or to cease operations, or has no realistic alternative but to do so.

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

Auditor's Responsibilities for the Audit of the Financial Statements

Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an 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 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 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 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 financial statements, including the disclosures, and whether the financial statements represent the underlying transactions and events in a manner that achieves fair presentation.

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.

The engagement partner on the audit resulting in this independent auditor's report is Barry Hartley .

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DALE MATHESON CARR-HILTON LABONTE LLP CHARTERED PROFESSIONAL ACCOUNTANTS

Vancouver, BC

September 29, 2021

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Orion Nutraceuticals Inc.

Consolidated Statements of Financial Position (Expressed in Canadian dollars)

AS AT,	Note May 31, 2021 May 31, 2020
ASSETS Current assets Cash Taxes receivable Promissory notes Prepaid expenses	$ 280,185 $ 501,293 100,394 83,199 3 2,047,460 - 643 475
TOTAL ASSETS	$ 2,428,682 $ 584,967
LIABILITIES AND SHAREHOLDERS’ EQUITY Current liabilities Accounts payable Accrued liabilities Loans payable	4,5 $ 215,907 $ 657,153 189,375 148,695 5,6 44,000 44,000
TOTAL LIABILITIES	449,282 849,848
SHAREHOLDERS’ EQUITY (DEFICIT) Share capital Share-based payment reserve Deficit	7 8,513,978 5,963,570 7 1,331,546 754,737 (7,865,202) (6,982,266)
Attributable to Shareholders Non-controlling interest	1,980,322 (263,959) 2 (922) (922)
TOTAL SHAREHOLDER’S EQUITY (DEFICIT)	1,979,400 (264,881)
TOTAL LIABILITIES AND SHAREHOLDERS’EQUITY	$ 2,428,682 $ 584,967

Nature of Operations and Going Concern (Note 1) Subsequent event (Note 11)

Approved and authorized by the Board on September 29, 2021

Approved by the Directors:

“Robin Linden”

“Sam Jenkins”

See accompanying notes to the consolidated financial statements

Consolidated Statements of Loss and Comprehensive Loss (Expressed in Canadian dollars)

Orion Nutraceuticals Inc.

	For the year ended Note May 31, 2021 May 31, 2020
EXPENSES Consulting fees Management fees Office administration Professional fees Regulatory and transfer agent fees Share based compensation	5 $ 191,163$ 311,526 5 90,000 148,503 11,817 19,519 231,618 34,764 17,508 28,241 5,7 10,390 544
OTHER ITEMS Change in fair value of promissory notes Foreign exchange loss Gain on settlement of accounts payable Gain on settlement of loan payable	(552,496) (543,097) 3 (175,615) - 3 (174,825) - 4 20,000 - 7 - 156,854
Loss and comprehensive loss for the year	$ (882,936)$ (386,243)
Net and comprehensive loss attributable to: Shareholders of Orion Non-controlling interests	$ (882,936)$ (385,321) 2 - (922)
	$ (882,936) $ (386,243)
Basic and diluted loss per share	$ (0.03) $ (0.20)
Weighted average number of common shares outstanding	26,637,358 1,911,025

See accompanying notes to the consolidated financial statements

Orion Nutraceuticals Inc.

Consolidated Statements of Changes in Shareholders’ Equity (Deficit) (Expressed in Canadian dollars)

	Share capital Number of shares* Amount $ Obligation to issue shares $ Share- based payment reserve $ Deficit $ Non- controlling Interest $ Total $
Balance at May 31, 2019 Shares issued for services (Note 7) Shares issued for private placement (Note 7) Shares issued to settle debt (Note 7) Obligation to issue shares (Note 7) Share based compensation (Note 7) Net and comprehensive loss Non-controlling interest (Note 2)	1,938,281 5,367,925 91,655 754,193 (6,596,945) - (383,172) 18,000 92,500 (92,500) - - - 4,727,274 500,000 - - - 500,000 37,000 3,145 - - - - 3,145 - - 845 - - - 845 - - - 544 - - 544 - - - - (385,321) - (385,321) - - - - - (922) (922)
Balance at May 31, 2020 Shares issued for private placement (Note 7) Finder's shares (Note 7) Share issuance cost (Note 7) Finder's warrants (Note 7) Warrants exercised (Note 7) Shares issued to settle debt (Notes 5 and 7) Share based compensation (Note 7) Net and comprehensive loss	6,720,555 5,963,570 - 754,737 (6,982,266) (922) (264,881) 20,000,000 3,020,000 - - - - 3,020,000 1,064,002 542,641 - - - - 542,641 - (662,341) - - - - (662,341) - (566,419) - 566,419 - - - 1,510,908 211,527 - - - - 211,527 12,500 5,000 - - - - 5,000 - - - 10,390 - - 10,390 - - - - (882,936) - (882,936)
Balance at May 31, 2021	29,307,965 8,513,978 - 1,331,546 (7,865,202) (922) 1,979,400

*The share numbers have been adjusted to reflect a consolidation of the Company’s share capital on a 25:1 basis effective May 22, 2020 (Note 1).

See accompanying notes to the consolidated financial statements

Orion Nutraceuticals Inc.

Consolidated Statements of Cash Flows

(Expressed in Canadian dollars)

		For the year	ended
		May 31, 2021	May	31, 2020
OPERATING ACTIVITIES
Loss for the year	$	(882,936) $	(386,243)
Adjustments for non-cash items:
Shares issued for services		-		845
Foreign exchange loss		174,822		-
Gain on settlement of accounts payable		(20,000)		-
Gain on settlement of loans payable		-	(156,854)
Stock based compensation		10,390		544
Change in fair value of promissory notes		175,615		-
Net change in non-cash working capital accounts:
Taxes receivable		(17,195)		(4,329)
Prepaid		(168)		2,025
Accounts payable		(375,566)		496,033
NET CASH FLOWS USED IN OPERATING ACTIVITIES		(935,038)		(47,979)
FINANCING ACTIVITIES
Proceeds from issuance of stock, net of share issuance costs		2,900,300		500,000
Proceeds from warrants exercised		211,527		-
Proceeds from loans		-		44,000
NET CASH FLOWS PROVIDED BY FINANCING ACTIVITIES		3,111,827		544,000
INVESTING ACTIVITIES
Promissory note receivable		(2,397,897)		-
NET CASH FLOWS USED IN INVESTING ACTIVITIES		(2,397,897)		-
Increase (decrease) in cash in the year		(221,108)		496,021
Cash, beginning		501,293		5,272
CASH, ENDING	$	280,185 $		501,293
Non-cash financing activities
Obligation to issue shares	$	- $		92,500
Shares issued to settle debt	$	5,000 $		3,145
Finders fee shares	$	566,419 $		-
Fair value of broker warrants	$	542,641 $		-

See accompanying notes to the consolidated financial statements

Orion Nutraceuticals Inc. Notes to the Consolidated Financial Statements (Expressed in Canadian dollars) For the year ended May 31, 2021 and 2020

1. NATURE OF OPERATIONS AND GOING CONCERN

Orion Nutraceuticals Inc. (the “Company” or “Orion”) was incorporated under the Business Corporations Act of British Columbia on November 7, 2017. On October 17, 2018, the shares of the Company commenced trading on the Canadian Securities Exchange (“CSE”) under the trading symbol ORI. On May 22, 2020, the Company completed a share consolidation on a 1 for 25 basis. All share capital numbers have been restated to reflect the share consolidation. The Company’s head office and principle place of business is located at Suite 810 -789 West Pender Street, Vancouver, British Columbia, V6C 1H2. The Company was in the business of pursuing acquisitions of, or investments in, subsidiaries in global markets to grow cannabis and extract cannabis oil that will be used as an ingredient in proprietary health and beauty products and distributed in bulk to other manufacturers. During the year ended May 31, 2021, the Company changed its business model to focus on re-purposing a United States Food and Drug Administration approved drug to target asthma and chronic obstructive pulmonary disease (COPD) (Note 3).

These consolidated financial statements have been prepared on the assumption that the Company will continue as a going concern, meaning they will continue in operation for the foreseeable future and will be able to realize assets and discharge liabilities in the ordinary course of operations. During the year ended May 31, 2021, the Company incurred a net loss of $882,936 (2020 - $386,243) and at May 31, 2021, the Company had a working capital of $1,979,400 (2020 – working capital deficiency of $264,881). The Company’s ability to meet its obligations and maintain its current operations is contingent upon successful completion of additional financing arrangements, continued cooperation of creditors and related parties, and ultimately upon generating profits from operations. These material uncertainties may cast significant doubt upon the entity’s ability to continue as a going concern.

The Company will depend almost exclusively on equity financing. Such equity financings will include the issuance of additional equity shares. There can be no assurance that equity financings will be available to meet the continuing operating costs or, if the equity is available, that it will be on terms acceptable to the Company. The issuances of additional equity securities by the Company may result in significant dilution to the equity interests of its current shareholders. Obtaining commercial loans, assuming those loans would be available, will increase the Company's liabilities and future cash commitments. If the Company is unable to obtain financing in the amounts and on terms deemed acceptable, the business and future success may be adversely affected, thus giving rise to doubt about the Company’s ability to continue as a going concern. These financial statements do not include any adjustments relating to the recoverability and reclassification of recorded asset amounts and classification of liabilities that might be necessary should the Company be unable to continue in existence.

In March 2020, the World Health Organization declared the outbreak of COVID-19 a global pandemic. Government measures to limit the spread of COVID-19, including the closure of non-essential businesses, did not materially disrupt the Company’s operations during the year ending May 31, 2021. Due to the rapid developments and uncertainty surrounding COVID-19, it is not possible to predict the impact that COVID-19 will have on the Company’s business, financial position and operating results in the future. In addition, it is possible that estimates in the Company’s financial statements will change in the near term as a result of COVID-19 and the effect of any such changes could be material, which could result in, among other things, impairment of long-lived assets including intangibles and goodwill. The Company is closely monitoring the impact of the pandemic on all aspects of its business.

2. SIGNIFICANT ACCOUNTING POLICIES AND BASIS OF PRESENTATION

Statement of compliance with International Financial Reporting Standards

The consolidated financial statements of the Company comply with International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board (“IASB”) and interpretations of the International Financial Reporting Interpretations Committee (“IFRIC”).

Basis of preparation

These consolidated financial statements have been prepared on an accrual basis and are based on historical costs, modified where applicable. The consolidated financial statements are presented in Canadian dollars, which unless otherwise noted, is the Company and its subsidiary’s functional currency.

Orion Nutraceuticals Inc.

Notes to the Consolidated Financial Statements (Expressed in Canadian dollars) For the year ended May 31, 2021 and 2020

2. SIGNIFICANT ACCOUNTING POLICIES AND BASIS OF PREPARATION (CONTINUED)

Basis of Consolidation

The Company’s consolidated financial statements include the accounts of the Company and its subsidiary MedicOasis Inc. (“MedicOasis”) in which the Company has a 99% ownership. A subsidiary is an entity controlled by the Company, where control exists when the Company has the power, directly or indirectly, to govern the financial and operating policies of an entity so as to obtain benefits from its activities. The financial statements of the Company’s subsidiary is included in the consolidated financial statements. All intercompany balances and transactions, income and expenses have been eliminated upon consolidation.

During the year ended May 31, 2020, MedicOasis incurred losses. During the year ended May 31, 2021, MedicOasis was inactive. The balance of the non-controlling interest as at May 31, 2021 was $(922) (2020 - $(922).

The non-controlling interest of 1% in MedicOasis was held by other minority shareholders.

	$
Non-controlling interest, May 31, 2019	-
Non-controlling interest in loss of Orion to May 31, 2020	(922)
Total non-controlling interest, May 31, 2021 and 2020	(922)

Significant estimates and assumptions

The preparation of financial statements in conformity with IFRS requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of income and expenses during the reporting period. The preparation of the financial statements also requires management to exercise judgement in the process of applying the accounting policies.

On an on-going basis, management evaluates its estimates and assumptions in relation to assets, liabilities and expenses. Management uses historical experience and various other factors it believes to be reasonable under the given circumstances, as the basis for its estimates and assumptions. Revisions to accounting estimates are recognized prospectively from the period in which the estimates are revised. Actual outcomes may differ from those estimates under different assumptions and conditions.

Estimates and assumptions where there is significant risk of material adjustments to assets and liabilities in future accounting periods include stock-based awards and payments, fair value measurements for financial instruments, the recoverability and measurement of deferred tax assets.

Significant judgments

The preparation of financial statements in accordance with IFRS requires the Company to make judgments, apart from those involving estimates, in applying accounting policies. The most significant judgments in applying the Company’s financial statements include:

• the assessment of the Company’s ability to continue as a going concern and whether there are events or conditions that may give rise to significant uncertainty.

Orion Nutraceuticals Inc. Notes to the Consolidated Financial Statements (Expressed in Canadian dollars) For the year ended May 31, 2021 and 2020

2. SIGNIFICANT ACCOUNTING POLICIES AND BASIS OF PREPARATION (CONTINUED)

Impairment of assets

The carrying amount of the Company’s non-financial assets is reviewed at each reporting date to determine whether there is any indication of impairment. If such indication exists, the recoverable amount of the asset is estimated in order to determine the extent of the impairment loss. An impairment loss is recognized whenever the carrying amount of an asset or its cash generating unit exceeds its recoverable amount. Impairment losses are recognized in the statement of comprehensive loss.

The recoverable amount of assets is the greater of an asset’s fair value less cost to sell and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects the current market assessments of the time value of money and the risks specific to the asset. For an asset that does not generate cash inflows largely independent of those from other assets, the recoverable amount is determined for the cash-generating unit to which the asset belongs.

An impairment loss is only reversed if there is an indication that the impairment loss may no longer exist and there has been a change in the estimates used to determine the recoverable amount. Any reversal of impairment cannot increase the carrying value of the asset to an amount higher than the carrying amount that would have been determined had no impairment loss been recognized in previous years.

Assets that have an indefinite useful life are not subject to amortization and are tested annually for impairment.

Financial instruments

(i) Classification

The Company classifies its financial instruments in the following categories: at fair value through profit and loss (“FVTPL”), at fair value through other comprehensive income (loss) (“FVTOCI”) or at amortized cost. The Company determines the classification of financial assets at initial recognition. The classification of debt instruments is driven by the Company’s business model for managing the financial assets and their contractual cash flow characteristics. Equity instruments that are held for trading are classified as FVTPL. For other equity instruments, on the day of acquisition the Company can make an irrevocable election (on an instrument-by-instrument basis) to designate them as at FVTOCI. Financial liabilities are measured at amortized cost, unless they are required to be measured at FVTPL (such as instruments held for trading or derivatives) or if the Company has opted to measure them at FVTPL.

The following table shows the classification under IFRS 9:

Financial assets/liabilities	Classification
Cash	FVTPL
Promissory notes	FVTPL
Accounts payable	Amortized cost
Loans payable	Amortized cost

(ii) Measurement

Financial assets and liabilities at amortized cost

Financial assets and liabilities at amortized cost are initially recognized at fair value plus or minus transaction costs, respectively, and subsequently carried at amortized cost less any impairment.

Financial assets and liabilities at FVTPL

Financial assets and liabilities carried at FVTPL are initially recorded at fair value and transaction costs are expensed in the statements of loss and comprehensive loss. Realized and unrealized gains and losses arising from changes in the fair value of the financial assets and liabilities held at FVTPL are included in the statements of loss and comprehensive loss in the period in which they arise.

Orion Nutraceuticals Inc. Notes to the Consolidated Financial Statements (Expressed in Canadian dollars) For the year ended May 31, 2021 and 2020

2. SIGNIFICANT ACCOUNTING POLICIES AND BASIS OF PREPARATION (CONTINUED)

Financial instruments (continued)

Debt investments at FVTOCI

These assets are subsequently measured at fair value. Interest income calculated using the effective interest method, foreign exchange gains and losses and impairment are recognised in profit or loss. Other net gains and losses are recognised in other comprehensive income (OCI). On derecognition, gains and losses accumulated in OCI are reclassified to profit or loss

Equity investments at FVTOCI

These assets are subsequently measured at fair value. Dividends are recognised as income in profit or loss unless the dividend clearly represents a recovery of part of the cost of the investment. Other net gains and losses are recognised in OCI and are never reclassified to profit or loss.

(iii) Impairment of financial assets at amortized cost

The Company recognizes a loss allowance for expected credit losses on financial assets that are measured at amortized cost. At each reporting date, the Company measures the loss allowance for the financial asset at an amount equal to the lifetime expected credit losses if the credit risk on the financial asset has increased significantly since initial recognition. If at the reporting date, the financial asset has not increased significantly since initial recognition, the Company measures the loss allowance for the financial asset at an amount equal to the twelve month expected credit losses. The Company shall recognize in the statements of loss and comprehensive loss, as an impairment gain or loss, the amount of expected credit losses (or reversal) that is required to adjust the loss allowance at the reporting date to the amount that is required to be recognized.

(iv) Derecognition

Financial assets

The Company derecognizes financial assets only when the contractual rights to cash flows from the financial assets expire, or when it transfers the financial assets and substantially all of the associated risks and rewards of ownership to another entity.

Financial liabilities

The Company derecognizes a financial liability when its contractual obligations are discharged or cancelled, or expire. The Company also derecognizes a financial liability when the terms of the liability are modified such that the terms and / or cash flows of the modified instrument are substantially different, in which case a new financial liability based on the modified terms is recognized at fair value.

Gains and losses on derecognition are generally recognized in profit or loss.

Loss per share

Basic loss per share is computed by dividing the net income or loss applicable to common shares of the Company by the weighted average number of common shares outstanding for the relevant period.

Diluted earnings/loss per common share is computed by dividing the net income or loss applicable to common shares by the sum of the weighted average number of common shares issued and outstanding and all additional common shares that would have been outstanding if potentially dilutive instruments were converted. If the calculation results in an anti-dilutive effect then only basic income or loss per share is presented.

Income taxes

Income tax expense comprises current and deferred tax. Current tax and deferred tax are recognized in net income except to the extent that it arises in a business combination, or from items recognized directly in equity or other comprehensive loss/income.

Orion Nutraceuticals Inc. Notes to the Consolidated Financial Statements (Expressed in Canadian dollars) For the year ended May 31, 2021 and 2020

2. SIGNIFICANT ACCOUNTING POLICIES AND BASIS OF PREPARATION (CONTINUED)

Income taxes (cont’d)

Current income tax assets and liabilities for the current period are measured at the amount expected to be recovered from or paid to the taxation authorities. The tax rates and tax laws used to compute the amount are those that are enacted or substantively enacted, at the reporting date, in the countries where the Company operates and generates taxable income. Current income tax relating to items recognized directly in other comprehensive income or equity is recognized in other comprehensive income or equity and not in profit or loss. Management periodically evaluates positions taken in the tax returns with respect to situations in which applicable tax regulations are subject to interpretation and establishes provisions where appropriate.

Deferred income tax is provided using the asset and liability method of temporary differences at the reporting date between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes. The carrying amount of deferred income tax assets is reviewed at the end of each reporting period and recognized only to the extent that it is probable that sufficient taxable profit will be available to allow all or part of the deferred income tax asset to be utilized. Deferred income tax assets and liabilities are measured at the tax rates that are expected to apply to the year when the asset is realized or the liability is settled, based on tax rates and tax laws that have been enacted or substantively enacted by the end of the reporting period. Deferred income tax assets and deferred income tax liabilities are offset, only if a legally enforceable right exists to set off current tax assets against current income tax liabilities and the deferred income taxes relate to the same taxable entity and the same taxation authority.

Share-based payments

Share-based payments to employees are measured at the fair value of the instruments issued and amortized over the vesting periods. Share-based payments to non-employees are measured at the fair value of goods or services received or the fair value of the equity instrument issued, if it is determined the fair value of the goods or services cannot be reliably measured, and are recorded at the date the goods or services are received. The corresponding amount is credited to the share-based payment reserve. The fair value of options is determined using the Black-Scholes Option Pricing Model. The number of shares and options expected to vest is reviewed and adjusted at the end of each reporting period such that the amount recognized for services received as consideration for the equity instruments granted, shall be based on the number of equity instruments that eventually vest.

Share capital

Financial instruments issued by the Company are classified as equity only to the extent that they do not meet the definition of a financial liability or financial asset. The Company’s common shares and share warrants are classified as equity instruments.

Incremental costs directly attributable to the issue of new shares or options are shown in equity as a deduction from the proceeds. Proceeds received on the issuance of units, consisting of common shares and warrants are allocated to share capital.

Valuation of equity units issued in private placements

The Company has adopted a residual value method with respect to the measurement of shares and warrants issued as private placement units. The residual value method first allocates value to the more easily measurable component based on fair value and then the residual value, if any, to the less easily measurable component.

The fair value of common shares issued in private placements was determined to be the more easily measurable component and are valued at their fair value, as determined by the closing quoted bid price on the announcement date. The balance, if any, is allocated to attached warrants. Any fair value attributed to warrants is recorded to reserves.

New or revised accounting standards

Other accounting standards or amendments to existing accounting standards that have been issued but have future effective dates are either not applicable or are not expected to have a significant impact on the Company’s financial statements.

Orion Nutraceuticals Inc. Notes to the Consolidated Financial Statements (Expressed in Canadian dollars) For the year ended May 31, 2021 and 2020

3. PROMISSORY NOTES

On August 25, 2020, the Company signed a non-binding letter of intent, as amended, to acquire all of the issued and outstanding securities of 2740162 Ontario Inc. (d/b/a “August Therapeutics”), a private corporation, in consideration for the payment of 60 million common shares in the capital of the Company to the shareholders of August Therapeutics pro rata to their ownership interest (the “Transaction”), expiring on December 31, 2021.

In connection with the proposed Transaction the Company extended to August Therapeutics a series of secured notes, bearing interest at 1% per annum compounded monthly totaling $1,725,017 (US$1,301,664). The proceeds of the notes shall be used by August Therapeutics strictly for the limited purpose of making subscription payments to InStatin, Inc. (“InStatin”) pursuant to a subscription earn-in agreement (the “Earn-in Agreement”) entered into among August Therapeutics and InStatin on August 12, 2020. All outstanding obligations under the secured notes will mature and be due and payable on the date that is 12 months from the date of the advances. The security for the secured notes shall be (i) the common shares of InStatin acquired pursuant to the Earn-in Agreement and (ii) a security interest in all present and futureacquired assets of August Therapeutics, which security interest shall be perfected by all legal steps required under applicable law. The notes were recorded at fair value using a discount rate of 20% at initial recognition and at year end.

During the year ended May 31, 2021, the Company extended to Ketiko Bio Corp. (“Ketiko”) a note, bearing interest of 1% per annum calculated monthly totaling $672,880 (US$500,000). The proceeds of the note shall be used by Ketiko strictly to purchase shares of InVixa Inc. (“InVixa”) pursuant to a subscription earn-in agreement entered into among Ketiko and InVixa on August 12, 2020. The note matures and is due and payable on October 28, 2021. The security for the note shall be (i) the common shares of InVixa acquired by Ketiko and (ii) a security interest in all present and future-acquired assets of Ketiko. The note was recorded at fair value using a discount rate of 20% at initial recognition and at year end. Subsequent to May 31, 2021, the Company advanced an additional US$150,000 note to Ketiko on the same terms as the initial advance (Note 12).

The following table summarizes the promissory note activity:

	August
	Therapeutics	Ketiko	Total
	$	$	$
Balance, May 31, 2020	-	-	-
Promissory notes advanced	1,725,017	672,880	2,397,897
Change in fair value	(126,022)	(49,593)	(175,615)
Foreign exchange	(117,188)	(57,634)	(174,822)
Balance, May 31, 2021	1,481,807	565,653	2,047,460

4. GAIN ON SETTLEMENT OF ACCOUNTS PAYABLE

During the year ended May 31, 2021, the Company settled accounts payable to a third-party vendor for amounts owing of $40,000 through a cash payment of $20,000. The gain on settlement of $20,000 was recorded as the difference between the amount owing and the settlement payment.

Orion Nutraceuticals Inc. Notes to the Consolidated Financial Statements (Expressed in Canadian dollars) For the year ended May 31, 2021 and 2020

5. RELATED PARTY TRANSACTIONS AND BALANCES

The Company defines key management as directors and officers of the Company.

During the years ended May 31, 2021 and 2020, the Company paid or accrued the following to key management compensation:

	May 31, 2021	May 31, 2020
	$	$
Management and consulting fees paid or accrued to a director of the Company	-	38,336
Management fees paid or accrued to the former CFO and related companies	-	37,500
Management fees paid or accrued to the former CEO and related companies	-	36,000
Management and consulting fees paid or accrued to the current CEO and related
companies	90,000	75,000
Consulting fees paid or accrued to a director of the Company	5,000	5,000
Share based compensation	10,390	12,146
Total	105,390	203,982

At May 31, 2021, the Company owes $140,400 (2020 - $183,800) directly or to companies controlled by key management personnel, which is included in accounts payable. At May 31, 2021, the Company owes $20,000 (2020 - $20,000) directly to key management personnel, which is included in loans payable (Note 6). These amounts are unsecured, non-interest bearing and due on demand.

On July 31, 2020, the Company issued 12,500 common shares with a fair value of $5,000 to settle $5,000 of director fees charged in 2020 (Note 7).

On March 2, 2021, pursuant to the terms of a settlement agreement dated September 3, 2020 between the Company and the former CEO, the Company transferred 13,271 shares of FCM Global, S.A.A.(“FCM”) to the former CEO in return for the full and final release of the Company from claims in regards to compensation owing to the former CEO as of the date of his departure. The Company acquired the 13,271 shares of FCM when it was pursuing the acquisition of FCM in 2019.The fair value of the 13,271 shares of FCM was fully impaired as of May 31, 2019 when the acquisition of FCM was no longer pursued by the Company.

6. LOANS PAYABLE

The Company has loan balances of $44,000 owing as of May 31, 2021 (May 31, 2020 - $44,000), of which $20,000 (2020 - $20,000) is payable to key management personnel (Note 5). The loans are unsecured, non-interest bearing and due on demand.

7. SHARE CAPITAL AND RESERVES

Authorized: Unlimited common shares without par value.

On May 22, 2020, the Company consolidated its common shares on the basis of 1 common share for every 25 common shares. All number of shares and per share amounts have been retroactively restated in these consolidated financial statements to reflect this share consolidation. At May 31, 2021, there were 37,056 (May 31, 2020 - 111,168) shares held in escrow.

Issued and Outstanding:

For the year ended May 31, 2021

On July 10, 2020, the Company closed the second tranche of a non-brokered private placement of 20,000,000 Units (“Unit”) of the Company at a price of $0.15 per Unit for gross proceeds of $3,020,000. Each Unit consists of one common share and one share purchase warrant (“Warrant”). Each Warrant expires on July 10, 2022 with an exercise price of $0.40. The Company uses the residual value method and as a result no value was assigned to the Warrants.

Orion Nutraceuticals Inc. Notes to the Consolidated Financial Statements (Expressed in Canadian dollars) For the year ended May 31, 2021 and 2020

7. SHARE CAPITAL AND RESERVES (CONTINUED)

For the year ended May 31, 2021 (continued)

In connection with the private placement completed on July 10, 2020, the Company granted to finders 1,084,002 finder’s warrants with an exercise price of $0.40 per warrant expiring on July 10, 2022. The total fair value of the warrants was estimated to be $552,553 using the Black-Scholes Option Pricing Model with the following assumptions: term of 2 years; expected volatility of 370%; risk-free rate of 0.25%; and expected dividends of zero. The Company also granted to finders 27,997 finder’s warrants with an exercise price of $0.15 per warrant expiring on July 10, 2021. The total fair value of the warrants was estimated to be $13,866 using the Black-Scholes Option Pricing Model with the following assumptions: term of 1 year; expected volatility of 458%; risk-free rate of 0.25%; and expected dividends of zero.

In connection with the private placement completed on July 10, 2020, the Company issued 1,064,002 common shares at fair value of $542,641 and paid cash finder’s fees of $70,700 to arm’s length parties. Included in the share issuance cost is $49,000 legal fees related to closing of the private placement.

On July 31, 2020, the Company issued 12,500 common shares with a fair value of $5,000 to settle $5,000 of director fees charged in 2020 (Note 5).

On August 26, 2020, the Company issued 1,510,908 common shares pursuant to warrants exercised for gross proceeds of $211,527.

For the year ended May 31, 2020

On July 24, 2019, the Company issued in-aggregate 18,000 common shares for services with a fair value of $92,500. The Company reclassified $92,500 from obligation to issue shares to share capital.

The Company settled $159,999 owing for services through the issuance of 37,000 common shares and recognized a gain on settlement of debt of $156,854. The gain was calculated as the difference between the fair value of services provided and the fair value of the shares issued.

On May 28, 2020, the Company closed the first tranche of a non-brokered private placement of 4,727,274 Units (“Unit”) of the Company at a price of $0.11 per Unit for gross proceeds of $500,000. Each Unit consists of one common share and one share purchase warrant (“Warrant”). Each Warrant expires on May 28, 2022 with an exercise price of $0.14. The Company uses the residual value method and as a result no value was assigned to the Warrants.

Obligation to issue shares

During the year ended May 31, 2020, the Company issued 18,000 common shares for services with a fair value of $92,500 and reversed an obligation to issue shares of $845 due to the termination of key executives.

Share Purchase Warrants

The following table summarizes warrant activity:

		Weighted average price
	Number of warrants	$
Balance at May 31, 2019	89,160	21.95
Issued	4,727,274	0.14
Balance at May 31, 2020	4,816,434	0.54
Issued	21,111,999	0.40
Expired	(89,160)	(21.95)
Exercised	(1,510,908)	(0.14)
Balance at May31, 2021	24,328,365	0.37

Notes to the Consolidated Financial Statements (Expressed in Canadian dollars) For the year ended May 31, 2021 and 2020

Orion Nutraceuticals Inc.

7. SHARE CAPITAL AND RESERVES (CONTINUED)

Share Purchase Warrants (continued)

Share purchase warrants outstanding at May 31, 2021is as follows:

Number of warrants	Exercise price		Weighted Average
outstanding and exercisable	$	Expiry date	Remaining Life(years)
3,216,366	0.14	May 28, 2022	0.99
20,000,000	0.40	July 10, 2022	1.11
1,084,002	0.40	July 10, 2022	1.11
27,997*	0.15	July 10, 2021	0.11
24,328,365			1.09

*Expired unexercised subsequent to the year ended May 31, 2021.

Options

The Company grants stock options to employees, directors, officers, and consultants of the Company as compensation for services pursuant to its Stock Option Plan (the “Plan”). Options have a maximum expiry period of up to five years from the grant date and are subject to minimum vesting requirements, as determined by the Board of Directors. The number of options that may be issued under the Plan may not exceed 20% of the number of issued and outstanding common shares of the Company at the time of granting of options.

The following table summarizes options activity:

		Weighted average price
	Number of options	$
Balance at May 31, 2019	168,000	6.50
Issued	12,000	3.75
Expired	(78,000)	(6.25)
Balance May 31, 2020	102,000	6.41
Expired	(44,000)	(7.31)
Balance at May31, 2021	58,000	5.73

Information regarding stock options outstanding at May 31, 2021 is as follows:

Number of options	Exercise price		Weighted Average
outstanding and exercisable	$	Expiry date	Remaining Life(years)
22,000	6.25	August 15, 2023	2.21
24,000	6.25	October 5, 2023	2.35
12,000	3.75	September 13, 2023	2.29
58,000			2.28

On August 15, 2018, the Company granted 92,000 stock options with an exercise price of $6.25 per share expiring on August 15, 2023. 83,250 options vested immediately with the remaining 8,750 options vesting 12.5% every 3 months. The total fair value of the stock options was estimated to be $431,475 using the Black-Scholes Option Pricing Model with the following assumptions: term of 5 years; expected volatility of 100%; risk-free rate of 2.16%; and expected dividends of zero. As at May 31, 2021, the number of exercisable options was 22,000. During the year ended May 31, 2020, the Company reversed share based compensation of $17,060 due to the resignation of an executive.

Orion Nutraceuticals Inc. Notes to the Consolidated Financial Statements (Expressed in Canadian dollars) For the year ended May 31, 2021 and 2020

7. SHARE CAPITAL AND RESERVES (CONTINUED)

Options (continued)

On February 21, 2019, the Company granted 12,000 stock options with an exercise price of $5.375 per share expiring on February 21, 2021. 6,000 options vested immediately with the remainder vesting 6 months from the date of grant. The total fair value of the stock options was estimated to be $24,096 using the Black-Scholes Option Pricing Model with the following assumptions: term of 2 years; expected volatility of 100%; risk-free rate of 1.79%; and expected dividends of zero. During the year ended May 31, 2019, the Company recognized share based compensation of $18,638. During the year ended May 31, 2020, the Company recognized share based compensation of $5,458.

On September 13, 2019, the Company granted 12,000 stock options with an exercise price of $3.75 per share expiring on September 13, 2023. 1/3 of the options vest on the first, second and third anniversary dates, respectively. The total fair value of the stock options was estimated to be $27,851 using the Black-Scholes Option Pricing Model with the following assumptions: term of 4 years; expected volatility of 210%; risk-free rate of 1.55%; and expected dividends of zero. During the year ended May 31, 2021, the Company recognized share based compensation of $10,390 (2020 - $12,146).

Share-based payment reserve

The share-based payment reserve records items recognized as stock based compensation expense and other share-based payments until such time that the stock options or warrants are exercised, at which time the corresponding amount will be transferred to share capital.

8. CAPITAL MANAGEMENT

The Company’s objective when managing capital is to safeguard the Company’s ability to continue as a going concern in order to carry out its business plan and to maintain a flexible capital structure which optimizes the costs of capital at an acceptable risk.

The Company depends on external financing to fund its activities. The capital structure of the Company consists of common shares. The Company manages the capital structure and makes adjustments to it in light of changes in economic conditions and the risk characteristics of the underlying assets. To maintain or adjust the capital structure, the Company may attempt to issue new shares, acquire or dispose of assets or adjust the amount of cash.

There were no changes in the Company’s approach to capital management during the year. There are no externally imposed capital requirements.

9. FINANCIAL INSTRUMENTS AND RISK MANAGEMENT

(a) Fair values

The fair values of cash, promissory notes, loans payable and accounts payable approximate their carrying values due to the short-term to maturities of these financial instruments.

Financial instruments measured at fair value are classified into one of three levels in the fair value hierarchy according to the relative reliability of the inputs used to estimate the fair values. The three levels of the fair value hierarchy are:

• 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; and

• Level 3 – Inputs that are not based on observable market data.

Orion Nutraceuticals Inc. Notes to the Consolidated Financial Statements (Expressed in Canadian dollars) For the year ended May 31, 2021 and 2020

9. FINANCIAL INSTRUMENTS AND RISK MANAGEMENT (CONTINUED)

• (b) Interest rate risk

Interest rate risk is the risk that the fair value of future cash flows of a financial instrument will fluctuate because of changes in market interest rates. The Company is not exposed to interest rate risk.

(c) Liquidity risk

Liquidity risk is the risk that the Company will not be able to meet its financial obligations as they become due. The Company’s objective in managing liquidity risk is to maintain sufficient readily available reserves in order to meet its liquidity requirements at any point in time. The Company achieves this by maintaining sufficient cash on hand to meet its financial obligations. Liquidity risk is assessed as moderate.

(d) Credit risk

Credit risk is the risk that one party to a financial instrument will fail to discharge an obligation and cause the other party to incur a financial loss. The Company’s primary exposure to credit risk is in its cash and promissory notes. The risk on cash is managed through the use of a major financial institution which has a high credit quality as determined by rating agencies. The Company is exposed to risk is on its promissory note, which is secured and receivable from two arm’s length parties. Credit risk is assessed as moderate.

• (e) 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’s promissory notes are denominated in United States dollars. The Company does not hedge its exposure to fluctuations in foreign exchange rates. At May 31, 2021, a 10% change in the United States dollar to Canadian dollar exchange rate would impact the Company’s net loss by $204,746.

10. INCOME TAXES

The actual income tax provision differs from the expected amounts calculated by applying the Canadian combined federal and provincial statutory corporate income tax rate to the Company’s loss before income tax recovery. The components of these differences are as follows:

		2021	2020
Loss before income tax recovery	$	(882,936)	$ (386,243)
Corporate tax rate		27%	27%
Income tax recovery at statutory tax rates		(238,000)	(104,000)
Increase resulting from:
Non-deductible expenses and other		97,000	-
Effect of share issuance costs not recognized		(32,000)	-
Change in unrecognized deductible temporary differences		173,000	104,000
Income tax recovery	$-		$-

Orion Nutraceuticals Inc.

Notes to the Consolidated Financial Statements (Expressed in Canadian dollars) For the year ended May 31, 2021 and 2020

10. INCOME TAXES (CONTINUED)

The significant components of the Company’s deferred tax liabilities and offsetting tax assets are as follows:

	2021	2020
Deferred Tax Asset
Non-capital losses carry forwards	$ 892,000	$ 744,000
Share issuance costs	28,000	43,000
Valuation allowance	(920,000)	(747,000)
	$-	$-

At May 31, 2021, the Company has non-capital losses of $3,304,195 that expire between 2038-2041.

11. SUBSEQUENT EVENT

Subsequent to May 31, 2021, the Company advanced an additional note of US$150,000 to Ketiko on the same terms as the initial advance, bearing interest at 1% per annum calculated monthly, and due 12 months from the date of advance (Note 3).