VIVO Cannabis : Q4 2020 Financial Statements

VIVO CANNABIS INC.

CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2020 AND 2019

(In Canadian Dollars)

Independent Auditor's Report

To the Shareholders of Vivo Cannabis Inc.:

Opinion

We have audited the consolidated financial statements of Vivo Cannabis Inc. and its subsidiaries (the "Company"), which comprise the consolidated statements of financial position as at December 31, 2020 and December 31, 2019, and the consolidated statements of loss and comprehensive loss, changes in shareholders' 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 December 31, 2020 and December 31, 2019, 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.

Material Uncertainty Related to Going Concern

We draw attention to Note 2(a) in the consolidated financial statements, which indicates that the Company incurred a net loss during the year ended December 31, 2020 and, as of that date, the Company had an accumulated deficit. As stated in Note 2(a), these events or conditions, along with other matters as set forth in Note 2(a), indicate that a material uncertainty exists that may cast significant doubt on the Company's ability to continue as a going concern. Our opinion is not modified in respect of this matter.

Emphasis of Matter - Restated Comparative Information

We draw attention to Note 2(g) to the consolidated financial statements, which explains that certain comparative information presented for the year ended December 31, 2019 has been restated. Our opinion is not modified in respect of this matter.

Key Audit Matters

Key audit matters are those matters that, in our professional judgment, were of most significance in our audit of the consolidated financial statements of the current period. These matters were addressed in the context of our audit of the consolidated financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. In addition to the matter described in the Material Uncertainty Related to Going Concern section, we have determined the matters described below to be the key audit matters to be communicated in our report.

Impairment of Long-lived Assets

Key Audit Matter Description

The Company performs impairment testing on an annual basis, or whenever events or change in circumstances indicate that the carrying value of a cash generating unit ("CGU") might exceed its recoverable amount, which is determined using the fair value less costs of disposal method. Impairment indicators existed due to a decline in the Company's market capitalization, changes in consumer behavior and increased competition in the Canadian cannabis sector. As a result, the Company performed impairment tests for all of its CGUs at December 31, 2020. An impairment loss of $33,500,000 was recognized during the year ended December 31, 2020. Refer to Note 9 of the consolidated financial statements for further details.

We identified the impairment of long-lived assets as a key audit matter. There was a high degree of auditor judgment required to evaluate the significant assumptions used in determining the recoverable amount including, but not limited to, forecasted revenue, gross margin, operating expenses, long-term growth rates and discount rates. The sensitivity of reasonable changes to the significant assumptions could have a significant impact on the determination of the recoverable amount of the CGUs and the Company's determination of impairment.

Audit Response

We responded to this matter by performing audit procedures in relation to the impairment of long-lived assets. Our audit work in relation to this included, but was not restricted to, the following:

• Evaluated the reasonability of the assumptions applied to key inputs, such as sales volumes and prices, gross margin, operating expenses, and long-term growth rates, which included comparing these assumptions to historical actual performance, approved budgets and external market and industry data;
• Performed a sensitivity analysis on the key assumptions to assess the impact of reasonable changes on the determination of the recoverable amounts; and
• Involved internal valuation professionals with specialized skills and knowledge, to assist with:
  o Verifying that management's fair value methodology is in compliance with the requirements of IFRS 13 Fair Value Measurement; and
  o Evaluating the reasonability of the discount rate and other inputs used in the impairment analysis based on industry data and other benchmarks.

Valuation of Biological Assets

Key Audit Matter Description

The Company measures biological assets, defined as cannabis plants up to the point of harvest, at fair value less costs to sell. Biological assets are transferred to inventory at fair value less costs to sell at the point of harvest, which becomes the initial cost basis for internally produced dried cannabis. The fair value of biological assets is measured using the income approach, which calculates the present value of expected future cash flows from the Company's biological assets. The significant assumptions used to measure the biological assets are average selling price per gram, cost to complete per gram, stage of growth and average yield per plant. As at December 31, 2020, the carrying value of the Company's biological assets was $2,015,573. Refer to Note 6 of the consolidated financial statements for further details.

We identified the valuation of biological assets as a key audit matter, as a high degree of auditor judgment was required to evaluate the significant assumptions. In addition, the fair value of biological assets forms the initial cost basis of internally produced cannabis inventory prior to an allocation of post-harvest costs.

Audit Response

We responded to this matter by performing audit procedures in relation to the valuation of biological assets and initial cost of internally produced inventory. Our audit work in relation to this included, but was not restricted to, the following:

• Evaluated the reasonability of the assumptions applied to key inputs by:
  o Testing the average selling price per gram by verifying to actual selling price per gram for sales made during 2020 and subsequent to the year end;
  o Testing the classification of costs between pre-harvest and post-harvest activities by reviewing source documents and assessing the allocation of costs;
  o Testing the stage of growth by performing a physical observation and assessing the growth stage as compared to the plant's birth date; and
  o Testing the average yield per plant by observing actual harvests and by verifying historical harvest results to supporting documentation.
• Performed a sensitivity analysis on the key assumptions to assess the impact of reasonable changes on the determination of the fair value of biological assets.

Valuation of Inventories

Key Audit Matter Description

The cost of finished goods cannabis inventories includes (a) cost of dried cannabis, (b) applicable allocation of cost of labour, fixed and variable overheads as part of the production process, and (c) other costs incurred to bring the inventories to their present location and condition. Inventories are subsequently assessed for write- down based on the lower of cost and net realizable value. As of December 31, 2020, the carrying value of the Company's inventories was $12,623,038. The Company recognized write-down of $1,857,013 and $2,053,337, which were included in cost of inventory sold and realized gain on biological transformation in the consolidated statement of loss and comprehensive loss for the year ended December 31, 2020. The write-down was based on assumptions including the nature of the product, future demand, selling prices and market conditions. Refer to Note 5 of the consolidated financial statements for further details.

We identified the valuation of inventories as a key audit matter, as a high degree of auditor judgment was required to evaluate the significant judgments made by management in determining the estimated net realizable value of inventories.

Audit Response

We responded to this matter by performing audit procedures in relation to the valuation of inventories. Our audit work in relation to this included, but was not restricted to, the following:

• Performed a physical observation of the year end inventories on a sample basis;
• Tested the allocation of post-harvest costs based on actual production quantities by assessing the appropriateness of the allocation method, recalculating the allocation, and verifying source documents;
• Tested the measurement of finished goods inventories by verifying the cost against the estimated net realizable value based on expected net selling prices and the relevant age; and
• Evaluated the reasonability of the expected net selling prices based on actual sales made and price adjustments made subsequent to year end.

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.

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

The engagement partner on the audit resulting in this independent auditor's report is Natalie Hope Feldman.

Toronto, Ontario	Chartered Professional Accountants
March 31, 2021	Licensed Public Accountants