1.     NATURE OF OPERATIONS

GVB Biopharma (the “Company” or “GVB”) was incorporated in the State of Nevada on September 27, 2019 and became the sole owner of ESI Holdings in January, 2020 through a conversion of member units to common shares. GVH Holdings LLC was formed in the State of Nevada on November 16, 2017 and changed its name to ESI Holdings LLC on May 30, 2019. GVB is primarily focused on providing hemp products. GVB organically cultivates hemp, manufacturers cannabinoids and white label products for hemp-based suppliers, customers, and consumers around the globe.

The combined consolidated financial statements include the accounts of the wholly owned subsidiaries:

2.     SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of presentation

These combined consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP.”) These combined consolidated financial statements have been prepared on the accrual basis of accounting except for cash flow information, and on a historical cost basis except for certain financial assets measured at fair value.

2.     SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued

Basis of combination and consolidation

These combined consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries, Evergreen, GV Farm, PTB, GVB Medical, and OCS. Those combined consolidated entities were then combined with ESS, which is owned by several members of the Company’s management. These subsidiaries reflect a common-controlled consolidation of previously existing entities (Note 1). Control exists when the Company has the power to govern the financial and operating policies of an entity so as to obtain benefits from its activities. The combined consolidated financial statements of the subsidiaries are included in the combined consolidated financial statements from the date that control commences until the date that control ceases. All intercompany transactions, balances, income and expenses were eliminated in full on combination and consolidation.

Critical accounting estimates and judgments

U.S. GAAP requires management to make judgments, estimates and assumptions that affect the reported amounts of assets, liabilities, and contingent liabilities at the date of the financial statements and reported amounts of revenues and expenses during the reporting period.

Estimates and assumptions are continuously evaluated and are based on management’s experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. However, actual outcomes can differ from these estimates.

Significant assumptions about the future and other sources of estimation uncertainty that management has made at the end of the reporting period, 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:

2.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued

COVID-19 estimation uncertainty

On March 11, 2020, the World Health Organization declared the outbreak of the novel coronavirus (COVID-19) a global pandemic. This has resulted in governments worldwide, including the American government, to enact emergency measures to combat the spread of the virus. These measures have caused material disruption to businesses globally, resulting in an economic slowdown. The production and sale of hemp and CBD have been recognized as essential services across the United States. For the years ended December 31, 2021 and 2020, the Company has observed negative downward pressure on its sales due to the COVID-19 pandemic.

The situation is dynamic and the ultimate duration and magnitude of the impact of COVID-19 on the economy and the financial effect on the Company’s business, financial position and operating results remain unknown at this time. In addition, it is possible that estimates in the Company’s combined consolidated financial statements will change in the near term as a result of COVID-19 and the effect of any such changes could be material.

U.S. GAAP Standards that are in effect for the current year

Leases (“ASC 842”)

In February 2016, the FASB established Topic 842, Leases, by issuing ASU No. 2016-02 (“ASU 2016-02”), which requires lessees to recognize leases on balance sheet and disclose key information about leasing arrangements. The new standard establishes a right-of-use model (“ROU”) that requires a lessee to recognize a ROU asset and lease liability on the balance sheet for all leases with a term longer than 12 months. Leases are classified as finance or operating, with classification affecting the pattern and classification of expense recognition in the income statement.

2.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued

The Company adopted ASU 2016-02 effective January 1, 2020 using the transitional method. In addition, the Company elected the transition package of three practical expedients permitted within the standard, among other practical expedients which allowed the Company to carry forward prior conclusions about lease identification and classification.

Adoption of the new standard resulted in the balance sheet recognition of additional assets of $1.2 million and lease liabilities of approximately $1.2 million. For additional information regarding the Company’s lease arrangements, see Note 7 in the notes to consolidated financial statements.

Definition of a lease

At the inception of a contract, the Company assesses whether a contract is, or contains, a lease. A contract is, or contains, a lease if the contract conveys the right to control the use of an identified asset for a period of time (defined as at least 12 months) in exchange for consideration. To assess whether a contract conveys this right the Company assesses whether:

• The contract involves the use of an identified asset – this may be specified explicitly or implicitly and should be physically distinct or represent substantially all the capacity of a physically distinct asset;

• The Company has the right to obtain substantially all the economic benefits from the use of the asset throughout the period of use; and

• The Company has the right to direct the use of the asset. The Company has this right when it has the decision-making rights that are most relevant to changing how and for what purpose the asset is used.

At inception or reassessment of a contract that contains lease and non-lease components, the Company allocates the consideration in the contract to each lease component on the basis of their relative stand-alone prices.

Accounting as a lessee under ASC 842

The Company recognizes a right-of-use asset and lease liability on the combined consolidated statements of financial position at the lease commencement date. The right-of-use asset is initially measured at cost, which comprises the initial amount of the lease liability adjusted for any lease payments made at or before the commencement date, plus any initial direct costs incurred and an estimate of costs to dismantle and remove the underlying asset or to restore the underlying asset or the site on which it is located, less any lease incentives received.

The right-of-use asset is subsequently depreciated using the straight-line method from the commencement date to the earlier of the end of its useful life or the end of the lease term. The estimated useful lives of right-of-use assets are determined on the same basis as those of property, plant and equipment. In addition, the right-of use asset is periodically reduced by impairment losses, if any, and adjusted for certain remeasurements of the lease liability.

The lease liability is initially measured at the present value of the lease payments that are not paid at the commencement date, discounted using the interest rate implicit in the lease or, if that rate cannot be readily determined, the Company’s incremental borrowing rate. The Company uses its incremental borrowing rate as the discount rate.

2.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued

Lease payments included in the measurement of the lease liability comprise the following:

• fixed payments, including in-substance fixed payments;

• variable lease payments that depend on an index or a rate, initially measured using the index or rate as of the commencement date;

• amounts expected to be payable under a residual value guarantee; and

• the exercise price under a purchase option that the Company is reasonably certain to exercise, lease payments in an optional renewal period if the Company is reasonably certain to exercise an extension option, and penalties for early termination of a lease unless the Company is reasonably certain not to terminate early.

The lease liability is measured at amortized cost using the effective interest method. The lease liability is subsequently increased by interest costs on the lease liability and decreased by lease payments made. It is remeasured when there is a change in future lease payments arising from a change in an index or rate, if there is a change in the Company’s estimate of the amount expected to be payable under a residual value guarantee, or if the Company changes its assessment of whether it will exercise a purchase, extension, or termination option. When the lease liability is remeasured in this way, a corresponding adjustment is made to the carrying amount of the right of use asset or is recorded in the combined consolidated statements of operations if the carrying amount of the right-of-use asset has been reduced to $0.

Payments associated with short-term leases are recognized as an expense on a straight-line basis in facility costs in the combined consolidated statements of operations. Short-term leases are defined as leases with a lease term of 12 months or less. Variable lease payments that do not depend on an index, rate, or subject to a fair market value renewal condition are expensed as incurred and recognized in facility costs.

Cash and cash equivalents

Cash and cash equivalents are comprised of deposits with banks and highly liquid investments that are readily convertible into known amounts of cash with original maturities of three months or less and are classified and measured at amortized cost which approximates fair value.

Revenue

The Company has adopted ASC 606, Revenue from Contracts with Customers, amending revenue recognition guidance and requiring a more structured approach to measuring and recognizing revenue as well as provide more detailed disclosures to enable users of financial statements to understand the nature, amount, timing, and uncertainty of revenue and cash flow arising from contracts with customers. The amended guidance, hereto referred to as ASC 606, was adopted for accounting periods commencing on or after January 1, 2020. Under ASC 606, a company is required to recognize revenue depicting the transfer of promised goods or services to the customer in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.

2.     SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued

The Company generates revenue primarily from raw material and finished product sales. The Company uses the following five-step contract-based analysis of transactions to determine if, when and how much revenue can be recognized:

1. Identify the contract with a customer;

2. Identify the obligation(s) in the contract;

3. Determine the transaction price;

4. Allocate the transaction price to the obligation(s) in the contract; and

5. Recognize revenue when or as the Company satisfies the obligation(s).

Product sales are generally recognized when the Company satisfies the obligations and transfers control over the goods to the customer. Revenue is recorded at the estimated amount of consideration to which the Company expects to be entitled.

For certain sales where the company licenses its formulations for hemp-based products, it recognizes revenue once the products have been sold to customers by the licensee.

Sales to customers are primarily made in the United States of America. When applicable the Company pays imports duties in the various countries to which it sends products to and bills the customer for such import costs. The Company recognizes the import duties as part of revenue in accordance with ASC 606.

There are no material sales provisions or volume discounts that provide variability in recording revenue amounts.

Accounts Receivable

Accounts receivable are recognized initially at fair value less any provisions for impairment. Financial assets measured at amortized cost are assessed for impairment at the end of each reporting period. Estimates of expected credit losses take into account the Company’s collection history, deterioration of collection rates during the average credit period, as well as observable changes in and forecasts of future economic conditions that affect default risk. Where applicable, the carrying amount of a trade receivable is reduced for any expected credit losses through the use of an allowance for doubtful accounts (“AFDA”) provision. When the Company determines that no recovery of the amount owing is possible, the amount is deemed irrecoverable and the financial asset is written off. As of December 31, 2021 and 2020, the AFDA was $266 and $207, respectively.

Inventory

Inventory is valued at the lower of cost or net realizable value. Cost of hemp biomass consists of initial third-party acquisition costs plus analytical testing costs. Costs of extracted and hemp oil inventory are comprised of initial acquisition cost of the biomass and all direct and indirect processing costs including labor related costs, consumables, materials, packaging supplies, utilities, facility costs, analytical testing costs, and production related depreciation. Net realizable value is determined as the estimated selling price in the ordinary course of business less the estimated cost of completion and the estimated costs necessary to make the sale. Packaging and supplies are initially valued at cost and subsequently at the lower of cost and net realizable value.

2.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued

Property, plant, and equipment

Property, plant, and equipment are stated at cost less accumulated depreciation and accumulated impairment losses. Subsequent costs are included in the asset’s carrying amount or recognized as a separate asset, as appropriate, only when it is probable that future economic benefits associated with the item will flow to the Company and the cost of the item can be measured reliably. The carrying amount of the replaced part is derecognized. All other repairs and maintenance are charged to profit or loss during the financial period in which they are incurred. The depreciation rate applicable to each category of property, plant and equipment is 4 years, straight-line.

The determination of appropriate useful lives and residual values are based on management’s judgement; therefore, the resulting depreciation is subject to estimation uncertainty.

Items of equipment are derecognized upon disposal or when no future economic benefits are expected to arise from their continued use. Any gain or loss arising from disposal or retirement is determined as the difference between the consideration received and the carrying amount of the asset and is recognized in the combined consolidated statements of operations in the year the asset is derecognized.

Impairment of non-financial assets

At the end of each reporting period, the carrying amounts of the Company’s assets are reviewed to determine whether there is any indication that those assets are impaired. If any such indication exists, the recoverable amount of the asset is estimated in order to determine the extent of the impairment, if any. The recoverable amount is the higher of fair value less costs to sell and value in use. Fair value is determined as the amount that would be obtained from the sale of the asset in an arm’s length transaction between knowledgeable and willing parties. 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. If the recoverable amount of an asset is estimated to be less than its carrying amount, the carrying amount of the asset is reduced to its recoverable amount and the impairment loss is recognized in profit or loss for the period. For an asset that does not generate largely independent cash inflows, the recoverable amount is determined for the cash generating unit to which the asset belongs.

When an impairment loss subsequently reverses, the carrying amount of the asset (or cash generating unit) is increased to the revised estimate of its 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 (or cash generating unit) in prior years. A reversal of an impairment loss is recognized immediately in profit or loss.

Cost of sales

Cost of sales represents costs directly related to manufacturing and distribution of the Company’s products and services. Primary costs include raw materials, packaging, direct labor, overhead, shipping and the depreciation of production equipment and facilities. Manufacturing overhead and related expenses include salaries, wages, employee benefits, utilities, maintenance, and property taxes. The Company recognizes the cost of sales as the associated revenue is recognized.

2.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued

Warrants

Under financing arrangements where the Company issues detachable warrants, the warrants are measured at fair value using the Black-Scholes pricing model. Funds received are first allocated to the fair value of the warrants then the host instrument.

Stock-based compensation

The Company has one stock-based compensation plan in addition to obligations to issue shares under certain employment agreements under which awards have been made. Stock-based compensation consists of granted stock options. The Company accounts for stock-based compensation in accordance with ASC 718, Compensation – Stock Compensation under which shared based payments that involve the issuance of common stock to employees and nonemployees and meet the criteria for equity-classified awards are recognized in the financial statements as salaries expense based on the fair value on the date of grant.

The Company grants stock options to acquire common shares of the Company to directors, officers, employees and consultants. An individual is classified as an employee when the individual is an employee for legal or tax purposes or provides services similar to those performed by an employee.

The fair value of the options is measured on the date of grant, using the Black-Scholes option pricing model, and is recognized over the vesting period. The fair value is recognized as an expense with a corresponding increase in equity. When stock options are exercised, stock capital is credited by the sum of the consideration paid and the related portion of stock-based compensation previously recorded in equity. Consideration paid for the stocks on the exercise of stock options is credited to stock capital.

Stock-based payment arrangements in which the Company receives goods or services as consideration for its own equity instruments are accounted for as equity settled stock-based payment transactions and measured at the fair value of goods or services received. If the fair value of the goods or services received cannot be estimated reliably, the stock-based payment transaction is measured at the fair value of the equity instruments granted at the date the Company receives the goods or the services.

Income taxes

The Company accounts for income taxes in accordance with ASC 740, Income Taxes, under which deferred tax liabilities and assets are recognized for the expected future tax consequences of temporary differences between financial statement carrying amounts and the tax basis of assets and liabilities and net operating loss and tax credit carryforwards. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized.

Current tax expense is the expected tax payable on the taxable income for the year, using tax rates enacted or substantively enacted at year end, adjusted for amendments to tax payable with regards to previous years.

Deferred tax is calculated by providing for temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. The following temporary differences are not provided for: goodwill not deductible for tax purposes, the initial recognition of assets or liabilities that affect neither accounting nor taxable profit, and

2.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued

differences relating to investments in subsidiaries to the extent that they will probably not reverse in the foreseeable future. The amount of deferred tax provided is based on the expected manner of realization or settlement of the carrying amount of assets and liabilities, using tax rates enacted or substantively enacted at the financial position reporting date applicable to the period of expected realization or settlement.

A deferred tax asset is recognized only to the extent that it is probable that future taxable profits will be available against which the asset can be utilized.

Deferred tax assets and liabilities are offset when there is a legally enforceable right to set off current tax assets against current tax liabilities and when they relate to income taxes levied by the same taxation authority and the Company intends to settle its current tax assets and liabilities on a net basis.

The Company follows accounting guidance issued by the FASB related to the application of accounting for uncertainty in income taxes. Under this guidance, the Company assesses the likelihood of the financial statement effect of a tax position that should be recognized when it is more likely than not that the position will be sustained upon examination by a taxing authority based on the technical merits of the tax position, circumstances, and information available as of the reporting date.

Fair value of financial assets and financial liabilities

Fair value of financial assets and financial liabilities recorded in the combined consolidated statements of financial position, which cannot be derived from active markets, are determined using a variety of techniques including the use of valuation models. The inputs to these models are derived from observable market data where possible, but where observable market data is not available, judgement is required to establish fair values. Judgement includes, but is not limited to, consideration of model inputs such as volatility, estimated life and discount rates.

Advertising

Advertising and marketing expenses during the years ended December 31, 2021 and 2020 totaled $807 and $288, respectively.

Depreciation expense related to property, plant and equipment was $1,797 and $1,585 for the years ended December 31, 2021 and 2020, respectively.

6.    VEHICLE LOANS

The Company has various vehicle loans with monthly payments ranging from $0.5 to $2.1, interest rates ranging from 0% to 11%, and maturity dates ranging from March 2023 to September 2026.

The scheduled future minimum vehicle loan payments are as follows:

7.     LEASES

Right of use assets

The Company leases its business facilities and certain vehicles from third parties. The leases expire under various terms through 2023.

7.     LEASES - continued

The following is the lease activity for the years ended December 31, 2021 and 2020:

Lease liabilities

The scheduled future minimum lease payments as of December 31, 2021 are as follows:

The following table sets forth the lease liability activity for the years ended December 31, 2021 and 2020:

When measuring lease liabilities, the Company discounts lease payments using its incremental borrowing rate. For leases recognized in the year ended December 31, 2021, the average rate applied was 6.41%. During the years ended December 31, 2021 and 2020, the Company recorded rent expense of $801 and $931, respectively.

Sales-Leaseback Financing Arrangement

In October 2019, the Company entered into a sale-leaseback agreement wherein the Company sold a portion of its machinery and equipment and then subsequently leased it back for a term of 36 months. Monthly lease payments as part of the sale-leaseback agreement were made in 6,944 stocks of common stock. On June 1, 2021, the Company exercised its right, as described in the sale-leaseback agreement, to purchase the equipment from the lessor for 50,000 stocks of common stock and recorded a gain of $139 on the transaction.

8. RELATED PARTY TRANSACTIONS

Key management personnel are those persons having the authority and responsibility for planning, directing and controlling the activities of the Company, directly or indirectly. The Company has defined key management personnel to include the CEO, COO, President of Sales, and directors of the Company. The remuneration and other payments to the Company’s directors and other key management personnel are as follows:

On July 17, 2019, the Company entered into that certain Secured Credit Facility with a majority stockholder pursuant to which the Company could borrow $1,000 at an interest rate of 12% per annum. As part of the Series A funding, $500 of this borrowing was converted to Series A preferred stocks. The balance on the Secured Credit Facility on December 31, 2021 including accrued interest was $728 and is included in due to related parties on the combined consolidated financial statements.

8. RELATED PARTY TRANSACTIONS - continued

Due to related parties have no specific terms of repayment, are unsecured and do not bear interest.

In April 2018, the Company entered into a month-to-month rental agreement with a stockholder. Rent paid to this related party under this agreement was $240 and $60 for the years ended December 31, 2021 and 2020, respectively.

9. NOTES PAYABLE

GVB note offering convertible secured promissory notes

On June 23, 2020, GVB completed an offering of 12% convertible secured promissory notes in the amount of $2,650 (“GVB Note Offering”). The maturity date of the note offering was April 30, 2021 and the Note Offering was secured by accounts receivable and all other corporate assets. As of December 31, 2020, $1,325 of the balance had been repaid and the remaining $1,325 had been converted to GVB preferred stocks at a price of $2.00 per stock. See Note 10, Warrants. As of December 31, 2020 the Company had incurred $132 in financing costs associated with the GVB Note Offering.

On October 29, 2021, GVB completed an offering of 12% convertible secured promissory notes in the amount of $1,500 (“GVB Bridge Note”). The maturity date of the bridge note is April 30, 2022 (the Bridge Note maturity date has subsequently been extended to October 30, 2022. See Note 16 and the GVB Bridge Note was secured by accounts receivable and all other corporate assets. As of December 31, 2021, $1,500 of this balance was outstanding. See Note 10, Warrants. As of December 31, 2021 the Company had incurred $31 in financing costs associated with the GVB Bridge Note.

Paycheck Protection Program

In April 2020, PTB, Evergreen, and GV Farm received loans in the amounts of $75, $826, and $42, respectively, from the Paycheck Protection Program (the “PPP”) established by the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”). In May 2020 ESS received a PPP loan in the amount of $300. In 2021, the Company and its various entities received additional PPP loans of $1,367. PPP loans and accrued interest are forgivable after a “covered period” (eight or 24 weeks) as long as the borrower maintains its payroll levels and uses the loan proceeds for eligible purposes, including payroll, benefits, rent, and utilities. Any unforgiven portion of a PPP loan is payable over two or five years at an interest rate of 1% with deferred payments for six months after the end of the covered period. PTB, Evergreen, GV Farm, and ESS account for all their PPP loans for each year in accordance with IAS 20, Accounting for Government Grants and Disclosure of Government Assistance. Because the 2020 PPP loans were fully forgiven in 2021, and the Company determined that forgiveness of the 2021 PPP loans was “probable”, government grant revenue was recorded for the year ended December 31, 2021 and included in the accompanying combined consolidated statement of operations.

10. STOCKHOLDERS’ EQUITY

Authorized stock capital

The Company is authorized to issue 40,000,000 of common and 20,000,000 preferred stocks at par value, at the discretion of the Board of Directors.

10. STOCKHOLDERS’ EQUITY - continued

Issued stocks

Year ended December 31, 2021

Year ended December 31, 2020:

Warrants

In consideration for the GVB Note Offering, GVB issued warrants to purchase 738,423 shares of GVB common stock (“GVB Common Stock”) to the promissory note holders at a price of $1.00 per GVB Common stock. See Note 9.

Between November 12, 2020 and January 22, 2021, GVB fully closed on its $10,500 Series A Preferred Stock Offering (“Series A Offering”). $1,865 of the $10,500 Series A Offering was purchased through conversion of a portion of the GVB Note Offering, and $8,635 was paid in cash.

10. STOCKHOLDERS’ EQUITY - continued

In consideration for the Series A Offering, GVB issued warrants to the Series A stockholders to purchase 787,502 shares of GVB Common Stock at a price of $2.00 per share.

Between January 15, 2021 and March 1, 2021, in consideration of the Series A Offering, GVB issued warrants to the Series A stockholders to purchase 3,364,781 GVB Common Stock at a price of $2.00 per share of share.

In consideration for the GVB Bridge Note, GVB issued warrants to purchase 358,711 shares of GVB Common Stock to the promissory note holders at a price of $3.25 per share. See Note 9.

The following table summarizes warrant activity during the years ended December 31, 2021 and 2020:

The Company used the Black-Scholes pricing model to establish the fair value of warrants granted by applying the following weighted average assumptions at issuance:

Option Plan

The Company has a legacy stock option plan which permits the Board of Directors of the Company to grant options to directors, employees, and non-employees to acquire common stocks of the Company at fair market value on the date of approval by the Board of Directors. Vesting for stock options granted in 2020 begins 3 months from the grant date and the balance fully vests over a

10. STOCKHOLDERS’ EQUITY - continued

period of one year from grant date. Vesting for stock options granted in 2021 begins at the grant date and the balance fully vests over a period of three years from grant date.

The following table summarizes stock options activity during the years ended December 31, 2021 and 2020:

The following table summarizes the stock options outstanding and exercisable as of December 31, 2021:

The Company used the Black-Scholes pricing model to establish the fair value of options granted on April 8, 2021 by applying the following weighted average assumptions at issuance. The assumptions used in the model as of December 31, 2021 were as follows:

10.  STOCKHOLDERS’ EQUITY - continued

The Company used the Discounted Cash Flow model to establish the fair value of options granted on April 28, 2020 by applying the following weighted average assumptions at issuance. The assumptions used in the model as of December 31, 2020 were as follows:

The reconciliation of the effective tax rate for the years ended December 31, 2021 is as follows:

11.  INCOME TAXES - continued

The reconciliation of the effective tax rate for the years ended December 31, 2020 is as follows:

The details of changes of deferred income taxes are as follows for the year ended December 31, 2021:

12.  SHAREHOLDERS’ EQUITY

The Company has two classes of shares authorized: Common Stock and Preferred Stock.

The Company has 40,000,000 shares of Common Stock authorized for issuance with a par value of $.0001. As of December 31, 2021 and 2020, 20,383,478 and 20,190,695 shares of Common Stock were issued and outstanding respectively. The Company has 20,000,000 shares of Preferred Stock authorized for issuance with a par value of $.0001. On November 12, 2020, the Company

12.  SHAREHOLDERS’ EQUITY - continued

filed a Certificate of Designation to designate 5,250,000 shares of the authorized Preferred Stock as Series A Convertible Preferred Stock.

The Series A Convertible Preferred Stock has the following features: (1) a cumulative dividend accruing at a rate per annum equal to 5% of the issue price, (2) liquidation preference to the Common Stock, (3) full voting rights on any matter which common stockholders may vote and (4) optional conversion to Common Stock on a 1 to 1 basis. As of December 31, 2021 and 2020 5,250,000 and 4,528,250 shares of Series A Convertible Preferred Stock were issued and outstanding, respectively. As of December 31, 2021 the Company had incurred $1,263 in financing costs associated with the Series A Offering.

14.  COMMITMENTS AND CONTINGENCIES

        Commitments

        See Note 7.

        Contingencies

The Company is party to litigation from time to time in the normal course of business. The Company accrues liabilities related to litigation only when it concludes that it is probable that it will incur costs related to such litigation and can reasonably estimate the amount of such costs. In cases where the Company determines that it is not probable, but reasonably possible that it has a material obligation, it discloses such obligations and the possible loss or range of loss, if such estimate can be made. The Company maintains insurance to cover certain actions and believes that resolution of such litigation in the normal course of business will not have a material adverse effect on the Company’s combined consolidated financial statements.

15.  SUBSEQUENT EVENTS

Financing activities

Between January 10 and January 14, 2022, GVB expanded the 12% convertible secured promissory notes in the amount of $1,750 (“GVB Bridge Note”). This brought the total offering to the amount of $3,250. The maturity date of the GVB Bridge Note is April 30, 2022 and the GVB

15.  SUBSEQUENT EVENTS - continued

Bridge Note was secured by accounts receivable and all other corporate assets. On April 18, 2022 the GVB Bridge Note was further expanded via 2% convertible secured promissory notes in the amount of $1,000. This brought the total offering to $4,250. As part of this expansion, the Company obtained an extension on the maturity of the GVB Bridge Note to October 30, 2022. In connection with the GVB Bridge Note, GVB also issued warrants to purchase 2,171,920 GVB common shares at an exercise price of $3.25 per share to subscribers under the GVB Bridge Note offering. As of the date of this report, the Company had incurred $168 in additional financing costs associated with the GVB Bridge Note.

In March 2022, the Company issued stock options to purchase an aggregate of 520,000 GVB common stock with an exercise price of $1.09 per stock. As of the date of this report, no stock options have been exercised, cancelled, or forfeited.

Completed Transaction

22^nd Century Group, Inc. (“22^nd Century”) and GVB (together with 22^nd Century, the “Companies”) entered into a non-binding letter of intent (“LOI”) dated March 10, 2022 to complete a business transaction (the “Transaction”). The Transaction will result in 22^nd Century acquiring 100% of the outstanding common and preferred shares of GVB and upon completion of the Transaction GVB will become a wholly owned subsidiary of 22^nd Century. The terms of the LOI were superseded by the Reorganization and Acquisition Agreement (the “Reorganization Agreement”), entered into and closed by the Companies on May 13, 2022.

Under the terms of the Reorganization Agreement, 22^nd Century acquired substantially all of the assets of GVB’s business which includes the equity interests of all GVB subsidiaries except for GVB Medical, LLC (the “Transaction”).

The aggregate consideration for the Transaction consisted of (i) the assumption of approximately $4.5 million of debt, (ii) the assumption and direct payment of certain third-party transaction costs incurred by GVB in connection with the Transaction totaling approximately $1.9 million and (iii) the issuance to GVB of 32,900,000 unregistered shares of common stock of the 22^nd Century (the “Shares”).

GVB will distribute the Shares to its current equity holders in exchange for all of their equity interests in GVB including common stock, preferred stock, warrants and options.

The value of the Shares at closing was $51,600. The Shares are being allocated to the GVB equity holders on the following basis: $34,200 to common holders, $11,600 to preferred holders, $1,200 to option holders and $4,600 to warrant holders.

1.            NATURE OF OPERATIONS

GVB Biopharma (the “Company” or “GVB”) was incorporated in the State of Nevada on September 27, 2019 and became the sole owner of ESI Holdings in January, 2020 through a conversion of member units to common shares. GVH Holdings LLC was formed in the State of Nevada on November 16, 2017 and changed its name to ESI Holdings LLC on May 30, 2019. GVB is primarily focused on providing hemp products. GVB organically cultivates hemp, manufacturers cannabinoids and white label products for hemp-based suppliers, customers, and consumers around the globe.

The unaudited condensed combined consolidated interim financial statements include the accounts of the wholly owned subsidiaries:

Basis of presentation

These condensed combined consolidated interim financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information. Accordingly, they do not include all the information and footnotes required by U.S. GAAP for complete financial statements. In the opinion of management, all adjustments consisting of normal recurring accruals considered necessary for a fair and non-misleading presentation of the financial statements have been included.

Operating results for the three months ended March 31, 2022 are not necessarily indicative of the results that may be expected for the year ending December 31, 2022. The balance sheet as of December 31, 2021 has been derived from the audited combined consolidated financial statements at that date but does not include all the information and footnotes required by U.S. GAAP for complete financial statements.

These condensed combined consolidated interim financial statements should be read in conjunction with the December 31, 2021 audited combined consolidated financial statements and the notes thereto for the year ended December 31, 2021.

Basis of combination and consolidation

These combined consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries, Evergreen, GV Farm, PTB, GVB Medical, and OCS. Those consolidated entities were then combined with ESS, which is owned by several members of the Company’s management. These subsidiaries reflect a common-controlled consolidation of previously existing entities (Note 1). Control exists when the Company has the power to govern the financial and operating policies of an entity so as to obtain benefits from its activities. The financial statements of the subsidiaries are included in the combined consolidated financial statements from the date that control commences until the date that control ceases. All intra-company transactions, balances, income and expenses were eliminated in full on combination and consolidation.

Critical accounting estimates and judgments

U.S. GAAP requires management to make judgments, estimates and assumptions that affect the reported amounts of assets, liabilities, and contingent liabilities at the date of the financial statements and reported amounts of revenues and expenses during the reporting period.

Estimates and assumptions are continuously evaluated and are based on management’s experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. However, actual outcomes can differ from these estimates.

Significant assumptions about the future and other sources of estimation uncertainty that management has made at the end of the reporting period, 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:

COVID-19 estimation uncertainty

On March 11, 2020, the World Health Organization declared the outbreak of the novel coronavirus (COVID-19) a global pandemic. This has resulted in governments worldwide, including the American government, to enact emergency measures to combat the spread of the virus. These measures have caused material disruption to businesses globally, resulting in an economic slowdown. The production and sale of hemp and CBD have been recognized as essential services across the United States. The Company has observed negative downward pressure on its sales due to the COVID-19 pandemic.

The situation is dynamic and the ultimate duration and magnitude of the impact of COVID-19 on the economy and the financial effect on the Company’s business, financial position and operating results remain unknown at this time. 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.

Right-of-use assets (“ROU”) and Lease Obligations  - The Company reviews any lease arrangements in accordance with ASU 2016-02, Subtopic ASC 842, Leases. Any lease having a lease term greater than twelve months will be recognized on the condensed combined consolidated interim statement of financial position as a ROU asset with an associated lease obligation—all other leases are considered short-term in nature and will be expensed as payments are made over the lease term. The ROU assets and lease obligations are recognized as of the commencement date at the net present value of the fixed minimum lease payments for the lease term. The lease term is determined based on the contractual conditions, including whether renewal options are reasonably certain to be exercised. The discount rate used is the interest rate implicit in the lease, if available, or the Company’s incremental borrowing rate which is determined using a base line rate plus an applicable spread

Revenue - The Company accounts for revenue transactions in accordance with ASC 606, Revenue from Contracts with Customers. Under ASC 606, a company is required to recognize revenue depicting the transfer of promised goods or services to the customer in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.

The Company generates revenue primarily from raw material and finished product sales. The Company uses the five-step contract-based analysis of transactions to determine if, when and how much revenue can be recognized.

Product sales are generally recognized when the Company satisfies the obligations and transfers control over the goods to the customer. Revenue is recorded at the estimated amount of consideration to which the Company expects to be entitled.

For certain sales where the company licenses its formulations for hemp-based products, it recognizes revenue once the products have been sold to customers by the licensee.

Sales to customers are primarily made in the United States of America. When applicable the Company pays imports duties in the various countries to which it sends products to and bills the customer for such import costs. The Company recognizes the import duties as part of revenue in accordance with ASC 606.

There are no material sales provisions or volume discounts that provide variability in recording revenue amounts.

Accounts Receivable - Accounts receivable are recognized initially at fair value less any provisions for impairment. Financial assets measured at amortized cost are assessed for impairment at the end of each reporting period. Estimates of expected credit losses take into account the Company’s collection history, deterioration of collection rates during the average credit period, as well as observable changes in and forecasts of future economic conditions that affect default risk. Where applicable, the carrying amount of a trade receivable is reduced for any expected credit losses through the use of an allowance for doubtful accounts (“AFDA”) provision. When the Company determines that no recovery of the amount owing is possible, the amount is deemed irrecoverable and the financial asset is written off. The AFDA as of March 31, 2022 and December 31, 2021 was $266.

Inventory - Inventory is valued at the lower of cost or net realizable value. Cost of hemp biomass consists of initial third-party acquisition costs plus analytical testing costs. Costs of extracted and hemp oil inventory are comprised of initial acquisition cost of the biomass and all direct and indirect processing costs including labor related costs, consumables, materials, packaging supplies, utilities, facility costs, analytical testing costs, and production related depreciation. Net realizable value is determined as the estimated selling price in the ordinary course of business less the estimated cost of completion and the estimated costs necessary to make the sale. Packaging and supplies are initially valued at cost and subsequently at the lower of cost and net realizable value.

Impairment of non-financial assets - At the end of each reporting period, the carrying amounts of the Company’s assets are reviewed to determine whether there is any indication that those assets are impaired. If any such indication exists, the recoverable amount of the asset is estimated in order to determine the extent of the impairment, if any. The recoverable amount is the higher of fair value less costs to sell and value in use. Fair value is determined as the amount that would be obtained from the sale of the asset in an arm’s length transaction between knowledgeable and willing parties. 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. If the recoverable amount of an asset is estimated to be less than its carrying amount, the carrying amount of the asset is reduced to its recoverable amount and the impairment loss is recognized in profit or loss for the period. For an asset that does not generate largely independent cash inflows, the recoverable amount is determined for the cash generating unit to which the asset belongs.

There were no impairment charges recorded in the three month periods ended March 31, 2022 and 2021 respectively.

Cost of sales - Cost of sales represents costs directly related to manufacturing and distribution of the Company’s products and services. Primary costs include raw materials, packaging, direct labor, overhead, shipping and the depreciation of production equipment and facilities. Manufacturing overhead and related expenses include salaries, wages, employee benefits, utilities, maintenance, and property taxes. The Company recognizes the cost of sales as the associated revenue is recognized.

Warrants

Under financing arrangements where the Company issues detachable warrants, the warrants are measured at fair value using the Black-Scholes pricing model. Funds received are first allocated to the fair value of the warrants then the host instrument.

Stock-based compensation

The Company has one stock-based compensation plan in addition to obligations to issue shares under certain employment agreements under which awards have been made. Stock-based compensation consists of granted stock options. The Company accounts for stock-based compensation in accordance with ASC 718, Compensation – Stock Compensation under which shared based payments that involve the issuance of common stock to employees and nonemployees and meet the criteria for equity-classified awards are recognized in the financial statements as salaries expense based on the fair value on the date of grant.

The Company grants stock options to acquire common shares of the Company to directors, officers, employees and consultants. An individual is classified as an employee when the individual is an employee for legal or tax purposes or provides services similar to those performed by an employee.

The fair value of the options is measured on the date of grant, using the Black-Scholes option pricing model, and is recognized over the vesting period. The fair value is recognized as an expense with a corresponding increase in equity. When stock options are exercised, share capital is credited by the sum of the consideration paid and the related portion of stock-based compensation previously recorded in equity. Consideration paid for the shares on the exercise of stock options is credited to share capital. 

Stock-based payment arrangements in which the Company receives goods or services as consideration for its own equity instruments are accounted for as equity settled stock-based payment transactions and measured at the fair value of goods or services received. If the fair value of the goods or services received cannot be estimated reliably, the stock-based payment transaction is measured at the fair value of the equity instruments granted at the date the Company receives the goods or the services.

Fair value of financial assets and financial liabilities

Fair value of financial assets and financial liabilities recorded in the combined consolidated statements of financial position, which cannot be derived from active markets, are determined using a variety of techniques including the use of valuation models. The inputs to these models are derived from observable market data where possible, but where observable market data is not available, judgement is required to establish fair values. Judgement includes, but is not limited to, consideration of model inputs such as volatility, estimated life and discount rates.

Recent Accounting Pronouncements –

In June 2016, the FASB issued ASU 2016-13, “Measurement of Credit Losses on Financial Instruments.” The standard replaces the incurred loss model with the current expected credit loss (CECL) model to estimate credit losses for financial assets measured at amortized cost and certain off-balance sheet credit exposures. The CECL model requires companies to estimate credit losses expected over the life of the financial assets based on historical experience, current conditions and reasonable and supportable forecasts. The provisions of the ASU have an effective date for the Company beginning after December 15, 2022 and interim periods within those fiscal years. The Company is evaluating the expected impacts of the ASU.

We consider the applicability and impact of all ASUs. If the ASU is not listed above, it was determined that the ASU was either not applicable or would have an immaterial impact on our condensed combined consolidated interim financial statements and related disclosures.

The Company has various vehicle loans with monthly payments ranging from $0.5 to $2.1, interest rates ranging from 0% to 11%, and maturity dates ranging from March 2023 to September 2026.

The scheduled future minimum vehicle loan payments are as follows:

Key management personnel are those persons having the authority and responsibility for planning, directing and controlling the activities of the Company, directly or indirectly. The Company has defined key management personnel to include the CEO, COO, President of Sales, and directors of the Company. The remuneration and other payments to the Company’s directors and other key management personnel for the three months ended March 31, 2022 and March 31, 2021 are as follows: