CRYM CryoMass Technologies Inc (QB)

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

1. Revision

During Q2 2021, the Company executed two tranches of convertible term note agreements in aggregate principal value of $3.0 million and $1.9 million, respectively that bear interest at a rate of 12% per annum. The notes mature on March 31, 2022 and September 30, 2022, respectively. In conjunction with the notes, the Company entered into certain warrant purchase agreements to purchase common shares of the Company. The Company offered 24,500,000 of warrant shares in conjunction with the issuance of the notes with an exercise price of $0.40. The warrants from each tranche of convertible notes shall be exercisable from the issuance date through March 31, 2023 and April 30, 2023, respectively.

As part of year-end audit procedures, the Company discovered these warrant contracts would require an independent fair value calculation, as well as beneficial conversion value to be attributed to the convertible notes. The Company engaged an independent valuation firm to perform a fair value calculation of the warrants and associated beneficial conversion feature. As a result of the fair value analysis, additional paid-in capital was allocated to beneficial conversion feature and to warrants, resulting in debt discount and associated amortization expense as of and for the period ended June 30, 2021.

Fair Value Measurements

Certain assets and liabilities of the Company are carried at fair value under GAAP. Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. Financial assets and liabilities carried at fair value are to be classified and disclosed in one of the following three levels of the fair value hierarchy, of which the first two are considered observable and the last is considered unobservable:

The carrying values reported in the consolidated balance sheets for cash, prepaid expenses, inventories, accounts payable, notes payable, and taxes payable approximate fair values because of the immediate or short-term maturities of these financial instruments. There were no other assets or liabilities that require fair value to be recalculated on a recurring basis.

The fair value of beneficial conversion features associated with convertible notes and the fair value of warrants are calculated utilizing level 2 inputs.

When multiple instruments are issued in a single transaction, the total proceeds from the transaction should be allocated among the individual freestanding instruments identified. The allocation occurs after identifying (1) all the freestanding instruments and (2) the subsequent measurement basis for those instruments. The subsequent measurement basis helps inform how the proceeds should be allocated. After the proceeds are allocated to the freestanding instruments, those instruments should be further evaluated for embedded features that may need to be bifurcated or separated.

If debt or stock is issued with detachable warrants, the guidance in ASC 470-20-25-2 (applied by analogy to stock) requires that the proceeds be allocated to the two instruments based on their relative fair values. This method is generally appropriate if debt or stock is issued with any other freestanding instrument that is classified in equity (such as a detachable forward contract) or as a liability but not subject to subsequent fair value accounting.

Given that the Notes and Warrants that were issued in the singular transaction are both not subject to subsequent fair value accounting treatment, Management determined the relative fair value method shall be used for allocating the proceeds of the transaction. Under the relative fair value method, the instrument being analyzed is allocated a portion of the proceeds based on its fair value to the sum of the fair value of all the instruments covered int the allocation.

Management additionally evaluated the facts and circumstances to determine whether the principal balance of the Notes ($4.9 million and $250K) approximated their fair value. The Notes were issued entirely to unrelated third parties which were deemed to be arm’s length transactions. In addition, the comparable interest rates for loans of similar companies as of the date of the Note issuances range from 10-15% given the liquidity concerns of the Company. The term of the Notes issued range from 8-15 months, which would support the conclusion that the principal balance approximates their fair value given the short-term maturities of each Note. Finally, the Warrants issued in connection with the Notes were included akin to a “sweetener” in the offering as opposed to compensation for adjusting the interest rate or other key terms within the Convertible Term Loan Agreements. As such, the Company concluded that the principal balance of the Notes approximated their fair value.

The Warrants were initially measured at fair value and subsequent fair value measurement is not required as long as the instrument continues to be classified in equity. The proceeds from the transaction will be allocated between the Notes and Warrants based on the relative fair value method.

As a result of our fair value calculations, we recognized $928,779 and $515,763 of additional paid in capital associated with the value of the warrants and beneficial conversion, respectively, resulting in a total notes payable discount of $1,444,542. As such, $188,782 of debt discount amortization was recognized as interest expense during the three months ended June 30, 2021.

CRYOMASS TECHNOLOGIES INC.

CONSOLIDATED BALANCE SHEETS

(UNAUDITED)