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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

(Mark One)    
     

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACMT OF 1934

For the quarterly period ended September 30, 2023

 
     
  or  
     

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _____ to _____

 

 

Commission File Number: 001-40578

 

 

 

AGRIFORCE GROWING SYSTEMS LTD.

(Exact name of registrant as specified in its charter)

 

 

British Columbia   Not Applicable

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

     

800 – 525 West 8th Avenue

Vancouver, BC, Canada

  V5Z 1C6
(Address of principal executive offices)   (Zip Code)

 

(604) 757-0952

(Registrant’s telephone number, including area code)

 

N/A

(Former name or former address and former fiscal year, if changed since last report)

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class   Trading Symbol(s)   Name of each exchange on which registered
Common Shares   AGRI   NASDAQ Capital Market
Series A Warrants   AGRIW   NASDAQ Capital Market

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” “non-accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

  Large accelerated filer ☐ Accelerated filer ☐
     
  Non-accelerated filer Smaller reporting company
     
    Emerging growth company

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to section 13(a) of the Exchange Act.

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No

 

As of November 2, 2023, the registrant has 1,413,511 shares of common stock, no par value per share, outstanding.

 

 

 

 

 

 

TABLE OF CONTENTS

 

PART I — FINANCIAL INFORMATION  
     
Item 1. Financial Statements 4
     
  Condensed Consolidated Balance Sheets as of September 30, 2023 (unaudited) and December 31, 2022 4
     
  Unaudited Condensed Consolidated Statements of Comprehensive Loss for the three and nine months ended September 30, 2023 5
     
  Unaudited Condensed Consolidated Statement of Changes in Shareholders’ Equity for the three and nine months ended September 30, 2023 and September 30, 2022 6
     
  Unaudited Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2023 and September 30, 2022 7
     
  Notes to Unaudited Condensed Financial Statements 8
     
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 18
     
Item 3. Quantitative and Qualitative Disclosures About Market Risk 27
     
Item 4. Controls and Procedures 27
     
PART II — OTHER INFORMATION  
     
Item 1. Legal Proceedings 28
     
Item 1A. Risk Factors 28
     
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 28
     
Item 3. Defaults Upon Senior Securities 29
     
Item 4. Mine Safety Disclosures 29
     
Item 5. Other Information 29
     
Item 6. Exhibits 29

 

2

 

 

Cautionary Note Regarding Forward-Looking Information

 

This Quarterly Report on Form 10-Q contains certain “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). These forward-looking statements represent our expectations, beliefs, intentions or strategies concerning future events, including, but not limited to, any statements regarding our assumptions about financial performance; the continuation of historical trends; the sufficiency of our cash balances for future liquidity and capital resource needs; the expected impact of changes in accounting policies on our results of operations, financial condition or cash flows; anticipated problems and our plans for future operations; and the economy in general or the future of the agriculture technology industry, all of which were subject to various risks and uncertainties.

 

When used in this Quarterly Report on Form 10- Q and other reports, statements, and information we have filed with the Securities and Exchange Commission (“Commission” or “SEC”), in our press releases, in our periodic reports on Forms 10-K and 10-Q, in oral statements made by or with the approval of an executive officer, the words or phrases “believes,” “may,” “will,” “expects,” “should,” “continue,” “anticipates,” “intends,” “will likely result,” “estimates,” “projects” or similar expressions and variations thereof are intended to identify such forward-looking statements. However, any statements contained in this Quarterly Report on Form 10-Q that are not statements of historical fact may be deemed to be forward-looking statements. We caution that these statements by their nature involve risks and uncertainties, certain of which are beyond our control, and actual results may differ materially depending on a variety of important factors.

 

We do not assume the obligation to update any forward-looking statement. You should carefully evaluate such statements in light of factors described in this annual report. In this Quarterly Report on Form 10-Q, AgriFORCE Growing Systems Ltd. has identified important factors that could cause actual results to differ from expected or historic results. You should understand that it is not possible to predict or identify all such factors. Consequently, you should not consider any such list to be a complete list of all potential risks or uncertainties.

 

3

 

 

PART I — FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

AGRIFORCE GROWING SYSTEMS LTD.

CONDENSED CONSOLIDATED INTERIM BALANCE SHEETS

(Expressed in US dollars)

 

         
  

September 30, 2023

(Unaudited)

   December 31, 2022 
        
ASSETS          
           
Current          
Cash and cash equivalents  $586,565   $2,269,320 
Other receivable   74,735    48,941 
Prepaid expenses and other current assets (Note 3)   242,033    598,342 
Inventories (Note 4)   38,167    - 
Advance (Note 5)   

218,934

    

-

 
Total current assets   1,160,434    2,916,603 
           
Non-current          
Property and equipment, net   92,482    121,672 
Intangible asset (Note 6)   12,620,896    13,089,377 
Operating lease right-of-use asset   1,406,060    1,540,748 
Construction in progress   2,056,459    2,092,533 
Land deposit (Note 3)   -    2,085,960 
Total assets   17,336,331    21,846,893 
           
LIABILITIES AND EQUITY          
           
Current          
Accounts payable and accrued liabilities (Note 7)   1,891,589    1,147,739 
Debentures (Note 8 and 14)   4,669,944    3,941,916 
Contract liabilities (Note 9)   23,262    - 
Lease liability – current (Note 13)   275,584    271,110 
Total current liabilities   6,860,379    5,360,765 
           
Non-current          
Lease liability – non-current (Note 13)   1,122,692    1,250,060 
Derivative liabilities (Note 11)   1,958,568    4,649,115 
Long term loan (Note 10)   44,379    44,300 
Total liabilities   9,986,018    11,304,240 
Commitments and contingencies (Note 14)   -    - 
           
Shareholders’ equity          
Common shares, no par value per share – unlimited shares authorized; 1,071,516 and 315,916 shares issued and outstanding at September 30, 2023 and December 31, 2022, respectively*   41,891,730    27,142,762 
Obligation to issue shares   44,214    - 
Additional paid-in-capital   6,486,532    16,816,695 
Accumulated deficit   (40,514,172)   (32,774,094)
Accumulated other comprehensive income   (557,991)   (642,710)
Total shareholders’ equity   7,350,313    10,542,653 
           
Total liabilities and shareholders’ equity  $17,336,331   $21,846,893 

 

*reflects the 1:50 reverse stock split effected on October 11, 2023.

 

The accompanying notes are an integral part of these Unaudited Condensed Consolidated Interim Financial Statements.

 

4

 

 

AGRIFORCE GROWING SYSTEMS LTD.

CONDENSED CONSOLIDATED INTERIM STATEMENTS OF COMPREHENSIVE LOSS (Unaudited)

(Expressed in US dollars)

 

   2023   2022   2023   2022 
   Three Months Ended September 30,   Nine Months Ended September 30, 
   2023   2022   2023   2022 
                 
OPERATING EXPENSES                    
Wages and salaries  $                      603,242   $695,510   $                  2,319,026   $2,521,164 
Consulting   

147,190

    

522,576

    

1,032,210

    

2,030,994

 
Professional fees   277,694    1,177,236    1,026,044    2,058,636 
Office and administrative   191,829    356,408    821,358    987,298 
Share based compensation   80,537    169,020    565,861    705,882 
Depreciation and amortization   172,096    6,714    512,695    15,706 
Investor and public relations   61,319    111,499    451,184    718,423 
Lease expense   73,261    79,293    222,535    238,728 
Sales and marketing   11,242    95,750    173,568    186,132 
Shareholder and regulatory   35,857    28,431    114,674    175,094 
Travel and entertainment   3,813    55,904    104,938    214,725 
Research and development   (27,046)   110,916    22,312    537,772 
Operating loss   (1,631,034)   (3,409,257)   (7,366,405)   (10,390,554)
                     
OTHER EXPENSES                    
Accretion of interest on debentures (Note 8)   2,064,936    1,688,672    6,045,214    1,688,672 
Loss (gain) on conversion of convertible debt (Note 8)   108,125    (93,973)   541,730    (93,973)
Change in fair value of derivative liabilities (Note 11)   (326,042)   (1,465,027)   (6,159,067)   (1,683,489)
Foreign exchange loss (gain)   25,472    (104,468)   (1,317)   (143,432)
Write-off of deposit (Note 3)   -    -    12,000    - 
Other income   (10,472)   (37,831)   (64,887)   (37,831)
                     
Net loss  $(3,493,053)  $(3,396,630)  $(7,740,078)  $(10,120,501)
                     
Other comprehensive income (loss)                    
                     
Foreign currency translation   (226,286)   (566,414)   84,719    (599,507)
                     
Comprehensive loss attributable to common shareholders  $(3,719,339)  $(3,963,044)  $(7,655,359)  $(10,720,008)
                     
Basic and diluted net loss attributed to common share*  $(4.03)  $(8.31)  $(12.58)  $(29.07)
                     
Weighted average number of common shares outstanding – basic and diluted*   867,110    408,702    615,152    348,133 

 

*reflects the 1:50 reverse stock split effected on October 11, 2023.

 

The accompanying notes are an integral part of these Unaudited Condensed Consolidated Interim Financial Statements.

 

5

 

 

AGRIFORCE GROWING SYSTEMS LTD.

CONDENSED CONSOLIDATED INTERIM STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (unaudited)

(Expressed in US dollars, except share numbers)

 

For the three and nine months ended September 30, 2023 and 2022

 

   # of Shares   Amount   capital   shares   deficit   income   equity 
   For the three months ended September 30     
   Common shares*   Additional
paid-in-
   Obligation
to issue
   Accumulated   Accumulated
other
comprehensive
   Total
shareholders’
 
   # of Shares   Amount   capital   shares   deficit   income   equity 
                             
Balance, July 1, 2023          454,335   $  33,086,067   $  11,478,156   $97,837   $(37,021,119)  $(331,705)  $      7,309,236 
Shares issued for conversion of convertible debt (Note 8)   422,104    3,013,171    -    -    -    -    3,013,171 
Shares issued for compensation (Note 12)   31,890    205,678    -    (53,623)   -    -    152,055 
Shares issued for cash, net of issuance costs (Note 12)   103,177    640,096    -    -    -    -    640,096 
Shares issued for consulting services   350    27,150    -    -    -    -    27,150 
Shares issued on conversion of vested prefunded warrants (Note 6)   59,660    4,919,568    (4,919,568)   -    -    -    - 
Share based compensation   -    -    (72,056)   -    -    -    (72,056)
Net loss   -    -    -    -    (3,493,053)   -    (3,493,053)
Foreign currency translation   -    -    -    -    -    (226,286)   (226,286)
Balance, September 30, 2023   1,071,516   $41,891,730   $6,486,532   $44,214   $(40,514,172)  $(557,991)  $7,350,313 
                                    
Balance, July 1, 2022   310,293   $26,710,990   $10,123,315   $-   $(26,624,863)  $(66,179)  $10,143,263 
Shares issued for conversion of convertible debt (Note 8)   1,351    131,532    -    -    -    -    131,532 
Shares issued for consulting services   600    59,500    -    -    -    -    59,500 
Shares issued compensation   1,528    100,564    -    -    -    -    100,564 
Share based compensation   -    -    68,456    -    -    -    68,456 
Prefunded warrants issued (Note 6)   -    -    3,376,946    -    -    -    3,376,946 
Net loss   -    -    -    -    (3,396,630)   -    (3,396,630)
Foreign currency translation   -    -    -    -    -    (566,414)   (566,414)
Balance, September 30, 2022   313,772   $27,002,586   $13,568,717   $-   $(30,021,493)  $(632,593)  $9,917,217 

 

*reflects the 1:50 reverse stock split effected on October 11, 2023.

 

   # of Shares   Amount   capital   shares   deficit   income   equity 
   For the nine months ended September 30     
   Common shares*   Additional
paid-in-
   Obligation
to issue
   Accumulated   Accumulated
other
comprehensive
   Total
shareholders’
 
   # of Shares   Amount   capital   shares   deficit   income   equity 
                             
Balance, January 1, 2023         315,916   $27,142,762   $16,816,695   $-   $(32,774,094)  $(642,710)  $    10,542,653 
Shares issued for conversion of convertible debt (Note 8)   472,431    4,756,872    -    -    -    -    4,756,872 
Shares issued for compensation (Note 12)   35,007    311,190    -    44,214    -    -    355,404 
Shares issued for cash, net of issuance costs (Note 12)   124,652    939,695    -    -    -    -    939,695 
Shares issued in private placement (Note 12)   20,000    204,880    -    -    -    -    204,880 
Shares issued for consulting services   900    80,885    -    -    -    -    80,885 
Shares issued on conversion of vested prefunded warrants (Note 6)   102,610    8,455,446    (8,455,446)   -    -    -    - 
Cancelled prefunded warrants (Note 3)   -    -    (2,085,960)   -    -    -    (2,085,960)
Share based compensation   -    -    211,243    -    -    -    211,243 
Net loss   -    -              (7,740,078)        (7,740,078)
Foreign currency translation   -    -    -    -    -    84,719    84,719 
Balance, September 30, 2023   1,071,516   $41,891,730   $6,486,532   $44,214   $(40,514,172)  $(557,991)  $7,350,313 
                                    
Balance, January 1, 2022   303,534   $25,637,543   $2,203,343   $93,295   $(19,900,992)  $(33,086)  $8,000,103 
                                    
Shares issued for conversion of convertible debt (Note 8)   1,351    131,532    -    -    -    -    131,532 
Shares issued for consulting services   5,195    801,457    -    (93,295)   -    -    708,162 
Shares issued for compensation   3,692    432,054    -    -    -    -    432,054 
Share based compensation   -    -    282,828    -    -    -    282,828 
Prefunded warrants issued (Note 6)   -    -    11,082,546    -    -    -    11,082,546 
Net loss   -    -    -    -    (10,120,501)   -    (10,120,501)
Foreign currency translation   -    -    -    -    -    (599,507)   (599,507)
Balance, September 30, 2022   313,772   $27,002,586   $13,568,717   $-   $(30,021,493)  $(632,593)  $9,917,217 

 

*reflects the 1:50 reverse stock split effected on October 11, 2023.

 

The accompanying notes are an integral part of these Unaudited Condensed Consolidated Interim Financial Statements.

 

6

 

 

AGRIFORCE GROWING SYSTEMS LTD.

CONDENSED CONSOLIDATED INTERIM STATEMENTS OF CASH FLOWS (Unaudited)

(Expressed in US Dollars)

 

   2023   2022 
   For the nine months ended September 30, 
   2023   2022 
         
CASH FLOWS FROM OPERATING ACTIVITIES          
Net loss for the period  $(7,740,078)  $(10,120,501)
Adjustments to reconcile net loss to net cash used in operating activities:          
Depreciation and amortization   512,695    15,706 
Share based compensation   211,243    282,828 
Shares issued for consulting services   80,885    708,162 
Shares issued for compensation   355,404    432,054 
Loss (gain) on debt conversion   541,730    (93,973)
Amortization of debt issuance costs   5,873,396    1,515,296 
Change in fair value of derivative liabilities   (6,159,067)   (1,683,489)
Write-off of deposit   12,000    - 
Changes in operating assets and liabilities:          
Other receivables   (25,794)   (14,411)
Prepaid expenses and other current assets   344,309    (60,914)
Inventories   (38,167)   - 
Advance   

(225,000

)   

-

 
Accounts payable and accrued liabilities   783,725    (35,791)
Right-of-use asset   134,688    249,038 
Lease liabilities   (122,894)   (255,731)
Contract liabilities   23,333    - 
Net cash used in operating activities   (5,437,592)   (9,061,726)
           
CASH FLOWS FROM INVESTING ACTIVITIES          
Payment towards acquisition of intangibles   -    (500,000)
Acquisition of equipment and leasehold improvements   -    (93,259)
Deposit for purchase of land   -    20,000 
Construction in progress   -    (50,000)
Net cash used in investing activities   -    (623,259)
           
CASH FLOWS FROM FINANCING ACTIVITIES        - 
Proceeds from common shares issued for cash   1,342,915    - 
Share issuance costs paid   (153,220)   - 
Proceeds from debentures – net of discount   4,615,385    12,750,000 
Repayment of convertible debentures   (1,741,950)   (1,122,000)
Financing costs of debentures   (325,962)   (1,634,894)
Net cash provided by financing activities   3,737,168    9,993,106 
           
Effect of exchange rate changes on cash and cash equivalent   17,669    (214,383)
Change in cash   (1,682,755)   93,738 
Cash, beginning of period   2,269,320    7,775,290 
Cash, end of period  $586,565   $7,869,028 
           
Supplemental cash flow information:          
Cash paid during the period for interest  $171,818   $173,376 
           
Supplemental disclosure of non-cash investing and financing transactions          
Shares issued for conversion of convertible debt  $4,756,872   $131,532 
Reclassified accrued construction in progress fees  $39,875   $- 
Initial fair value of debenture warrants (“Second Tranche Warrants”)  $2,378,000   $- 
Initial fair value of conversion feature of debentures (“Second Tranche Debentures”)  $1,599,000   $- 
Fair value of debenture warrants (“First Tranche Warrants”)  $-   $4,342,877 
Fair value of conversion feature of debentures (“First Tranche Debentures”)  $-   $2,249,000 
Prefunded warrants issued related to intangible assets  $-   $8,996,586 
Prefunded warrants issued related to land deposit  $-    $2,085,960 
Prefunded warrants related to land deposit cancelled  $

2,085,960

   $- 
Initial operating lease liability recognized under Topic 842  $-   $1,776,599 
Initial lease right-of-use asset recognized under Topic 842  $-   $1,837,782 

 

The accompanying notes are an integral part of these Unaudited Condensed Consolidated Interim Financial Statements.

 

7

 

 

NOTES TO THE CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

For the nine months ended September 30, 2023 and 2022 (unaudited)

(Expressed in US Dollars, except where noted)

 

1. NATURE OF OPERATIONS AND BASIS OF PREPARATION

 

Business Overview

 

AgriFORCE Growing Systems Ltd. (“AgriFORCE” or the “Company”) was incorporated as a private company by Articles of Incorporation issued pursuant to the provisions of the Business Corporations Act (British Columbia) on December 22, 2017. The Company’s registered and records office address is at 800 – 525 West 8th Avenue, Vancouver, British Columbia, Canada, V5Z 1C6.

 

The Company is an innovative agriculture-focused technology company that delivers reliable, financially robust solutions for high value crops through our proprietary facility design and automation Intellectual Property to businesses and enterprises globally through our AgriFORCE™ Solutions division (“Solutions”) and delivers nutritious food products through our AgriFORCE™ Brands division (“Brands”).

 

Solutions intends to operate in the plant based pharmaceutical, nutraceutical, and other high value crop markets using its unique proprietary facility design and hydroponics based automated growing system that enable cultivators to effectively grow crops in a controlled environment (“FORCEGH+™”). The Company has designed FORCEGH+™ facilities to produce in virtually any environmental condition and to optimize crop yields to as near their full genetic potential possible whilst substantially eliminating the need for the use of pesticides and/or irradiation.

 

Brands is focused on the development and commercialization of plant-based ingredients and products that deliver healthier and more nutritious solutions. We will market and commercialize both branded consumer product offerings and ingredient supply.

 

Basis of Presentation

 

The accompanying Unaudited Condensed Consolidated Interim Financial Statements and related financial information of AgriFORCE Growing Systems Ltd. should be read in conjunction with the audited financial statements and the related notes thereto for the years ended December 31, 2022 and 2021 included in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission (“SEC”) on March 13, 2023. These unaudited interim financial statements have been prepared in accordance with the rules and regulations of the United States Securities and SEC for interim financial information. Accordingly, they do not include all of the information and footnotes required by the accounting principles generally accepted in the United States of America (“U.S. GAAP”) for complete financial statements.

 

In the opinion of management, the accompanying interim financial statements contain all adjustments which are necessary to state fairly the Company’s financial position as of September 30, 2023 and December 31, 2022, and the results of its operations and cash flows during the three and nine months ended September 30, 2023 and 2022. Such adjustments are of a normal and recurring nature. The results for the nine months ended September 30, 2023 are not necessarily indicative of the results to be expected for the full fiscal year ending December 31, 2023, or for any future period.

 

Liquidity and Management’s Plan

 

The Company has incurred substantial operating losses since its inception and expects to continue to incur significant operating losses for the foreseeable future. As reflected in the interim financial statements for the nine months ended September 30, 2023, the Company had a net loss of $7.7 million, $5.4 million of net cash used in operating activities, and the Company had a working capital deficit of $5.7 million.

 

8

 

 

The accompanying interim financial statements have been prepared on a going concern basis, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. The interim financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might result from the outcome of this uncertainty. The Company is at the development stage of its business plan. As such it is likely that additional financing will be needed by the Company to fund its operations and to develop and commercialize its technology. These factors raise substantial doubt about the Company’s ability to continue as a going concern. For the next twelve months from issuance of these interim financial statements, the Company will seek to obtain additional capital through the sale of debt or equity financings or other arrangements to fund operations; however, there can be no assurance that the Company will be able to raise needed capital under acceptable terms, if at all. The sale of additional equity may dilute existing shareholders and newly issued shares may contain senior rights and preferences compared to our currently outstanding common shares. If the Company is unable to obtain such additional financing, future operations would need to be scaled back or discontinued. Due to the uncertainty in the Company’s ability to raise capital, management believes that there is substantial doubt in the Company’s ability to continue as a going concern for twelve months from the issuance of these interim financial statements.

 

Reverse Stock Split

 

On October 11, 2023, the Company executed a one-for-fifty reverse stock split of the Company’s common shares (the “Reverse Split”). As a result of the Reverse Split, every 50 shares of the Company’s old common shares were converted into one share of the Company’s new common shares. Fractional shares resulting from the reverse split were rounded up to the nearest whole number. The Reverse Split automatically and proportionately adjusted all issued and outstanding shares of the Company’s common shares, as well as convertible debentures, convertible features, prefunded warrants, stock options and warrants outstanding at the time of the date of the Reverse Split. The exercise price on outstanding equity based-grants was proportionately increased, while the number of shares available under the Company’s equity-based plans was proportionately reduced. Share and per share data (except par value) for the periods presented reflect the effects of the Reverse Split. References to numbers of common shares and per share data in the accompanying financial statements and notes thereto for periods ended prior to October 11, 2023 have been adjusted to reflect the Reverse Split on a retroactive basis.

 

2. SIGNIFICANT ACCOUNTING POLICIES

 

Recent Accounting Pronouncements

 

In June 2016, the FASB issued ASU 2016-13, “Financial Instruments – Credit Losses.” The standard, including subsequently issued amendments, requires a financial asset measured at amortized cost basis, such as accounts receivable and certain other financial assets, to be presented at the net amount expected to be collected based on relevant information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. This ASU is effective for fiscal years beginning after December 15, 2022, and interim periods within those fiscal years, and requires the modified retrospective approach. ASU 2016-13 was adopted by the Company on January 1, 2023. Based on the composition of the Company’s affected financial assets, current market conditions, and historical credit loss activity, the adoption did not have a material impact to these interim financial statements.

 

In August 2020, the FASB issued ASU 2020-06 “Debt – Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging – Contracts in Entity’s Own Equity” (“ASU 2020-06”). The intention of ASU 2020-06 is to address the complexities in accounting for certain financial instruments with a debt and equity component. Under ASU 2020-06, the number of accounting models for convertible notes will be reduced and entities that issue convertible debt will be required to use the if-converted method for the computation of diluted “Earnings per share” under ASC 260. ASC 2020-06 is effective for fiscal years beginning after December 15, 2023 and may be adopted through either a modified retrospective method of transition or a fully retrospective method of transition. ASU 2020-06 was adopted by the Company on January 1, 2023. Since the Company had a net loss for the nine months ended September 30, 2023 and its convertible debentures were determined to be anti-dilutive, there was no material impact to its basic and diluted net loss per share for the period as a result of adopting ASU 2020-06.

 

In October 2021, the Financial Accounting Standards Board (“FASB”) issued ASU 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers. Under ASU 2021-08, an acquirer must recognize and measure contract assets and contract liabilities acquired in a business combination in accordance with Topic 606. The guidance is effective for interim and annual periods beginning after December 15, 2022, with early adoption permitted. ASU 2021-08 was adopted on January 1, 2023 and did not have a material impact to these interim financial statements.

 

9

 

 

Other accounting standards that have been issued or proposed by FASB that do not require adoption until a future date are not expected to have a material impact on the consolidated financial statements upon adoption. The Company does not discuss recent pronouncements that are not anticipated to have an impact on or are unrelated to its financial condition, results of operations, cash flows or disclosures.

 

Inventories

 

Inventories consist of finished goods of milled flour and related packaging material recorded at the lower of cost or net realizable value with the cost measured using the average cost method. Inventories includes all costs that relate to bringing the inventory to its present condition and location under normal operating conditions.

 

Revenue Recognition

 

Product revenue includes sales from hydroxyl generators. We recognize product revenue when we satisfy performance obligations by transferring control of the promised products or services to customers. Product revenue is recognized at a point in time when a good is shipped or delivered to the customer.

 

Contract Balances

 

We recognize a receivable when the Company has a right to consideration for which the Company has completed the performance obligations and only the passage of time is required before payment of that consideration is due.

 

We recognize a contract asset when revenue is recognized prior to invoicing.

 

We recognize a contract liability when a customer provides payment to the Company for a performance obligation not yet satisfied.

 

Payment terms generally require payments within 30 days.

 

Convertible Instruments

 

The Company evaluates and accounts for conversion options embedded in its convertible instruments in accordance with ASC 815, Derivatives and Hedging (“ASC 815”), which provides that if three criteria are met, the Company is required to bifurcate conversion options from their host instruments and account for them as free-standing derivative financial instruments. These three criteria include circumstances in which;

 

(a) the economic characteristics and risks of the embedded derivative instrument are not clearly and closely related to the economic characteristics and risks of the host contract;
(b) the hybrid instrument that embodies both the embedded derivative instrument and the host contract is not re-measured at fair value under otherwise applicable generally accepted accounting principles with changes in fair value reported in earnings as they occur; and
(c) a separate instrument with the same terms as the embedded derivative instrument would be considered a derivative instrument.

 

ASC 815 also provides an exception to this rule when the host instrument is deemed to be conventional as defined under professional standards as “The Meaning of Conventional Convertible Debt Instrument.”

 

The Company accounts for convertible instruments (when it has determined that the embedded conversion options should not be bifurcated from their host instruments) in accordance with professional standards when “Accounting for Convertible Securities with Beneficial Conversion Features,” as those professional standards pertain to “Certain Convertible Instruments.” Accordingly, the Company records, when necessary, discounts to convertible notes for the intrinsic value of conversion options embedded in debt instruments based upon the differences between the fair value of the underlying common stock at the commitment date of the note transaction and the effective conversion price embedded in the note. Debt discounts under these arrangements are amortized over the term of the related debt to their earliest date of redemption. The Company also records when necessary deemed dividends for the intrinsic value of conversion options embedded in preferred shares based upon the differences between the fair value of the underlying common stock at the commitment date of the note transaction and the effective conversion price embedded in the note. ASC 815 provides that, among other things, generally, if an event is not within the entity’s control could or require net cash settlement, then the contract shall be classified as an asset or a liability.

 

Definite Lived Intangible Asset

 

Definite lived intangible asset consists of a granted patent. Amortization is computed using the straight-line method over the estimated useful life of the asset. The estimated useful life of the granted patent is 20 years and the patent was available for use starting January 2023.

 

Fair Value of Financial Instruments

 

The fair value of the Company’s other receivable, accounts payable and other current liabilities approximate their carrying amounts due to the relative short maturities of these items.

 

The Company issued warrants having a strike price denominated in U.S. dollars, which creates an obligation to issue shares for a price that is not denominated in the Company’s functional currency, Canadian dollars, and renders the warrants not indexed to the Company’s stock. The Series A warrants, representative warrants issued as part of the IPO, and convertible debt warrants are thus classified as derivative liabilities and are measured at fair value.

 

10

 

 

The convertible debentures also have a conversion feature whereby the debt holders can convert their outstanding debentures into common shares of the Company. The conversion price has a strike price denominated in U.S. dollars and accordingly, the conversion feature is classified as a derivative liability and measured at fair value.

 

The fair value of the Company’s warrants are determined in accordance with FASB ASC 820, “Fair Value Measurement,” which establishes a fair value hierarchy that prioritizes the assumptions (inputs) to valuation techniques used to price assets or liabilities that are measured at fair value. The hierarchy, as defined below, gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. The guidance for fair value measurements requires that assets and liabilities measured at fair value be classified and disclosed in one of the following categories:

 

Level 1: Defined as observable inputs, such as quoted (unadjusted) prices in active markets for identical assets or liabilities.
   
Level 2: Defined as observable inputs other than quoted prices included in Level 1. This includes quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets and liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
   
Level 3: Defined as unobservable inputs to the valuation methodology that are supported by little or no market activity and that are significant to the measurement of the fair value of the assets or liabilities. Level 3 assets and liabilities include those whose fair value measurements are determined using pricing models, discounted cash flow methodologies or similar valuation techniques, as well as significant management judgment or estimation.

 

Reclassifications

 

The Company has reclassified certain amounts in the 2022 consolidated financial statements to comply with the 2023 presentation.

 

3. PREPAID EXPENSES, OTHER CURRENT ASSETS AND LAND DEPOSIT

 

  

September 30,

2023

  

December 31,

2022

 
Prepaid expenses  $169,448   $436,496 
Legal retainer   30,811    24,457 
Inventory advances   36,107    - 
Deferred offering costs   -    100,337 
Deposits   -    12,000 
Others   5,667    25,052 
Prepaid expenses, other current assets  $242,033   $598,342 

 

The Company wrote off a non-refundable deposit amounting to $12,000 which was related to a previous land purchase agreement.

 

Inventory advances represent payments made to manufacturers for goods not received.

 

On August 31, 2022, the Company signed a purchase and sale agreement with Stronghold Power Systems, Inc. (“Stronghold”), to purchase approximately seventy acres of land located in the City of Coachella as well as to have Stronghold complete certain permitting, zoning, and infrastructure work for a total purchase price of $4,300,000. The purchase price consists of:

 

  (i) $1,500,000 in cash due on March 31, 2023.
     
  (ii) A first stock deposit of $1,700,000 in prefunded warrants. The Company issued 13,917 prefunded warrants on September 9, 2022 to Stronghold.
     
  (iii) A second stock deposit $1,100,000 in prefunded warrants. The Company issued 9,005 prefunded warrants on September 9, 2022 to Stronghold.

 

As at December 31, 2022 the $2,085,960 of prefunded warrants were recorded under land deposit in relation to the Stronghold agreement.

 

On March 31, 2023 the prefunded warrants issued were rescinded and the warrants were rendered null and void as the Company presented a termination notice to Stronghold and the value under land deposit was also reversed.

 

11

 

 

4. INVENTORIES

 

As at September 30, 2023, the Company had $38,167 (December 31, 2022 - nil) in finished goods. At the end of each reporting period, inventories are reviewed to ensure that they are recorded at the lower of cost and net realizable value.

 

5. ADVANCE

 

On June 18, 2023, the Company signed a memorandum of understanding (“MOU”) with Radical Clean Solutions Ltd. (“RCS”) to advance $225,000 to RCS to be used exclusively for the advance purchase of hydroxyl generating devices. On June 26, 2023, the Company advanced $225,000 to RCS. The Company has an option to convert the advance into an investment for 14% of the issued and outstanding common shares of RCS. Upon conversion of the advance into an investment, the Company will receive one of five board of director seats of RCS and will have a right of first refusal to maintain an ownership percentage in RCS of not less than 10% of the total issued and outstanding common shares.

 

On October 1, 2023 the Company and RCS signed a definitive agreement to convert the advance into a 14% ownership investment in RCS.

 

6. INTANGIBLE ASSET

 

Intangible asset represents $12,620,896 (December 31, 2022 - $13,089,377) for intellectual property (“Manna IP”) acquired under an asset purchase agreement with Manna Nutritional Group, LLC (“Manna”) dated September 10, 2021. The Manna IP encompasses patented technologies to naturally process and convert grains, pulses, and root vegetables, into low-starch, low-sugar, high-protein, fiber-rich baking flour products, as well as a wide range of breakfast cereals, juices, natural sweeteners, and baking enhancers. The Company paid $1,475,000 in cash and issued 147,600 prefunded warrants valued at $12,106,677 (the “Purchase Price”) adjusted for foreign exchange differences of $469,058 (December 31, 2022 - $492,300). Subject to a 9.99% stopper and SEC Rule 144 restrictions, the prefunded warrants will vest in tranches up until March 10, 2024. When vested the tranches of prefunded warrants are convertible into an equal number of common shares.

 

On January 3, 2023, Manna satisfied all of its contractual obligations when the patent was approved by the US Patents Office and the title was transferred to the Company. During the nine months ended September 30, 2023, the Company issued 102,610 shares in relation to this transaction. As at September 30, 2023, there were 44,990 unconverted prefunded warrants outstanding.

 

Based on the terms above and in conformity with US GAAP, the Company accounted for purchase as an asset acquisition and has deemed the asset purchased as an in-process research and development. The asset was completed and will be amortized over its useful life of 20 years. The Company recorded $492,220 in amortization expense related to the Manna IP for the nine months ended September 30, 2023.

 

The estimated annual amortization expense for the next five years are as follows:

 

Period ending:  Amount 
Remaining 2023  $163,908 
2024   655,631 
2025   655,631 
2026   655,631 
2027   655,631 
Subsequent years   9,834,464 
Total  $12,620,896 

 

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7. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES

 

  

September 30,

2023

  

December 31,

2022

 
Accounts payable  $623,887   $498,188 
Accrued expenses   665,696    365,521 
Other   602,006    284,030 
Accounts payable and accrued liabilities  $1,891,589   $1,147,739 

 

8. DEBENTURES

 

On June 30, 2022, the Company executed the definitive agreement with arm’s length accredited institutional investors (the “Investors”) for $14,025,000 in debentures with a 10% original issue discount (“First Tranche Debentures”) for gross proceeds of $12,750,000. The First Tranche Debentures were convertible into common shares at $111.00 per share. In addition, the Investors received 82,129 warrants at a strike price of $122.10, which expire on December 31, 2025 (the “First Tranche Warrants”). The First Tranche Warrants and First Tranche Debentures each have down round provisions whereby the conversion and strike prices will be adjusted downward if the Company issues equity instruments at lower prices. The First Tranche Warrants strike price and the First Tranche Debenture conversion price will be adjusted down to the effective conversion price of the issued equity instruments. The transaction costs incurred in relation to first tranche were $1,634,894.

 

The Investors have the right to purchase additional tranches of $5,000,000 each, up to a total additional principal amount of $33,000,000.

 

On January 17, 2023, the Investors purchased additional debentures totaling $5,076,923 with a 10% original issue discount for gross proceeds of $4,615,385 (the “Second Tranche Debenture”). The Second Tranche Debentures were convertible into common shares at $62.00 per share and the Investors received an additional 53,226 warrants at a strike price of $62.00, which expire on December 31, 2025 (the “Second Tranche Warrants”). The issuance of the additional tranche triggered the down round provision, adjusting the exercise prices of the First Tranche Debentures and the First Tranche Warrants to $62.00. The transaction costs incurred in relation to second tranche were $325,962.

 

The First Tranche and Second Tranche Debentures (the “Debentures”) have an interest rate of 5% for the first 12 months, 6% for the subsequent 12 months, and 8% per annum thereafter. Principal repayments will be made in 25 equal installments which began on September 1, 2022 for the First Tranche Debentures and on July 1, 2023 for the Second Tranche Debentures. The Debentures may be extended by nine months at the election of the Company by paying a sum equal to nine months interest on the principal amount outstanding at the end of the 18th month, at the rate of 8% per annum.

 

13

 

 

On August 9, 2023, the Company entered into another waiver and amendment agreement (“Agreement”) with the Investors with respect to a certain Senior Convertible Debenture (the “Debentures”) due July 17, 2025 issued by the Company to that Investor. The Agreement provides as follows:

 

  1. The Company wishes to make Monthly Redemptions in shares of the Company’s Common Stock in lieu of cash payments, until further written notice from the Company to the Purchaser.
  2. The Purchaser is willing to accept such shares as payment of the Monthly Redemption Amount provided that the Equity Conditions are met; and will consider on a case-by-case basis accepting payments in shares of Common Stock if the Equity Conditions are not met, at its sole discretion. Company may inquire of the Purchaser at least 5 Trading Days prior to a Monthly Redemption Date whether the Purchaser is willing to accept Shares without the Equity Conditions having been met. An email reply from the Purchaser shall be sufficient evidence of such monthly waiver.
  3. The Purchaser will accept the August 1, 2023 Monthly Redemption Amount in shares of Common Stock valued at the August 1 Repayment Price for such date.

 

On August 30, 2023, the Company issued common shares for cash under an ATM agreement (the “ATM”) triggering the down round provision, adjusting the exercise prices of the First and Second Tranche Debentures as well as the First and Second Tranche Warrants to $5.50.

 

Due to the currency of the above noted features being different from the Company’s functional currency, the First Tranche Warrants and Second Tranche Warrants (the “Debenture Warrants), as well as the Debentures’ convertible features were classified as derivative liabilities and are further discussed in Note 11.

 

The following table summarizes the outstanding debentures as of the dates indicated:

 

   Maturity Cash
Interest Rate
   September 30,
2023
   December 31,
2022
 
Principal (First Tranche Debentures)  12/31/2024   5.00% - 8.00 %  $14,025,000   $14,025,000 
Principal (Second Tranche Debentures)  17/07/2025   5.00% - 8.00 %   5,076,923    - 
Repayments and conversions            (8,431,581)   (2,955,000)
Debt issuance costs and discounts (Note 8 & 11)            (6,000,398)   (7,128,084)
Total Debentures (current)           $4,669,944   $3,941,916 

 

During the nine months ended September 30, 2023, the Investors converted $3,734,631 of principal and $305,175 of interest into shares of the Company resulting in a $541,730 loss on the conversion of convertible debentures. During the nine months ended September 30, 2023, the Company incurred $6,045,214 in accretion interest.

 

9. CONTRACT BALANCES

 

For the nine months ended September 30, 2023, contact balances consisted of $23,262 of advance payments for product sales not yet delivered, which are recognized as a contract liability (December 31, 2022 - $nil).

 

10. LONG TERM LOAN

 

During the year ended December 31, 2020, the Company entered into a loan agreement with Alterna Bank for a principal amount of $29,586 (December 31, 2022 - $29,533) (CAD$40,000) under the Canada Emergency Business Account Program (the “Program”).

 

The Program, as set out by the Government of Canada, requires that the funds from this loan shall only be used by the Company to pay non-deferrable operating expenses including, without limitation, payroll, rent, utilities, insurance, property tax and regularly scheduled debt service, and may not be used to fund any payments or expenses such as prepayment/refinancing of existing indebtedness, payments of dividends, distributions and increases in management compensation.

 

In April 2021, the Company applied for an additional loan with Alterna Bank under the Program and received $14,793 (CAD$20,000) (December 31, 2022 - $14,767). The expansion loan is subject to the original terms and conditions of the Program.

 

The loan is interest free for an initial term that ends on January 18, 2024. Repaying the loan balance on or before January 18, 2024 will result in loan forgiveness of up to a third of loan value (up to CAD $20,000). Any outstanding loan after initial term carries an interest rate of 5% per annum, payable monthly during the extended term i.e. January 19, 2024 to December 31, 2025. The loan is due December 31, 2026.

 

The balance as at September 30, 2023 was $44,379 (CAD $60,000) (December 31, 2022 - $44,300 (CAD $60,000)).

 

14

 

 

11. DERIVATIVE LIABILITIES

 

Warrant Liabilities

 

As of September 30, 2023, the Warrant Liabilities represent aggregate fair value of publicly traded 61,765 Series A warrants (“IPO Warrants”), 2,721 representative’s warrants (“Rep Warrants”), 82,129 First Tranche Warrants, 53,226 Second Tranche Warrants and 20,000 warrants issued in a private placement (Note 12) on June 20, 2023 (“Private Placement Warrants”).

 

The fair value of the Private Placement Warrants amount to $2,407 (June 20, 2023 - $45,120). As at September 30, 2023 the Company utilized the Black-Scholes option-pricing model for the Private Placement Warrants and used the following assumptions: stock price $5.50 (June 20, 2023 - $12.50), dividend yield – nil (June 20, 2023 – nil), expected volatility 59% (June 20, 2023 – 65.0%), risk free rate of return 4.91% (June 20, 2023 – 4.58%), and expected term of 1.75 years (June 20, 2023 – expected term of 2 years).

 

The fair value of the IPO Warrants and Rep Warrants amount to $64,161 (December 31, 2022 - $275,115). The Rep Warrants are exercisable one year from the effective date of the IPO registration statement and will expire three years after the effective date.

 

The fair value of the First Tranche Warrants amounted to $234,000 (December 31, 2022 - $2,917,000). As at September 30, 2023 the Company utilized the Monte Carlo option-pricing model to value the First Tranche Warrants using the following assumptions: stock price $5.60 (December 31, 2022 - $56.50), dividend yield – nil (December 31, 2022 – nil), expected volatility 80.0% (December 31, 2022 – 95.0%), risk free rate of return 4.97% (December 31, 2022 – 4.22%), and expected term of 2.25 years (December 31, 2022 – expected term of 3 years).

 

On January 17, 2023 the Company issued Second Tranche Warrants. As at September 30, 2023 the Second Tranche Warrants had a fair value that amounted to $75,000 (January 17, 2023 - $2,378,000). As at September 30, 2023 the Company utilized the Monte Carlo option-pricing model to value the Second Tranche Warrants using the following assumptions: stock price $5.60 (January 17, 2023 - $60.50), dividend yield – nil (January 17, 2023 – nil), expected volatility 80.0% (January 17, 2023 – 95.0%), risk free rate of return 4.85% (January 17, 2023 – 3.80%), and expected term of 2.80 years (January 17, 2023 – expected term of 3.5 years).

 

Debenture Convertible Feature

 

On June 30, 2022, the Company issued First Tranche Debentures with an equity conversion feature, see Note 8. As at September 30, 2023 the fair value of the First Tranche Debentures’ convertible feature amounted to $887,000 (December 31, 2022 - $1,457,000). The Company utilized the Monte Carlo option-pricing model for valuing the convertible feature using the following assumptions: stock price $5.60 (December 31, 2022 - $56.50), dividend yield – nil (December 31, 2022 – nil), expected volatility 80.0% (December 31, 2022 – 95.0%), risk free rate of return 5.35% (December 31, 2022 – 4.41%), discount rate 16.23% (December 31, 2022 – 13.65%), and expected term of 1.25 years (December 31, 2022 – 2 years).

 

On January 17, 2023, the Company issued Second Tranche Debentures with an equity conversion feature, see Note 8. As at September 30, 2023 the fair value of the Second Tranche Debentures’ convertible feature amounted to $696,000 (January 17, 2023 - $1,599,000). The Company utilized the Monte Carlo option-pricing model for valuing the convertible feature using the following assumptions: stock price $5.60 (January 17, 2023 - $60.50), dividend yield – nil (January 17, 2023 – nil), expected volatility 80.0% (January 17, 2023 – 95.0%), risk free rate of return 5.12% (January 17, 2023 – 4.02%), discount rate 16.01% (January 17, 2023 – 11.65%), and expected term of 1.80 years (January 17, 2023 – 2.50 years).

 

The IPO Warrants, Rep Warrants, and Private Placement Warrants (the “Equity Warrants”) are classified as Level 1 financial instruments, while the Debenture Warrants and Debenture Convertible Feature are classified as Level 3 financial instruments.

 

15

 

 

Changes in the fair value of the Company’s financial instruments for the nine months ended September 30, 2023 and 2022 were as follows:

 

   Level 1   Level 3   Level 3     
  

Equity

Warrants

  

Debenture

Warrants

  

Debenture

Convertible

Feature

   Total 
Balance at January 1, 2023  $275,115    2,917,000    1,457,000    4,649,115 
Additions   45,120    2,378,000    1,599,000    4,022,120 
Conversions   -    -    (529,340)   (529,340)
Change in fair value   (259,123)   (4,960,112)   (939,832)   (6,159,067)
Effect of exchange rate changes   5,456    (25,888)   (3,828)   (24,260)
Balance at September 30, 2023  $66,568   $309,000   $1,583,000   $1,958,568 

 

   Level 1   Level 3   Level 3     
  

Equity

Warrants

  

Debenture

Warrants

  

Debenture

Convertible

Feature

   Total 
Balance at January 1, 2022  $1,418,964   $-   $-   $1,418,964 
Additions   -    4,080,958    3,336,535    7,417,493 
Conversions   -    -    (63,723)   (63,723)
Change in fair value   (640,540)   (191,957)   (850,992)   (1,683,489)
Effect of exchange rate changes   (85,547)   (239,001)   (172,820)   (497,368)
Balance at September 30, 2022  $692,877   $3,650,000   $2,249,000   $6,591,877 

 

Due to the expiry date of the warrants and conversion feature being greater than one year, the liabilities have been classified as non-current.

 

12. SHARE CAPITAL

 

During the nine months ended September 30, 2023, the Company issued shares for cash under its at-the market agreement (the “ATM”). In total 124,652 shares were issued for $1,092,915 less share issuance costs of $153,220.

 

On June 20, 2023 the Company entered in to a private placement agreement issuing 20,000 units of one common share and one whole Private Placement Warrant at a strike price of $25.00 with an expiry date of June 20, 2025 for total consideration of $250,000. The fair value of the Private Placement Warrants at initial recognition was $45,120.

 

On September 30, 2023, the Company owed $44,214 worth of stock-based compensation to Company officers. The balance issuable was classified as an Obligation to issue shares.

 

Basic and diluted net loss per share represents the loss attributable to shareholders divided by the weighted average number of shares and prefunded warrants outstanding during the period on an as converted basis.

 

Potentially dilutive securities that are not included in the calculation of diluted net loss per share because their effect is anti-dilutive are as follows (in common equivalent shares):

 

  

September 30,

2023

  

September 30,

2022

 
Warrants   270,762    197,536 
Options   76,185    12,711 
Convertible debentures   2,020,390    114,892 
Total anti-dilutive weighted average shares   2,367,337    325,139 

 

16

 

 

13. LEASES

 

The Company entered an operating lease for office space. As at September 30, 2023, the remaining lease term is six years and the discount rate is 7.0%. The Company has no finance leases.

 

The components of lease expenses were as follows:

 

  

Nine months ended

September 30, 2023

  

Nine months ended

September 30, 2022

 
Operating lease cost  $219,018   $226,098 
Short-term lease cost   3,517    12,630 
Total lease expenses  $222,535   $238,728 

 

The minimum future annual payments under the lease for our continuing operations as at September 30 is as follows:

 

      
Remaining 2023  $68,896 
2024   280,907 
2025   296,876 
2026   296,876 
2027   296,876 
Subsequent years   519,533 
Total minimum lease payments   1,759,964 
Less: imputed interest   (361,688)
Total lease liability   1,398,276 
Current portion of lease liability   (275,584)
Non-current portion of lease liability  $1,122,692 

 

On November 1, 2023, the Company terminated its operating lease of its office space and entered in to a short-term lease.

 

14. COMMITMENTS AND CONTINGENCIES

 

Debenture principal repayments

 

The following table summarizes the future principal payments related to our outstanding debt as of September 30, 2023:

 

      
Remaining 2023  $3,056,307 
2024   6,395,573 
2025   1,218,462 
Long Term Debt  $10,670,342 

 

Contingencies

 

Litigation

 

On August 11, 2023, Mr. Ingo Mueller, the former Chief Executive Officer and former director of the Company, filed a claim for wrongful dismissal in the BC Supreme Court. On September 8, 2023, the Company filed a reply to this civil claim. The Company’s reply states that the Company’s position is that Mr. Mueller was terminated for just cause as a result of certain actions taken by Mr. Mueller which are alleged to constitute breaches of his employment agreement with the Company and violations of the Company’s corporate governance policies.

 

The Company denies any liability to Mr. Mueller in connection with termination of Mr. Mueller’s employment agreement and will vigorously defend the claims made against the Company. The Company has not recorded a liability related to this claim as we do not believe Mr. Mueller has any legal or other grounds to pursue this claim nor that he will have any success whatsoever in pursuing it.

 

15. SUBSEQUENT EVENTS

 

The Company evaluated subsequent events through November 2, 2023, the date on which these interim financial statements were available to be issued, to ensure that this filing includes appropriate disclosure of events both recognized in the interim financial statements as of and subsequent to September 30, 2023, but were not recognized in the interim financial statements. Except as disclosed below, there were no events that required recognition, adjustment or disclosure in the financial statements.

 

On October 1, 2023, the Company issued 111,419 common shares upon conversion of convertible debt in lieu of repayment in cash.

 

On October 1, 2023, the Company issued 13,644 common shares upon conversion of prefunded warrants.

 

On October 12, 2023, the Company was served a legal complaint filed in the Superior Court of California from Stronghold for breach of contract, breach of covenant of good faith and fair dealing, and common count: goods and services rendered in relation to the purchase and sale agreement for the Coachella property (Note 3). The Company intends to vigorously defend itself in this matter; however, we cannot predict the outcome. The Company is unable to estimate the exact amount of loss, its estimated total exposure ranges from $nil to $452,000.

 

On October 18, 2023 one of the Investors purchased an additional tranche totaling $2,750,000 in convertible debentures and received 620,230 warrants. The convertible debentures and warrants were issued with an exercise price of $2.62. The issuance of the additional tranche triggered the down round provision, adjusting the exercise prices of the First and Second Tranche Debentures as well as the First and Second Tranche Debenture Warrants to $2.62 (Note 8 & 11).

 

On October 23, 2023, the Company issued 37,251 fractional shares due to the round up from the reverse stock split.

 

On October 30, 2023, one of the Investors converted $50,000 of convertible debentures into 19,084 shares.

 

On November 1, 2023, the Company issued 160,500 common shares upon conversion of convertible debt in lieu of repayment in cash.

 

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

Prospective investors should read the following discussion and analysis of our financial condition and results of operations together with our financial statements and the related notes and other financial information included elsewhere in this Annual Report. Some of the information contained in this discussion and analysis or set forth elsewhere in this Annual Report, including information with respect to our plans and strategy for our business, includes forward-looking statements that involve risks and uncertainties. See “Cautionary Note Regarding Forward-Looking Statements.” You should review the “Risk Factors” section of this Annual Report for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis.

 

Company History and Our Business

 

AgriFORCE Growing Systems Ltd. (“AgriFORCE” or the “Company”) was incorporated as a private company by Articles of Incorporation issued pursuant to the provisions of the Business Corporations Act (British Columbia) on December 22, 2017. The Company’s registered and records office address is at 800 – 525 West 8th Avenue, Vancouver, BC, Canada, V5Z 1C6.

 

AgriFORCE™ is dedicated to positively transforming farm, food, and family every day, everywhere. We aim to achieve this goal by providing novel agriculturally focused consulting, facility solutions, and products & services through our Solutions division, and by leveraging innovative technologies and processes to deliver healthier more nutritious food to consumers through our Brands division.

 

The AgriFORCE™ Solutions division is dedicated to transforming modern agricultural development “Building from the Seed to Deliver sustainable, Efficient, and Healthier crops” through our integrated Agtech platform 2.0 combining knowledge and IP with CEA equipment solutions, including our FORCEGH+™” solution, implementing solutions that are best suited to the crops and environment chosen.

 

Our AgriFORCE™ Brands division is focused on the development and commercialization of plant-based ingredients and products that deliver more nutritious “Food to Table”. We will market and commercialize both branded consumer product offerings and ingredient supplies.

 

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AgriFORCE Solutions

 

Understanding Our Approach – The AgriFORCE™ Precision Growth Method

 

Traditional farming includes three fundamental approaches: outdoor, greenhouse and indoor. AgriFORCE™ introduces a unique fourth method, the AgriFORCE™ precision growth method, which is informed by cutting-edge science and leveraging the latest advances in artificial intelligence (AI) and Internet of Things (IoT).

 

With a carefully optimized approach to facility design, IoT, AI utilization, nutrient delivery, and micro-propagation, we have devised an intricate, scientific and high success-oriented approach designed to produce much greater efficacy yields using fewer resources. This method is intended to outperform traditional growing methods using a specific combination of new and traditional techniques required to attain this efficiency. We call it precision growth. The AgriFORCE™ precision growth method focuses on addressing some of the most important legacy challenges in agriculture: environmental impact, operational efficiency and yield volumes.

 

The AgriFORCE™ precision growth method presents a tremendous opportunity to positively disrupt all corners of the industry. The market size of just the nutraceutical and plant-based pharmaceutical and vaccine/therapeutics market is over $500 billion. Including the traditional hydroponics high value crops and controlled-environment food markets, the addressable market approaches nearly $1 trillion(1)(2)(3).

 

The AgriFORCE™ Model – Managing the Difficulties of Agricultural Verticals with Modern Technology and Innovation

 

Our intellectual property combines a uniquely engineered facility design and automated growing system to provide a clear solution to the biggest problems plaguing most high value crop agricultural verticals. It delivers a clean, self-contained environment that maximizes natural sunlight and offers near ideal supplemental lighting. It also limits human intervention and – crucially – it was designed to provide superior quality control. It was also created to drastically reduce environmental impact, substantially decrease utility demands, as well as lower production costs, while delivering customers daily harvests and higher crop yields.

 

(1) https://home.kpmg/pl/en/home/insights/2015/04/nutraceuticals-the-future-of-intelligent-food.html

(2) https://link.springer.com/article/10.1057/jcb.2010.37

(3) https://medium.com/artemis/lets-talk-about-market-size-316842f1ab27

 

Our Position in the Ag-Tech Sector

 

The Ag-Tech sector is severely underserved by the capital markets, and we see an opportunity to acquire global companies who have provided solutions to the industry and are leading innovation moving forward. The robustness of our engagement with potential targets has confirmed our belief and desire to be part of a larger integrated Ag-Tech solutions provider, where each separate element of the business has its existing legacy business and can leverage across areas of expertise to expand their business footprint.

 

The AgriFORCE™ Grow House

 

The Company intends to operate in the plant based pharmaceutical, nutraceutical, and high value crop markets using its unique patented facility design and hydroponics based automated growing system that enable cultivators to effectively grow crops in a controlled environment (“FORCEGH+™”). The Company has designed FORCEGH+™ facilities to produce in virtually any environmental condition and to optimize crop yields to as near their full genetic potential possible while substantially eliminating the need for the use of pesticides, fungicides and/or irradiation.

 

The Company continues to develop its solution for fruits and vegetables focusing on the integration of its current structure with a new form of vertical grow technology.

 

BUSINESS PLAN

 

The Company is exploring opportunities to utilize its patented grow house structures and automated growing systems to expand its internal operations as well as external opportunities for joint ventures and licensing.

 

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AgriFORCE Brands

 

UN(THINK)™ Foods

 

The Company purchased Intellectual Property (“IP”) from Manna Nutritional Group, LLC (“Manna”), a privately held firm based in Boise, Idaho on September 10, 2021. The IP encompasses a granted patent to naturally process and convert grain, pulses and root vegetables, resulting in low-starch, low-sugar, high-protein, fiber-rich baking flour as well as produces a natural sweetener juice. The core process is covered under the Patent Nr. 11,540,538 in the U.S. and key international markets. The all-natural process is designed to unlock nutritional properties, flavors, and other qualities in a range of modern, ancient and heritage grains, pulses and root vegetables to create specialized all-natural baking and all-purpose flours, sweeteners, juices, naturally sweet cereals and other valuation products, providing numerous opportunities for dietary nutritional, performance and culinary applications.

 

During the period ended September 30, 2023, the Company has achieved milestones towards the commercialization of our Awakened Grains™ flour, the Company’s first brand to utilize the IP. Management has defined and tested its quality controls and safety protocols for production, and produced several multi-ton batches of germinated grains, refining and scaling production processes with our partners in Canada. We are also in the process of qualifying partners in the US to establish additional production hubs which will support growth and reduce logistics costs for customers in the region. Additionally, we have established our supply chain logistics with a contracted shipping company and two warehouses in Canada and the US. Our commercial team made progress in defining pricing and is conducting advanced customer R&D trials to understand how to integrate the product into food suppliers’ manufacturing processes. Online sales logistics and advertising materials were developed during the period to support the establishment of the direct-to-consumer sales channel. Lastly, the Company has developed an extensive number of recipes for the application of Awakened Grains™ flour for both customers and consumers.

 

With our R&D partners, the Company is developing several finished product prototypes including a line of pancake mixes, which are ready for consumer testing.

 

Wheat and Flour Market

 

Modern diet is believed to be a contributor to health risks such as heart disease, cancer, diabetes and obesity, due in part to the consumption of highly processed foods that are low in natural fiber, protein and nutrition; and extremely high in simple starch, sugar and calories. These “empty carbs” produce glycemic swings that may cause overeating by triggering cravings for food high in sugar, salt and starch. As an example, conventional baking flour is low in natural fiber (~ 2-3%), low-to-average in protein (~ 9%), and very high in starch (~ 75%)(4). Whole wheat flour is only marginally better.

 

(4) Based on protein, fiber, and starch content figures from a nationally certified independent laboratory, as compared to standard all-purpose flour.

 

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In contrast, foods high in fiber help to satiate hunger, suppress cravings and raise metabolism(5). They also assist in weight loss, lower cholesterol, and may reduce the risk of cancer, heart disease and diabetes.

 

Advantages of the UN(THINK)™ Foods IP

 

The Controlled Enzymatic Reaction & Endothermic Saccharification with Managed Natural Germination (“CERES-MNG) patented process allows for the development and manufacturing of all-natural flours that are significantly higher in fibers, nutrients and proteins and significantly lower in carbohydrates and calories than standard baking flour.

 

CERES-MNG baking flour produced from soft white wheat has 40 times more fiber, three (3) times more protein and 75% less net carbohydrates than regular all- purpose flour(6).

 

 

Source: Independent analysis by Eurofins Food Chemistry Testing Madison, Inc, February 2022

 

The CERES-MNG patent will help develop new flours and products from modern, ancient and heritage grains, seeds, legumes and tubers/root vegetables.

 

(5) https://my.clevelandclinic.org/health/articles/14400-improving-your-health-with-fiber

(6) Based on protein, fiber, and starch content figures from a nationally certified independent laboratory, as compared to standard all-purpose flour.

 

Products that AgriFORCE™ intends to develop for commercialization from the CERES-MNG patented process under the UN(THINK)™ foods brand:

 

  - High protein, high fiber, low carb modern, heritage and ancient grain flours (for use in breads, baked goods, doughs, pastry, snacks, and pasta)
  - Protein flours and protein additives
  - High protein, high fiber, low carb cereals and snacks
  - High protein, high fiber, low carb oat based dairy alternatives
  - Better tasting, cleaner label, high protein, high fiber, low carb nutrition bars
  - High protein, high fiber, low carb nutrition juices
  - Sweeteners – liquid and granulated
  - High protein, high fiber, low carb pet foods and snacks

 

We intend to commercialize these products behind three (3) main sales channels:

 

  - Ingredients
  - Branded ingredients
  - Consumer branded products

 

Successful commercialization of premium specialized products from the UN(THINK)™ foods IP and the capture of a small percentage share of the category is a notable business opportunity for AgriFORCE™. We estimate potential revenues to be between $500 million and $1 billion by 2030 (excluding any potential revenues from the Maltose-Power Juice applications).

 

   Breads
&Bakery
   Functional
Flours
   Pulse
Flours
 
   Dairy
Alternatives
   Nutrition
Bars
   Total 
Global market sizes  $222B   $48B