NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
AS OF AND FOR THE YEARS THEN ENDED DECEMBER 31, 2019 and 2018
Target Group Inc. (“Target Group” or “the
Company”) was incorporated on July 2, 2013 under the laws of the state of Delaware to engage in any lawful corporate undertaking,
including, but not limited to, selected mergers and acquisitions.
Target Group Inc. is a diversified and vertically integrated,
progressive company with focus on both national and international presence. The Company owns and operates Canary Rx Inc, a final-stage,
Canadian licensed producer, regulated under The Cannabis Act. Canary Rx Inc, operates a 44,000 square foot facility located in
Norfolk County, Ontario, and has partnered with Dutch breeder, Serious Seeds, to cultivate exclusive & world class proprietary
genetics. The Company has begun structuring multiple international production and distribution platforms and intends to continue
rapidly expanding its global footprint as it focuses on building an iconic brand portfolio whose focus aims at developing cutting
edge Intellectual Property among the medical and recreational cannabis markets. Target Group is committed to building industry-leading
companies that transform the perception of cannabis and responsibly elevate the overall consumer experience.
The Company’s current business is to produce,
manufacture, distribute, and conduct sales of cannabis products. As of the current year end, the company has not produced, manufactured,
distributed or sold any cannabis products.
In May, 2014, the Company effected a change in control
by the redemption of the stock held by its original shareholders, the issuance of shares of its common stock to new shareholders,
the resignation of its original officers and directors and the appointment of new officers and directors.
On July 6, 2015, the Company filed its form S-1/A,
to amend its form S-1 previously filed on January 26, 2015 and December 11, 2014. The prospectus relates to the offer and sale
of 1,500,000 shares of common stock (the “Shares”) of the Company, $0.0001 par value per share, offered by the holders
thereof (the “Selling Shareholder Shares”), who are deemed to be statutory underwriters. The selling shareholders will
offer their shares at a price of $0.50 per share, until the Company’s common stock is listed on a national securities exchange
or is quoted on the OTC Bulletin Board (or a successor); after which, the selling shareholders may sell their shares at prevailing
market or privately negotiated prices, including (without limitation) in one or more transactions that may take place by ordinary
broker’s transactions, privately-negotiated transactions or through sales to one or more dealers for resale.
On July 13, 2015, the Company received a notice of
effectiveness from the SEC for the registration of its shares.
On July 3, 2018, the Company filed an amendment in
its Articles of association to change its name to Target Group Inc. The Company was able to secure an OTC Bulletin Board symbol
CBDY from Financial Industry Regulatory Authority (FINRA).
On June 27, 2018, the Company entered into an Agreement
and Plan of Share Exchange (“Exchange Agreement”) with Visava Inc., a private Ontario, Canada corporation (“Visava”).
Visava owns 100% of Canary Rx Inc., a Canadian corporation that holds a leasehold interest in a parcel of property located in Ontario’s
Garden Norfolk County for the production of cannabis.
The Exchange Agreement provides that, subject to its
terms and conditions, the Company issued to the Visava shareholders an aggregate of 25,500,000 shares of the Company’s Common
Stock in exchange for all of the issued and outstanding common stock held by the Visava shareholders. In addition of its Common
Stock, the Company issued to the Visava shareholders, prorata Common Stock Purchase Warrants purchasing an aggregate of 25,000,000
shares of the Company’s Common Stock at a price per share of $0.10 for a period of two years following the issuance date
of the Warrants. Upon the closing of the Exchange Agreement, the Visava shareholders held approximately 46.27% of the issued and
outstanding Common Stock of the Company and Visava will continue its business operations as a wholly-owned subsidiary of the Company.
The transaction was closed effective August 2, 2018.
Effective January 25, 2019, the Company entered into
an Agreement and Plan of Share Exchange (“Exchange Agreement”) with CannaKorp Inc., a Delaware corporation (“CannaKorp”).
Company had previously entered into a Letter of Intent with CannaKorp dated November 30, 2018 which was disclosed in the Company’s
report on Form 8-K filed December 4, 2018.
The Exchange Agreement provides that, subject to its
terms and conditions, the Company issued to the CannaKorp shareholders an aggregate of 30,407,412 shares of the Company’s
common stock, based on a price per share of $0.10, in exchange for 100% of the issued and outstanding common stock of CannaKorp
held by the CannaKorp shareholders. In addition, the Company will issue Common Stock Purchase Warrants (“Warrants”)
in exchange for all outstanding and promised CannaKorp stock options. The Warrants will grant the holders thereof the right to
purchase up to approximately 7,211,213 shares of the Company’s common stock. The Company will also assume all outstanding
liabilities of CannaKorp. Upon the closing of the Exchange Agreement, CannaKorp will continue its business operations as a subsidiary
of the Company. The transaction was closed effective March 1, 2019.
Effective August 8, 2019, the Company entered into
an Exclusive License Agreement (“License Agreement”) with cGreen, Inc., a Delaware corporation (“cGreen”).
The License Agreement grants to the Company an exclusive license to manufacture, and distribute the patent-pending THC antidote
True Focus™ in the United States, Europe and the Caribbean. The term of the license is ten (10) years and four (4) months
from the effective date of August 8, 2019. In consideration of the license, the Company will issue 10,000,000 shares of its common
stock as follows: (i) 3,500,000 within ten (10) days of the effective date; (ii) 3,500,000 shares on January 10, 2020; and (iii)
3,000,000 shares not later than June 10, 2020. In addition, the Company will pay cGreen royalties of 7% of the net sales of the
licensed products and 7% of all sublicensing revenues collected by the Company. The Company will pay cGreen an advance royalty
of $300,000.00 within ten (10) days of the effective date; $300,000.00 on January 10, 2020; and $400,000.00 on or before June 10,
2020 and $500,000 on or before November 10, 2020. All advance royalty payments will be credited against the royalties owed by the
Company through December 31, 2020. The Company is arbitration with cGreen for breach of the terms of the License Agreement, refer to Note
9 for additional details. In addition, during the quarter ended December 31, 2019, the intangible asset was written off based on
management’s review and evaluation of its recoverability.
On September 17 2019, the CannaKorp has signed an agreement
with Nabis Holding (Nabis), where Nabis will purchase 200 wisp unit and 5000 pods per quarter from the Company. CannaKorp hereby
agrees to sell to Nabis, one CannaMatic. The purchase price for the one CannaMatic shall be $4,500 USD in cash to be paid by Nabis
to CannaKorp within 3 calendar days of Nabis obtaining regulatory approval of its vertically integrated licenses and $40,500 or
the balance owing to be paid by Nabis to CannaKorp, within 180 days of the Effective Date.
As of the date of this report, the equipment to Nabis has been
shipped and the 180 days mark has not passed. Once when it does, the Company will invoice Nabis. Additionally, the first quarter
of the Nabis agreement minimums were shipped and invoiced (200 Wisp Units and 5000 Pod Assemblies to enable Nabis to manufacture
5000 complete Wisp Pods) for online and retail distribution in the Arizona Market. Nabis has had delays in rolling out all the
products for which they have exclusive licenses with, and the Company expects their next order will likely be in the next 45 to
60 days.
2.
|
BASIS OF PRESENTATION AND CONSOLIDATION
|
The summary of significant accounting policies presented
below is designed to assist in understanding the Company’s consolidated financial statements. Such consolidated financial
statements and accompanying notes are the representations of the Company’s management, who are responsible for their integrity
and objectivity. These accounting policies conform to accounting principles generally accepted in the United States of America
(“GAAP”) in all material respects, and have been consistently applied in preparing the accompanying consolidated financial
statements.
The consolidated financial statements include the accounts
of the Company and its wholly-owned subsidiary, Visava Inc. and CannaKorp, Inc. Significant intercompany accounts and transactions
have been eliminated upon consolidation.
The Company has minimal revenue since inception
to date and has sustained operating losses during the year ended December 31, 2019. The Company had working capital deficit of
$4,922,069 and an accumulated deficit of $19,462,624 as of December 31, 2019. The Company’s continuation as a going concern
is dependent on its ability to generate sufficient cash flows from operations to meet its obligations and/or obtaining additional
financing from its members or other sources, as may be required.
The accompanying consolidated financial statements
have been prepared assuming that the Company will continue as a going concern; however, the above condition raises substantial
doubt about the Company’s ability to do so. The consolidated financial statements do not include any adjustments to reflect
the possible future effects on the recoverability and classification of assets or the amounts and classifications of liabilities
that may result should the Company be unable to continue as a going concern.
In order to maintain its current level of operations,
the Company will require additional working capital from either cash flow from operations, sale of its equity or issuance of debt.
However, the Company currently has no commitments from any third parties for the purchase of its equity. If the Company is unable
to acquire additional working capital, it will be required to significantly reduce its current level of operations.
4.
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
|
USE OF ESTIMATES
The preparation of consolidated financial statements
in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the consolidated financial statements, and the reported amounts
of revenues and expenses during the reporting periods. Actual results could differ from those estimates.
CASH
Cash and cash equivalents include cash on hand and
on deposit at banking institutions as well as all highly liquid short-term investments with original maturities of 90 days or less.
The Company did not have cash equivalents as of December 31, 2019 and 2018.
ACCOUNTS RECEIVABLE
Accounts receivable consists of amounts due to the
Company from customers as a result of the Company’s normal business activities. Accounts receivable is reported on the balance
sheets net of an estimated allowance for doubtful accounts. The Company establishes an allowance for doubtful accounts for estimated
uncollectible receivables based on historical experience, assessment of specific risk, review of outstanding invoices, and various
assumptions and estimates that are believed to be reasonable under the circumstances, and recognizes the provision as a component
of selling, general and administrative expenses. Uncollectible accounts are written off against the allowance after appropriate
collection efforts have been exhausted and when it is deemed that a balance is uncollectible. As of December 31, 2019, the Company
expects to collect these balances completely and therefore has not created any allowance for it.
INVENTORY
Inventory is stated at the lower of cost or net
realizable value, cost being determined on a weighted average cost basis, and market being determined as the lower of cost or
net realizable value. The Company records write-downs of inventory that is obsolete or in excess of anticipated demand or
market value based on consideration of product lifecycle stage, technology trends, product development plans and assumptions
about future demand and market conditions. Actual demand may differ from forecasted demand, and such differences may have a
material effect on recorded inventory values. Inventory write-downs are charged to cost of revenue and establish a new cost
basis for the inventory. The cost is determined on the basis of the average cost or first-in, first-out methods.
GOODWILL AND INTANGIBLE ASSETS
Goodwill and other identifiable intangible assets with
indefinite lives that are not being amortized, such as trade names, are tested at least annually for impairment and are written
down if impaired. Identifiable intangible assets with finite lives are amortized over their estimated useful lives and are reviewed
for impairment whenever facts and circumstances indicate that their carrying values may not be fully recoverable.
The Company evaluates the recoverability of the infinite-lived
intangible assets for possible impairment whenever events or circumstances indicate that the carrying amount of such assets may
not be recoverable. Recoverability of these assets is measured by a comparison of the carrying amounts to the future undiscounted
cash flows the assets are expected to generate. If such review indicates that the carrying amount of intangible assets is not recoverable,
the carrying amount of such assets is reduced to fair value.
REVENUE RECOGNITION
The Company adopted ASC 606 effective January 1, 2019,
using the modified retrospective method after electing to delay the adoption of the accounting standard as the Company qualified
as an “emerging growth company”. Since the Company did not have any contracts as of the effective day, therefore,
there was no material impact on the consolidated financial statements upon adoption of the new standard. Revenue is recognized
when performance obligations under the terms of the contracts with our customers are satisfied. Our performance obligation generally
consists of the promise to sell our finished products to our customers, wholesalers, distributors or retailers. Control of the
finished products is transferred upon shipment to, or receipt at, our customers' locations, as determined by the specific terms
of the contract. Once control is transferred to the customer, we have completed our performance obligation, and revenue is recognized.
The Company generated nil revenue during year ended
December 31, 2019. Revenue of 263 during year ended December 31, 2018 which represents membership fee for the Company’s chess
gaming website.
Deferred revenue is due to a shipment sent to one of
the Company’s distributors. However, since control has not been transferred and the performance obligation has not been completed,
revenue has not been recognized and proceeds received are classified as deferred revenue.
FOREIGN CURRENCY TRANSLATION
The functional currency of the Company’s Canadian-based
subsidiary is the Canadian dollar and the US-based parent is the U.S. dollar. In addition, effective April 1, 2019, the Company
changed its functional currency from United States Dollar to Canadian Dollar thereby having an impact on additional paid in capital
and accumulated comprehensive income (loss). The presentation currency of the Company has remained unchanged at United States
Dollar. Transactions denominated in currencies other than the functional currency are translated into the functional currency
at the exchange rates prevailing at the dates of the transaction. Monetary assets and liabilities denominated in foreign currencies
are translated using the exchange rate prevailing at the balance sheet date. Non-monetary assets and liabilities are translated
using the historical rate on the date of the transaction. All exchange gains or losses arising from translation of these foreign
currency transactions are included in net income (loss) for the year. In translating the consolidated financial statements of
the Company and its Canadian subsidiaries from their functional currency into the Company’s reporting currency of United
States dollars, balance sheet accounts are translated using the closing exchange rate in effect at the balance sheet date and
income and expense accounts are translated using an average exchange rate prevailing during the reporting period. Adjustments
resulting from the translation, if any, are included in cumulative other comprehensive income (loss) in stockholders’ equity.
The Company has not, to the date of these consolidated financial statements, entered into derivative instruments to offset the
impact of foreign currency fluctuations.
SOFTWARE DEVELOPMENT COSTS
The costs incurred in the preliminary stages of development
are expensed as incurred. Once an application has reached the development stage, internal and external costs, if direct and incremental,
are capitalized until the application is substantially complete and ready for its intended use. These costs are amortized using
the straight-line method over the estimated economic useful life of 5 years starting from when the application is substantially
complete and ready for its intended use.
CONCENTRATION OF RISK
Financial instruments that potentially subject the
Company to concentrations of credit risk consist principally of cash. The Company places its cash with high quality banking institutions.
The Company did not have a cash balances in excess of the Federal Deposit Insurance Corporation limit as of December 31, 2019 (December
31, 2018: The Company had excess cash balances in excess of the Federal Deposit Insurance Corporation limit).
INCOME TAXES
Under ASC 740, “Income Taxes,” deferred
tax assets and liabilities are recognized for the future tax consequences attributable to temporary differences between the financial
statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities
are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are
expected to be recovered or settled. Valuation allowances are established when it is more likely than not that some or all of the
deferred tax assets will not be realized. As of December 31, 2019, there were no deferred taxes due to the uncertainty of the realization
of net operating loss or carry forward prior to expiration.
OPERATING LEASES
The Company leases office space and the production
facility under operating lease agreements. The lease term begins on the date of initial possession of the leased property for purposes
of recognizing lease expense on a straight-line basis over the term of the lease. Lease renewal periods are considered on a lease-by-lease
basis and are generally not included in the initial lease term.
LOSS PER COMMON SHARE
Basic loss per common share excludes dilution and
is computed by dividing net loss by the weighted average number of common shares outstanding during the period. Diluted loss per
common share reflect the potential dilution that could occur if securities or other contracts to issue common stock were exercised
or converted into common stock or resulted in the issuance of common stock that then shared in the loss of the entity. Convertible
promissory notes, warrants and preferred stock as at December 31, 2019 are likely to be converted into shares of common stock,
however, due to losses, their effect would be antidilutive. As of December 31, 2019, convertible notes, warrants and preferred
stock warrants outstanding could be converted into 27,535,127 (2018: 9,125,002), 412,654,530 (2018: 88,094,634) and 100,000,000
(2018: 100,000,000) shares of common stock, respectively.
CONVERTIBLE NOTES PAYABLE AND DERIVATIVE INSTRUMENTS
The Company has adopted the provisions of ASU 2017-11
to account for the down round features of warrants issued with private placements effective as of January 1, 2017. In doing so,
warrants with a down round feature previously treated as derivative liabilities in the consolidated balance sheet and measured
at fair value are henceforth treated as equity, with no adjustment for changes in fair value at each reporting period. The Company
accounted for conversion options embedded in convertible notes in accordance with ASC 815. ASC 815 generally requires companies
to bifurcate conversion options embedded in convertible notes from their host instruments and to account for them as free-standing
derivative financial instruments. ASC 815 provides for an exception to this rule when convertible notes, as host instruments, are
deemed to be conventional, as defined by ASC 815-40. The Company accounts for convertible notes deemed conventional and conversion
options embedded in non-conventional convertible notes which qualify as equity under ASC 815, in accordance with the provisions
of ASC 470-20, which provides guidance on accounting for convertible securities with beneficial conversion features. Accordingly,
the Company records, as a discount to convertible notes, the intrinsic value of such conversion options 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.
STOCK BASED COMPENSATION
The Company accounts for stock based payments in accordance
with the provision of ASC 718, which requires that all share-based payments issued to acquire goods or services, including grants
of employee stock options, be recognized in the statement of operations based on their fair values, net of estimated forfeitures.
ASC 718 requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures
differ from those estimates. Compensation expense related to share-based awards is recognized over the requisite service period,
which is generally the vesting period.
The Company accounts for stock based compensation awards
issued to non-employees for services, as prescribed by ASC 718-10, at either the fair value of the services rendered or the instruments
issued in exchange for such services, whichever is more readily determinable, using the guidelines in ASC 505-50. The Company issues
compensatory shares for services including, but not limited to, executive, management, accounting, operations, corporate communication,
financial and administrative consulting services.
MARKETING EXPENSES
Marketing and advertising expenditures are expensed
in the annual period in which the expenditure is incurred.
IMPAIRMENT OF LONG-LIVED ASSETS
In accordance with ASC 360-10, the Company, on a regular
basis, reviews the carrying amount of long-lived assets for the existence of facts or circumstances, both internally and externally,
that suggest impairment. The Company determines if the carrying amount of a long-lived asset is impaired based on anticipated undiscounted
cash flows, before interest, from the use of the asset. In the event of impairment, a loss is recognized based on the amount by
which the carrying amount exceeds the fair value of the asset. Fair value is determined based on appraised value of the assets
or the anticipated cash flows from the use of the asset or asset group, discounted at a rate commensurate with the risk involved.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company follows guidance for accounting for fair
value measurements of financial assets and financial liabilities and for fair value measurements of nonfinancial items that are
recognized or disclosed at fair value in the consolidated financial statements on a recurring basis. Additionally, the Company
adopted guidance for fair value measurement related to nonfinancial items that are recognized and disclosed at fair value in the
consolidated financial statements on a nonrecurring basis. The guidance establishes a fair value hierarchy that prioritizes the
inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices
in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to measurements involving
significant unobservable inputs (Level 3 measurements).
The three levels of the fair value hierarchy are as follows:
Level 1 inputs are quoted prices (unadjusted) in active
markets for identical assets or liabilities that the Company has the ability to access at the measurement date.
Level 2 inputs are inputs other than quoted prices
included within Level 1 that are observable for the asset or liability, either directly or indirectly.
Level 3 inputs are unobservable inputs for the asset
or liability. The carrying amounts of financial assets such as cash approximate their fair values because of the short maturity
of these instruments.
The estimated fair value of cash, accounts payable,
and accrued liabilities approximate their carrying values due to the short-term maturity of these instruments. The derivative liabilities
of the promissory convertible notes are valued Level 3, refer to Note 15 for further details.
5.
|
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
|
The Company qualifies as an “emerging growth
company” (CGC) under the 2012 JOBS Act. Section 107 of the JOBS Act provides that an emerging growth company can take advantage
of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting
standards. As an emerging growth company, management can delay the adoption of certain accounting standards until those standards
would otherwise apply to private companies. The management has elected to take advantage of the benefits of this extended transition
period.
From time to time, new accounting pronouncements are
issued by the Financial Accounting Standards Board (FASB) or other standard setting bodies that are adopted by the Company as of
the specified effective date.
In July 2017, the FASB issued Accounting Standards
Update (ASU) No. 2017-11, Earnings Per Share (Topic 260); Distinguishing Liabilities from Equity (Topic 480); Derivatives and Hedging
(Topic 815).
|
I.
|
Accounting for Certain Financial Instruments with Down Round Features
|
|
II.
|
Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling Interests with a Scope Exception
|
The amendments in Part I of this Update change the
classification analysis of certain equity-linked financial instruments (or embedded features) with down round features. When determining
whether certain financial instruments should be classified as liabilities or equity instruments, a down round feature no longer
precludes equity classification when assessing whether the instrument is indexed to an entity’s own stock. The amendments
also clarify existing disclosure requirements for equity-classified instruments.
The amendments in Part II of this Update recharacterize
the indefinite deferral of certain provisions of Topic 480 that now are presented as pending content in the Codification, to a
scope exception. Those amendments do not have an accounting effect.
The amendments in this Update apply to all companies.
Part I becomes effective for public business entities in the annual period ending after December 15, 2018, and interim periods
within those fiscal years, with early application permitted. Management does not expect to have a significant impact of this ASU
on the Company’s financial statements. The amendments in Part II of this Update do not require any transition guidance because
those amendments do not have an accounting effect.
In August 2018, the FASB issued ASU 2018-13, “Changes
to Disclosure Requirements for Fair Value Measurements”, which will improve the effectiveness of disclosure requirements
for recurring and nonrecurring fair value measurements. The standard removes, modifies, and adds certain disclosure requirements,
and is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. The Company
will be evaluating the impact this standard will have on the Company’s consolidated financial statements.
In June 2018, the FASB issued an accounting pronouncement
(FASB ASU 2018-07) to expand the scope of ASC Topic 718, Compensation - Stock Compensation, to include share-based payment transactions
for acquiring goods and services from nonemployees. The pronouncement is effective for fiscal years, and for interim periods within
those fiscal years, beginning after December 15, 2018, with early adoption permitted. The Company is currently in the process of
evaluating the effects of this pronouncement on the consolidated financial statements.
In February 2016, the FASB issued ASU No.
2016-02, Leases (Topic 842). This guidance revises the accounting related to leases by requiring lessees to recognize a lease
liability and a right-of-use asset for all leases. The new lease guidance also simplifies the accounting for sale and
leaseback transactions. This ASU is effective for annual reporting periods beginning after December 15, 2018 and early
adoption is permitted. The Company is currently in the process of evaluating the effects of this pronouncement on the
consolidated financial statements and will have material impact in the first quarter of year ending December 31, 2020.
At December 31, 2019, the Company had prepaid expenses
of $37,702 compared to $35,145 as at December 31, 2018. The balance represents the retainer fees paid to the lawyer and security
deposit for the leased land of the subsidiary’s facility.
At December 31, 2019, the Company had $48,744
of gross sales tax recoverable compared to $294,033 as at December 31, 2018. This is due to sales tax paid by the subsidiary on
expenses incurred during the year which are recoverable from the government.
The Company has recorded an allowance
of 25% of the sales tax recoverable of $12,186 (2018: $75,902) stemming from the potential uncollectible balances within the outstanding
sales tax recoverable amount.
At December 31, 2019, the inventory in
the amount of $124,000 consists of finished goods and is held at a third-party location as at December 31, 2019.
During the year ended December 31, 2019,
the Company recorded a write-down of inventory to its net realizable value, in the amount of $51,640 due to decrease in inventory
value and recorded an impairment in the amount of $150,954 due to obsolete inventory bringing the total inventory impairment amounting
to $202,594.
In addition, the inventory in the amount
of $124,000 is secured against the loan provided by the Company’s shareholder. Refer to Note 13 for further details.
Effective August 8, 2019, the Company entered into
an Exclusive License Agreement (“License Agreement”) with cGreen, Inc., a Delaware corporation (“cGreen”).
The License Agreement grants to the Company an exclusive license to manufacture, and distribute the patent-pending THC antidote
True Focus™ in the United States, Europe and the Caribbean. The term of the license is ten (10) years and four (4) months
from the effective date of August 8, 2019. In consideration of the license, the Company will issue 10,000,000 shares of its common
stock as follows: (i) 3.500,000 within ten (10) days of the effective date; (ii) 3,500,000 shares on January 10, 2020; and (iii)
3,000,000 shares not later than June 10, 2020. In addition, the Company will pay cGreen royalties of 7% of the net sales of the
licensed products and 7% of all sublicensing revenues collected by the Company. The Company will pay cGreen an advance royalty
of $300,000.00 within ten (10) days of the effective date; $300,000.00 on January 10, 2020; and $400,000.00 on or before June 10,
2020 and $500,000 on or before November 10, 2020. All advance royalty payments will be credited against the royalties owed by the
Company through December 31, 2020. The value of the license is based on 10 million common stock valued at the market rate of the
stock prevailing on August 8, 2019 and the royalty payments. The asset is amortized over the terms of license.
During the quarter ended December 31, 2019,
the intangible asset was written off in the amount of $2,149,613 based on management’s review and evaluation of its recoverability.
As at December 31, 2019, no shares have
been issued, the first tranche of 3,500,000 shares, in the amount of $260,050, have been recorded in shares to be issued as equity
while the remaining 6,500,000 shares, in the amount of $482,950, are have been recorded in shares to be issued as liability. The
initial payment of royalty payable of $308,140 has been paid during the year ended December 31, 2019 while the remaining in the
amount of $1,191,860 is recorded as royalty payable.
10.
|
FIXED ASSETS AND CAPITAL WORK IN PROGRESS
|
The Company’s subsidiary,
Canary, initiated construction on its 44,000 square foot cannabis cultivation facility in September of 2017. Since then, extensive
demolition and structural upgrades have been carried out at the site. As at December 31, 2019, the Company has capitalized $7,713,444
in payments to multiple vendors for the construction of the facility.
On May 1, 2019, the Company completed the
construction of its 44,000 square foot cannabis cultivation facility and on May 14, 2019, the Company submitted a Site Evidence
Package to Health Canada as part of the steps to obtain the license to cultivate cannabis at the Company’s facility. On October
8, 2019, the Company was granted licenses to cultivate, process and sell cannabis pursuant to the Cannabis Act (Bill
C-45).
Since the facility is not operating during
the year ended December 31, 2019, no depreciation has been charged on all assets of Canary.
The Company’s other subsidiary, CannaKorp,
has been utilizing its assets throughout the year and accordingly, has recorded depreciation expense of $29,025 during the year
ended December 31, 2019.
Below is a breakdown of the consolidated
fixed asset, category wise:
|
|
Machinery &
Equipment
|
|
|
Software
|
|
|
Furniture &
fixture
|
|
|
Leasehold
improvements
|
|
|
Total
|
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
Cost
|
|
|
771,202
|
|
|
|
43,597
|
|
|
|
949,287
|
|
|
|
6,957,018
|
|
|
|
8,721,104
|
|
Accumulated depreciation
|
|
|
(572,819
|
)
|
|
|
(40,460
|
)
|
|
|
(4,085
|
)
|
|
|
—
|
|
|
|
(617,364
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
198,383
|
|
|
|
3,137
|
|
|
|
945,202
|
|
|
|
6,957,018
|
|
|
|
8,103,740
|
|
Business Acquisition
ASC Topic 805, “Business Combinations”
requires that all business combinations be accounted for using the acquisition method and that certain identifiable intangible
assets acquired in a business combination be recognized as assets apart from goodwill. ASC Topic 350, “Intangibles-Goodwill
and Other” (“ASC 350”) requires goodwill and other identifiable intangible assets with indefinite useful lives
not be amortized, such as trade names, but instead tested at least annually for impairment (which the Company tests each year end,
absent any impairment indicators) and be written down if impaired. ASC 350 requires that goodwill be allocated to its respective
reporting unit and that identifiable intangible assets with finite lives be amortized over their useful lives.
CannaKorp Inc.
Effective January 25, 2019, the Company entered into
an Agreement and Plan of Share Exchange (“Exchange Agreement”) with CannaKorp Inc., a Delaware corporation (“CannaKorp”).
Company had previously entered into a Letter of Intent with CannaKorp dated November 30, 2018 which was disclosed in the Company’s
report on Form 8-K filed December 4, 2018.
The Exchange Agreement provides that, subject to its
terms and conditions, the Company issued to the CannaKorp shareholders an aggregate of 30,407,412 shares of the Company’s
common stock, based on a price per share of $0.10, in exchange for 100% of the issued and outstanding common stock of CannaKorp
held by the CannaKorp shareholders. In addition, the Company will issue Common Stock Purchase Warrants (“Warrants”)
in exchange for all outstanding and promised CannaKorp stock options. The Warrants will grant the holders thereof the right to
purchase up to approximately 7,211,213 shares of the Company’s common stock. The Company will also assume all outstanding
liabilities of CannaKorp. Upon the closing of the Exchange Agreement, CannaKorp will continue its business operations as a subsidiary
of the Company. The transaction was closed effective March 1, 2019.
Due to the publicly traded nature of the Company’s
shares of the common stock, the equity issuance of the shares was considered to be a more reliable measurement of fair market value
of the transaction compared to having a separate valuation of the net assets.
This acquisition was accounted for using the acquisition
method of accounting. The fair value of assets, liabilities and intangible assets and the purchase price allocation as of March
1, 2019 was as follows:
|
Allocation of
Purchase Price
|
|
|
$
|
|
Cash
|
|
18,961
|
|
Accounts Receivable
|
|
2,068
|
|
Inventory
|
|
326,595
|
|
Prepaid and other receivables
|
|
89,585
|
|
Property and equipment, net
|
|
88,129
|
|
Total assets
|
|
525,338
|
|
|
|
|
|
Accounts payable
|
|
(1,365,790
|
)
|
Accrued expenses and other current liabilities
|
|
(286,435
|
)
|
Deferred revenue
|
|
(128,158
|
)
|
Payable to related parties
|
|
(753,738
|
)
|
Total liabilities
|
|
(2,534,121
|
)
|
Net liabilities
|
|
(2,008,783
|
)
|
Goodwill
|
|
6,071,627
|
|
Total net assets acquired
|
|
4,062,844
|
|
The purchase consideration of 30,407,412 shares and 7,211,213 warrants of
the Company’s common stock valued as detailed below:
|
|
$
|
|
Number of Common Stock
|
|
|
30,407,712
|
|
Market price on the date of issuance
|
|
|
0.108
|
|
Fair value of Common Stock
|
|
|
3,284,033
|
|
|
|
$
|
|
Number of warrants
|
|
|
7,211,213
|
|
Fair value price per warrant
|
|
|
0.108
|
|
Fair value of warrant
|
|
|
778,811
|
|
|
|
|
|
|
Fair value of Common Stock
|
|
|
3,284,033
|
|
Fair value of warrant
|
|
|
778,811
|
|
Purchase consideration
|
|
|
4,062,844
|
|
The fair value of these warrants was measured at the
date of acquisition using the Black-Scholes option pricing model using the following assumptions:
|
·
|
Forfeiture rate of 0%;
|
|
·
|
Stock price of $0.108 per share;
|
|
·
|
Exercise price between the range of $0.13 to $0.15 per share
|
|
·
|
Volatility at 635.49%
|
|
·
|
Risk free interest rate of 2.55%;
|
|
·
|
Expected life of 2 years; and
|
|
·
|
Expected dividend rate of 0%
|
During the quarter ended December 31, 2019,
the goodwill was revaluated after the completion of CannaKorp’s audit of the year ended December 31, 2018. This resulted
in changing the balance on acquisition date, March 1, 2019 thereby increasing the goodwill by $369,315 to $6,071,627.
During the year ended, December 31, 2019, the Company identified
circumstances which would call for evaluation of goodwill impairment and therefore impaired $1,485,925 reducing the goodwill related
to the CannaKorp to $4,585,702.
As at December 31, 2019, there were 8,724,327 (2018:
nil) warrants outstanding, fully vested and with a remaining contractual life term of 1.16 years (2018: nil).
Visava Inc./Canary Rx Inc.
On June 27, 2018, the Company entered into an Agreement
and Plan of Share Exchange (“Exchange Agreement”) with Visava Inc., a private Ontario, Canada corporation (“Visava”).
Visava owns 100% of Canary Rx Inc., a Canadian corporation that holds a leasehold interest in a parcel of property located in Ontario’s
Garden Norfolk County for the production of cannabis.
Pursuant to the Agreement, the Company acquired 100%
of the issued and outstanding shares of Visava Inc. in exchange for the issuance of 25,500,000 shares of the Company’s Common
Stock and will issue to the Visava shareholders, prorata Common Stock Purchase Warrants purchasing an aggregate of 25,000,000 shares
of the Company’s Common Stock at a price per share of $0.10 for a period of two years following the issuance date of the
Warrants. As a result of this transaction, Visava Inc. became a wholly owned subsidiary of the Company and the former shareholders
of Visava Inc. owned approximately 46.27% of the Company’s shares of Common Stock. The transaction was closed effective August
2, 2018.
This acquisition was accounted for using the acquisition
method of accounting. The fair value of assets, liabilities and intangible assets and the purchase price allocation as of August
2, 2018 was as follows:
|
|
Allocation of
Purchase Price
|
|
|
|
$
|
|
Prepaid and other receivables
|
|
|
15,368
|
|
Sales tax recoverable
|
|
|
133,614
|
|
Furniture and equipment
|
|
|
897
|
|
Capital work in progress
|
|
|
898,422
|
|
Total assets
|
|
|
1,048,301
|
|
|
|
|
|
|
Bank overdraft
|
|
|
(63,693
|
)
|
Accounts payable
|
|
|
(1,158,164
|
)
|
Payable to related parties
|
|
|
(101,797
|
)
|
Total liabilities
|
|
|
(1,323,654
|
)
|
Net liabilities
|
|
|
(275,353
|
)
|
Goodwill
|
|
|
3,594,195
|
|
Total net assets acquired
|
|
|
3,318,842
|
|
|
|
$
|
|
Number of Common Stock
|
|
|
25,500,000
|
|
Market price on the date of issuance
|
|
|
0.067
|
|
Fair value of Common Stock
|
|
|
1,695,750
|
|
|
|
$
|
|
Number of warrants
|
|
|
25,000,000
|
|
Fair value price per warrant
|
|
|
0.065
|
|
Fair value of warrant
|
|
|
1,623,092
|
|
|
|
|
|
|
Fair value of Common Stock
|
|
|
1,695,750
|
|
Fair value of warrant
|
|
|
1,623,092
|
|
Purchase consideration
|
|
|
3,318,842
|
|
The fair value of these warrants was measured at the
date of acquisition using the Black-Scholes option pricing model using the following assumptions:
|
·
|
Stock price of $0.067 per share;
|
|
·
|
Exercise price of $0.10 per share
|
|
·
|
Risk free interest rate of 2.66%;
|
|
·
|
Expected life of 2 years; and
|
|
·
|
Expected dividend rate of 0%
|
As at December 31, 2019, there were 25,000,000 (2018:
25,000,000) warrants outstanding, fully vested and with a remaining contractual life term of 0.59 years.
During the year ended December 31, 2019,
the Company has identified no circumstances which would call for further evaluation of goodwill impairment related to Canary.
Goodwill
The Company tests for impairment of goodwill at the
reporting unit level. In assessing whether goodwill is impaired, the Company utilize the two-step process as prescribed by ASC
350. The first step of this test compares the fair value of the reporting unit, determined based upon discounted estimated future
cash flows, to the carrying amount, including goodwill. If the fair value exceeds the carrying amount, no further work is required
and no impairment loss is recognized. If the carrying amount of the reporting unit exceeds the fair value, the goodwill of the
reporting unit is potentially impaired and step two of the goodwill impairment test would need to be performed to measure the amount
of an impairment loss, if any. In the second step, the impairment is computed by comparing the implied fair value of the reporting
unit’s goodwill with the carrying amount of the goodwill. If the carrying amount of the reporting unit’s goodwill is
greater than the implied fair value of its goodwill, an impairment loss in the amount of the excess is recognized and charged to
statement of operations.
12.
|
ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
|
Accounts payable amounting to $2,494,588
as at December 31, 2019, primarily represents consulting and construction services related to capital work in progress amounting
to $1,079,498, interest on promissory notes and loan amounting to $53,945, marketing services cost amounting to $18,115, valuation
fee accrual of $3,500, accounting fee accrual of $2,500 and review fee accrual of $3,000, and outstanding professional fees of
$942,000.
Accounts payable amounting to $1,739,765
as at December 31, 2018, primarily represents consulting and construction services related to capital work in progress amounting
to $ 1,330,693, interest on promissory notes amounting to $133,082, advertising and promotion services amounting to $332, marketing
services cost amounting to $13,650, valuation fee accrual of $3,500, accounting fee accrual of $2,500 and review fee accrual of
$3,000, and outstanding professional fees of $54,391.
13.
|
RELATED PARTY TRANSACTIONS AND BALANCES
|
During the year ended December 31, 2019,
$nil (December 31, 2018: $300,000) was recorded as management services fee payable to Rubin Schindermann and Alexander Starr, who
are shareholders and former officers in the Company. The amount is included in the related party balance as at December 31,
2019.
They were issued 14,834,850 shares (December
31, 2018: 5,529,412 shares) for these services performed and to settle the shareholder advance as of and for the year ended December 31, 2019. These were recorded at fair value in the amount of
$1,665,329. Rubin Schindermann received 3,000,000 shares in quarter ended June 30, 2019 as part of the Employee Stock Incentive
Plan.
On February 22, 2019, Alexander Starr terminated
his employment agreement and the Company has guaranteed to pay $180,000 within the next twelve months starting from March 1, 2019
with payments being made twice a month. As at December 31, 2019, the balance outstanding is $60,000.
In addition to the above, during the quarter
ended June 30, 2019, out of the above mentioned 14,834,850 share issuance, 8,234,850 shares, fair valued at $885,329 were issued
to Alexander Star to settle the outstanding management service fee payable of $162,019 and shareholder advances in amount of $14,032.
The company recorded a loss on settlement in the amount of $709,278.
Amounts payable to Rubin Schindermann and
Alexander Starr as at December 31, 2019 were $nil and $nil, respectively (December 31, 2018: $200,00 and $139,697, respectively).
During the year ended, December 31,
2019, Saul Niddam, Chief Innovation Officer of Target & CEO of the subsidiary, CannaKorp, purchased 1,666,667 shares
(December 31, 2018: nil shares) as consideration for private placement. These were recorded at fair value in the amount of
$37,385 based on the cash proceeds received by the Company. These shares were issued in settlement of accrued wages owing. As
at December 31, 2019, the balance outstanding is $30,796.
During the year ended December 31, 2019,
$196,991 (December 31, 2018: $60,000) was paid as remuneration for management services as salaries to Randal MacLeod, who is shareholder
in the Company and President of the subsidiary, Visava. In addition, 3,000,000 shares were issued as a bonus for completing the
facility’s construction, fair valued in the amount of $294,000 included in management fee. As at December 31, 2019, the balance
owing is $18,582.
During the year ended December 31, 2019,
the Company settled with the loan holders provided to the Company's subsidiary, CannaKorp. Total amount subject to settlement was
$817,876 which includes accrued interest and accrued payroll. The company settled by paying $954,374 as consideration of cash,
920,240 shares and warrants of 920,240 shares with an exercise price of $0.15 per share. This resulted in a settlement loss of
$136,498. Of the total settlement amount, $40,000 is still outstanding to be paid.
During the year ended December 31, 2019,
the Company has purchased goods and services amounting to $500,000 from a Euro Horti Tech which is owned by a shareholder of the
Company.
Additionally, on December 20, 2019, one
of the Company’s shareholders provided a loan up to $769,900 (CAD $1,000,000). The loan bears an annual interest rate of
16%, is secured by all assets owned by the Company and its subsidiaries and matures in one year that is December 20, 2020. As at
December 31, 2019, the Company was advanced $269,465 (CAD $350,000). Interest expense charged in amount of $1,279 (CAD $1,688)
is included in interest and bank charges on the consolidated statement of loss and comprehensive loss and accrued interest is included
in accounts payable and accrued liabilities on the consolidated balance sheet.
As at December 31, 2019, the remaining
balance of $12,817 in payable to related parties are management fee accruals for services performed by key management personals
(December 31, 2018: $62,500).
During the year ended December 31, 2019,
the Company has purchased consulting services amounting to $26,100 from GTA Angel Group which is owned by the Company’s CEO.
The balance is still outstanding as at December 31, 2019 and is included in accounts payable and accrued liabilities.
During the year ended December 31, 2019,
the Company has purchased consulting services amounting to $26,100 from BaK Consulting which is owned by one of the Company’s
director. The balance is still outstanding as at December 31, 2019 and is included in accounts payable and accrued liabilities.
During the year ended December 31, 2019,
the Company leases its principal executive office premise from Norlandam Marketing Inc., a company owned by one of directors and
rent expense amounted to $38,324. There is no balance outstanding as at December 31, 2019. Refer to Note 17 for the lease terms.
During the year ended December 31, 2019,
the Company had advanced $130,883 to ProCanna Bioscience Inc. (“ProCanna”), a company owned by one of employees of
the Company and expensed the entire amount as the employee’s management fee for management services provided by the employee.
There is no balance owing or outstanding from ProCanna as at December 31, 2019.
During the year ended December 31, 2019,
the Company expensed $1,481,284 (2018: $362,500) in management service fee for services provided by CEO, President, CFO and other
key officers of the company.
During the year ended December 31, 2018,
a loan owed to one of the Company’s shareholders in the amount of $72,570 (CAD $99,000) was extinguished in exchange of 15,800,100
Class A common shares of the Company’s subsidiary Visava Inc. Thereby, a gain on loan settlement in the amount of $74,933
(CAD $99,000) was recorded.
Shareholder advances represent
expenses paid by the owners from personal funds. The amount is non-interest bearing, unsecured and due on demand. The amount of
advance as at December 31, 2019 and December 31, 2018 was $nil and $209,046, respectively. Additionally, in the amount of $2,025
were receivable from a shareholder. The amounts repaid during the year ended December 31, 2019 and 2018 were $203,945 and $281,927,
respectively, and during the year ended December 31, 2019, $133,423 was settled through issuance of shares of common stock. Refer
to Note 13 for details.
15.
|
CONVERTIBLE PROMISSORY NOTES
|
During the year ended December 31, 2019,
the Company issued convertible promissory notes, details of which are as follows:
Convertible promissory note issued on October 18, 2019,
amounting to $168,300 (Note R).
The key terms/features of the convertible note are
as follows:
|
1.
|
The maturity date of the Note is April 18, 2021.
|
|
|
|
|
2.
|
Interest on the unpaid principal balance of this Note accrues at the rate of 12% per annum.
|
|
|
|
|
3.
|
In the event the Note holder exercises the right of conversion, the conversion price will be equal to 75% of the lowest closing bid price of the Company’s common stock for the fifteen (15) trading days prior to the date of conversion.
|
|
|
|
|
4.
|
The Company shall not be obligated to accept any conversion request before six months from the date of the note.
|
|
|
|
|
5.
|
Conversion is limited to the holder beneficially holding not more than 4.99% of the Company’s then issued and outstanding common stock after the conversion.
|
Convertible promissory note issued on February 16,
2019, amounting to $103,000 (Note Q).
The key terms/features of the convertible note are
as follows:
|
1.
|
The maturity date of the Note is August 16, 2020.
|
|
|
|
|
2.
|
Interest on the unpaid principal balance of this Note accrues at the rate of 12% per annum.
|
|
|
|
|
3.
|
In the event the Note holder exercises the right of conversion, the conversion price will be equal to 61% of the lowest closing bid price of the Company’s common stock for the fifteen (15) trading days prior to the date of conversion.
|
|
|
|
|
4.
|
The Company shall not be obligated to accept any conversion request before six months from the date of the note.
|
|
|
|
|
5.
|
Conversion is limited to the holder beneficially holding not more than 4.99% of the Company’s then issued and outstanding common stock after the conversion.
|
During the quarter ended June 30, 2019, the Company
settled the outstanding balance in full with a cash payment and recorded a loss of $35,173 as settlement of debt in the condensed
consolidated statement of operations. The loss is due to the prepayment penalty as per the note agreement.
Convertible promissory note issued on December 24,
2018, amounting to $83,000 (Note P).
The key terms/features of the convertible note are
as follows:
|
1.
|
The maturity date of the Note is June 24, 2020.
|
|
2.
|
Interest on the unpaid principal balance of this Note shall accrue at the rate of 12 % per annum.
|
|
3.
|
In the event the Note holder exercises the right of conversion, the conversion price will be equal to 61% of the average of the three (3) lowest trading price of the Company’s common stock for the fifteen (15) trading days prior to the date of conversion.
|
|
4.
|
The Company shall not be obligated to accept any conversion request before six months from the date of the note.
|
|
5.
|
Conversion is limited to the holder beneficially holding not more than 4.99% of the Company’s then issued and outstanding common stock after the conversion.
|
During the quarter ended June 30, 2019, the Company
settled the outstanding balance in full with a cash payment and recorded a loss of $36,085 as settlement of debt in the condensed
consolidated statement of operations. The loss is due to the prepayment penalty as per the note agreement.
Convertible promissory note issued on November 28,
2018, amounting to $75,000 (Note O).
The key terms/features of the convertible note are
as follows:
|
1.
|
The maturity date of the Note is November 28, 2019.
|
|
2.
|
Interest on the unpaid principal balance of this Note shall accrue at the rate of 10 % per annum.
|
|
3.
|
In the event the Note holder exercises the right of conversion, the conversion price will be equal to 52% of the lowest trading price of the Company’s common stock for the twenty (20) trading days prior to the date of conversion.
|
|
4.
|
Conversion is limited to the holder beneficially holding not more than 4.99% of the Company’s then issued and outstanding common stock after the conversion.
|
During the quarter ended June 30, 2019, the Company
settled the outstanding balance in full with a cash payment and recorded a loss of $27,526 as settlement of debt in the condensed
consolidated statement of operations. The loss is due to the prepayment penalty as per the note agreement.
Convertible promissory note issued on September 5,
2018, amounting to $103,000 (Note N).
The key terms/features of the convertible note are
as follows:
|
1.
|
The maturity date of the Note is December 5, 2019.
|
|
2.
|
Interest on the unpaid principal balance of this Note shall accrue at the rate of 12 % per annum.
|
|
3.
|
In the event the Note holder exercises the right of conversion, the conversion price will be equal to 61% of the average of the three (3) lowest trading price of the Company’s common stock for the fifteen (15) trading days prior to the date of conversion.
|
|
4.
|
The Company shall not be obligated to accept any conversion request before six months from the date of the note.
|
|
5.
|
Conversion is limited to the holder beneficially holding not more than 4.99% of the Company’s then issued and outstanding common stock after the conversion.
|
During the quarter ended March 31, 2019, the Company
settled the outstanding balance in full with a cash payment and recorded a loss of $27,368 as settlement of debt in the condensed
consolidated statement of operations. The loss is due to the prepayment penalty as per the note agreement.
Convertible promissory note issued on August 9, 2018,
amounting to $65,000 (Note M).
The key terms/features of the convertible note are
as follows:
|
1.
|
The maturity date of the Note is September 9, 2019.
|
|
2.
|
Interest on the unpaid principal balance of this Note shall accrue at the rate of 10% per annum.
|
|
3.
|
In the event the Note holder exercises the right of conversion, the conversion price will be equal to 52% of the lowest closing bid price of the Company’s common stock for the twenty (20) trading days prior to the date of conversion.
|
|
4.
|
Conversion is limited to the holder beneficially holding not more than 4.99% of the Company’s then issued and outstanding common stock after the conversion.
|
During the quarter ended March 31, 2019, the Company
settled the outstanding balance in full with a cash payment and recorded a loss of $23,342 as settlement of debt in the condensed
consolidated statement of operations. The loss is due to the prepayment penalty as per the note agreement.
Convertible promissory note issued on January 16, 2018,
amounting to $28,000 (Note L).
The key terms/features of the convertible note are
as follows:
|
1.
|
The maturity date of the Note was October 30, 2018.
|
|
2.
|
Interest on the unpaid principal balance of this Note accrues at the rate of 12 % per annum.
|
|
3.
|
In the event the Note holder exercises the right of conversion, the conversion price will be equal to 58% of the lowest closing bid price of the Company’s common stock for the fifteen (15) trading days prior to the date of conversion.
|
|
4.
|
As maturity date has passed, the Company is now obligated to accept all conversion requests on the note.
|
|
5.
|
Conversion is limited to the holder beneficially holding not more than 4.99% of the Company’s then issued and outstanding common stock after the conversion.
|
During the year ended December 31, 2017,
the Company issued convertible promissory notes, details of which are as follows:
Convertible Redeemable note issued on November 28,
2017, amounting to $33,000 (Note K).
The key terms/features of the convertible note are
as follows:
|
1.
|
The maturity date of the Note was March 10, 2019.
|
|
2.
|
Interest on the unpaid principal balance of this Note shall accrue at the rate of 12 % per annum.
|
|
3.
|
In the event the Note holder exercises the right of conversion, the conversion price will be equal to 58% of the lowest closing bid price of the Company’s common stock for the twenty (15) trading days prior to the date of conversion. During June 2018, an amendment to the note was executed where by the conversion price was fixed at $0.0151 per share.
|
|
4.
|
As maturity date has passed, the Company is now obligated to accept all conversion requests on the note.
|
|
5.
|
Conversion is limited to the holder beneficially holding not more than 4.99% of the Company’s then issued and outstanding common stock after the conversion.
|
Convertible promissory note issued on May
5, 2017 amounting to $23,000 (Note J).
The key terms/features of the convertible note are
as follows:
|
1.
|
The maturity date of the note was February 20, 2018
|
|
2.
|
Interest on the unpaid principal balance of this note accrued at the rate of 12% per annum.
|
|
3.
|
When the Note holder exercised the right of conversion, the conversion price was equal to 58% of the average of the three (3) lowest closing bid price of the Company’s common stock for the fifteen (15) trading days prior to the date of conversion.
|
|
4.
|
The Company was not be obligated to accept any conversion request before six months from the date of the note.
|
|
5.
|
Conversion was limited to the holder beneficially holding not more than 4.99% of the Company’s then issued and outstanding common stock after the conversion.
|
Note J’s full principal amount and
its associated accrued interest was converted during the year ended December 31, 2018.
Convertible promissory note issued on January
31, 2017 amounting to $33,000 (Note I).
The key terms/features of the convertible note are
as follows:
|
1.
|
The maturity date of the note was November 5, 2017
|
|
2.
|
Interest on the unpaid principal balance of this note accrues at the rate of 12% per annum.
|
|
3.
|
In the event the Note holder exercises the right of conversion, the conversion price will be equal to 58% of the average of the three (3) lowest closing bid price of the Company’s common stock for the fifteen (15) trading days prior to the date of conversion.
|
|
4.
|
As maturity date has passed, the Company is now obligated to accept all conversion requests on the note.
|
|
5.
|
Conversion is limited to the holder beneficially holding not more than 4.99% of the Company’s then issued and outstanding common stock after the conversion.
|
During the year ended December 31, 2016, the Company
issued convertible promissory notes, details of which are as follows:
Convertible Redeemable note issued on October
18, 2016, amounting to $140,000 (Note H), representing commitment fee owed by the Company pursuant to Securities Purchase Agreement
entered into by the Company dated October 18, 2016. The commitment fee was considered a prepaid asset. During the three months
ended September 30, 2017, the pending S1 registration statement was withdrawn, removing the benefit associated with the prepaid
asset. The amount was therefore written off as commitment fee in the statement of operations.
During the quarter ended March 31, 2018,
the Company obtained forgiveness of the liability and the interest associated with the note payable and recorded a gain of $153,471
as forgiveness of debt in the consolidated statement of operations.
The key terms/features of the convertible
note are as follows:
|
1.
|
The maturity date of the Note was July 18, 2017.
|
|
2.
|
Interest on the unpaid principal balance of this Note accrues at the rate of 7 % per annum.
|
|
3.
|
In the event the Note holder exercises the right of conversion, the conversion price will be equal to 80% of the lowest trading price of the Company’s common stock for the twenty (20) trading days prior to the date of conversion.
|
|
4.
|
As maturity date has passed, the Company is now obligated to accept all conversion requests on the note.
|
|
5.
|
Conversion is limited to the holder beneficially holding not more than 9.99% of the Company’s then issued and outstanding common stock after the conversion.
|
Convertible Redeemable notes issued on October 18,
2016, amounting to $100,000 and $25,000 (Notes F and G).
The key terms/features of the convertible note are
as follows:
|
1.
|
The maturity date of the Note was July 18, 2017.
|
|
2.
|
Interest on the unpaid principal balance of this Note accrues at the rate of 7 % per annum.
|
|
3.
|
In the event the Note holder exercises the right of conversion, the conversion price will be equal to 57.5% of the lowest trading price of the Company’s common stock for the twenty (20) trading days prior to the date of conversion.
|
|
4.
|
As maturity dates has passed, the Company is now obligated to accept all conversion requests on the note.
|
|
5.
|
Conversion is limited to the holder beneficially holding not more than 9.99% of the Company’s then issued and outstanding common stock after the conversion.
|
During the six months ended June 30, 2018, the Company
entered into a Debt Exchange Agreement with the holder of the convertible note F and G. The outstanding principal amounts of the
notes were extinguished and settled by issuance of 2,500,000 common shares of the Company. The Company recorded a loss of $267,522
as a result of this settlement.
Convertible promissory note issued on May 13, 2016,
amounting to $75,000 (Note D).
The key terms/features of the convertible note are
as follows:
|
1.
|
The maturity date of the note was May 13, 2017.
|
|
2.
|
Interest on the unpaid principal balance of this note accrues at the rate of 8 % per annum.
|
|
3.
|
In the event the Note holder exercises the right of conversion, the conversion price will be equal to 52% of the lowest closing bid price of the Company’s common stock for the twenty (20) trading days prior to the date of conversion.
|
|
4.
|
As maturity date has passed, the Company is now obligated to accept all conversion requests on the note.
|
|
5.
|
Conversion is limited to the holder beneficially holding not more than 4.99% of the Company’s then issued and outstanding common stock after the conversion.
|
Convertible promissory notes issued on March 1, 2016
amounting to $150,000 each to two investors (Notes B and C).
The key terms/features of the convertible notes are
as follows:
|
1.
|
The Holders have the right from six months after the date of issuance, and until any time until the Notes are fully paid, to convert any outstanding and unpaid principal portion of the Notes, into fully paid and non–assessable shares of Common Stock (par value $.0001).
|
|
2.
|
The Notes are convertible at a fixed conversion price of 45% of the lowest trading price of the Common Stock as reported on the OTC Pink maintained by the OTC Markets Group, Inc. upon which the Company’s shares are currently quoted, for the four (4) prior trading days including the day upon which a Notice of Conversion is received by the Company. During June 2018, an amendment to the note was executed where by the conversion price was fixed at $0.0151 per share.
|
|
3.
|
Interest on the unpaid principal balance of this Note accrues at the rate of twenty-four (24 %) per annum.
|
|
4.
|
Beneficial ownership is limited to 4.99%.
|
|
5.
|
The Notes may be prepaid in whole or in part, at any time during the period beginning on the issue date and ending on the maturity date September 1, 2016, beginning at 100% of the outstanding principal, accrued interest and certain other amounts that may be due and owing under the Notes.
|
Interest amounting to $75,348 was accrued for the year
ended December 31, 2019 (2018: $67,923).
Principal amount outstanding as at December 31, 2019
was $200,488 of which $32,188 is current portion while $168,300 is the non-current portion (2018: $479,079 – all current
portion).
All notes maturing prior to the date of this report
are outstanding.
Derivative liability
During the year ended December 31, 2019, holders of
convertible promissory notes converted principal and interest amounting to $159,908 and $77,353, (2018: $318,494 and $5,281) respectively.
The Company recorded and fair valued the derivative liability as follows:
|
|
Derivative
liability as at
December 31,
2018
|
|
|
Conversions
/ Redemption
during the
period
|
|
|
Change
due to
Issuances
|
|
|
Fair
value
adjustment
|
|
|
Derivative
liability as at
December 31,
2019
|
|
Note B and C
|
|
|
374,911
|
|
|
|
(49,433
|
)
|
|
|
—
|
|
|
|
(325,478
|
)
|
|
|
—
|
|
Note D
|
|
|
4,030
|
|
|
|
(5,565
|
)
|
|
|
—
|
|
|
|
2,792
|
|
|
|
1,257
|
|
Note F
|
|
|
10,948
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(1,084
|
)
|
|
|
9,864
|
|
Note G
|
|
|
3,976
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(393
|
)
|
|
|
3,583
|
|
Note I
|
|
|
30,144
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,905
|
|
|
|
32,049
|
|
Note K
|
|
|
15,679
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(14,896
|
)
|
|
|
783
|
|
Note M
|
|
|
105,181
|
|
|
|
(95,113
|
)
|
|
|
—
|
|
|
|
(10,068
|
)
|
|
|
—
|
|
Note N
|
|
|
97,936
|
|
|
|
(86,363
|
)
|
|
|
—
|
|
|
|
(11,573
|
)
|
|
|
—
|
|
Note O
|
|
|
122,090
|
|
|
|
(109,782
|
)
|
|
|
—
|
|
|
|
(12,308
|
)
|
|
|
—
|
|
Note P
|
|
|
97,588
|
|
|
|
(81,918
|
)
|
|
|
—
|
|
|
|
(15,670
|
)
|
|
|
—
|
|
Note Q
|
|
|
—
|
|
|
|
(104,111
|
)
|
|
|
121,362
|
|
|
|
(17,251
|
)
|
|
|
—
|
|
Note R
|
|
|
—
|
|
|
|
—
|
|
|
|
107,273
|
|
|
|
(3,975
|
)
|
|
|
103,298
|
|
|
|
|
862,483
|
|
|
|
(532,285
|
)
|
|
|
228,635
|
|
|
|
(407,999
|
)
|
|
|
150,834
|
|
During the quarter ended December 31, 2018, the Company
changed its valuation method from Black-Scholes Model to Multinomial Lattice Model. This is considered a change in the Company’s
estimate and therefore, it has been accounted prospectively.
Key assumptions used for the valuation of convertible
notes
Derivative element of the convertible notes was fair
valued using multinomial lattice model. Following assumptions were used to fair value these notes as at December 31, 2019:
|
·
|
Projected annual volatility of 170.5% to 208.1%;
|
|
·
|
Discount rate of 1.55% to 1.59%;
|
|
·
|
Stock price of $0.01976;
|
|
·
|
Liquidity term of 0.25 to 1.38 years;
|
|
·
|
Exercise price of $0.0072 to $0.0151 to and
|
During the quarter ended December 31, 2018, the Company issued three (3)
new notes, resulting in the initial derivative liability recognized in the amount of $322,668. As a result, the Company recorded
an initial discount in the amount of $260,380 and a loss on issuance of notes (day one derivative) in the amount of $62,288. During
the quarter, $2,923 of the discount has been amortized and the remaining portion expected to be amortized over the life of the
notes in year ended December 31, 2019.
On July 3, 2017, the Company filed an amended Certificate of
Incorporation in Delaware to increase its authorized common stock to 20,000,000,000 shares. The Company’s authorized preferred
stock remained at 20,000,000 shares. 1,000,000 shares of Preferred Stock having a par value of $0.0001 per share shall be designated
as Series A Preferred Stock (“Series A Stock”).
Effective September 25, 2018, the Company filed an
amended Certificate of Incorporation in Delaware to decrease its authorized common stock to 850,000,000 shares. The Company’s
authorized preferred stock remained at 20,000,000 shares.
Capitalization
The Company is authorized to issue 850,000,000 shares
of common stock, par value $0.0001, of which 571,145,968 shares are outstanding as at December 31, 2019 (at December 31, 2018:
93,624,289 shares of common stock issued and outstanding). The Company is also authorized to issue 20,000,000 shares of preferred
stock, par value $0.0001, of which 1,000,000 shares were outstanding as at December 31, 2019 and 2018.
As of December 31, 2019, convertible notes,
warrants and preferred stock warrants outstanding could be converted into 27,535,127 (2018: 9,125,002), 412,654,530 (2018: 88,094,634)
and 100,000,000 (2018: 100,000,000) shares of common stock, respectively. These together will exceed the authorized common share
limit; however, majority of the warrants are unlikely to be exercised due to the depressed share price.
Preferred Stock
Shares of preferred stock may be issued
from time to time in one or more series as may be determined by the board of directors. The board of directors may fix the designation,
powers, preferences and rights of the shares of each such series and the qualifications, limitations or restrictions thereof without
any further vote or action by the stockholders of the Company, except that no holder of preferred stock shall have pre-emptive
rights. Any shares of preferred stock so issued would typically have priority over the common stock with respect to dividend or
liquidation rights. The board of directors does not at present intend to seek stockholder approval prior to any issuance of currently
authorized stock, unless otherwise required by law or otherwise.
Series A Preferred Stock (“Series
A Stock”)
Dividends shall be declared and set aside for any shares of
Series A Stock in the same manner and amount as for the Common Stock. Series A Stock, as a class, shall have voting rights equal
to a multiple of 2X the number of shares of Common Stock issued and outstanding that are entitled to vote on any matter requiring
shareholder approval. The Series A Stock holders shall not vote as a separate class, but shall vote together with the common stock
on all matters, including any amendment to increase or decrease the authorized capital stock. Upon the voluntary or involuntary
dissolution, liquidation or winding up of the corporation, the assets of the Company available for distribution to its shareholders
shall be distributed to the holders of common stock and the holders of the Series A Stock ratably without any preference to the
holders of the Series A Stock. Shares of Series A Stock can be converted at any time into fully-paid and nonassessable shares
of Common Stock at the rate of One Hundred (100) shares of Common Stock for each One (1) share of Series A Stock.
Common Stock
Holders of shares of common stock are entitled to one
vote for each share on all matters to be voted on by the stockholders. Holders of common stock do not have cumulative voting rights.
Subject to preferences that may be applicable to any
outstanding shares of preferred stock, the holders of common stock are entitled to share ratably in dividends, if any, as may be
declared from time to time by the board of directors in its discretion from funds legally available therefor.
Holders of common stock have no pre-emptive rights
to purchase the Company’s common stock. There are no conversion or redemption rights or sinking fund provisions with respect
to the common stock. The Company may issue additional shares of common stock which could dilute its current shareholder's share
value.
During the quarter ended March 31, 2018, the Company issued 5,529,412
shares of common stock to Rubin Schindermann and Alexander Starr as consideration to settle outstanding management fee recorded
at fair value of $84,000, of which $9,000 had previously been recorded in Accounts Payable. Additionally, the Company issued 5,156,933
shares of common stock to individuals on conversion of convertible promissory notes amounting to $21,518 and 300,000 shares were
issued as consideration for consulting services amounting to $3,600.
During the quarter ended June 30, 2018, the Company
issued 3,140,506 shares of common stock to individuals on conversion of convertible promissory notes amounting to $47,826 and 500,000
shares were issued as consideration for consulting services amounting to $22,500. Furthermore, the Company issued 2,500,000 shares
of common stock to the note holder for settlement of debt. See Note 15 for detail.
During the quarter ended September 30, 2018, the Company
issued 4,551,990 shares of common stock to individuals on conversion of convertible promissory notes amounting to $85,695. In addition
to that, the Company issued 25,500,000 shares of common stock to shareholders of Visava Inc. as per the Exchange Agreement mentioned
in Note 11 and 750,000 shares were issued as consideration for marketing services amounting to $46,575.
During the quarter ended December 31, 2018, the Company
issued 7,964,528 shares of common stock to individuals on conversion of convertible promissory notes amounting to $126,384.
During the year ended December 31, 2018, 63,094,634
shares of common stock to be issued as consideration for private placements. These were recorded at fair value of $2,735,545, based
on the cash proceeds received by the Company. As part of consideration for the private placement, the Company also agreed to issue
warrants to purchase 63,094,634 shares of common stock. Out of the total amount of shares to be issued, the Company issued 22,757,102
shares during quarter ended December 31, 2018. Refer below for additional details regarding the warrant issued under the subheading
“Warrants”.
Additionally, $215,680 were received as partial consideration
for private placements and since signed agreements were executed during December 2018, the remaining balance of $220,319 has been
classified as a Stock subscription receivable under equity. During the quarter ended March 31, 2019, the remaining balance was
collected.
During the quarter ended March 31, 2019, the Company
issued 588,237 shares of common stock to individuals on conversion of convertible promissory notes amounting to $30,000. Additionally,
the Company issued 30,407,412 shares of common stock to shareholders of CannaKorp Inc. as per the Exchange Agreement mentioned
in Note 11.
During the quarter ended March 31, 2019, the Company
sold 226,441,371 shares of common stock as consideration for private placements. These were recorded at fair value of $4,558,282,
based on the cash proceeds received by the Company. As part of consideration for the private placement, the Company also agreed
to issue warrants to purchase 226,554,129 shares of common stock.
Effective April 1, 2019, the Company changed its
functional currency from United States Dollar to Canadian Dollar thereby having an impact on prepaid expenses, additional
paid in capital and accumulated comprehensive income (loss) in the amount of $600, $339,007 and $339,607. The presentation currency of the Company has remained unchanged
at United States Dollar.
During the quarter ended June 30, 2019, the Company
issued 10,562,252 shares of common stock to individuals on conversion of convertible promissory notes amounting to $159,490.
250,000 shares of common stock to be issued as consideration
of the intellectual property rights granted by Smit to the Company’s subsidiary, Canary. These were recorded at fair value
of $27,000, based on the market price of the Company’s stock on the date of agreement. These were initially recorded under
shares to be issued and allocated between common stock and additional paid in capital during the quarter ended June 30, 2019 when
the shares were issued.
During the quarter ended June 30, 2019, the
Company issued 6,600,000 and 8,234,850 shares of common stock to Rubin Schindermann and Alexander Starr, respectively, as
consideration to settle outstanding management fee and shareholder advances recorded at fair value of $1,665,329. Plus,
3,000,000 shares of common stock were issued as a bonus for completing the facility’s construction, fair valued in the
amount of $294,000. Refer to Note 13 for additional details. In addition, 500,000 shares were issued as consideration for
consulting services amounting to $48,000.
During the three months ended, June 30, 2019, Saul
Niddam, Chief Operating Officer of the subsidiary, CannaKorp purchased 1,666,667 shares (December 31, 2018: nil shares) as consideration
for private placement. These were recorded at fair value in the amount of $37,385 based on the cash proceeds received by the Company.
During the quarter ended June 30, 2019, the Company
sold 126,109,709 shares of common stock as consideration for private placements. These were recorded at fair value of $4,194,665,
based on the cash proceeds received by the Company. As part of consideration for the private placement, the Company also agreed
to issue warrants to purchase 81,139,987 shares of common stock.
During the quarter ended June 30, 2019, the Company
issued 358,520,843 shares for past and current private placements. Refer below for additional details regarding the warrant issued
under the subheading “Warrants”. Additionally, proceeds of $358,074 were received as consideration for private
placements, however signed agreements were not executed as at June 30, 2019 and these have therefore been classified as a liability.
Subsequently, during the quarter ended September 30, 2019, the agreements were executed and shares were issued, therefore, transfer
to equity.
During the quarter ended September 30, 2019, the Company
issued 1,324,503 shares of common stock to an individual on conversion of convertible promissory notes amounting to $20,000.
During the quarter ended September 30, 2019, the Company
sold 3,879,524 shares of common stock as consideration for private placements. These were recorded at fair value of $229,545 based
on the cash proceeds received by the Company. As part of consideration for the private placement, the Company also agreed to issue
warrants to purchase 8,724,327 shares of common stock.
During the quarter ended September 30, 2019, the Company
issued 18,459,885 shares for past and current private placements. Refer below for additional details regarding the warrant issued
under the subheading “Warrants”.
During the quarter ended December 31, 2019, the Company
issued 1,243,107 shares of common stock to two individuals on conversion of convertible promissory notes amounting to $18,771.
During the quarter ended September 30, 2019, the Company
sold 454,545 shares of common stock as consideration for private placements. These were recorded at fair value of $7,576 based
on the cash proceeds received by the Company.
During the quarter ended December 31, 2019, the Company
issued 4,876,691 shares for past and current private placements. Refer below for additional details regarding the warrant issued
under the subheading “Warrants”.
During the quarter ended December 31, 2019, the
Company had found an error in issuing in the incorrect private placement and therefore had recorded a subscription receivable
in the amount of $220,000 based on the cash proceeds of the private placement and this was offset by shares to be issued, therefore, a net zero effect on equity. Subsequent to the year end, during quarter
ended March 31, 2020, the incorrect number of shares, 11,000,000, were cancelled.
Shares to be issued include the following:
4,006,832 numbers of shares outstanding as at December
31, 2019 amounting to $611,261 as details below:
80,000 shares of common stock to be issued as compensation
to advisers and consultants. These were recorded at fair value of $52,000, based on the market price of the Company’s stock
on the date of issue.
35,000 to be issued as settlement of amount due for
website development services amounting to $247,306. The fair value of the shares on the date of settlement was $21,000, resulting
in gain on settlement amounting to $226,306 during year ended December 31, 2017.
703,439 shares of common stock to be issued as
consideration for private placements with a fair value of $37,840 based on cash proceeds received. Proper allocation between common stock and additional paid in capital of the amount
received will be completed in the period when the shares are issued.
930,240 shares of common stock to be issued as consideration
for settlement of loan based on a fair value of $80,838. Refer Note 13 for details.
3,500,000 shares of common stock to be issued as consideration
for intangible assets based on a fair value of $260,050. Refer Note 9 for details.
Warrants
The fair value of the warrants issued during the year
issued was measured at the date of acquisition using the Black-Scholes option pricing model using the following assumptions:
|
|
During quarter
ended
December 31,
2019
|
|
|
During quarter
ended
September 30,
2019
|
|
|
During quarter
ended
June 30,
2019
|
|
|
During quarter
ended
March 31,
2019
|
|
|
During year
ended
December 31,
2018
|
|
Forfeiture rate
|
|
|
0%
|
|
|
|
0%
|
|
|
|
0%
|
|
|
|
0%
|
|
|
|
0%
|
|
Stock price
|
|
|
$0.087 per share
|
|
|
|
$0.067 to $0.110 per share
|
|
|
|
$0.080 to $0.149 per share
|
|
|
|
$0.080 to $0.120 per share
|
|
|
|
$0.060 to $0.210 per share
|
|
Exercise price
|
|
|
$0.150 per share
|
|
|
|
$0.05 to $0.150 per share
|
|
|
|
$0.023 to $0.200 per share
|
|
|
|
$0.050 per share
|
|
|
|
$0.050 to $0.150 per share
|
|
Volatility
|
|
|
312%
|
|
|
|
606% to 671%
|
|
|
|
605% to 679%
|
|
|
|
690%
|
|
|
|
646%
|
|
Risk free interest rate
|
|
|
2.27%
|
|
|
|
1.53% to 2.51%
|
|
|
|
1.69% to 2.54%
|
|
|
|
2.26% to 2.60%
|
|
|
|
2.52% to 2.96%
|
|
Expected life
|
|
|
2 years
|
|
|
|
2 and 3 years
|
|
|
|
2 and 3 years
|
|
|
|
3 years
|
|
|
|
2 and 3 years
|
|
Expected dividend rate
|
|
|
0%
|
|
|
|
0%
|
|
|
|
0%
|
|
|
|
0%
|
|
|
|
0%
|
|
Fair value of warrants
|
|
$
|
78,006
|
|
|
$
|
830,890
|
|
|
$
|
8,873,292
|
|
|
$
|
23,305,826
|
|
|
$
|
6,417,010
|
|
As at December 31, 2019, related to private placements,
there were 379,513,077 (2018: 63,094,634) warrants were outstanding, fully vested and with a remaining contractual life term of
a range between 0.49 and 2.62 (2018: 1.49 and 2.98) years.
As at December 31, 2019, related to the acquisition
of the Company’s subsidiaries, Visava Inc. and CannaKorp Inc, there were 25,000,000 (2018: 25,000,000) and 7,211,213 (2018:
nil) warrants outstanding, fully vested and with a remaining contractual life term of 0.59 (2018: 1.59) and 1.16 (2018: N/A) years,
respectively.
As at December 31, 2019, related to the settlement of the Company’s
subsidiary, CannaKorp’s loan, there were 930,240 (2018: N/A) warrants outstanding, fully vested and with a remaining contractual
life term of 1.24 (2018: N/A).
The Company is a party to a 5-year lease
agreement (initiated on September 2018) with respect to its office premises. Total minimum rent for the premises is $838 (CAD $1,100)
plus applicable taxes per month. On the first anniversary date, the minimum rent per month will increase to $876 (CAD $1,138) plus
applicable taxes, on the second anniversary date, the minimum rent per month will increase to $897 (CAD $1,166) plus applicable
taxes, on the third anniversary date, the minimum rent per month will increase to $919 (CAD $1,193) plus applicable taxes, on the
fourth anniversary date, the minimum rent per month will increase to $940 (CAD $1,221) plus applicable taxes.
The Company’s subsidiary, Canary,
is a party to a 10-year lease agreement (initiated on July 2014) with respect to its facility to produce Medical Marijuana. Total
minimum rent for the building is $1,925 (CAD $2,500) plus applicable taxes per month. Effective January 1, 2019, the minimum rent
was increased to $19,248 (CAD $25,000) plus applicable taxes per month. The lease agreement
has three 10-year renewal options and on each anniversary date, commencing from January 1, 2020, the minimum rent will increase
by the cumulative annual percentage increase in the Canadian Consumer Price Index.
Deferred rent is due to the amortization
of the operating lease expense resulting from the use of straight-line method versus the non-level lease payments and tenant improvements
being made in the Company’s production facility paid by the Company’s landlord in amount of $1,716,694 (CAD $2,331,063).
As at December 31, 2019, The Company has recorded tenant improvement allowance incentive amount in work in progress. The Company
will be amortizing these deferred rent charges on a monthly basis in the amount of $28,042 (CAD $36,423) over the remaining term
ending on June 30, 2024 as a reduction in rent expense.
The Company’s subsidiary, CannaKorp,
is a party to a monthly lease agreement (initiated on December 1, 2014) with respect to its facility, approximately 1,000 square
feet of space located in a multi-tenant building. Total minimum rent for the premises is $1,200 plus applicable taxes per month,
tenancy may be terminated by a sixty (60) days written notice by the Company or the landlord.
For the year ended December 31, 2019, rent expense was $183,105
(2018: $36,072).
Future minimum rent payments for above
leases are as follows:
|
|
$
|
|
2020
|
|
|
246,648
|
|
2021
|
|
|
246,904
|
|
2022
|
|
|
247,164
|
|
2023
|
|
|
372,332
|
|
2024
|
|
|
128,760
|
|
|
|
|
1,113,048
|
|
Income taxes
The Tax Cuts and Jobs Act (the “Act”) enacted
on December 22, 2017 reduces the US federal corporate tax rate from 35% to 21% and requires companies to pay a one-time transition
tax on earnings of certain foreign subsidiaries that were previously tax deferred and creates new taxes on certain foreign sourced
earnings. As of December 31, 2018, the Company has not completed the accounting for the tax effects of enactment of the Act; however,
as described below, it has made a reasonable estimate of the effects on existing deferred tax balances. These amounts are provisional
and subject to change.
The provision for income taxes is calculated at US
corporate tax rate of approximately 21% (2018: 21%) as follows:
|
|
2019
|
|
|
2018
|
|
Expected income tax recovery from net loss
|
|
$
|
2,177,211
|
|
|
$
|
399,072
|
|
Tax effect of expenses not deductible for income tax:
|
|
|
|
|
|
|
|
|
Annual effect of book/tax differences
|
|
|
(693,407
|
)
|
|
|
(131,861
|
)
|
Change in valuation allowance
|
|
|
(1,483,804
|
)
|
|
|
(267,211
|
)
|
|
|
|
—
|
|
|
|
—
|
|
Deferred tax assets
Deferred taxes are provided on a liability method whereby
deferred tax assets are recognized for deductible temporary differences and operating loss and tax credit carryforwards and deferred
tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported
amounts of assets and liabilities and their tax bases. Deferred tax assets are reduced by a valuation allowance when, in the opinion
of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Deferred tax
assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment.
Net deferred tax assets consist of the following components
as of December 31:
|
|
2019
|
|
|
2018
|
|
Tax effect of NOL Carryover
|
|
$
|
2,047,257
|
|
|
$
|
563,454
|
|
Less valuation allowance
|
|
|
(2,047,257
|
)
|
|
|
(563,454
|
)
|
|
|
|
—
|
|
|
|
—
|
|
At December 31, 2019, the Company performed
a comprehensive analysis of its tax estimates and revised comparative figures accordingly, which had no net impact on deferred
tax recorded. The Company had net operating loss carry forwards of approximately $9,748,843 (2018: $2,683,112) that may be offset
against future taxable income from the year by 2039. No tax benefit has been reported in the December 31, 2019 consolidated financial
statements since the potential tax benefit is offset by a valuation allowance of the same amount. The Company is taxed in
the United States at the Federal level. All tax years since inception are open to examination because no tax returns have been
filed.
During the year ended December 31, 2019,
a terminated employee of Canary has filed a lawsuit against the Company amounting to approximately $1,616,790 (CAD $2,100,000)
in Ontario, Canada. Currently, the Company is defending its position and believes that the ultimate decision will be in favor of
the Company. Due to the uncertainty of timing and the amount of estimated future cash flows, if any, relating to this claim, no
provision has been recognized.
During the year ended December 31, 2019,
a terminated employee of Canary had delivered a demand letter claiming wrongful dismissal. A settlement was reached in the amount
of $5,678 (CAD $7,375) which were due within 30 days of the execution of the settlement agreement. To date the Company has not
made any payment and is in violation of the agreement. Due to the immaterial amount, no provision has been recognized.
During the year ended December 31, 2019,
a terminated employee of Canary had delivered a demand letter claiming wrongful dismissal plus unpaid wages, expenses and vacation
pay for a minimum amount of $53,440 (CAD $69,412). Currently, the Company is defending its position and believes that the ultimate
decision will be in favor of the Company, however, the Company is open to a settlement. As at December 31, 2019, $33,424 (CAD $33,424)
has been recorded in the Canary’s payable. Due to the uncertainty of timing and the amount of estimated future cash flows,
if any, relating to this claim, no further amount has been recognized.
A complaint for damages in the amount of $150,000
was lodged against CannaKorp by the former Chief Financial Officer of the CannaKorp for outstanding professional fees. No
claim has been registered and is working with management for a settlement. The Management are of the view that no material
losses will arise in respect of the legal claim at the date of these financial statements. As at December 31, 2019, $96,480
has been recorded in the CannaKorp’s payable. Due to the uncertainty of timing and the amount of estimated future cash
flows, if any, relating to this claim, no further amount has been recognized.
A complaint for damages was lodged against the
Company by cGreen for missed payment of the January 2020, non issuance of 7 million shares as promised in the agreement and
loss in the share value. No claim has been registered and is working with management for a settlement. The management are of
the view that no material losses will arise in respect of the legal claim at the date of these financial statements. Refer to
Note 9, for royalty payable and shares to be issued balance as at December 31, 2019. Due to the uncertainty of timing and the
amount of estimated future cash flows, if any, relating to this claim, no further amount has been recognized.
The Company’s management has evaluated subsequent
events up to April 14, 2020, the date the consolidated financial statements were issued, pursuant to the requirements of ASC 855
and has determined the following material subsequent events:
As disclosed in Note 16, during January 2020, the Company
cancelled 11,000,000 shares.
During February 2020, Target and Canary settled with
a vendor providing equipment to Canary for outstanding dues. The settlement agreement cleared the outstanding balance of $100,150
due to the vendor and the vendor removed the equipment from Canary’s premises.
Effective March 11, 2020, the Company and
the Company’s shareholder, as mentioned in Note 13, (“Lender”) entered into a First Amending Agreement with the
Lender pursuant to which the Lender agreed to lend the Company an additional $230,970 (CAD $300,000). The new loan carries interest
at the rate of 3.0146% per month. The loan is payable upon demand of the Lender. The net proceeds to the Company is $207,873 (CAD
$270,000) after the payment of a $23,097 (CAD $30,000) loan fee to the Lender. The remaining terms and conditions of the Original
Loan remain in full force and effect.
During March 2020, Canary and 9258159 Canada Inc. (“Thrive”)
signed a letter of intent (the "Letter of Intent") to create a joint venture which will enter into a Master Services
Agreement (the “MSA”) with Canary in respect of the cultivation, processing and sale of cannabis at Canary’s
licensed site.