NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
AS OF AND FOR THE YEARS THEN ENDED DECEMBER 31, 2018 and
2017
Target Group Inc. (formerly known as Chess
Supersite Corporation) (“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.
|
|
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.
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, 2018. The Company had working capital deficit of $2,877,445 and an accumulated deficit of $9,094,954 as
of December 31, 2018. 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, 2018 and 2017.
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 intangible assets with definite lives are being amortized over its estimated useful lives of 5 years using the straight-line
method.
The Company operated an online chess site
featuring sophisticated playing zones, game broadcasts with software analyses and top analysts' commentaries, education and other
chess oriented resources. Intangible assets represented the amount incurred by the Company related to the development of the online
chess gaming website.
Under ASC 985-20, there are two main stages
of software development. These stages are defined as:
(A) When the technological feasibility
is established, and
(B) When the product is available for general
release to customers.
Costs incurred by the Company up to stage
A have been expensed while costs incurred to move from stage A to stage B have been capitalized.
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.
During the year ended December 31, 2017,
the intangible asset was written off based on management’s review and evaluation of its recoverability.
With respect to goodwill, during the year
ended December 31, 2018, the Company has identified no circumstances which would call for further evaluation of goodwill impairment.
REVENUE RECOGNITION
In accordance with ASC 605, revenue is
recognized when persuasive evidence of an arrangement exists, services have been performed, the amount is fixed and determinable,
and collection is reasonably assured.
During the year ended December 31, 2018,
the Company earned revenue of $263 as membership fee for the Company’s chess gaming website.
During the year ended December 31, 2017,
the Company earned revenue of $15,434 which comprises of an amount of $13,882, which we invoiced as consideration for the revenue
earned from ticket sales for 2017 Orlando Sunshine Open and $1,552 as membership fee for the Company’s chess gaming website.
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. 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’s 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 had cash balances in excess of the Federal Deposit Insurance Corporation limit as of December
31, 2018.
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, 2018, 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 as at December 31, 2018 are likely to be converted into shares, however, due to losses, their effect would be
antidilutive. As of December 31, 2018, convertible notes outstanding could be converted into 9,125,002 shares of common stock.
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 (EGC) and has elected the deferral period for all new standards.
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 November 2016, an accounting pronouncement
was issued by the FASB to update the guidance related to the presentation of restricted cash. Under this Update, the amendments
require that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts
generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash
and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and
end-of-period total amounts shown on the statement of cash flows. The amendments in this Update do not provide a definition of
restricted cash or restricted cash equivalents. The amendments in this Update are effective for public business entities for fiscal
years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted, including
adoption in an interim period. If an entity early adopts the amendments in an interim period, any adjustments should be reflected
as of the beginning of the fiscal year that includes that interim period. The amendments in this Update should be applied using
a retrospective transition method to each period presented. The adoption of this pronouncement did not have a material impact on
the balance sheet and/or statement of operations.
In May 2017, the FASB issued Accounting
Standards Update (ASU) No. 2017-09, Compensation – Stock Compensation (Topic 718). The amendments in this ASU require that
the company apply modification accounting when the company changes the terms or conditions of a share-based payment award. The
amendments in this Update apply to all companies. They became effective for public business entities in the annual period ending
after December 15, 2017, and interim periods within those fiscal years, with early application permitted. The adoption of this
pronouncement did not have a material impact on the balance sheet and/or statement of operations.
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.
On January 1, 2018, the Company adopted
the accounting pronouncement issued by the FASB to clarify existing guidance on revenue recognition. This guidance includes the
required steps to achieve the core principle that a company should recognize revenue when it transfers promised goods or services
to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods
or services. The Company adopted this pronouncement on a modified retrospective basis.
On January 1, 2018, the Company adopted
the accounting pronouncement issued by the FASB to clarify how entities should present restricted cash and restricted cash equivalents
in the statement of cash flows. This guidance requires entities to show changes in the total of cash, cash equivalents and restricted
cash in the combined statement of cash flows. This guidance was adopted on a retrospective basis, and such adoption did not have
a material impact on consolidated balance sheet and/or statement of operations
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.
At December 31, 2018, the Company had prepaid
expenses of $35,145 compared to $nil as at December 31, 2017. The balance represents the retainer fees paid to the lawyer and security
deposit for the leased land of the subsidiary’s facility.
While as at December 31, 2016 prepaid asset represents a commitment fee owed by the Company to a certain
investor in respect of a Securities Purchase Agreement entered into by the Company dated October 18, 2016. The Company has issued
a convertible promissory note in respect of the commitment fee. The asset was, however, written off in the statement of operations
during the year ended December 31, 2017 because the benefit associated in form of the equity line of credit no longer existed.
At December 31, 2018, the Company had $294,033
of gross sales tax recoverable compared to $nil as at December 31, 2017. 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 $75,902 stemming from the
potential uncollectible balances within the outstanding sales tax recoverable amount.
The Company is continuing software development
and is recognizing costs related to these activities as expenses during the year in which they are incurred. Intangible assets
amounting to $137,611 were capitalized during the year ended and as at December 31, 2016. 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. During the year ended December 31, 2017, the intangible asset was written off based on management’s
review and evaluation of its recoverability.
|
|
9.
|
CAPITAL WORK IN PROGRESS
|
The Company 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. Construction remains on schedule
for completion by mid-April 2019. As at December 31, 2018, the Company has capitalized $2,595,022 in payments to multiple vendors
for the construction of the facility.
Construction in progress
is not depreciated until ready for service.
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.
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, 2018, there were 25,000,000
warrants outstanding, fully vested and with a remaining contractual life term of 1.59 years.
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.
|
|
11.
|
ACCOUNTS PAYABLE AND
ACCRUED LIABILITIES
|
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. (2017: account payable for advertising and promotion amounting to $14,214,
accrual for marketing services amounting to $13,650, and other accruals for professional services).
|
|
12.
|
RELATED PARTY TRANSACTIONS
AND BALANCES
|
During the year ended December 31, 2018,
$300,000 (December 31, 2017: $300,000) was recorded as management services fee payable to Rubin Schindermann and Alexander Starr,
who are shareholders in the Company. The amount is included in the related party balance as at December 31, 2017. They were issued
5,529,412 shares (December 31, 2016: 12,920,000) for these services performed as of and for the year ended December 31, 2018. These
were recorded at fair value.
Advisory and consultancy fee includes $nil
(December 31, 2017: $36,000) for Rubin Schindermann and Alexander Starr, who are shareholders in the Company.
Amounts payable to Rubin Schindermann and
Alexander Starr as at December 31, 2018 were $200,00 and $139,697, respectively (2017: $92,000 and $31,697, respectively).
During the year ended December 31, 2017,
Eric Schindermann, who is the son of Rubin Schindermann, became a lender to the Company by way of assignment of an existing promissory
note liability of the Company amounting to $18,000. 1,591,556 shares of the Company’s common stock were issued to Eric Schindermann
during the year end December 31, 2018, on full conversion of the debt.
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.
During the year ended December 31, 2018,
$60,000 (December 31, 2017: $nil) was paid as remuneration for management services as salaries to Randal MacLeod, who is shareholder
in the Company and President of the subsidiary, Visava.
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, 2018 and 2017 was $209,046 and $304,322, respectively.
The amounts repaid during the years ended December 31, 2018 and 2017 were $281,927 and $48,236, respectively.
|
|
14.
|
CONVERTIBLE PROMISSORY
NOTES
|
During the year ended December
31, 2018, the Company issued convertible promissory notes, details of which are as follows:
Convertible promissory note issued on December
24, 2018, amounting to $83,000 (Note P).
Consistent with previous accounting treatment
of similar financial instruments, no derivative liability is recognized for Note P as at December 31, 2018 due to the six month
conversion clause as explained below.
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.
|
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.
|
Convertible promissory note issued on September
5, 2018, amounting to $103,000 (Note N).
Consistent with previous accounting treatment
of similar financial instruments, no derivative liability is recognized for Note N as at December 31, 2018 due to the six month
conversion clause as explained below.
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.
|
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.
|
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 is 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.
|
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 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 $67,923 was accrued
for the year ended December 31, 2018 (2016: $99,195).
All notes maturing prior to the date of
this report are outstanding.
Derivative liability
During the year ended December 31, 2018,
holders of convertible promissory notes converted principal and interest amounting to $318,494 and $5,281, respectively. The Company
recorded and fair valued the derivative liability as follows:
|
|
|
Derivative
liability as at
December 31,
2017
|
|
|
Conversions
during the
period
|
|
|
Fair value
adjustment
|
|
|
Derivative
liability as at
September 30,
2018
|
|
|
Conversions
during the
period
|
|
|
Change due to
Issuances
|
|
|
Fair value
adjustment
|
|
|
Derivative
liability as at
December 31,
2018
|
|
|
Note A
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Note B and C
|
|
|
534,214
|
|
|
|
(172,060
|
)
|
|
|
598,991
|
|
|
|
961,145
|
|
|
|
(13,905
|
)
|
|
|
—
|
|
|
|
(572,329
|
)
|
|
|
374,911
|
|
|
Note D
|
|
|
87,821
|
|
|
|
(111,205
|
)
|
|
|
134,372
|
|
|
|
110,988
|
|
|
|
(39,321
|
)
|
|
|
—
|
|
|
|
(67,637
|
)
|
|
|
4,030
|
|
|
Note F
|
|
|
98,276
|
|
|
|
(3,377
|
)
|
|
|
(35,206
|
)
|
|
|
59,693
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(48,745
|
)
|
|
|
10,948
|
|
|
Note G
|
|
|
21,096
|
|
|
|
—
|
|
|
|
586
|
|
|
|
21,682
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(17,706
|
)
|
|
|
3,976
|
|
|
Note H
|
|
|
143,985
|
|
|
|
—
|
|
|
|
(143,985
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Note I
|
|
|
39,048
|
|
|
|
—
|
|
|
|
104,274
|
|
|
|
143,322
|
|
|
|
(3,841
|
)
|
|
|
—
|
|
|
|
(109,337
|
)
|
|
|
30,144
|
|
|
Note J
|
|
|
27,396
|
|
|
|
(103,881
|
)
|
|
|
76,485
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Note K
|
|
|
—
|
|
|
|
(232,111
|
)
|
|
|
271,552
|
|
|
|
39,441
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(23,762
|
)
|
|
|
15,679
|
|
|
Note L
|
|
|
—
|
|
|
|
(56,266
|
)
|
|
|
63,036
|
|
|
|
6,770
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(6,770
|
)
|
|
|
—
|
|
|
Note M
|
|
|
—
|
|
|
|
—
|
|
|
|
554,366
|
|
|
|
554,366
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(449,185
|
)
|
|
|
105,181
|
|
|
Note N
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
102,380
|
|
|
|
(4,444
|
)
|
|
|
97,936
|
|
|
Note O
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
121,361
|
|
|
|
729
|
|
|
|
122,090
|
|
|
Note P
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
98,927
|
|
|
|
(1,339
|
)
|
|
|
97,588
|
|
|
|
|
|
951,836
|
|
|
|
(678,900
|
)
|
|
|
1,624,471
|
|
|
|
1,897,407
|
|
|
|
(57,067
|
)
|
|
|
322,668
|
|
|
|
(1,300,525
|
)
|
|
|
862,483
|
|
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, 2018:
|
|
·
|
Stock price of $0.0844 to $0.1700;
|
|
|
·
|
Projected annual volatility of 247.7% to 560.6%;
|
|
|
·
|
Discount rate of 47.75% to 66.01%;
|
|
|
·
|
Exercise price of $0.0151 to $0.0519 and
|
|
|
·
|
Liquidity term of 0.69 to 1.48 years;
|
|
|
|
|
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.
|
|
15.
|
STOCKHOLDERS’
DEFICIT
|
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”). 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 Company, as authorized by its Board
of Directors and stockholders, has approved a Reverse Split whereby record owners of the Company’s Common Stock as of the
Effective Date, shall, after the Effective Date, own one share of Common Stock for every one thousand (1,000) held as of the Effective
Date. As a result, an aggregate of $387,978 was reclassified from common stock to additional paid in capital. The Effective Date of this amendment was November 1, 2017.
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 93,624,289 shares are outstanding as at December 31, 2018 (at December 31,
2017: 14,973,819 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, 2018 and 2017.
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, 2017,
the Company issued 4,000 shares of common stock to individuals as consideration for advisory and consultancy services amounting
to $36,000 which were recorded at fair value.
During the quarter ended March 31, 2017,
the Company issued 13,917 shares of common stock to individuals on conversion of convertible promissory notes amounting to $26,126,
respectively.
During the quarter ended March 31, 2017,
the Company issued 20,000 shares of common stock each to Rubin Schindermann and Alexander Starr as consideration to settle outstanding
management fee in the amount of $50,000 each, which were recorded at fair value.
During the quarter ended June 30, 2017,
the Company issued 234,458 shares of common stock to individuals on conversion of convertible promissory notes amounting to $181,530.
During the quarter ended June 30, 2017,
the Company issued 40,000 shares of common stock each to Rubin Schindermann and Alexander Starr as consideration to settle outstanding
management fee in the amount of $108,000 each, which were recorded at fair value.
During the quarter ended September 30,
2017, the Company issued 675,627 shares of common stock to individuals on conversion of convertible promissory notes amounting
to $51,729. Of these shares, the Company issued 533,348,384 shares at $30,779 and as a result of the contractual conversion price
adjustments, these shares were issued below par value, with the offsetting balance recorded as a reduction in additional paid-in
capital in the amount of $22,556 during the three months ended September 30, 2017.
During the quarter ended September 30,
2017, the Company issued 1,400,000 shares of common stock each to Rubin Schindermann and Alexander Starr as consideration to settle
outstanding management fee in the amount of $140,000 each, which were recorded at fair value.
During the quarter ended December 31, 2017,
the Company issued 5,000,000 shares of common stock each to Rubin Schindermann and Alexander Starr as consideration to settle outstanding
management fee in the amount of $50,000 each, which were recorded at fair value.
During the year ended December 31, 2017,
533,348 shares of common stock were issued at a fair value which was lower than the par value of the shares. This resulted in a
reduction in additional paid in capital amounting to $22,556.
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 14 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 10 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.
Shares to be issued include the following:
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.
40,337,532 shares of common stock to be issued as consideration for private placements. 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.
250,000 shares of common stock to be issued
as consideration of the intellectual property rights granted by Smit to the Company’s subsidiary. These were recorded at
fair value of $27,000, based on the market price of the Company’s stock on the date of issue.
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.
Warrants
The fair value of the warrants issued to
private placement purchasers was measured at the date of acquisition using the Black-Scholes option pricing model using the following
assumptions:
|
|
·
|
Stock price between the range of $0.060 to $0.210 per share;
|
|
|
·
|
Exercise price between the range of $0.050 to $0.150 per share
|
|
|
·
|
Risk free interest rate between the range of 2.52% to 2.96%;
|
|
|
·
|
Expected life of 2 and 3 years; and
|
|
|
·
|
Expected dividend rate of 0%.
|
The fair value of these warrants was determined at $6,417,010.
As at December 31, 2018, related to private placements, there were 63,094,634 warrants were outstanding,
fully vested and with a remaining contractual life term of a range between 1.49 and 2.98 years.
As at December 31, 2018, related to the
acquisition of the Company’s subsidiary, there were 25,000,000 warrants outstanding, fully vested and with a remaining contractual
life term of 1.59 years.
The Company is a party to a 10-year lease agreement (initiated on July 2014) with respect to its facility
to produce Medical Marijuana. Total rent for the building is $1,833 (CAD $2,500) plus applicable taxes per month until the notification
of the right to produce under their application for approval as licensed producer under the Marijuana for Medical Purpose Regulation.
to the notification, as of January 1st 2019 the rent increased to $18,326 (CAD $25,000) plus applicable
taxes per month.
The Company is also party to a five-year
lease agreement dated August 29, 2018 for the lease of its office premises. Total rent for the premises is $1,298 plus applicable
taxes per month.
Future minimum rent payments for both leases
are as follows:
|
|
|
|
$
|
|
|
2019
|
|
|
|
235,488
|
|
|
2020
|
|
|
|
235,488
|
|
|
2021
|
|
|
|
235,488
|
|
|
2022
|
|
|
|
235,488
|
|
|
2023 and onwards
|
|
|
|
340,252
|
|
|
|
|
|
|
1,282,204
|
|
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% (2017: 35%) as follows:
|
|
|
2018
|
|
|
2017
|
|
|
Expected income tax recovery from net loss
|
|
$
|
399,072
|
|
|
$
|
365,963
|
|
|
Tax effect of expenses not deductible for income tax:
|
|
|
|
|
|
|
|
|
|
Annual effect of book/tax differences
|
|
|
(131,861
|
)
|
|
|
(303,870
|
)
|
|
Change in valuation allowance
|
|
|
(267,211
|
)
|
|
|
(62,093
|
)
|
|
|
|
|
—
|
|
|
|
—
|
|
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:
|
|
|
2018
|
|
|
2017
|
|
|
Tax effect of NOL Carryover
|
|
$
|
563,454
|
|
|
$
|
452,343
|
|
|
Cumulative change due to reduced rate
|
|
|
|
|
|
|
(156,117
|
)
|
|
Less valuation allowance
|
|
|
(563,454
|
)
|
|
|
(296,226
|
)
|
|
|
|
|
—
|
|
|
|
—
|
|
At December 31, 2018, 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 carryforwards of approximately $2,683,112 (2017: $1,410,682) that may be offset
against future taxable income from the year by 2038. No tax benefit has been reported in the December 31, 2018 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.
The Company’s management has evaluated subsequent events up to April 1, 2019, the date the consolidated
financial statements were issued, pursuant to the requirements of ASC 855 and has determined the following material subsequent
events:
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 is the definitive agreement based on the general terms and conditions contained in the Letter of Intent.
The Exchange Agreement provides that, subject
to its terms and conditions, the Company will issue to the CannaKorp shareholders an aggregate of 30,000,000 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 7,200,000 shares of the Company’s common stock. The Company will also assume all outstanding liabilities
of CannaKorp.
Under the terms of the Exchange Agreement,
the Company is not obligated to consummate the share exchange unless the CannaKorp shareholders have tendered to the Company not
less than 90% of the outstanding CannaKorp capital stock. Upon the closing of the Exchange Agreement, CannaKorp will continue its
business operations as a subsidiary of the Company.
The transaction was closed effective February
5, 2019 and therefore no major operational activity relevant to the reporting period took place. Future filings however would include
required information and disclosure on operational activity of CannaKorp.
During March 2019, the Company issued 30,407,712
shares pursuant to the Exchange Agreement explained above to the shareholder of CannaKorp.
During January 2019, the Company received
the remaining funds of $220,319 pertaining to private placements for which partial funds were received during the quarter ended
December 31, 2018.
As disclosed in Note 15, during March 2019,
the Company issued 29,074,075 shares pursuant to private placement funds received during the year ended December 31, 2018.
During March 2019, the Company issued 588,237 shares of common stock pursuant to conversion notices received
from one of the holders of the convertible promissory notes.