The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS
For the Three Month Interim Periods Ended
March 31, 2020 and 2019
NOTE 1.
|
NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
|
Nature of Operations
CannaPharmaRx, Inc. (the “Company”)
is a Delaware corporation. In November 2018 it formed an Ontario corporation, Hanover CPMD Acquisition Corporation, to facilitate
the acquisition described below. As of the date of this Report the Company intends to engage in acquisitions or joint ventures
with a company or companies that will allow to become a national or internationally branded cannabis cultivation company, or otherwise
engage in the cannabis industry. Management is engaged in seeking out and evaluating businesses for acquisition. However, if an
opportunity in another industry arises the Company will review that opportunity as well.
History
The Company was originally incorporated
in the State of Colorado in August 1998 under the name “Network Acquisitions, Inc.” It changed its name to Cavion Technologies,
Inc. in February 1999 and subsequently to Concord Ventures, Inc. in October 2006. On December 21, 2000, the Company filed for protection
under Chapter 11 of the United States Bankruptcy Code. In connection with the filing, on February 16, 2001, the Company sold its
entire business, and all of its assets, for the benefit of its creditors. After the sale, the Company still had liabilities of
$8.4 million and was subsequently dismissed by the Court from the Chapter 11 reorganization, effective March 13, 2001, at which
time the last of the Company’s then remaining directors resigned. On March 13, 2001, the Company had no business or source
of income, no assets, no employees or directors, outstanding liabilities of approximately $8.4 million, and had terminated its
duty to file reports under securities law. In February 2008, after filing of a Form 10 registration statement pursuant to the Securities
Exchange Act of 1934, as amended, we were re-listed on the OTC Bulletin Board.
In April 2010, the Company re-domiciled
in Delaware under the name CCVG, Inc. (“CCVG”). Effective December 31, 2010, the Company completed an Agreement and
Plan of Merger and Reorganization (the “Reorganization") which provided for the merger of two of the Company’s
wholly-owned subsidiaries. As a result of this reorganization, the Company’s name became “Golden Dragon Inc.,”
which became the surviving publicly quoted parent holding company.
On May 9, 2014, the Company entered
into a Share Purchase Agreement (the “Share Purchase Agreement”) with CannapharmaRX, Inc., a Colorado corporation
(“Canna Colorado”), and David Cutler, a former President, Chief Executive Officer, Chief Financial Officer and
director of the Company. Under the Share Purchase Agreement, Canna Colorado purchased 1,421,120 restricted shares of the Company’s
common stock from Mr. Cutler and an additional 9,000,000 common shares directly from the Company.
In October 2014, the Company changed its
legal name to “CannaPharmaRx, Inc.”
In
April 2016, the Company ceased operations. As a result, the Company was then considered a “shell” company as defined
under the Securities Exchange Act of 1934, as amended, as defined in Rule 405 of the Securities Act and Rule 12b-2 of the
Exchange Act.
Effective December 31, 2019, the Company
and Hanover CPMD Acquisition Corp. (“CPMD Hanover”) a newly formed, wholly-owned subsidiary, entered into a Securities
Purchase Agreement with Alternative Medical Solutions, Inc., an Ontario, Canada corporation (“AMS”), its shareholders,
wherein the Company acquired all of the issued and outstanding securities of AMS. AMS is a corporation organized under the laws
of the Province of Ontario, Canada. It is a late-stage marijuana licensed producer applicant in Canada. It is currently in the
Pre-License Inspection and Licensing phase, which is Stage 5 of 6, with a fully approved license. Upon completion of the final
construction of the facility, Health Canada will inspect the facility and relevant operating procedures to ensure it meets the
standards that have been approved in the application. There can be no assurances that the Company will receive this license.
The facility is a 48,750 square foot marijuana
grow facility built on a 6.7-acre parcel of land located in Hanover, Ontario Canada. To date, the exterior construction of
the building has been completed. However, no interior construction has begun. Upon full completion, the facility will contain up
to 20 separate growing rooms which we believe will provide an annual production capacity of 9,500 kilos of marijuana (20,900 lbs.).
Completion of the build-out of the facility is expected to take an estimated 20 weeks. Together with the remaining equipment needed
to complete the grow the Company estimates that it will require approximately CAD$20.0 million in additional financing which it
may seek to raise via equity and debt. There can be no assurances that the Company will successfully raise the financing required
to complete the construction of the facility and begin cultivation.
As a result of the completion of the acquisition
of AMS on December 31, 2019, the Company no longer fit the definition of a “shell company,” as defined in Rule 405
of the Securities Act and Rule 12b-2 of the Exchange Act. It filed the required disclosure on Form 8-K/A with the SEC on February
14, 2019, advising that it was no longer a shell company pursuant to the aforesaid Rule.
Effective February 25, 2019, the Company
acquired 3,712,500 shares and 2,500,000 Warrants to purchase 2,500,000 shares of Common Stock of GN Ventures, Ltd, Alberta, Canada,
f/k/a Great Northern Cannabis, Ltd. (“GN”), in exchange for an aggregate of 7,988,963 shares of its Common Stock, from
a former shareholder of GN who is now the Company’s President and CEO. These shares and warrants, when exercised, will represent
approximately 5% and 3%, respectively, of the issued and outstanding stock of GN. While no assurances can be provided, the Company
believes this is the initial step in its efforts to acquire all or a significant portion of the issued and outstanding stock of
GN. The Company anticipates making additional purchases of stock from other shareholders of GN.
GN owns a 60,000 square foot cannabis cultivation
and grow facility located on 38 acres in Stevensville, Ontario, Canada. Because the Company is a minority shareholder of GN and
GN is a privately held company, the Company cannot confirm that the information it currently has on GN’s operations is complete
or fully reliable. GN estimates annual total production capacity from the Stevensville facility of up to 12,500 kilograms of cannabis.
GN believes the Stevensville facility to be complete, and GN’s subsidiary, 9869247 Canada Limited, received a license to
cultivate from the Canadian Ministry of Health on July 5, 2019. As a result, in October 2019, GN commenced cultivation activities
and began generating revenues during the first calendar quarter of 2020. The Company expects that it will obtain additional information
on the business activities of GN as it has renewed discussions to acquire additional interests and is performing its due diligence
procedures.
Effective June 11, 2019, the Company entered
into a Securities Purchase Agreement with Sunniva, Inc, a British Columbia, Canada corporation (“Sunniva”) wherein
the Company agreed to acquire all of the issued and outstanding securities of Sunniva’s wholly-owned subsidiaries Sunniva
Medical Inc. (“SMI”) and 1167025 B.C. LTD (“1167025”) for CAD $16.0 million in cash and a note in the principal
amount of CAD $4.0 million. These companies are the current owners of the Sunniva Canada Campus, which includes construction assets
for a planned 759,000 square-foot greenhouse located on an approximately 114-acre property in Okanagan Falls, British Columbia.
On June 8, 2020, the Company received a
notice of termination of this Purchase Agreement, as amended, from Sunniva. As a result, for the three-month interim period ended
March 31, 2020, the Company incurred a charge of $1,881,126 due to the write-off of its deposit to Sunniva, banking fees and prepaid
expenses associated with the failed acquisition of Sunniva. The Company is in discussions with Sunniva, as well as banks who received
deposits from the Company, about recovering all or a portion of its deposits, banking fees, and prepaid expenses, as well as acquiring
a smaller segment of the Sunniva lands. See Note 16, Subsequent Events, below. The accompanying financial statements as of March
31, 2020, do not reflect, potential recovery amounts related to Sunniva and other parties, if any.
COVID-19
On March 11, 2020, the World Health Organization
(“WHO”) declared the Covid-19 outbreak to be a global pandemic. In addition to the devastating effects on human life,
the pandemic is having a negative ripple effect on the global economy, leading to disruptions and volatility in the global financial
markets. Most US states and many countries have issued policies intended to stop or slow the further spread of the disease.
Covid-19 and the U.S’s response to
the pandemic are significantly affecting the economy. There are no comparable events that provide guidance as to the effect the
Covid-19 pandemic may have, and, as a result, the ultimate effect of the pandemic is highly uncertain and subject to change. We
do not yet know the full extent of the effects on the economy, the markets we serve, our business, or our operations.
Management’s Representation
of Interim Financial Statements
The accompanying unaudited consolidated
financial statements have been prepared by the Company without audit pursuant to the rules and regulations of the Securities and
Exchange Commission (“SEC”). Certain information and disclosures normally included in financial statements prepared
in accordance with accounting principles generally accepted in the United States (“GAAP”) have been condensed or omitted
as allowed by such rules and regulations, and management believes that the disclosures are adequate to make the information presented
not misleading. These consolidated financial statements include all of the adjustments, which in the opinion of management are
necessary to a fair presentation of financial position and results of operations. All such adjustments are of a normal and recurring
nature. Interim results are not necessarily indicative of results for a full year. These consolidated financial statements should
be read in conjunction with the audited consolidated financial statements at December 31, 2019, and 2018, as presented in the Company’s
Form 10-K filed on May 27, 2020 with the SEC.
Basis of Presentation
The accompanying unaudited consolidated
financial statements have been prepared in accordance with the Financial Accounting Standards Board (“FASB”)
“FASB Accounting Standard Codification™” (the “Codification”) which is the source of authoritative
accounting principles recognized by the FASB to be applied by nongovernmental entities in the preparation of financial statements
in conformity with generally accepted accounting principles (“GAAP”) in the United States. Certain amounts in
prior periods have been reclassified to conform to the current presentation.
All figures are in U.S. dollars unless indicated otherwise.
Use of Estimates
The preparation of financial statements
in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of liabilities
and disclosure of contingent assets and liabilities at the date of the financial statements and the reported assets and expenses
during the reporting period. The most significant estimates relate to investments, purchase price allocation of acquired assets,
impairment of long-lived assets, intangibles, and goodwill. The Company bases its estimates on historical experience, known or
expected trends and various other assumptions that are believed to be reasonable given the quality of information available as
of the date of these financial statements. The results of these assumptions provide the basis for making estimates about the carrying
amounts of assets and liabilities that are not readily apparent from other sources. Actual results could differ from these estimates.
Cash and Cash Equivalents
The Company considers all highly liquid
temporary cash investments with an original maturity of three months or less to be cash equivalents. On March 31, 2020, and December
31, 2019, the Company’s cash and cash equivalents totaled $83,197 and $1,547, respectively.
Comprehensive Gain or Loss
ASC 220 “Comprehensive Income,”
establishes standards for the reporting and display of comprehensive income and its components in the financial statements. As
of March 31, 2020, and December 31, 2019, the Company determined that it had items that represented components of comprehensive
income and, therefore, has included a statement of comprehensive income in the financial statements.
Derivative Financial Instruments
The Company does not use derivative instruments
to hedge exposures to cash flow, market or foreign currency risk. Terms of convertible and other promissory notes are reviewed
to determine whether they contain embedded derivative instruments that are required to be accounted for separately from the host
contract and recorded on the balance sheet at fair value. The fair value of derivative liabilities is required to be revalued at
each reporting date, with corresponding changes in fair value recorded in current period operating results.
During the three months ended March
31, 2020, the Company entered into four convertible note instruments amounting to $438,000 that contained embedded derivative
features. As a result, the Company performed a Black Scholes analysis and recorded a derivative liability and an expense
amounting to $925,484.
Beneficial Conversion Features
In accordance with FASB ASC 470-20, “Debt
with Conversion and Other Options” the Company records a beneficial conversion feature (“BCF”) related to the
issuance of convertible debt or preferred stock instruments that have conversion features at fixed rates that are in-the-money
when issued. The BCF for the convertible instruments is recognized and measured by allocating a portion of the proceeds equal to
the intrinsic value of that feature to additional paid-in capital. The intrinsic value is generally calculated at the commitment
date as the difference between the conversion price and the fair value of the common stock or other securities into which the security
is convertible, multiplied by the number of shares into which the security is convertible. If certain other securities are issued
with the convertible security, the proceeds are allocated among the different components. The portion of the proceeds allocated
to the convertible security is divided by the contractual number of the conversion shares to determine the effective conversion
price, which is used to measure the BCF. The effective conversion price is used to compute the intrinsic value. The value of the
BCF is limited to the basis that is initially allocated to the convertible security.
Foreign Currency Translation
The functional currency and the reporting
currency of the Company’s US operations is United States dollars, (“USD”). The functional currency of the Company’s
Canadian operations in Canadian dollars (“CAD”), Management has adopted ASC 830 “Foreign Currency Matters”
for transactions that occur in foreign currencies. Monetary assets denominated in foreign currencies are translated using the exchange
rate prevailing at the balance sheet date. Average monthly rates are used to translate revenues and expenses.
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. Exchange gains or losses arising from foreign currency transactions are included in the determination of net income
for the respective periods.
Assets and liabilities of the Company’s
operations are translated into the reporting currency, United States dollars, at the exchange rate in effect at the balance sheet
dates. Revenue and expenses are translated at average rates in effect during the reporting periods. Equity transactions are recorded
at the historical rate when the transaction occurred. The resulting translation adjustment is reflected as accumulated other comprehensive
income, a separate component of stockholders' equity in the statement of stockholders' equity. These translation adjustments are
reflected in accumulated other comprehensive income, a separate component of the Company's stockholders' equity.
Harmonized Sales Tax
The Harmonized Sales Tax (“HST”)
is a combination of the Canadian Goods and Services Tax (“GST”) and Provincial Sales Tax (“PST”) that is
applied to taxable goods and services. By fusing sales tax at the federal level with sales tax at the provincial level, the participating
provinces harmonized both taxes into a single federal-provincial sales tax. HST is a consumption tax paid by the consumer at the
point of sale (POS). The vendor or seller collects the tax proceeds from consumers by adding the HST rate to the cost of goods
and services. They then remit the total collected tax to the government periodically.
The HST is in effect in five of the ten
Canadian provinces: New Brunswick, Newfoundland and Labrador, Nova Scotia, Ontario, and Prince Edward Island. The HST is collected
by the Canada Revenue Agency (CRA), which remits the appropriate amounts to the participating provinces. The HST may differ across
these five provinces, as each province will set its own PST rates within the HST. In provinces and territories which have not enacted
the HST, the CRA collects only the 5% goods and services tax. The current rate in Ontario is 13%.
Capital Assets- Construction in Progress
As of March 31, 2020, and December 31,
2019, the Company had $1,405,776 and $1,540,918 in construction in progress, respectively, comprised entirely of the construction
in progress relating to the building acquired with the acquisition of AMS. Additionally, the Company had $131,111 and $143,201,
respectively, in land upon which the construction in process was situated.
Depreciation expense related to the construction
in progress amounted to $-0- and $-0- for the periods ended March 31, 2020, and March 31, 2019, respectively.
Stock Purchase Warrants
The Company accounts for warrants issued
to purchase shares of its common stock as equity in accordance with FASB ASC 480, Accounting for Derivative Financial Instruments
Indexed to, and Potentially Settled in, a Company’s Own Stock, Distinguishing Liabilities from Equity.
Stock-Based Compensation
The Company has adopted ASC Topic 718,
(Compensation-Stock Compensation), which establishes a fair value method of accounting for stock-based compensation plans.
In accordance with guidance now incorporated in ASC Topic 718, the cost of stock options and warrants issued to employees and non-employees
is measured on the grant date based on the fair value. The fair value is determined using the Black-Scholes option-pricing model.
The resulting amount is charged to expense on the straight-line basis over the period in which the Company expects to receive the
benefit, which is generally the vesting period. The fair value of stock warrants was determined at the date of grant using the
Black-Scholes option-pricing model. The Black-Scholes option model requires management to make various estimates and assumptions,
including expected term, expected volatility, risk-free rate, and dividend yield. Stock options and warrants outstanding shares
of common stock are excluded from the calculations of diluted net loss per share since their effect is anti-dilutive.
Goodwill and Intangible Assets
Goodwill represents the future economic
benefit arising from other assets acquired that could not be individually identified and separately recognized. The goodwill arising
from the Company’s acquisitions is attributable to the value of the potential expanded market opportunity with new customers.
Intangible assets have either an identifiable or indefinite useful life. Intangible assets with identifiable useful lives are amortized
on a straight-line basis over their economic or legal life, whichever is shorter. The Company’s amortizable intangible assets
consist of a marijuana license with a useful life of 15 years.
Goodwill and indefinite-lived assets are
not amortized but are subject to annual impairment testing unless circumstances dictate more frequent assessments. The Company
performs an annual impairment assessment for goodwill during the fourth quarter of each year and more frequently whenever events
or changes in circumstances indicate that the fair value of the asset may be less than the carrying amount. Goodwill impairment
testing is a two-step process performed at the reporting unit level. Step one compares the fair value of the reporting unit to
its carrying amount. The fair value of the reporting unit is determined by considering both the income approach and market approaches.
The fair values calculated under the income approach and market approaches are weighted based on circumstances surrounding the
reporting unit. Under the income approach, the Company determines fair value based on estimated future cash flows of the reporting
unit, which are discounted to the present value using discount factors that consider the timing and risk of cash flows. For the
discount rate, the Company relies on the capital asset pricing model approach, which includes an assessment of the risk-free interest
rate, the rate of return from publicly traded stocks, the Company’s risk relative to the overall market, the Company’s
size and industry and other Company-specific risks. Other significant assumptions used in the income approach include the terminal
value, growth rates, future capital expenditures and changes in future working capital requirements. The market approach use key
multiples from guideline businesses that are comparable and are traded on a public market. If the fair value of the reporting unit
is greater than its carrying amount, there is no impairment. If the reporting unit’s carrying amount exceeds its fair value,
then the second step must be completed to measure the amount of impairment, if any. Step two calculates the implied fair value
of goodwill by deducting the fair value of all tangible and intangible net assets of the reporting unit from the fair value of
the reporting unit as calculated in step one. In this step, the fair value of the reporting unit is allocated to all of the reporting
unit’s assets and liabilities in a hypothetical purchase price allocation as if the reporting unit had been acquired on that
date. If the carrying amount of goodwill exceeds the implied fair value of goodwill, an impairment loss is recognized in an amount
equal to the excess.
Determining the fair value of a reporting
unit is judgmental in nature and requires the use of significant estimates and assumptions, including revenue growth rates, strategic
plans, and future market conditions, among others. There can be no assurance that the Company’s estimates and assumptions
made for purposes of the goodwill impairment testing will prove to be accurate predictions of the future. Changes in assumptions
and estimates could cause the Company to perform an impairment test prior to scheduled annual impairment tests.
The Company performed its annual fair value
assessment on December 31, 2019, on its subsidiaries with material goodwill and intangible asset amounts on their respective balance
sheets and determined that no impairment exists.
Long-Lived Assets
The Company evaluates the recoverability
of its long-lived assets whenever events or changes in circumstances have indicated that an asset may not be recoverable. The long-lived
asset is grouped with other assets at the lowest level for which identifiable cash flows are largely independent of the cash flows
of other groups of assets and liabilities. If the sum of the projected undiscounted cash flows is less than the carrying value
of the assets, the assets are written down to the estimated fair value.
The Company evaluated the recoverability
of its long-lived assets on March 31, 2020, and on December 31, 2019, respectively on its subsidiaries with material amounts on
their respective balance sheets and determined that no impairment exists.
Fair Values of Assets and Liabilities
The Company has adopted the guidance under
ASC Topic 820 for financial instruments measured on fair value on a recurring basis. Fair value is defined as the exchange price
that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market
for the asset or liability, in an orderly transaction between market participants on the measurement date. Valuation techniques
used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs.
Financial Instruments
The estimated fair value for financial
instruments was determined at discrete points in time based on relevant market information. These estimates involve uncertainties
and could not be determined with exact precision. The fair value of the Company’s financial instruments, which include cash,
prepaid expenses, accounts payable and the related party loan, each approximate their carrying value due either to their short
length to maturity or interest rates that approximate prevailing market rates.
Income Taxes
The Company accounts for income taxes under
the liability method, which requires recognition of deferred tax assets and liabilities for the expected future tax consequences
of events that have been included in the financial statements or tax returns. Under this method, deferred tax assets and liabilities
are determined based on the difference between the financial statements and tax bases of assets and liabilities using enacted tax
rates in effect for the year in which the differences are expected to reverse.
Cost Method Investment
Our cost method investment consists of an investment in a private
company in which we do not have the ability to exercise significant influence over its operating and financial activities. The
investment is tested for impairment quarterly.
Income (Loss) Per Share
Income (loss) per share is presented in
accordance with Accounting Standards Update (“ASU”), Earning per Share (Topic 260) which requires
the presentation of both basic and diluted earnings per share (“EPS”) on the income statements. Basic EPS would
exclude any dilutive effects of options, warrants, and convertible securities but does include the restricted shares of common
stock issued. Diluted EPS reflects the potential dilution that would occur if securities or other contracts to issue common stock
were exercised or converted to common stock. Basic EPS calculations are determined by dividing net income by the weighted average
number of shares of common stock outstanding during the year. Diluted EPS calculations are determined by dividing net income by
the weighted average number of common shares and dilutive common share equivalents outstanding.
Business Segments
The Company’s activities during the
three months ended March 31, 2020, and the year ended December 31, 2019, comprised a single segment.
Recently Issued Accounting Pronouncements
The Company has implemented all new accounting
pronouncements that are in effect and that may impact its financial statements and does not believe that there are any other new
pronouncements that have been issued that might have a material impact on its financial position or results of operations. The
Company adopted ASC 842 on January 1, 2019. However, the adoption of the standard had no impact on the Company’s financial
statements since all Company leases are month to month, or short-term rental.
NOTE 2.
|
GOING CONCERN AND LIQUIDITY
|
As of March 31, 2020 and December 31, 2019,
the Company had $83,197 and $1,547 in cash on hand respectively, and no revenue-producing business or other sources of income.
Additionally, as of March 31, 2020, the Company had outstanding liabilities totaling $12,048,829 and $102,134 in short term liquid
assets.
In the Company’s financial statements
for the fiscal years ended December 31, 2019, and 2018, the Reports of the Independent Registered Public Accounting Firm include
an explanatory paragraph that describes substantial doubt about the Company’s ability to continue as a going concern. These
financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the settlement
of liabilities and commitments in the normal course of business. Based on the Company’s current financial projections, it
believes it does not have sufficient existing cash resources to fund its current limited operations.
It is the Company’s current intention
to raise debt and/or equity financing to fund ongoing operating expenses. There is no assurance that these events will be satisfactorily
completed or at terms acceptable to the Company. Any issuance of equity securities, if accomplished, could cause substantial dilution
to existing stockholders. Any failure by the Company to successfully implement these plans would have a material adverse effect
on its business, including the possible inability to continue operations.
As of March 31, 2020, and December
31, 2019, the Company had deposits of $-0- and $1,308,830 respectively. The $1,308,830 which was non-refundable and was
intended to be credited against the purchase price of the Sunniva acquisition (referenced throughout this Report) if it had
been successfully consummated. This balance was written off by the Company due to the termination of the Sunniva Purchase
Agreement on June 8, 2020.
The following table sets forth the components
of the Company’s prepaid expenses at March 31, 2020, and December 31, 2019:
|
|
March 31,
2020
|
|
|
December 31,
2019
|
|
|
|
|
|
|
|
|
Prepaid interest acquisition expenses-Sunniva
|
|
$
|
–
|
|
|
$
|
592,473
|
|
Total
|
|
$
|
–
|
|
|
$
|
592,473
|
|
The prepaid acquisition expenses for Sunniva
were written off during the period ended March 31, 2020 due to the termination of the Sunniva Agreement on June 8, 2020.
NOTE 5.
|
FAIR VALUE OF FINANCIAL INSTRUMENTS
|
The Company has adopted the guidance under
ASC Topic 820 for financial instruments measured on a fair value on a recurring basis. Fair value is defined as the exchange price
that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market
for the asset or liability, in an orderly transaction between market participants on the measurement date. Valuation techniques
used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs.
ASC Topic 820 establishes a fair value
hierarchy, giving the highest priority to quoted prices in active markets and the lowest priority to unobservable data and requires
disclosures for assets and liabilities measured at fair value based on their level in the hierarchy. The fair value hierarchy is
based on three levels of inputs, of which the first two are considered observable and the last unobservable, as follows:
●
|
Level 1 applies to assets or liabilities for which there are quoted prices in active markets for identical assets or liabilities.
|
|
|
●
|
Level 2 applies to assets or liabilities for which there are inputs other than quoted prices that are observable for the asset or liability such as quoted prices for similar assets or liabilities in active markets; quoted prices for identical assets or liabilities in markets with insufficient volume or infrequent transactions (less active markets); or model-derived valuations in which significant inputs are observable or can be derived principally from, or corroborated by, observable market data.
|
|
|
●
|
Level 3 applies to assets or liabilities for which there are unobservable inputs to the valuation methodology that are significant to the measurement of the fair value of the assets or liabilities.
|
The Company’s financial instruments
consist principally cash, accounts payable, and accrued liabilities. The carrying values of these financial instruments approximate
their fair value due to their short maturities. The carrying amount of the Company’s debt approximates fair value because
the interest rates on these instruments approximate the interest rate on debt with similar terms available to the Company.
The Company analyzes all financial instruments
with features of both liabilities and equity under ASC 480, “Distinguishing Liabilities from Equity” and ASC 815, “Derivatives
and Hedging”. Derivative liabilities are adjusted to reflect fair value at each period end, with any increase or decrease
in the fair value being recorded in results of operations as adjustments to fair value of derivatives. The effects of interactions
between embedded derivatives are calculated and accounted for in arriving at the overall fair value of the financial instruments.
Also, the fair value of freestanding derivative instruments such as warrant and option derivatives are valued using the Black-Scholes
simulation model.
The Company’s derivative liabilities
were adjusted to fair market value at the end of each reporting period, using Level 3 inputs.
The following table sets forth by level
with the fair value hierarchy the Company’s financial assets and liabilities measured at fair value on March 31, 2020:
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative financial instruments
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
925,484
|
|
|
$
|
925,484
|
|
On February 25, 2019, the Company acquired
3,712,500 shares and 2,500,000 Warrants to purchase 2,500,000 shares of common stock at a price of CAD$1.00 of GN Ventures, Ltd.,
Alberta, Canada, f/k/a Great Northern Cannabis, Ltd. (“GN”), in exchange for an aggregate of 7,988,963 shares of the
Company’s Common Stock from a former shareholder of GN. On the date of purchase, the Company’s Common Stock was trading
at $1.41 which values the purchase at $11,264,438. For balance sheet purposes the Company has treated this purchase using the cost
method because the purchase consists of an investment in a private company in which the Company does not have the ability to exercise
significant influence over GN’s operating and financial activities.
The Company conducted an impairment test
on December 31, 2019 and determined that an impairment existed resulting in a write-down of the investment by $7,070,841 to a current
value of $4,193,597.
Additionally, the Company conducted an
impairment test at March 31, 2020, and determined that no further impairment existed.
NOTE 7.
|
PROPERTY, PLANT AND EQUIPMENT
|
The following table sets forth the components
of the Company’s property and equipment at March 31, 2020, and December 31, 2019:
|
|
March 31, 2020
|
|
|
December 31, 2019
|
|
|
|
Gross Carrying Amount
|
|
|
Accumulated Depreciation
|
|
|
Net Book Value
|
|
|
Gross Carrying Amount
|
|
|
Accumulated Depreciation
|
|
|
Net Book Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Computers, software, and office equipment
|
|
$
|
4,371
|
|
|
$
|
(1,094
|
)
|
|
|
3,277
|
|
|
$
|
4,757
|
|
|
$
|
(779
|
)
|
|
$
|
3,978
|
|
Land
|
|
|
131,111
|
|
|
|
–
|
|
|
|
131,111
|
|
|
|
143,201
|
|
|
|
–
|
|
|
|
143,201
|
|
Construction in progress
|
|
|
1,405,776
|
|
|
|
–
|
|
|
|
1,405,776
|
|
|
|
1,540,918
|
|
|
|
–
|
|
|
|
1,540,918
|
|
Total fixed assets
|
|
$
|
1,541,258
|
|
|
$
|
(1,094
|
)
|
|
|
1,540,164
|
|
|
$
|
1,688,876
|
|
|
$
|
(779
|
)
|
|
$
|
1,688,097
|
|
For the three months ended March 31, 2020,
and 2019, the Company recorded depreciation expense of $385 and $-0-, respectively.
The facility acquired as part of the AMS
acquisition is a 48,750 square foot marijuana grow facility built on a 6.7-acre parcel of land located in Hanover, Ontario Canada.
To date, the exterior construction of the building has been completed, however, no interior construction has begun.
For construction in-progress assets, no depreciation is recorded
until the asset is placed in service. When construction is completed, the asset should be reclassified as building, building improvements,
or land improvement and should be capitalized and depreciated. Construction in progress includes all costs related to the construction
of a medical cannabis facility. Cost also includes soft costs such as loan fees and interest and consulting fees and related expenses.
The facility is not available for use and therefore not being amortized.
NOTE 8.
|
GOODWILL AND INTANGIBLE ASSETS
|
As of March 31, 2020 and December 31, 2019,
the Company had $5,832,508 in goodwill and $1,649,335 in intangible assets, compared to $6,370,333 and $1,834,176 respectively.
The goodwill and intangible assets arose as a result of the acquisition of AMS. Based on a valuation study performed on the acquisition,
the Company determined that the marijuana license in process at AMS had a value of $1,871,000 which will be amortized over a fifteen-year
period or approximately $124,733 per year.
The Company has recorded amortization expense
of $31,349 and $32,000 respectively, for the three months ended March 31, 2020, and March 31, 2019.
NOTE 9.
|
ACCOUNT PAYABLE AND ACCRUED LIABILITIES
|
Accounts payables are recognized initially
at the transaction price and subsequently measured at the undiscounted amount of cash or other consideration expected to be paid.
Accrued expenses are recognized based on the expected amount required to settle the obligation or liability.
The following table sets forth the components
of the Company’s accrued liabilities on March 31, 2020, and December 31, 2019.
|
|
March 31,
2020
|
|
|
December 31,
2019
|
|
|
|
|
|
|
|
|
Accounts payable and accrued expenses
|
|
$
|
1,024,051
|
|
|
$
|
902,854
|
|
Accrued interest (a)
|
|
|
51,850
|
|
|
|
27,630
|
|
Accrued legal settlement (b)
|
|
|
190,000
|
|
|
|
190,000
|
|
Total accounts payable and accrued liabilities
|
|
$
|
1,265,901
|
|
|
$
|
1,120,484
|
|
|
(a)
|
Represents interest accrued on the outstanding convertible notes -see Note 12, Notes Payable
|
|
(b)
|
The Company had previously been a party to an action filed by Gary M. Cohen, a former officer and director of the Company in 2014. In March 2015, the Company entered into a Settlement Agreement with Mr. Cohen wherein the Company agreed to repurchase 2,250,000 shares of its Common Stock from Mr. Cohen in consideration for $350,000. Mr. Cohen passed away while there was a remaining balance of $190,000 remaining to be paid in accordance with the Settlement Agreement. The Company has taken the position that his death has discharged any obligation the Company might have to make the balance of the payments. The Company has not received any demand for payment or otherwise been involved in any attempt to collect this balance for a period of greater than two years prior to the date of this Report.
|
NOTE 10.
|
RELATED PARTY TRANSACTIONS
|
The following table sets forth the components
of the Company’s related party liabilities on March 31, 2020, and December 31, 2019.
|
|
March 31,
2020
|
|
|
December 31,
2019
|
|
|
|
|
|
|
|
|
Accounts payable and accrued payroll related party(a)
|
|
$
|
399,912
|
|
|
$
|
582,096
|
|
Accrued expense - related party (b)
|
|
|
749,307
|
|
|
|
606,356
|
|
Total accounts payable and accrued liabilities
|
|
$
|
1,149,219
|
|
|
|
1,188,452
|
|
(a)
|
Accounts payable and accrued payroll-related parties as of March 31, 2020, is comprised of the following:
|
Interest-free loans of $75,000 and $140,158
from a director and the Company’s CEO and a director, respectively, amounting to a total of $215,158, accrued salaries for
officers and employees of $184,754.
(b) Accrued expense related parties of
$749,307 is comprised of accrued bonuses and fees due to current and former directors and officers of the Company. As of March
31, 2020, there was $150,000 included in the $748,307 amount due to claims received from two former directors, which was purported
to be accrued salaries arising out of services provided in 2015 and 2016. Management is in the process of reviewing these claims.
From April 1, 2018 through March 2019,
the Company’s principal place of business was located at 2 Park Plaza, Suite 1200 – B. Irvine, CA 92614. This space
was provided to the Company on a twelve-month term by a company of which Mr. Nicosia, one of the Company’s directors, serves
of the President and CEO. The monthly rent at that location was $1,000, however, as of the date of this report, the Company has
not made any rent payments and continues to accrue those amounts as accounts payable.
Effective on March 1, 2019, the Company
changed its principal place of business to Suite 206 1180 Sunset Drive, Kelowna, BC, Canada Z1Y 9W6, which the Company has rented
pursuant to an oral sublease from PLC International Investments Inc, a company owned and controlled by Dominic Colvin, the Company’s
current CEO, President and a director. This location consists of approximately 500 sq. feet. The Company paid a monthly rent of
$1,500 (CAD).
Effective March 22, 2019, the Company changed
its principal place of business and leases three offices at 3600 888 3 St SW, Calgary, Alberta, Canada, T2P 5C5. The lease may
be terminated by either party on 30 days’ notice. Rent is $4,000 CAD per month. This space was provided by a company to which,
Mr. Orman, one of the Company’s directors, serves as a Director.
See Note 16, Subsequent Events, below,
for additional related party transactions.
NOTE 11.
|
CONVERTIBLE NOTES AND DERIVATIVE LIABILITIES
|
The following tables set forth the components
of the Company’s, convertible debentures as of March 31, 2020, and December 31, 2019:
|
|
March 31,
2020
|
|
|
December 31,
2019
|
|
|
|
|
|
|
|
|
Principal value of convertible notes
|
|
$
|
1,988,000
|
|
|
$
|
1,550,000
|
|
Note discount
|
|
|
(987,732
|
)
|
|
|
(997,397
|
)
|
Total convertible notes, net current
|
|
$
|
1,000,268
|
|
|
$
|
522,603
|
|
In July 2018, the Company commenced an
offering of up to $2 million of one-year maturity convertible notes (“Notes”). The maximum amount under the Offering
was subsequently increased to $2,500,000 These Notes carried both a voluntary conversion feature and an automatic conversion feature.
The Notes carried an interest rate of 12% and are convertible into shares of the Company’s Common Stock.
Through the period ended December 31,
2018, the Company had received $2,072,000 in proceeds from the sale of convertible notes to 35 accredited investors. No
proceeds were received from convertible notes during the year ended December 31, 2019 or during the three month period ended
March 31, 2020.
Automatic conversion feature
If the Company issues equity
securities (“Equity Securities”) in a transaction or series of related transactions resulting in aggregate gross proceeds
to the Company of at least $5,000,000, including conversion of the Notes and any other indebtedness, or issuance of Equity Securities
in connection with any business combination, including a merger or acquisition (a “Qualified Financing”), then the
Notes, and any accrued but unpaid interest thereon, will automatically convert into the equity securities issued pursuant to the
Qualified Financing at a conversion price equal to the lesser of (i) 50% of the per-share price paid by the purchasers of such
equity securities in the Qualified Financing or (ii) $0.40 per share.
Voluntary conversion feature
If these Notes have not been previously
converted pursuant to a Qualified Financing, then, upon Holders election prior to the Maturity Date or effective upon the Maturity
Date, the Holder may elect to convert their Notes into shares of the Company’s Common Stock at a conversion price equal to
the lesser of (i) 50% of the market price for the Company’s Common Stock as of the Maturity Date or (ii) $0.40 per share.
During the three month period ended March
31, 2019, the Company entered into a Qualified Financing with its minority purchase of GN stock and warrants described in Note
4 “Investment”. As a result on March 31, 2019, the convertible notes amounting to $2,072,000 along with $130,212 of
accrued interest were converted, pursuant to the automatic conversion terms described above, to equity at a price of $0.40 per
share, or a total of 5,505,530 shares.
No further convertible notes were offered
under these terms and Offering was closed.
On July 8, 2019, the Company commenced
a private offering of Units at a price of $50,000 per Unit, each Unit consisting of 50,000 shares of the Company’s Common
Stock and one $50,000 unsecured Convertible Note (“a Convertible Note”), which mature one year from the date of issuance
and accrue interest at 5% per annum. These Convertible Notes are convertible into shares of the Company’s Common Stock at
a conversion price of $1.00 per share. During the year ended December 31, 2019, the Company issued 31 Units in this offering for
and received proceeds of $1,550,000 from six accredited investors. Since the Company’s stock price exceeded the conversion
feature of the Convertible Notes and was immediately exercisable, the Company recorded a beneficial conversion feature (“BCF”)
and expense of $1,550,000 which was charged to interest expense with an offset to paid-in capital.
In addition, the 5,505,530 shares of Common
Stock included in the Units were valued at $5,075,000. The excess above the $1,550,000 face value of the Convertible Notes or,
$3,525,000, was charged to interest expense with an offset to paid-in capital. The remaining $1,550,000 was recorded as a Note
discount of $1,550,000 to be amortized over the three year period from the date of the Note to the maturity date. The Company
recorded $552,602 in interest expense related to the amortization of note discount during the year ended December 31, 2019. During
the three months ended March 31, 2020 the Company recorded $19,322 in interest expense on these Notes and amortized $386,438 of
note discount which was charged to interest expense. As of March 31, 2020, there was $46,952 in accrued interest on these notes,
and $610,959 in unamortized note discount related to these notes.
During the three months ended March 31,
2020, the Company issued $438,000 in unsecured 8% convertible notes to four accredited investors. Under the terms of each convertible
note, the investors received the right to convert their to common stock commencing six months after the date of issuance at 75%
of the lowest closing price for the Company’s common measured 20 business days prior to conversion. Additionally, these notes
were issued with an original issue discount of $18,000 which were immediately expensed. One of the noteholders also received 153,940
“returnable” shares in connection with issuance of the convertible notes. These shares are returnable to the Company
if the underlying convertible note ($160,000) is redeemed before the passage of 180 days.
Based on the Company’s current financial
condition, management determined it was unlikely that these notes would be refinanced before the noteholders had the opportunity
to convert their note to common shares. As a result the Company determined that each of the notes had embedded derivative features
which were likely to be exercised. The Company recorded a note discount of $438,000 on these notes and expensed the stock issuance
as a financing cost in the amount of $130,849 related to the issuance of the 153,940 shares describe above. During the three months
ended March 31, 2020, the Company recorded $4,898 in interest expense on these four new notes and amortized $61,227 of note discount
which was charged to interest expense. As of March 31, 2020, there was $4,898 in accrued interest on these notes, and $376,773
in unamortized mote discount related to these notes.
The FASB has issued authoritative guidance
whereby instruments which do not have fixed settlement provisions are deemed to be derivative instruments. The conversion prices
of the Notes described above were not a fixed amount because they were either subject to an adjustment based on the occurrence
of future offerings or events or they were variable. Since the number of shares is not explicitly limited, the Company is unable
to conclude that enough authorized and unissued shares are available to settle the conversion option. In accordance with the FASB
authoritative guidance, the conversion features have been characterized as derivative liabilities to be re-measured at the end
of every reporting period with the change in value reported in the statement of operations.
As of March 31, 2020, derivative liabilities
were valued using a probability-weighted average Black-Scholes-Merton pricing model with the following assumptions:
|
|
March 31,
2020
|
|
|
|
|
|
Exercise Price
|
|
$
|
0.0003–0.035
|
|
Stock Price
|
|
$
|
0.0006
|
|
Risk-free interest rate
|
|
|
.19%-1.55%
|
|
Expected volatility
|
|
|
133.80%-443.00%
|
|
Expected life (in years)
|
|
|
1.00
|
|
Expected dividend yield
|
|
|
0%
|
|
Fair Value:
|
|
$
|
925,484
|
|
The risk-free interest rate was based on
rates established by the Federal Reserve Bank. The Company uses the historical volatility of its common stock to estimate the future
volatility for its common stock. The expected life of the conversion feature of the notes was based on the remaining term of the
notes. The expected dividend yield was based on the fact that the Company has not customarily paid dividends in the past and does
not expect to pay dividends in the future.
During the three months ended March 31,
2020, the Company recognized a loss of $925,484 as other expense, which represented the net change in the value of the derivative
liability.
The following tables set forth the components
of the Company’s secured notes payable as of March 31, 2020, and December 31, 2019:
|
|
March 31,
2020
|
|
|
December 31,
2019
|
|
|
|
|
|
|
|
|
Principal value of Promissory Notes
|
|
$
|
8,099,000
|
|
|
|
8,789,794
|
|
Loan discounts
|
|
|
(391,043
|
)
|
|
|
(488,117
|
)
|
Less: current portion
|
|
|
(1,050,000
|
)
|
|
|
(1,090,794
|
)
|
Promissory Notes, long term net of discount
|
|
$
|
6,657,957
|
|
|
|
7,210,883
|
|
Pursuant to the terms of the Securities
Purchase Agreement with AMS the Company issued a non-interest bearing CAD $10,000,000 ($7,330,000 USD) promissory note secured
only by the shares acquired in AMS. Principal payments under the Promissory Note are due quarterly commencing upon AMS receiving
a license to cultivate and are computed based upon 50% of AMS' cash flow, defined as EBITDA less all capital expenditures, taxes
incurred, non-recurring items and other non-cash items for the relevant fiscal quarter, including the servicing of all senior debt
payment obligations of the Company. The Promissory Note matures the earlier of two years from the date AMS receives a license to
cultivate, or December 31, 2021. Since AMS had not received its cultivation license as of March 31, 2020, the Note Payable will
have a maturity date of December 31, 2021.
The Company performed a valuation study
as part of the AMS acquisition. The valuation study determined that the Promissory Note should be valued at $6,632,917 since it
was non-interest bearing. As a result, the Company recorded a note discount of $697,083. The note discount will be amortized to
interest expense over the three-year term of the Promissory Note. During the year ended December 31, 2019, the Company recorded
$317,000 in interest expense related to the amortization of the note discount. No interest expense was recorded in 2018 since the
acquisition occurred on December 31, 2018.
On July 3, 2019, the Company entered into
a 12% $1,000,000 Loan Agreement with Koze Investments LLC (“Koze”), payable in full on June 28, 2020. The Company
is currently in discussions with Koze to extend the maturity date of the Note. While the Company believes it will be successful
in extending the maturity date, there are no assurances this will occur. Under the terms of the 12% Note, Koze took a first security
interest against the Company’s Hanover, Ontario cannabis facility in progress and required the Company to pay off its existing
mortgage of approximately $650,000 CAD. Additionally, the Company agreed to pay a 3% origination fee, prepay six months of interest
($60,000) and to issue to Koze five-year warrants to purchase 1,001,000 shares of the Company’s Common Stock at an exercise
price $1.00 per share. After paying the origination fees, the prepayment and paying off the original mortgage, the Company used
a portion of the remaining proceeds as payment against the SMI purchase price of CAD $1,000,000.
As of March 31, 2020, the Company has approximately
$61,000,000 of federal net operating loss carryforwards. The federal net operating loss carryforwards begin to expire in 2030.
State net operating loss carryforwards begin to expire in 2034. Due to the change in ownership provisions of the Internal Revenue
Code, the availability of the Company’s net operating loss carryforwards could be subject to annual limitations against taxable
income in future periods which could substantially limit the eventual utilization of such carryforwards. The Company has not analyzed
the historical or potential impact of its equity financings on beneficial ownership and therefore no determination has been made
whether the net operating loss carryforward is subject to any Internal Revenue Code Section 382 limitation. To the extent there
is a limitation there could be a substantial reduction in the deferred tax asset with an offsetting reduction in the valuation
allowance. As of March 31, 2020, the Company has no unrecognized income tax benefits.
The tax years from 2014 and forward remain
open to examination by federal and state authorities due to net operating loss and credit carryforwards. The Company is currently
not under examination by the Internal Revenue Service or any other taxing authorities.
NOTE 14.
|
COMMITMENTS AND CONTINGENCIES
|
On April 1, 2018, the Company changed its
principal place of business to 2 Park Plaza, Suite 1200 – B. Irvine, CA 92614. This space is provided on a twelve-month term
by a company to which Mr. Nicosia, one of the Company’s directors, serves as Chief Executive Officer. Monthly rent is $1,000,
however, as of the date of this filing, the Company has not made any rent payments and continues to accrue those amounts as accounts
payable.
In March 2019, the Company temporarily
moved its principal place of business to Suite 206 1180 Sunset Drive, Kelowna, BC, Canada Z1Y 9W6, which the Company rented under
an oral sublease from PLC International Investments Inc, a company owned and controlled by Dominic Colvin, the Company’s
current CEO, President, and a director. This location consists of approximately 500 sq. feet. The Company continues to occupy this
location as of the date of this Report and pays a monthly rent of $1,500 (CAD).
Effective March 22, 2019, the Company
moved into a new principal place of business and entered into a lease agreement to lease three offices at Suite 3600, 888 3 St
SW, Calgary, Alberta, Canada, T2P 5C5. The lease may be terminated by either party on 30 days’ notice. Rent is $4,000
CAD per month. This space was provided by a company to which, Mr. Orman, one of the Company’s directors, serves as a
Director.
NOTE 15.
|
STOCKHOLDERS’ EQUITY
|
Preferred Stock
The Company is authorized to issue up to
10,000,000 shares of one or more series of Preferred Stock, par value of $0.0001 per share. The Board of Directors may, without
stockholder approval, determine the dividend rates, redemption prices, preferences on liquidation or dissolution, conversion rights,
voting rights, and any other preferences.
Series A Preferred Stock
In April 2018, the Company issued 60,000
shares of its Series A Convertible Preferred Stock at a price of $1.00 per share to certain investors who then became members of
management and the board of directors. Each share of Series A Convertible Preferred Stock is convertible into 1,250 shares of Common
Stock and vote on an as-converted basis. The rights and designations of these Preferred Shares include the following:
|
·
|
entitles the holder thereof to 1,250 votes on all matters submitted to a vote of the shareholders:
|
|
·
|
The holders of outstanding Series A Convertible Preferred Stock shall only be entitled to receive dividends upon declaration by the Board of Directors of a dividend payable on the Company’s Common Stock, whereupon the holders of the Series A Convertible Preferred Stock shall receive a dividend on the number of shares of Common Stock into which each share of Series A Convertible Preferred Stock is convertible;
|
|
·
|
Each Series A Preferred Share is convertible into 1,250 shares of Common Stock;
|
The beneficial conversion (“BCF”)
feature attributed to the purchase of Preferred Stock was deemed to have no value on the date of purchase because there was no
public trading market for the Convertible Preferred Stock, and none is expected to develop in the future. Therefore, the BCF related
to the Preferred Shares was considered to have no value on the date of issuance.
There were 60,000 shares of Series A Preferred
Stock issued and outstanding as of March 31, 2020, and December 31, 2019, respectively.
Series B Preferred Stock / Common
Stock
In February 2019, the Company commenced
an offering of up to $3 million in principal amount of Units at a price of $1.00 per Unit, each Unit consisting of one share of
Series “B” Convertible Preferred Stock, each Convertible Preferred Share convertible into one share of the Company’s
Common Stock at the election of the holder and one Common Stock Purchase Warrant exercisable to purchase one share of Common Stock
at an exercise price of $2.00 per share, which offering is to be offered only to “accredited investors,” as that term
is defined in Rule 501 of Regulation D. this Offering was closed at the end of August 2019. As of March 31, 2020, the Company had
accepted $475,000 in subscriptions in this offering.
There were 475,000 shares of Series B Convertible
Preferred Stock issued and outstanding as of March 31, 2020, and December 31, 2019, respectively.
The Company is authorized to issue 300,000,000
shares of Common Stock, par value $0.0001 per share. As of March 31, 2020, and December 31, 2019, 36,640,030 and 36,486,999 shares
of Common Stock were issued and outstanding, respectively.
In January 2019, the Company closed a private
offering of 12% Convertible Debentures where it accepted subscriptions in the aggregate amount of $2,072,000 from 35 accredited
investors, as that term is defined in Rule 501 of Regulation D. Each Convertible Debenture is convertible into shares of common
stock at the lesser of $0.40 or 50% of the closing market price on the date a business combination valued at greater than $5,000,000
is completed., The Company used the proceeds from this offering for the purchase of AMS, as well as working capital, including
costs associated with the preparation of over three years of reports that had not been filed with the SEC. During the three month
period ended March 31, 2019, the Company entered into a Qualified Financing with its minority purchase of GN stock and warrants
described in Note 4 “Investment”. As a result on March 31, 2019, the convertible notes amounting to $2,072,000 along
with $130,212 of accrued interest were converted, pursuant to the automatic conversion terms described above, to equity at a price
of $0.40 per share, or a total of 5,505,530 shares.
Unit Offering
On July 8, 2019 the Company commenced a
private offering of Units at a price of $50,000 per Unit, each Unit consisting of 50,000 shares of the Company’s Common Stock
and one $50,000 unsecured Convertible Note (“Unit Convertible Note”), which mature in one year from the date of issuance
and accrue interest at 5% per annum. These Unit Convertible Notes are convertible into one share of the Company’s Common
stock at a conversion price of $1.00 per share. During the three months ended March 31, 2020, the Company issued $1,200,000 in
Unit Convertible Notes to two accredited investors. Since the Company’s stock price exceeded the conversion feature of the
Unit convertible Notes and was immediately exercisable, the Company recorded a beneficial conversion feature (“BCF”)
and expense of $1,200,000 which was charged to interest expense with an offset to paid-in capital.
Additionally, 1.2 million shares of Common
Stock were issued in connection with the sale of the Units which were valued at $2,598,000. The excess above the $1,200,000 face
value of the Unit Convertible Notes or, $1,398,000 was charged to interest expense with an offset to paid-in capital. The remaining
$1,200,000 was recorded as a Note discount of $1,200,000 to be amortized over a one year period at the rate of $100,000 per month.
$200,000 in interest expense related to this discount was recorded during the three month period ended March 31, 2020.
Shares Issued in Connection with the Assignment Agreement
with Great Northern Ltd
On September 28, 2018, Great Northern Cannabis,
Ltd (“GN”), entered a Letter of Intent with P2P Green Power Energy Solutions and certain individuals to acquire all
of the issued and outstanding shares of AMS. On October 10, 2018, the Company entered into an Assignment and Assumption Agreement
(“the AA Agreement”) with GN. Under the terms of the AA Agreement, the Company essentially purchased the right to acquire
AMS from GN for the following consideration:
|
·
|
A refundable payment of CAD $200,000
|
|
|
·
|
An accountable reimbursement of GN expenses and fees related to the AMS acquisition not to exceed CAD $300,000
|
|
·
|
In the event that we didn’t enter into a management agreement with GN post-closing, we agreed to issue GN, 2,500,000 shares of our Common Stock trading under symbol “CPMD”
|
All of the above consideration was expressly
contingent upon the closing of the AMS acquisition which was consummated by the Company on December 31, 2019. The payments
of $200,000 and $300,000 were made to GN. On August 30, 2019, the parties determined that no management agreement had been entered
into so the Company issued 2,500,000 shares to GN valued at $5,800,000 as required pursuant to the Agreement. Under the guidelines
of ASC 805, Business Combinations, since we disclosed that the AMS transaction was complete, the goodwill re-measurement period
ended and therefore we could not adjust goodwill for this transaction. As a result, we recorded an acquisition expense on the Company’s
income statement for $5,800,000.
Shares Reserved for Issuance
As of March 31, 2020, the Company had 80,119,750
Common Shares reserved for issuance. These shares are comprised of 75,000,000 Common Shares issuable upon the conversion of the
Series A Preferred Stock; 475,000 Common Shares issuable upon the conversion of Series B Preferred Stock; 750,000 Common Shares
upon the exercise of stock options, 1,550,000 shares issuable upon a conversion of the convertible notes, and 2,344,750 Common
Shares issuable upon the exercise of warrants. None of these shares were used in the calculation of earnings per share because
their inclusion would be anti-dilutive since the Company is operating at a loss. There are no assurances that the conversion rights
will be utilized or that the options or the warrants will be exercised.
Additionally, at March 31, 2020 there
were 1,374,118 shares not included in shares reserved for issuance that would have issuable under the provisions of certain convertible
notes. See “Note 11. Convertible Notes and Derivative Liabilities.”
Stock Options
During the period ended March 31, 2020,
and December 31, 2019, the Company did not record any stock-based compensation expense related to stock options. As of March 31,
2020, there were options outstanding to purchase 750,000 shares of the Company’s Common Stock at an exercise price of $1.00
per share. These stock options expire on November 1, 2024.
Stock Purchase Warrants
The following table reflects all outstanding and exercisable
warrants on March 31, 2020, and December 31, 2019:
|
|
Number of
Warrants
Outstanding (a)
|
|
|
Weighted Average
Exercise Price
|
|
|
Average Remaining
Contractual
Life (Years)
|
|
|
|
|
|
|
|
|
|
|
|
Warrants outstanding, January 1, 2018
|
|
|
–
|
|
|
$
|
–
|
|
|
|
–
|
|
Warrants issued
|
|
|
350,000
|
|
|
|
0.57
|
|
|
|
3.00
|
|
Warrants exercised
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
Warrant forfeited
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
Warrants outstanding, December 31, 2018
|
|
|
350,000
|
|
|
$
|
0.57
|
|
|
|
1.62
|
|
Warrants issued (a)
|
|
|
1,519,750
|
|
|
$
|
1.01
|
|
|
|
2.09
|
|
Warrants outstanding December 31, 2019
|
|
|
1,869,750
|
|
|
$
|
0.92
|
|
|
|
2.25
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants outstanding March 31, 2020
|
|
|
1,869,750
|
|
|
$
|
0.92
|
|
|
|
2.00
|
|
Stock purchase warrants are exercisable
for a period of two-five years from the date of issuance.
|
(a)
|
The number of
warrants reflected in this table does not include 475,000 warrants that were issued at various times during 2019 in
connection with the issuance of the Company’s Series B Preferred stock. These warrants are exercisable for a period of
three years at a strike price of $2.00 per share. The Company accounts for warrants issued to purchase shares of its common
stock or preferred stock as equity in accordance with FASB ASC 480, Accounting for Derivative Financial Instruments Indexed
to, and Potentially Settled in, a Company’s Own Stock, Distinguishing Liabilities from Equity. Therefore, no stock-based
compensation expense was recorded for the issuance of these 475,000 warrants.
|
The value of the stock purchase warrants
for the periods ended March 31, 2020, and December 31, 2019, was determined using the following Black-Scholes methodology:
|
|
|
|
Expected dividend yield (1)
|
|
|
0.00%
|
|
Risk-free interest rate range (2)
|
|
|
1.75 - 2.91%
|
|
Volatility range (3)
|
|
|
1.23% - 442.92%
|
|
Expected life (in years)
|
|
|
2.00 - 5.00
|
|
______________
(1)
|
The Company has no history or expectation of paying cash dividends on its Common Stock.
|
(2)
|
The risk-free interest rate is based on the U.S. Treasury yield for a term consistent with the expected life of the awards in effect at the time of grant.
|
(3)
|
The volatility of the Company’s Common Stock is based on trading activity for the previous three year period ended at each stock purchase warrant contract date.
|
During the three-month periods ended March
31, 2020 and 2019, the Company recorded $206,759 and $161,344, respectively, in stock-based compensation.
NOTE 16.
|
SUBSEQUENT EVENTS
|
On June 8, 2020 the Company received notice
from Sunniva, Inc. of its exercise of its rights to terminate that Purchase Agreement dated June 11, 2019, as amended, wherein
we had agreed to purchase Sunniva’s wholly-owned subsidiaries Sunniva Medical Inc. and 1167025 B.C. LTD.
On May 11, 2020 the Company issued an OID
note for $53,000 from an accredited investor and received $50,000 in proceeds. These Notes were issued with a one-year maturity
date, a 10% interest rate. The OID Notes are convertible into shares of the Company’s Common Stock at a price equal to 61%
multiplied by the Market Price/share (the lowest closing price of Common Stock for 20 consecutive trading days prior to conversion).at
any time after 180 days. The borrower has the right to prepayment up to 180 days at a premium of between 115% – 135%. The
Company has reserviced 4,344,262 shares of its Common Stocks a result of this obligation.
On June 4, 2020, the Company issued another
OID note for $43,000 from an accredited investor and received $40,000 in proceeds, with terms same as above.
On May 25, 2020the Company received $28,000
in proceeds from non-interest-bearing promissory notes from Officers of the Company. These notes are on demand, with no fixed payment
terms.
On April 21, 2020, the Company received
a loan from the Government of Canada under the Canada Emergency Business Account program (CEBA). This loan was in the amount of
$40,000 CAD. These funds are interest free until December 31, 2022, at which time the remaining balance will convert to a 3-year
term loan at an interest rate of 5% per annum. If the Company repays the loan prior to December 31, 2022, there will be loan forgiveness
of 25% or $10,000 CAD.
On May 31, 2020, the Company signed a non-binding
letter of intent to acquire all of the remaining shares of GN.
On June 26, 2020, the Company signed a
Purchase Agreement with Bristol Capital Investors, LLC. to acquire all of their membership interests in Ramon Road Production Campus
LLC, This LLC owns the Cathedral City Cannabis Campus, located in Coachella Valley, California, a state-of-the-art cannabis cultivation
and production facility consisting of 325,599 square feet situated on nearly 20 acres, designed with long term automation methodologies,
efficiency and a focus on sustainability of cannabis production. The sale of this property is being made on an “as is, where
is” basis. The purchase price is $10 million. The Company has no commitment from any financing source to provide this funding
as of the date of this Report. This transaction is currently scheduled to close on July 22, 2020.