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.
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 and Six Month Interim Periods
Ended June 30, 2020, and June 30, 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 fits 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. In May 2020, the Company exchanged 5,507,400 of its shares for 3,671,597 shares 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 June 30, 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
an investment banker who received deposits from the Company, about recovering all or a portion of its deposits, banking fees,
and prepaid expenses. There can be no assurances that the Company will be successful in recovering any amounts. See Note 16, Subsequent
Events, below. The accompanying financial statements as of June 30, 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 June 30, 2020, and December 31, 2019,
the Company’s cash and cash equivalents totaled $3,789 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 June 30, 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 six months ended
June 30, 2020, the Company entered into six convertible note instruments amounting to $534,000 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 $969,102.
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 June 30, 2020, and December 31,
2019, the Company had $1,463,411 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 $136,487 and $143,201,
respectively, in the 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 June 30, 2020, and June 30, 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 June 30, 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 June 30, 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 June 30, 2020, and December 31, 2019,
the Company had $3,789 and $1,547 in cash on hand respectively, and no revenue-producing business or other sources of income. Additionally,
as of June 30, 2020, the Company had outstanding liabilities totaling $13,310,613 and $4,829 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.
NOTE 3. DEPOSITS
As of June 30, 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.
NOTE 4. PREPAID EXPENSES
The following table sets forth the components
of the Company’s prepaid expenses at June 30, 2020, and December 31, 2019:
|
|
June 30,
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.
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 June 30, 2020:
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Derivative financial instruments
|
|
$
|
–
|
|
|
$
|
–
|
|
|
$
|
969,102
|
|
|
$
|
969,102
|
|
NOTE 6.
INVESTMENT
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.
On May 8, 2020 the Company exchanged 5,507,400
of its shares for 3,671,597 shares of GN. These shares were value at $.67 each which represents the value of the GN shares as
determined by the Company’s year-end impairment analysis and were recorded as an investment of $2,478,422. As of June 30,
2020 the Company’s investment in GN was $6,672,019.
Additionally, the Company conducted an
impairment test at June 30, 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 June 30, 2020, and December 31, 2019:
|
|
June 30, 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
|
|
$
|
4,549
|
|
|
$
|
(1,516
|
)
|
|
$
|
3,033
|
|
|
$
|
4,757
|
|
|
$
|
(779
|
)
|
|
$
|
3,978
|
|
Land
|
|
|
136,487
|
|
|
|
–
|
|
|
|
136,487
|
|
|
|
143,201
|
|
|
|
–
|
|
|
|
143,201
|
|
Construction in progress
|
|
|
1,463,411
|
|
|
|
–
|
|
|
|
1,463,411
|
|
|
|
1,540,918
|
|
|
|
–
|
|
|
|
1,540,918
|
|
Total fixed assets
|
|
$
|
1,604,447
|
|
|
$
|
(1,516
|
)
|
|
$
|
1,602,931
|
|
|
$
|
1,688,876
|
|
|
$
|
(779
|
)
|
|
$
|
1,688,097
|
|
For the ended June 30, 2020,
and 2019, the Company recorded depreciation expense of $758 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 June 30,
2020 and December 31, 2019, the Company had $6,071,633 in goodwill and $1,685,738 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 $63,141 and $63,787 respectively, for the six months ended June 30, 2020, and June 30, 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 June 30, 2020, and December 31, 2019.
|
|
June 30,
2020
|
|
|
December 31,
2019
|
|
Accounts payable and accrued expenses
|
|
$
|
1,055,326
|
|
|
$
|
902,854
|
|
Accrued interest (a)
|
|
|
82,302
|
|
|
|
27,630
|
|
Accrued legal settlement (b)
|
|
|
190,000
|
|
|
|
190,000
|
|
Total accounts payable and accrued liabilities
|
|
$
|
1,327,628
|
|
|
$
|
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 June 30, 2020, and December 31, 2019.
|
|
June 30,
2020
|
|
|
December 31,
2019
|
|
Accounts payable and accrued payroll-related party(a)
|
|
$
|
495,088
|
|
|
$
|
582,096
|
|
Accrued expense - related party (b)
|
|
|
899,307
|
|
|
|
606,356
|
|
Total accounts payable and accrued liabilities
|
|
$
|
1,394,395
|
|
|
$
|
1,188,452
|
|
|
(a)
|
Accounts payable and accrued payroll-related parties as of June 30, 2020, is comprised
of the following: Interest-free loans of $226,899 from directors and officers and accrued salaries for officers and employees
of $268,189.
|
|
(b)
|
Accrued expense related parties of $899,307 is comprised of accrued bonuses and fees
due to current and former directors and officers of the Company. As of June 30, 2020, there was $150,000 included with 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 June 30, 2020, and December 31, 2019:
|
|
June 30,
2020
|
|
|
December 31,
2020
|
|
Principal value of convertible notes
|
|
$
|
2,084,000
|
|
|
$
|
1,550,000
|
|
Note discount
|
|
|
(492,093
|
)
|
|
|
(997,397
|
)
|
Total convertible notes, net current
|
|
$
|
1,591,907
|
|
|
$
|
552,603
|
|
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 years 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
six months ended June 30, 2020 the Company recorded $38,643 in interest expense on these Notes and amortized $772,877 of note
discount which was charged to interest expense. As of June 30, 2020, there was $66,274 in accrued interest on these notes, and
$224,521 in unamortized note discount related to these notes.
During the six months ended
June 30, 2020, the Company issued $438,000 in unsecured 8% convertible notes, and $96,000 in unsecured 10% 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% and 61%, respectively 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 $534,000 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 six months ended June 30, 2020, the Company recorded $16,028 in interest expense on these six new notes and amortized
$180,751 of note discount which was charged to interest expense. As of June 30, 2020, there was $16,028 in accrued interest on
these notes, and $353,429 in unamortized note 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 June 30, 2020,
derivative liabilities were valued using a probability-weighted average Black-Scholes-Merton pricing model with the following
assumptions:
|
|
June 30,
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:
|
|
$
|
969,102
|
|
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 six months ended June 30, 2020, the Company recognized a loss of $969,102 as “Other
Expense” on its Statements of Operations, which represented the net change in the value of the derivative liability.
NOTE 12. NOTES PAYABLE
The following tables
set forth the components of the Company’s secured notes payable as of June 30, 2020, and December 31, 2019:
|
|
June 30,
2020
|
|
|
December 31,
2019
|
|
Principal value of Promissory Notes
|
|
$
|
8,376,501
|
|
|
$
|
8,789,794
|
|
Loan discounts
|
|
|
(348,921
|
)
|
|
|
(488,117
|
)
|
Less: current portion
|
|
|
(1,079,352
|
)
|
|
|
(2,800,559
|
)
|
Promissory Notes, long term net of discount
|
|
$
|
6,948,228
|
|
|
$
|
5,501,118
|
|
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 June 30, 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 the date this Report the Company has continued to accrue interest on the Koze Note and is in discussion to extend its term.
Koze has not asserted that a default has occurred.
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 (USD $29,352). 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.
NOTE 13. INCOME TAXES
As of June 30, 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 June 30, 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 for $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 June 30, 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 June 30, 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 June 30, 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 June 30, 2020, and December 31, 2019, 42,448,339 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 June 30, 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 June 30, 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 June 30, 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 one year at the rate of $100,000 per month. $200,000
in interest expense related to this discount was recorded during the three months ended June 30, 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 June 30, 2020, the
Company had 122,568,069 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 June 30, 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 June 30, 2020,
and December 31, 2019, the Company did not record any stock-based compensation expense related to stock options. As of June 30,
2020, options were 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 June 30, 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
|
|
|
|
2.75
|
|
Warrants exercised
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
Warrant forfeited
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
Warrants outstanding, December 31, 2018
|
|
|
350,000
|
|
|
$
|
0.57
|
|
|
|
1.37
|
|
Warrants issued (a)
|
|
|
1,519,750
|
|
|
$
|
1.01
|
|
|
|
1.84
|
|
Warrants outstanding December 31, 2019
|
|
|
1,869,750
|
|
|
$
|
0.92
|
|
|
|
2.05
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants outstanding June 30, 2020
|
|
|
1,869,750
|
|
|
$
|
0.92
|
|
|
|
1.75
|
|
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 June 30, 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 June
30, 2020 and 2019, the Company recorded $206,579 and $161,335, respectively, in stock-based compensation.
NOTE 16. SUBSEQUENT EVENTS
On July 8, 2020, we filed a lawsuit in
the United States District Court for the District of Colorado against Gary Herick, Arrowhead Consulting, LLC, Whitemoon Energy
LLC., Jamie Huttrer a/k/a Jamie Huttrer-Herick, and ZeroRMW, LLC (collectively, the “Herick Parties”). The lawsuit
alleges, among other things, the Herick Parties engaged in various legal violations including breach of fiduciary duty, common
law fraud, conversion, usurpation of corporate opportunities, securities violations pursuant to Section 10b-5 of the Securities
Exchange Act of 1934, and civil conspiracy. Mr. Herick is a former officer and director of the Company.
On July 8, 2020, August 7, 2020, and August
16, 2020, three notes principal amount due of $200,000, $200,000 and $800,000, respectively reached their maturity dates. These
notes remain outstanding and we continue to accrue the required interest on the principal balance. As of the date of this Report,
the noteholders not asserted that a default has occurred and, while there can be no assurance, we believe we will be successful
in extending the maturity dates of these notes.
On July 9, 2020, we made a demand of Gary
Herick, Arrowhead Consulting, LLC, Whitemoon Energy LLC., Jamie Huttrer a/k/a Jamie Huttrer-Herick, and ZeroRMW, LLC (collectively,
the “Herick Parties”) for a return of with seeking the return of profits made between the period of August 2018, to
January 2019. During this period, Gary Herick was the Chief Financial Officer and Director of the Issuer. Gary Herick was also
the owner of approximately twenty-six percent (26%) of the Issuer’s common stock. Pursuant to the Securities Exchange Act
of 1934, §16(b), 15 U.S.C.S. § 78p(b), an issuer may recover any profits realized by a beneficial owner from the sale
of the issuer's equity securities within a six (6) month period. All unlawful profits must be returned to the Issuer on or before
Tuesday, September 8, 2020. If Herick does not return such profits by that date, the Company will file a lawsuit to recover such
profits.
On August 4, 2020, we executed a non-binding
Letter of Intent with Triton Funds LP (“Triton”) whereby Triton would agree to purchase $3,000,000 of our Common Stock
at a price equal to 80% of the lowest trading price of the prior ten trading days. Triton would purchase shares of our Common Stock
in tranches of $250,000. In order to consummate this financing, we will be required to file, and have declared effective, a Registration
Statement on Form S-1 with the Securities and Exchange Commission.