Notes
to Consolidated Financial Statements
For
The Three Months Ended March 31, 2015 and 2014
The
results for the three months ended March 31, 2015 and 2014 are not necessarily indicative of the results of operations for the
full year. These financial statements and related footnotes should be read in conjunction with the financial statements and footnotes
thereto included in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission.
The
accompanying financial statements have been prepared by the Company without audit. In the opinion of management, all adjustments
(which include only normal recurring adjustments) necessary to present fairly the financial condition, results of operations,
and cash flows and for the related periods presented have been made.
1.
NATURE OF OPERATIONS, HISTORY AND PRESENTATION
Nature
of Operations
Canadian
Cannabis Corp. (“CCC”, “the Company” “we” or “us”) was originally incorporated
on September 19, 2011, under the laws of the State of Delaware as Gold Party Payday, Inc. At that time, the Company’s
business operations consisted of organizing events and parties in which guests bring their unwanted jewelry, scrap gold and silver,
coins and other gold and silver items to sell to the Company at a discount, after which the Company resold the items to refineries.
Canada
Cannabis Corp. was incorporated in the Province of Ontario, Canada on January 20, 2014. Canada Cannabis Corp. planned to cultivate
and distribute medical marijuana in Canada pursuant to a license which was expected to be issued by Health Canada. Canada Cannabis
Corp.’s planned business was to cultivate Cannabis for medical marijuana purposes and distribute directly to patients throughout
Canada and export to international markets, where an existing framework and legislation existed for medical marijuana.
On
May 21, 2014, the Company consummated a merger agreement (the “Merger Agreement”) with 2418146 Ontario Inc., an Ontario
(Canada) corporation (“GPAY Sub”), which was our wholly-owned subsidiary formed for purposes of consummating
the Merger Agreement, and Canada Cannabis Corp. Pursuant to the terms of the Merger Agreement, Canada Cannabis Corp. and GPAY
Sub executed and filed Articles of Amalgamation pursuant to the Ontario Business Corporations Act to consummate the amalgamation.
Pursuant to the terms of the Merger Agreement, the company resulting from the amalgamation (“CCC-Sub”) is a wholly-owned
subsidiary of the Company and retained the Canada Cannabis Corp. name and business, and each of the predecessor companies ceased.
Pursuant to the Merger Agreement, the Company agreed to exchange the outstanding common stock of Canada Cannabis Corp. held by
its Shareholders for shares of common stock of the Company on a 1:19.5 basis. At the closing of the Merger Agreement, there were
approximately 19,822,635 shares of Canada Cannabis Corp. common stock outstanding, which were exchanged for 1,016,503 new shares
of the Company’s common stock, par value of $0.000001 per share. Prior to the merger, Gold Party Payday, Inc. had 333,350
shares of common stock issued outstanding and no preferred stock. After the effects of the merger transaction as discussed, there
were 1,349,853 shares of common stock outstanding.
As
a result of the transactions effected by the Merger Agreement and the Transfer Agreement, (i) the business plan of the former
Canada Cannabis Corp., to market and manufacture medical marijuana products for sale in Canada, became the sole business of the
Company’s wholly-owned subsidiary, CCC, (ii) the Company is the parent and holding company of the subsidiary operating company,
and (iii) there was a change of control whereby the former shareholders of the former Canada Cannabis Corp. obtained ownership
of a controlling 75% ownership interest in the Company. On July 16, 2014, we changed our name to Canadian Cannabis Corp. to more
accurately reflect current business operations. On October 3, 2014, the Company’s common shares had a forward split
of 19.5:1 for all shareholders of record on that date and the Company has reflected that split in the current share count. We
also changed our trading symbol from GPAY to CCAN, effective October 15, 2014, to reflect our name change.
The
Company intended to pursue a business plan of operating under the newly effective Marihuana for Medical Purposes Regulation (the
“MMPR”) to manufacture and market medical marijuana products in Canada and internationally, as permitted by local
laws. The Company’s former management raised a significant amount of capital through private placements of
equity and debt and set out to establish the business in preparation for commencing full operations in the production
and supply of medical marijuana in accordance with our business plan following licensure by Health Canada, the Canadian government
agency charged with enforcing the MMPR.
On
April 3, 2014, the Company submitted to Health Canada an application to obtain an initial license to produce and supply medical
marijuana under the MMPR and began to identify suitable properties to acquire for the purpose of establishing a large scale grow
operation.
On
July 4, 2014, the Company closed on the acquisition of real property, including an approximately 312,500 square foot industrial
building, located at 98-102 Rutherford Road South, Brampton, Ontario (the “Brampton Property”) through our consolidated
VIE, 2264793 Ontario Inc., for a total consideration of CAD $13,885,000 (approximately USD $13.0 million), which included the
final adjusted purchase price of CAD $13,421,000 (approximately USD $12.6 million) and land transfer taxes and related surcharges
totaling CAD $464,000 (approximately USD $400,000). In connection with the acquisition of the Brampton Property, we incurred financing
in the amount of CAD $9,400,000 (approximately USD $8.8 million) (the “Loan”) through 2264793 Ontario Inc., which
is secured primarily by mortgage on the Brampton Property. 2264793 Ontario Inc. was required to make monthly interest only payments
on the Loan in the amount of CAD $78,333 (approximately USD $73,000). A portion of the building had existing leases which provided
some cash flow to the Company while it worked on the MMPR license approval which partially offset the monthly interest payments
on the Loan.
While
the Company waited for its MMPR license application to be processed, it began renovations to the Brampton property to begin to
prepare for a large scale grow operation. In addition the Company acquired a 45% stake in Growlite Canada for CAD $1 million (approximately
USD $900,000) cash investment. Additionally, the Company made a CAD $3 million (approximately USD $2.7 million) loan for operating
capital and business expansion.
In
the course of the Company’s audit for the year ended December 31, 2014, the Company’s management at the time reviewed
this investment for impairment and had made the determination the due to unfavorable changes in the market the Company would write
the investment down to $800,000 which approximated the carrying value of Growlite’s inventory at December 31, 2014. Subsequent
to this analysis the Company was informed that a manufacturer’s defect has been identified in Growlite’s most popular
fixture that resulted in the request for all customers to stop using the product. Given the uncertainty of the value of the remaining
inventory and the financial and reputational harm Growlite would incur, the Company chose to write down its investment to zero
and fully provide a reserve against the loan and receivable due from Growlite during the period ended December 31, 2014.
In
2015 the Company had begun renovations on the Brampton property and ultimately received notice that it would not be
approved for the MMPR license from Health Canada. At this time, in addition to the CAD 9,400,000 first mortgage the Company
had on the building, it had also taken a CAD $2,300,000 second mortgage on the building and an additional CAD $2,000,000 in loans
from Avonlea-Drewry Holdings Inc. (“ADH”) and certain related parties of ADH (together with ADH, the “ADH Group”)
which were secured by the building. The Company began to market the building for sale in mid-2015 and was able to sell the property
in January 2016 for CAD $15,500,000, which after accounting for all accrued fees was enough to satisfy all but approximately CAD
$254,000 of the debt on the building to the ADH Group. The Company subsequently entered into a forbearance agreement with the
ADH Group with regard to the balance owed that included an agreement for a consulting agreement with ADH for CAD $1,000,000 and
a forbearance fee of CAD $250,000. ADH and its affiliates own 3,750.000 shares, approximately 8%, of the Company’s common
stock.
During
2015 and 2016, the Company pursued a number of merger and acquisition candidates with various companies in the Canadian cannabis
space and signed several letters of intent to acquire companies with existing MMPR licenses, but was unable to bring any of the
transactions to completion. At the same time, the Company formed a wholly owned subsidiary called The Clinic Network (“TCN”).
TCN was formed as a network of medical clinics across Canada to offer multidisciplinary therapies for patients that suffer from
chronic pain, rheumatoid conditions. TCN was to provide patients with access to the latest medical advancements as well as pharmaceutical
and cannabis-related therapies.
In
August 2016, Benjamin Ward, the Company’s CEO and Director resigned. Scott Keevil, an existing shareholder, was appointed
as the new CEO and Director and tasked with restructuring the Company’s debt, raising additional capital and acquiring additional
business in order to restore shareholder value.
Negotiations
to settle the debts owed to the ADH Group began in late 2016 and a settlement agreement was reached in March 2017, which was later
revised in March 2018. Under the terms of the agreement the Company assigned the assets of TCN to ADH, agreed to make certain
payments for expenses incurred in relation to its business and the settlement agreement with the ADH Group, close a private placement
financing and listing transaction satisfactory to ADH and take steps to bring the Company’s SEC filings current. In exchange
and upon completion of the Company’s requirements under the agreement, the ADH Group will execute a termination and release
agreement, terminating the various agreements among the various ADH parties and the Company, and acknowledging that all of the
debt owed to the ADH Group are satisfied in full, and releasing the Company and its parties from their obligations under the various
agreements and any related claims which the ADH Group may have against the Company and its related parties. In addition, ADH transferred
the assets of TCN to a related party and delivered 1,750,000 shares of Cura-Can Health Corp (“Cura-Can”), valued
and CAD $1.00 per share, into an escrow account to satisfy the Company’s obligations under the settlement agreement. The
shares will be sold to fund the items required to be paid by the Company under the settlement agreement. It is anticipated that
by the time that all of the Company’s obligations have been met, all of the shares of Cura-Can will have been liquidated.
Once
completed, the settlement agreement with the ADH Group will provide a clean slate for the Company to pursue new business opportunities
with the intent of restoring shareholder value.
Basis
of Presentation
The
accompanying financial statements have been prepared in accordance with generally accepted accounting principles in the United
States of America (GAAP) applicable to a going concern, which contemplates the realization of assets and the satisfaction of liabilities
in the normal course of business. The Company incurred a net loss of USD $16,150,898 for the period from inception (January
20, 2014) through March 31, 2015. The Company has not yet established a stable ongoing source of revenues sufficient to cover
its operating costs and allow it to continue as a going concern. The continuation of the Company as a going concern is dependent
upon the continued financial support from its shareholders, the ability of the Company to obtain necessary financing to continue
operations, and the attainment of profitable operations. The Company has total shareholders’ equity of USD $417,831.
The accompanying condensed consolidated financial statements do not include any adjustments to reflect the recoverability
and classification of recorded asset amounts and classification of liabilities that might be necessary should the Company be unable
to continue as a going concern.
2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The
financial statements include the results of the Company from inception on January 20, 2014 through December 31, 2014 and for the
quarter ended March 31, 2015. This summary of significant accounting policies is presented to assist the reader in understanding
and evaluating the Company’s financial statements. The financial statements and notes are representations of the Company’s
management, which is responsible for their integrity and objectivity. These accounting policies conform to generally accepted
accounting principles and have been consistently applied in the preparation of the financial statements.
Variable
Interest Entities
A
variable interest entity (“VIE”) is an entity that either (i) has insufficient equity to permit the entity to finance
its activities without additional subordinated financial support or (ii) has equity investors who lack the characteristics of
a controlling financial interest. The primary beneficiary of a VIE is the party with both the power to direct the activities of
the VIE that most significantly impact the VIE’s economic performance and the obligation to absorb the losses or the right
to receive benefits that could potentially be significant to the VIE. The Company performs ongoing reassessments of whether it
is the primary beneficiary of a VIE, which includes consideration of whether the Company has acquired or divested the power to
direct the most significant activities of the VIE through changes in governing documents or other circumstances. The Company also
reconsiders whether entities previously determined not to be VIEs have become VIEs, based on certain events, and therefore are
subject to the VIE consolidation framework.
The
Company has assessed its investment in Growlite Canada and its relationship with 2264793 Ontario Inc. with regard to whether it
is the primary beneficiary of these entities. While the Company believes it is not the primary beneficiary of Growlite Canada,
it believes that it is in fact the primary beneficiary of 2264793 Ontario, Inc. and accordingly, consolidates the entity in its
Condensed Consolidated Financial Statements. See “Principles of Consolidation”
Principles
of Consolidation
The
accompanying condensed consolidated financial statements include Canadian Cannabis Corp. (formerly, Gold Party Payday, Inc.) and
Canada Cannabis Corp., our wholly-owned subsidiary. All significant intercompany balances and transactions have been eliminated
in consolidation.
The
Company also consolidates any variable interest entities (VIEs), of which it is the primary beneficiary, as defined. In accordance
with FIN 46(R), the Company believes that it meets the definition of the primary beneficiary for 2264793 Ontario Inc. and consolidates
the entity in its Condensed Consolidated Financial Statements. See “Variable Interest Entities”
Property
and Equipment
Building
and land are stated at cost less accumulated depreciation. Depreciation is computed by the straight-line method over the estimated
useful lives of the relevant asset, generally 20 years.
Cash
and cash equivalents
The
Company considers all highly liquid investments with an original maturity of three months or less as cash equivalents. The Company
holds cash balances in both U.S. Dollars (USD) and Canadian Dollars (CAD) and places its cash equivalents with high credit quality
financial institutions. All amounts in as deposits are insured up to CAD $100,000 by the Canadian Deposit and Insurance Corporation
(CDIC), with Bank of Montreal (BMO) as a Member Institution. As of March 31, 2015 the Company’s cash balances held at Canadian
banks was approximately CAD $4,408 (USD $3,471).
Fair
Value Measurements
ASC
Topic 820, Fair Value Measurements and Disclosures (“ASC 820”), provides a comprehensive framework for measuring fair
value and expands disclosures which are required about fair value measurements. Specifically, ASC 820 sets forth a definition
of fair value and establishes a hierarchy prioritizing the inputs to valuation techniques, giving the highest priority to quoted
prices in active markets for identical assets and liabilities and the lowest priority to unobservable value inputs. ASC 820 defines
the hierarchy as follows:
Level
1 - Quoted prices are available in active markets for identical assets or liabilities as of the reported date. The types of assets
and liabilities included in Level 1 are highly liquid and actively traded instruments with quoted prices, such as equities listed
on the New York Stock Exchange.
Level
2 - Pricing inputs are other than quoted prices in active markets, but are either directly or indirectly observable as of the
reported date. The types of assets and liabilities in Level 2 are typically either comparable to actively traded securities or
contracts, or priced with models using highly observable inputs.
Level
3 - Significant inputs to pricing that are unobservable as of the reporting date. The types of assets and liabilities included
in Level 3 are those with inputs requiring significant management judgment or estimation, such as complex and subjective models
and forecasts used to determine the fair value of financial transmission rights.
Our
financial instruments consist of cash, accounts payables and accrued expenses. The carrying values of cash, accounts payables
and accrued expenses approximate their fair value due to their short maturities.
Long-Lived
Assets
In
accordance with ASC 350, the Company regularly reviews the carrying value of intangible and other long-lived assets for the existence
of facts or circumstances, both internally and externally, that suggest impairment. If impairment testing indicates a lack of
recoverability, an impairment loss is recognized by the Company if the carrying amount of a long-lived asset exceeds its fair
value. There can be no assurances that demand for the Company’s products or services, which could result in an impairment
of long-lived assets in the future.
Advertising
costs
Advertising
costs are expensed as incurred. No advertising costs were incurred during the period from inception (January 20, 2014) through
March 31, 2015.
Foreign
Currency Transactions and Translation
The
Company’s principal country of operations is Canada. The financial position and results of operations of the Company are
determined using the local currency, Canadian Dollars (“CAD”) as the functional currency. The results of operations
denominated in foreign currency are translated at the average rate of exchange during the reporting period.
Assets
and liabilities denominated in foreign currencies at the balance sheet date are translated at the exchange rates prevailing at
the balance sheet date. The results of operations are translated from CAD to US Dollar (“USD”) at the weighted average
rate of exchange during the reporting period. The registered equity capital denominated in the functional currency is translated
at the historical rate of exchange at the time of capital contribution. All translation adjustments resulting from the translation
of the financial statements into the USD reporting currency are dealt with as a component of accumulated other comprehensive income
(loss). Translation adjustments net of tax totaled USD ($791,857) for the period from inception (January 20, 2014) through
March 31, 2015.
As
of March 31, 2015, the exchange rate is CAD .7874 per U.S. Dollar. The average exchange rate for the quarter ended March 31, 2015
is CAD .8052.
Comprehensive
Income (Loss)
Comprehensive
income (loss) is defined as all changes in shareholders’ equity (deficit), exclusive of transactions with owners, such as
capital investments. Income includes net income or loss, changes in certain assets and liabilities that are reported directly
in equity such as translation adjustments on investments in foreign subsidiaries and unrealized gains (losses) on available-for-sale
securities. The Company had accumulated other comprehensive loss of USD $791,857 for the period from inception (January
20, 2014) through March 31, 2015.
Earnings
(loss) per share
The
Company computes net earnings (loss) per share in accordance with ASC 260, “Earnings per Share”. ASC 260 requires
presentation of both basic and diluted net earnings per share (“EPS”) on the face of the income statement. Basic EPS
is computed by dividing earnings (loss) available to common shareholders (numerator) by the weighted average number of shares
outstanding (denominator) during the period. Diluted EPS gives effect to all dilutive potential common shares outstanding during
the period using the treasury stock method and convertible preferred stock using the if-converted method. In computing diluted
EPS, the average stock price for the period is used in determining the number of shares assumed to be purchased from the exercise
of stock options or warrants. Diluted EPS excludes all dilutive potential shares if their effect is anti-dilutive. For the period
from inception (January 20, 2014) through December 31, 2014, there were 300,000 options and 400,000 warrants outstanding, but
due to the Net loss, no potentially dilutive common shares are calculated as outstanding during the period.
Recently
Issued Accounting Standards
In
May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”)
2014-09, which created a new topic in the Accounting Standards Codification (“ASC”) 606, “Revenue from Contracts
with Customers.” In addition to superseding and replacing nearly all existing U.S. GAAP revenue recognition guidance, including
industry-specific guidance, ASC 606 requires an entity to recognize revenue in a manner that depicts the transfer of promised
goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange
for those goods or services. The standard also specifies the accounting of some costs to obtain or fulfill a contract with a customer
and expands the disclosure requirements around contracts with customers. The Company will adopt the standard beginning October
1, 2018 using the modified retrospective method.
In
February 2016, the FASB issued ASU 2016-02, “Leases (ASC 842),” which will require that a lessee recognize assets
and liabilities on the balance sheet for all leases with a lease term of more than twelve months, with the result being the recognition
of a right of use asset and a lease liability. Additionally, in July 2018, the FASB issued ASU 2018-10, “Codification Improvements
to ASC 842, Leases” which provides narrow amendments to clarify how to apply certain aspects of the new leases standard.
The new leases standard guidance is effective for the Company for annual reporting periods, including interim periods therein,
beginning October 1, 2019, with early adoption permitted. The Company is currently evaluating the impact of adopting this standard
on its consolidated financial statements and disclosures.
In
August 2016, the FASB issued ASU 2016-15, “Statement of Cash Flows—Classification of Certain Cash Receipts and Cash
Payments,” which clarifies existing guidance related to accounting for cash receipts and cash payments and classification
on the statement of cash flows. This guidance is effective for fiscal years, and interim periods within those years, beginning
after December 15, 2017, with early adoption permitted. The Company elected to early adopt this standard in the fourth quarter
of fiscal 2017. The adoption of this standard did not have a material impact on its consolidated statement of cash flows.
In
May 2017, the FASB issued ASU 2017-09, “Compensation—Stock Compensation (ASC 718): Scope of Modification Accounting,”
which provides clarity on which changes to the terms or conditions of share-based payment awards require an entity to apply the
modification accounting provisions required in ASC 718. The standard is effective for all entities for annual periods beginning
after December 15, 2017, with early adoption permitted, including adoption in any interim period for which financial statements
have not yet been issued. The adoption of this standard is not expected to have a material impact on our consolidated financial
statements.
In
February 2018, the FASB issued ASU 2018-02, “Income Statement - Reporting Comprehensive Income (ASC 220): Reclassification
of Certain Tax Effects from Accumulated Other Comprehensive Income,” which gives entities the option to reclassify tax effects
stranded in accumulated other comprehensive income as a result of the Tax Cuts and Jobs Act (the “Act”) into retained
earnings. The guidance allows entities to reclassify from accumulated other comprehensive income to retained earnings stranded
tax effects resulting from the Act’s new federal corporate income tax rate. The guidance also allows entities to elect to
reclassify other stranded tax effects that relate to the Act but do not directly relate to the change in the federal tax rate
(e.g., state taxes, changing from a worldwide tax system to a territorial system). Tax effects that are stranded in accumulated
other comprehensive income for other reasons (e.g., prior changes in tax law, a change in valuation allowance) may not be reclassified.
The standard is effective for all entities for fiscal years beginning after December 15, 2018, and interim periods within the
fiscal year. Early adoption is permitted, including adoption in any interim period for which financial statements have not yet
been issued. Entities have the option to apply the guidance retrospectively or in the period of adoption. The adoption of this
standard is not expected to have a material impact on our consolidated financial statements.
In
March 2018, the FASB issued ASU 2018-05, “Income Taxes (ASC 740), Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting
Bulletin No. 118.” The ASU adds various SEC paragraphs pursuant to the issuance of the December 2017 SEC Staff Accounting
Bulletin No. 118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act (“SAB 118”), which was effective
immediately. The SEC issued SAB 118 to address concerns about reporting entities’ ability to timely comply with the accounting
requirements to recognize all of the effects of the Tax Cuts and Jobs Act in the period of enactment. SAB 118 allows disclosure
that timely determination of some or all of the income tax effects from the Tax Cuts and Jobs Act are incomplete by the due date
of the financial statements and if possible to provide a reasonable estimate. We have accounted for the tax effects of the Tax
Cuts and Jobs Act under the guidance of SAB 118, on a provisional basis. Our accounting for certain income tax effects is incomplete,
but we have determined reasonable estimates for those effects and have recorded provisional amounts in our consolidated financial
statements. Refer to Note 13, “Income Taxes,” for further information.
3
.
NOTES PAYABLE
Notes
Payable to Shareholders
At
various times throughout the year ended December 31, 2014 and the quarter ended March 31, 2015, our former CEO and shareholder
advanced amounts to the Company in the form of short-term loans to help the Company with operating capital as needed. All notes
have expired and are in default. The current amount due as of March 31, 2015 is CAD $433,569, (USD $341,393).
At
various times throughout the year ended December 31, 2014 and the quarter ended March 31, 2015, a shareholder advanced amounts
to the company in the form of short-term loans to help the company with operating capital as needed. On December 15, 2014 these
notes, totaling CAD $1,150,000, (USD $988,885) were consolidated into a one-year interest free note. The note matures December
15, 2015 but the Company may prepay the note upon receiving adequate funding. The current amount due as of March 31, 2015 is CAD
$1,100,000, (USD $866,142).
On
November 21, 2014 the Company and 2264793 Ontario Inc, a consolidated VIE of the Company, jointly issued a promissory note to
Crimson Capital, LLC for CAD $600,000, (USD $472,441) to be used for various expenses related to our Brampton property. The note
bears a 54% per annum interest rate and matured on February 21, 2015, however the Company has the ability to extend the note on
a month-by-month basis. The total interest accrued as of March 31, 2015 was CAD$114,509.
Convertible
Notes
On
May 24, 2014, the Company issued a convertible promissory note for USD $100,000 to an investor which has an interest rate
of 10% per annum and matures on December 31, 2015. Under the terms of the agreement, the note is convertible into common shares
of the Company at the option of the Holder at a conversion rate of USD $3.00 per share.
In
March 2015, the Company issued two separate convertible promissory notes, each for CAD $50,000 to two separate investors.
Each of the notes carried an interest rate of 10% per annum and matures on December 31, 2016. Under the agreements, each
of the notes are convertible into common shares of the Company at the option of the Holders at a conversion rate of CAD $2.00
per share.
4
.
STOCK HOLDERS’ EQUITY
Preferred
Stock
The
Company is authorized to issue 5,000,000 shares of preferred stock, par value $0.000001. No shares of preferred stock have been
issued or are outstanding, and no rights, privileges or preferences have been determined and designated by the board of directors.
Common
Stock
The
Company is authorized to issue 95,000,000 shares of common stock, par value $0.000001.
Common
Stock Sales
Prior
management conducted the following private placements:
On
January 9, 2015, the Company issued 75,000 shares of its common stock for cash consideration of CAD $2.00 per share for a total
of approximately CAD $150,000 (USD $127,500).
On
January 12, 2015, the Company issued 10,000 shares of its common stock for cash consideration of USD $3.00 per share for a total
of approximately CAD $35,300 (USD $30,000).
On
January 30, 2015, the Company issued 40,000 shares of its common stock for cash consideration of CAD $2.50 per share for a total
of approximately CAD $100,000 (USD $79,000). As part of the transaction, the investor also received a two-year warrant
to purchase an additional 40,000 shares of the Company’s common stock at USD $3.00 per share.
On
February 8, 2015, the Company issued 40,000 shares of its common stock for cash consideration of CAD $2.50 per share for a total
of approximately CAD $100,000 (USD $80,000). As part of the transaction, the investor also received a five-year warrant
to purchase an additional 40,000 shares of the Company’s common stock at USD $2.50 per share.
On
March 5, 2015, the Company issued 8,000 shares of its common stock for cash consideration of USD $3.00 per share for a total of
approximately CAD $30,350 (USD $24,000).
On
March 10, 2015 the Company issued 18,333 shares of its common stock for cash consideration of CAD $3.00 per share for a total
of approximately CAD $55,000 (USD $43,450).
On
March 31, 2015 the Company issued 15,000 shares of its common stock for cash consideration of CAD $3.00 per share for a total
of approximately CAD $45,000 (USD $35,550).
Options:
On
October 1, 2014 the Company issued 600,000 options to a contract employee for services provided to purchase shares of our common
stock at $1.13 per share for a period of seven years. 250,000 of the options vested immediately and 100,000 options vest each
subsequent year for three years and 50,000 vest after four years. On the date of the grant, the Company valued the options at
USD $676,293 using the Black-Scholes option pricing model with the following assumptions: expected life of the options of 7 years,
expected volatility of 226.68%, risk-free rate of 2.12% and no dividend yield. The expected volatility was estimated by calculating
the standard deviation of daily price changes in our stock from the date of the merger to the date of the grant and the seven
year constant maturity treasury rate on the date of the grant was used for the risk free rate. An expense of USD $329,852 was
recognized based on the options that had vested as of December 31, 2014. During the quarter ended March 31, 2015 an expense of
USD 28,179 in recognition of the vesting schedule of the remaining options.
On
October 1, 2014 the Company issued 50,000 options to another contract employee for services provided to purchase shares of our
common stock at $1.13 per share for a period of five years, all of which vested immediately. On the date of the grant, the Company
valued the options at USD $55,890 using the Black-Scholes option pricing model with the following assumptions: expected life of
the options of 5 years, expected volatility of 226.68%, risk-free rate of 1.69% and no dividend yield. The expected volatility
was estimated by calculating the standard deviation of daily price changes in our stock from the date of the merger to the date
of the grant and the five year constant maturity treasury rate on the date of the grant was used for the risk free rate. An expense
of USD $55,890 was recognized based on the options that had vested as of December 31, 2014.
A
summary of the options issued as of March 31, 2015 is as follows:
|
|
March 31, 2015
|
|
|
|
|
|
|
Shares
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Intrinsic
Value
|
|
Outstanding at beginning of period
|
|
|
650,000
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Issued
|
|
|
650,000
|
|
|
$
|
1.13
|
|
|
$
|
734,500
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
Forfeited
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
Expired
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
Outstanding at end of period
|
|
|
650,000
|
|
|
$
|
1.13
|
|
|
$
|
734,500
|
|
Exercisable at end of period
|
|
|
300,000
|
|
|
$
|
1.13
|
|
|
$
|
339,000
|
|
|
|
|
March 31, 2015
|
|
Number of Options
|
|
|
Weighted
Average
Remaining
Life
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Shares
Exercisable
|
|
|
650,000
|
|
|
|
6.51
|
|
|
$
|
1.13
|
|
|
|
300,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
650,000
|
|
|
|
6.51
|
|
|
$
|
1.13
|
|
|
|
300,000
|
|
Warrants:
On
November 10, 2014, the Company issued an aggregate of 1.2 million warrants to purchase common stock and committed to issue another
800,000 warrants to purchase our common stock The investors received 200,000 A Warrants to purchase common shares at $1.50 per
share for a five year period, 400,000 B Warrants to purchase common shares at $3.00 per share for a five year period and, upon
the exercise of no less than 100,000 of the B Warrants, the Company will issue to the investor 400,000 C Warrants to purchase
common shares at $3.00 per share. Each of the warrants is exercisable for a five year period from issuance.
On
January 3, 2015 the Company issued a three year warrant to purchase 28,000 shares of its common stock at USD $2.00 per share.
On the date of the grant, the Company valued the warrants at USD $117,941 using the Black-Scholes option pricing model with the
following assumptions: expected life of the warrants of 3 years, expected volatility of 147.19%, risk-free rate of 1.67% and no
dividend yield. The expected volatility was estimated by calculating the standard deviation of daily price changes in our stock
from the date of the merger to the date of the grant and the five year constant maturity treasury rate on the date of the grant
was used for the risk free rate. An expense of USD $117,941 was recognized for the warrants during the period ended March 31,
2015.
On
January 15, 2015 the Company issued a three year warrant to purchase 50,000 shares of its common stock at USD $3.00 per share.
On the date of the grant, the Company valued the warrants at USD $231,490 using the Black-Scholes option pricing model with the
following assumptions: expected life of the warrants of 5 years, expected volatility of 147.19%, risk-free rate of 1.32% and no
dividend yield. The expected volatility was estimated by calculating the standard deviation of daily price changes in our stock
from the date of the merger to the date of the grant and the five year constant maturity treasury rate on the date of the grant
was used for the risk free rate. An expense of USD $231,490 was recognized for the warrants during the period ended March 31,
2015.
A
summary of the warrants issued as of March 31, 2015 is as follows:
March 31, 2015
|
|
|
Shares
|
|
|
Weighted Average Exercise Price
|
|
Outstanding at beginning of period
|
|
|
2,000,000
|
|
|
$
|
2.70
|
|
Issued
|
|
|
151,333
|
|
|
$
|
1.68
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
Forfeited
|
|
|
-
|
|
|
|
-
|
|
Expired
|
|
|
-
|
|
|
|
-
|
|
Outstanding at end of period
|
|
|
2,151,333
|
|
|
$
|
2.70
|
|
Exercisable at end of period
|
|
|
1,351,333
|
|
|
$
|
2.52
|
|
|
|
|
March 31, 2015
|
|
Number of Warrants
|
|
|
Weighted Average Remaining
Life
|
|
|
Weighted Average Exercise
Price
|
|
|
Shares Exercisable
|
|
|
400,000
|
|
|
|
4.62
|
|
|
$
|
1.50
|
|
|
|
400,000
|
|
|
28,000
|
|
|
|
2.76
|
|
|
$
|
2.00
|
|
|
|
28,000
|
|
|
40,000
|
|
|
|
1.84
|
|
|
$
|
2.50
|
|
|
|
40,000
|
|
|
1,683,333
|
|
|
|
4.63
|
|
|
$
|
3.00
|
|
|
|
883,333
|
|
|
2,151,333
|
|
|
|
4.56
|
|
|
$
|
2.52
|
|
|
|
1,351,333
|
|
Total
Common Shares
On
June 16, 2014 a majority of the shareholders of the Company by written consent authorized a special dividend, whereas each of
the shareholders of the common stock of the Company would receive 19.5 shares for every share of Company common stock owned. The
Company filed a corporate action with FINRA on June 19, 2014 in relation to the declared stock dividend. The dividend is payable
on receipt of all necessary approvals, if any, to the holders of record of all the issued and outstanding shares of common stock
as of the close of business on September 30, 2014, in the amount of 19.5 shares of common stock per one (1) share of common stock
held.
The
dividend was approved by FINRA and became effective on October 3, 2014, as such, the effects of the dividend have been reflected
retroactively in the unaudited condensed consolidated financial statements.
The
total shares issued and outstanding on March 31, 2015 were 29,910,165.
5
.
EARNINGS (LOSS) PER SHARE
FASB
ASC Topic 260,
Earnings Per Share
, requires a reconciliation of the numerator and denominator of the basic and diluted
earnings (loss) per share (EPS) computations.
Basic
earnings (loss) per share are computed by dividing net income (loss) available to common shareholders by the weighted-average
number of common shares outstanding during the period. Diluted earnings (loss) per share is computed similar to basic earnings
per share except that the denominator is increased to include the number of additional common shares that would have been outstanding
if the potential common shares had been issued and if the additional common shares were dilutive.
The
Company had 650,000 options and 2,401,333 warrants outstanding and convertible notes which are convertible into 86,301 shares
as of March 31, 2015, but due to the Net loss they are not included. Therefore, there was no difference in the basic and dilutive
earnings (loss) per share.
The
following table sets forth the computation of basic and diluted net loss per share:
|
|
Period
from
|
|
|
|
January
1, 2015
|
|
|
|
through
|
|
|
|
March
31, 2015
|
|
Net
loss from continued operations
|
|
$
|
(447,872
|
)
|
Net
loss from discontinued operations
|
|
|
(1,323,721
|
)
|
Net
loss
|
|
|
(1,771,593
|
)
|
|
|
|
|
|
Basic
weighted average outstanding shares of common stock
|
|
|
29,843,749
|
|
Dilutive
effect of common stock equivalents
|
|
|
1,231,811
|
|
Diluted
weighted average common stock equivalents
|
|
|
31,075,560
|
|
|
|
|
|
|
Loss
per share of voting and nonvoting common stock Basic and Diluted
|
|
|
|
|
Continued
operations
|
|
$
|
(0.02
|
)
|
Discontinued
operations
|
|
$
|
(0.04
|
)
|
Total
Loss per share - Basic and Diluted
|
|
$
|
(0.06
|
)
|
6
.
RELATED PARTY TRANSACTIONS
Legal
and Other Services
The
Company engaged in a Consulting and Professional services contract with a shareholder who also provided legal and other
services for the Company. For the three months ended March 31, 2015, this shareholder was paid, either as an individual or through
entities controlled by the individual, approximately CAD $43,400, (USD $31,173) for legal services rendered, which includes the
amounts paid under the disclosed contract.
The
Company incurred an additional CAD $19,072, (USD $15,107) of legal fees from another shareholder. That amount was applied to their
respective note payable.
Notes
Payable to Shareholders
At
various times throughout the year ended December 31, 2014 and the quarter ended March 31, 2015, our former CEO and shareholder
advanced amounts to the Company in the form of short-term loans to help the Company with operating capital as needed. All notes
have expired and are in default. The current amount due as of March 31, 2015 is CAD $433,569, (USD $341,393).
At
various times throughout the year ended December 31, 2014 and the quarter ended March 31, 2015, a shareholder advanced amounts
to the Company in the form of short-term loans to help the company with operating capital as needed. On December 15, 2014 these
notes, totaling CAD $1,150,000, (USD $988,885) were consolidated into a one-year interest free note. The note matures December
15, 2015 but the Company may prepay the note upon receiving adequate funding. The current amount due as of March 31, 2015 is CAD
$1,100,000, (USD $866,142).
On
November 21, 2014 the Company and 2264793 Ontario Inc, a consolidated VIE of the Company, jointly issued a promissory note to
Crimson Capital, LLC for CAD $600,000, (USD $472,441) to be used for various expenses related to our Brampton property. The note
bears a 54% per annum interest rate and matured on February 21, 2015, however the Company had the ability to extend the note on
a month-by-month basis. The loan was repaid in June 2015. The total interest accrued and paid as of June 2015 was CAD$183,748.
In
connection with the acquisition of the Brampton Property, the Company loaned to 2264793 Ontario Inc. the amount of CAD $4,259,222,
(approximately USD $3,933,000) to fund a portion of the down payment on the Brampton Property (the “Down Payment Loan”).
This Down Payment Loan was evidence by a promissory note dated December 31, 2015 made by 2264793 Ontario Inc. in favor of the
Company in the amount of CAD $4,259,222 (approximately USD $3,933,000), bearing interest at a rate of 0%. 2264793 Ontario Inc.
is owned by several of our directors, officers, and shareholders of Canadian Cannabis Corp.
7
.
Property, Plant & Equipment
The
Company’s property, plant and equipment are summarized as follows:
Description
|
|
12/31/14
|
|
|
Change
|
|
|
3/31/15
|
|
Buildings and Equipment
|
|
|
3,981,925
|
|
|
|
363,128
|
|
|
|
4,345,053
|
|
Land
|
|
|
11,859,807
|
|
|
|
(250,000
|
)
|
|
|
11,609,807
|
|
Impairment
|
|
|
-
|
|
|
|
(414,428
|
)
|
|
|
(414,428
|
)
|
Accumulated Depreciation
|
|
|
(24,268.00
|
)
|
|
|
(13,752.00
|
)
|
|
|
(38,020
|
)
|
Total Balances in CAD
|
|
|
15,817,464
|
|
|
|
(315,052
|
)
|
|
|
15,502,412
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at Cost in USD
|
|
$
|
14,737,960
|
|
|
$
|
61,309
|
|
|
$
|
14,799,269
|
|
On
December 31, 2014, the Company recorded a CAD $250,000, ($214,975 USD) accrual for remediation and site cleanup of the Brampton
Property. This work will include excavation and disposal of impacted dirt, brick, garbage, waste, tires and chemicals. As of March
31, 2015, the accrual was reversed as the Company has purchased only minor improvements associated with the general maintenance
of the building.
8
.
Impairment of Long-Term Asset
In
January 2016 the Company sold the building and land for CAD $15,500,000 and recorded a loss on its investment of CAD $414,428,
USD $326,321. As a result of the loss, we impaired the asset as of March 31, 2015 for the full value of the loss.
9
.
Discontinued Operations
As
a result of the Company’s inability to receive an MMPR license and subsequent sale of the Brampton property, the Company
determined that revenues and expenses related to this portion of the business would be classified as discontinued operations.
As of March 31, 2014, we recognized the sale transaction as part of the discontinued operations and will continue to do
so moving forward. Below is a summary of the discontinued operations presented in our Balance Sheet and Statement of Operations.
BALANCE
SHEET
Discontinuing
Operations
|
|
March 31, 2015
|
|
|
December 31,
2014
|
|
ASSETS
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
$
|
76,510
|
|
|
|
$ 45,845
|
|
Prepaid expenses
|
|
|
-
|
|
|
|
201,677
|
|
Notes receivable, related parties
|
|
|
-
|
|
|
|
33,480
|
|
Property, plant & equipment, net
|
|
|
14,799,269
|
|
|
|
14,737,960
|
|
Total Assets
|
|
$
|
14,875,779
|
|
|
$
|
15,022,433
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
Current Liabilities
|
|
|
|
|
|
|
|
|
Accounts payable and accrued liabilities
|
|
$
|
-
|
|
|
$
|
2,253,222
|
|
Accrued interest, shareholders
|
|
|
113,456
|
|
|
|
-
|
|
Mortgage payable
|
|
|
7,529,488
|
|
|
|
8,083,060
|
|
Accrued stock payable
|
|
|
-
|
|
|
|
209,992
|
|
Customer deposits
|
|
|
39,352
|
|
|
|
-
|
|
Notes payable
|
|
|
164,491
|
|
|
|
-
|
|
I/C Notes payable
|
|
|
3,725,848
|
|
|
|
-
|
|
Notes payable to shareholders, net
of discount
|
|
|
1,794,149
|
|
|
|
1,951,918
|
|
Total Liabilities
|
|
|
13,366,784
|
|
|
|
12,498,192
|
|
|
|
|
|
|
|
|
|
|
Total Stockholders’ Equity
|
|
|
1,508,995
|
|
|
|
2,524,241
|
|
Total Liabilities and Stockholders’ Equity
|
|
$
|
14,875,779
|
|
|
$
|
15,022,433
|
|
STATEMENT
OF OPERATIONS
Discontinuing
Operations
|
|
March 31, 2015
|
|
|
March 31, 2014
|
|
Rental income
|
|
$
|
102,306
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
OPERATING EXPENSES:
|
|
|
|
|
|
|
|
|
Consulting fees
|
|
|
323,932
|
|
|
|
512,014
|
|
Professional fees
|
|
|
45,977
|
|
|
|
151,842
|
|
General and administrative
|
|
|
533,641
|
|
|
|
78,308
|
|
|
|
|
903,550
|
|
|
|
742,164
|
|
|
|
|
|
|
|
|
|
|
Loss from discontinued operations
|
|
|
(801,244
|
)
|
|
|
(742,164
|
)
|
|
|
|
|
|
|
|
|
|
OTHER INCOME (EXPENSE)
|
|
|
|
|
|
|
|
|
Interest expense, shareholders
|
|
|
(42,534
|
)
|
|
|
(1,951
|
)
|
Interest expense
|
|
|
(116,029
|
)
|
|
|
-
|
|
Interest income
|
|
|
69
|
|
|
|
-
|
|
Loss on impairment of asset
|
|
|
(333,721
|
)
|
|
|
-
|
|
Foreign currency gain (loss), net
|
|
|
(30,262
|
)
|
|
|
(53,879
|
)
|
Total Other Income (Expense)
|
|
|
(522,477
|
)
|
|
|
(55,830
|
)
|
Net loss from discontinued operations
|
|
$
|
(1,323,721
|
)
|
|
$
|
(797,994
|
)
|
|
|
|
|
|
|
|
|
|
Loss per share on discontinued operations - Basic and Diluted
|
|
$
|
(0.04
|
)
|
|
$
|
(0.72
|
)
|
|
|
|
|
|
|
|
|
|
Weighted Average Common Shares Outstanding - Basic
|
|
|
29,843,749
|
|
|
|
1,107,794
|
|
10
.
Subsequent Events
In
2015, the Company began renovations on the Brampton property and ultimately received notice that it would not
be approved for the MMPR license from Health Canada. At this time, in addition to the CAD 9,400,000 first mortgage the Company
had on the building, it had also taken a CAD $2,300,000 second mortgage on the building and an additional CAD $2,000,000 in loans
from Avonlea-Drewry Holdings Inc. (“ADH”) and certain related parties of ADH (together with ADH, the “ADH Group”)
which were secured by the building. The Company began to market the building for sale in mid-2015 and was able to sell the property
in January 2016, for CAD $15,500,000, which after accounting for all accrued fees was enough to satisfy all but approximately
CAD $254,000 of the debt on the building to the ADH Group. The Company subsequently entered into a forbearance agreement with
the ADH Group with regard to the balance owed that included an agreement for a consulting agreement with ADH for CAD $1,000,000
and a forbearance fee of CAD $250,000. ADH and its affiliates own 3,750.000 shares, approximately 8%, of the Company’s common
stock.
In
October 2015, the Company entered into a letter of intent to acquire The Hydropothecary Corporation (“Hydropothecary”).
Under the agreement, the Company paid a non-refundable deposit of CAD $1,000,000 consisting of two CAD $500,000 tranches. If the
letter of intent was not followed by a Definitive Agreement, the deposit was to be converted into common shares of Hydropothecary
at a price of CAD $4.00 per share. The CAD $1,000,000 deposit was funded by loans from Avonlea Ventures, Inc. (“Avonlea”)
which were secured by the Brampton property. On January 29, 2016, the Company sold the Brampton property and repaid all loans
that had encumbered the property including the loans to Avonlea. In early 2016, when the Hydropothecary transaction was terminated
and the Company was issued 250,000 shares of Hydropothecary stock valued and CAD $1,000,000, the loans used to fund the deposit
had already been repaid, so the Company’s then management used those shares to repay another shareholder loan from a former
Director in the amount of CAD $1,000,000.
During
2015 and 2016, the Company pursued a number of merger and acquisition candidates with various companies in the Canadian cannabis
space and signed several letters of intent to acquire companies with existing MMPR licenses, but was unable to complete
any of the transactions. At the same time, the Company formed a wholly owned subsidiary called The Clinic Network
(“TCN”). TCN was formed as a network of medical clinics across Canada to offer multidisciplinary therapies for patients
that suffer from chronic pain, rheumatoid conditions. TCN was to provide patients with access to the latest medical advancements
as well as pharmaceutical and cannabis-related therapies.
In
August 2016, Benjamin Ward, the Company’s CEO and Director resigned. Scott Keevil, an existing shareholder, was appointed
as the new CEO and Director and tasked with restructuring the Company’s debt, raising additional capital and acquiring additional
business in order to restore shareholder value.
Negotiations
to settle the debts owed to the ADH Group began in late 2016 and a settlement agreement was reached in March 2017, which was later
revised and settled in March 2018. Under the terms of the agreement the Company assigned the assets of TCN to ADH, agree to make
certain payments for expenses incurred in relation to its business and the settlement agreement with the ADH Group, close a private
placement financing and listing transaction satisfactory to ADH and take steps to bring the Company’s SEC filings current.
In exchange and upon completion of the Company’s requirements under the agreement, the ADH Group will execute a termination
and release agreement, terminating the various agreements among the various ADH parties and the Company, and acknowledging that
all of the debt owed to the ADH Group are satisfied in full, and releasing the Company and its parties from their obligations
under the various agreements and any related claims which the ADH Group may have against the Company and its related parties.
In addition, ADH transferred the assets of TCN to a related party and delivered 1,750,000 shares of Cura-Can Health Corp
(“Cura-Can”), valued and CAD $1.00 per share, into an escrow account to satisfy the Company’s obligations under
the settlement agreement. The shares will be sold to fund the items required to be paid by the Company under the settlement agreement.
It is anticipated that by the time that all of the Company’s obligations have been met, all of the shares of Cura-Can will
have been liquidated.
Once
completed, the settlement agreement with the ADH Group will provide a clean slate for the Company to pursue new business opportunities
with the intent of restoring shareholder value.