CANX Cannawake Corporation (CE)

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

1. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES 

The accompanying unaudited interim consolidated financial statements of CannAwake Corporation (formerly Delta International Oil & Gas Inc.) (“we”, “our”, “CannAwake” or the “Company”) have been prepared in accordance with accounting principles generally accepted in the United States of America and the rules of the Securities and Exchange Commission. In the opinion of management, all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of financial position and the results of operations for the interim periods presented have been reflected herein. The results of operations for interim periods are not necessarily indicative of the results to be expected for the full year.

On September 12, 2017 American Green, Inc. (“American Green”) entered into a Purchase Agreement with Roxanne Lang as Trustee for the Freeman-Lang Revocable Trust, et al, Roxanne M. Lang, individually, N.T.P., Inc., and Provident Corporation to purchase all of the real estate and buildings (together, with the associated land and fixtures) comprising the unincorporated township of Nipton, California for $5,012,888. American Green subsequently made improvements to the Nipton Properties.

On March 6, 2018 American Green entered into a Purchase Agreement with Nipton, Inc. (“Nipton”), its wholly owned subsidiary, to purchase all of the real estate and buildings (together, with the associated land and fixtures) comprising the unincorporated township of Nipton, California in consideration for the assumption of the first and second deeds of trust and the acceptance of the third and fourth deeds of trust.

On March 14, 2018 the Company entered into a Securities Exchange Agreement with American Green and its wholly owned subsidiary Nipton. On April 5, 2018, CannAwake and American Green closed the Nipton acquisition. At the closing of the Agreement, CannAwake issued 160,000 shares of its Series A Convertible Preferred Stock, convertible into 160,000,000 shares of its common stock, to American Green, the former stockholder of Nipton, in exchange for all the outstanding shares of capital stock of Nipton. The shares accrue dividends at the rate of five percent per annum on the stated value of $25 per share. Following the closing of the acquisition, Nipton. became a wholly-owned subsidiary of the Company, with American Green, the former stockholder of Nipton, owning a controlling interest of approximately 82% of the outstanding shares of common stock of CannAwake. The transaction was accounted for as a reverse merger with Nipton as the accounting acquirer. The net liabilities of CannAwake as of March 31, 2018, as set forth below, were assumed by Nipton as a result of the reverse merger.

On June 13, 2018, our Board approved changing the Company’s name to CannAwake Corporation, and authorized the filing by the Company in Delaware on June 13, 2018, of a Certificate of Amendment to the Company’s Certificate of Incorporation providing for changing the name of the Company from Delta International Oil & Gas Inc. (“Delta”) to CannAwake Corporation. The change of the Company’s name became effective August 9, 2018 following approval by the Financial Industry Regulatory Authority as effective for trading purposes in the OTC markets. The change of the Company’s name required only Board of Directors approval under the Delaware General Corporation Law; stockholder approval of the Company’s stockholders was not required. Our new trading symbol is “CANX” following the name change.

Principles of Consolidation

The Company’s financial statements include the accounts of all majority-owned subsidiaries where its ownership is more than 50 percent of the common stock.  All material intercompany transactions and balances have been eliminated.

Use of Estimates

The preparation of the consolidated financial statements in conformity with accepted accounting principles generally accepted in the United States of America requires the Company to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosure of contingent assets and liabilities.  On an ongoing basis, the Company evaluates its estimates including, but not limited to, those related to such items as impairments of assets, income tax exposures, accruals, depreciable/useful lives, allowance for doubtful accounts, and valuation allowances.  The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources.  Actual results could differ from those estimates.

Revenue Recognition

In May, 2014, the FASB issued Accounting Standards Update No. 2014-09 (Topic 606) “Revenue from Contracts with Customers.” Topic 606 supersedes the revenue recognition requirements in Topic 605 “Revenue Recognition” (Topic 605) and requires entities to recognize revenues when control of the promised goods or services is transferred to customers at an amount that reflects the consideration to which the entity expects to be entitled to in exchange for those goods or services. We adopted Topic 606 as of January 1, 2018. As a consequence of the adoption of Topic 606, we did not recognize lease income related to Nipton in the second quarter of 2018 since collectability was not probable.

Impairment of long lived assets

Management reviews long-lived assets for potential impairment whenever significant events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Impairment exists when the carrying amount of the long-lived asset is not recoverable and exceeds its fair value. The carrying amount of a long-lived asset is not recoverable if it exceeds the sum of the estimated undiscounted cash flows expected to result from the use and eventual disposition of the asset. If, impairment exists, the resulting write-down would be the difference between fair market value of the long-lived asset and the related net book value.

Income Taxes

The Company accounts for income taxes in accordance with the liability method. Under the liability method, deferred assets and liabilities are recognized based upon anticipated future tax consequences attributable to differences between financial statement carrying amounts of assets and liabilities and their respective tax bases. The Company establishes a valuation allowance to the extent that it is more likely than not that deferred tax assets will not be utilized against future taxable income.

Uncertain Tax Positions

The Company evaluates uncertain tax positions pursuant to ASC Topic 740-10-25 “Accounting for Uncertainty in Income Taxes,” which allows companies to recognize a tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities based on the technical merits of the position. Those tax positions failing to qualify for initial recognition are recognized in the first interim period in which they meet the more likely than not standard, or are resolved through negotiation or litigation with the taxing authority, or upon expiration of the statute of limitations. De-recognition of a tax position that was previously recognized occurs when an entity subsequently determines that a tax position no longer meets the more likely than not threshold of being sustained.

At June 30, 2018 and December 31, 2017, the Company has approximately $0 and $0, respectively, of liabilities for uncertain tax positions. Interpretation of taxation rules relating to investments in Argentina concessions may give rise to uncertain positions.  In connection with the uncertain tax position, there was no interest or penalties recorded.

The Company is subject to ongoing tax exposures, examinations and assessments in various jurisdictions. Accordingly, the Company may incur additional tax expense based upon the outcomes of such matters. In addition, when applicable, the Company will adjust tax expense to reflect the Company’s ongoing assessments of such matters, which require judgment and can materially increase or decrease its effective rate as well as impact operating results.

The number of years with open tax audits varies depending on the tax jurisdiction. The Company’s major taxing jurisdictions include the United States (including applicable states).

Earnings (Loss) Per Share

Basic earnings per share are computed by dividing net earnings by the weighted average number of common shares outstanding during the period.  Diluted earnings per common share are computed by dividing net earnings by the weighted average number of common share and potential common share outstanding during the period.  Potential common shares consist of outstanding common stock purchase warrants and convertible preferred stock. For the six months ended June 30, 2018, there were 169,648,126 potentially dilutive common shares outstanding. These potentially dilutive common shares are anti-dilutive during the six months ended June 30, 2018, due to our operating losses, and therefore, have not been included in the calculation of earnings per share.

Stock-based Compensation 

The Company accounts for non-employee share-based awards based upon ASC 505-50, “Equity-Based Payments to Non-Employees.”  ASC 505-50 requires the costs of goods and services received in exchange for an award of equity instruments to be recognized using the fair value of the goods and services or the fair value of the equity award, whichever is more reliably measurable. The fair value of the equity award is determined on the measurement date, which is the earlier of the date that a performance commitment is reached or the date that performance is complete.  Generally, our awards do not entail performance commitments.  When an award vests over time such that performance occurs over multiple reporting periods, we estimate the fair value of the award as of the end of each reporting period and recognize an appropriate portion of the cost based on the fair value on that date.  When the award vests, we adjust the cost previously recognized so that the cost ultimately recognized is equivalent to the fair value on the date the performance is complete.

We account for stock-based compensation to employees in accordance with FASB ASC 718 which requires companies to measure the cost of employee services received in exchange for an award of an equity instrument based on the grant-date fair value of the award. Stock-based compensation expense is recognized on a straight-line basis over the requisite service period.

Fair Value of Financial Measurements

FASB ASC 820, Fair Value Measurements and Disclosures, defines fair value 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. FASB ASC 820 also establishes a fair value hierarchy, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. FASB ASC 820 describes three levels of inputs that may be used to measure fair value:

The Company utilizes the accounting guidance for fair value measurements and discloses for all financial assets and liabilities that are recognized or disclosed at fair value in the consolidated financial statements on a recurring basis during the reporting period.

The fair value is an exit price, representing the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.  The Company utilizes market data or assumptions that market participants would use in pricing the asset or liability.  ASC 820, “Fair Value Measurements and Disclosures”, establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value.  These tiers are defined as follows:  

Level 1 - Observable inputs such as quoted market prices in active markets.

Level 2 - Inputs other than quoted prices in active markets that are either directly or indirectly observable.

Level 3 - Unobservable inputs about which little or no market data exists, therefore requiring an entity to develop its own assumptions.

As of June 30, 2018 and December 31, 2017, there were no financial assets or liabilities that require to be fair valued on a recurring basis.

Recent Accounting Pronouncements

In July 2017, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2017-11, Earnings Per Share (Topic 260), Distinguishing Liabilities from Equity (Topic 480), Derivatives and Hedging (Topic 815). The amendments in Part I of this Update change the classification analysis of certain equity-linked financial instruments (or embedded features) with down round features. When determining whether certain financial instruments should be classified as liabilities or equity instruments, a down round feature no longer precludes equity classification when assessing whether the instrument is indexed to an entity’s own stock. The amendments also clarify existing disclosure requirements for equity-classified instruments. As a result, a freestanding equity-linked financial instrument (or embedded conversion option) no longer would be accounted for as a derivative liability at fair value as a result of the existence of a down round feature. For freestanding equity classified financial instruments, the amendments require entities that present earnings per share (EPS) in accordance with Topic 260 to recognize the effect of the down round feature when it is triggered. That effect is treated as a dividend and as a reduction of income available to common shareholders in basic EPS. Convertible instruments with embedded conversion options that have down round features are now subject to the specialized guidance for contingent beneficial conversion features (in Subtopic 470-20, Debt—Debt with Conversion and Other Options), including related EPS guidance (in Topic 260). The amendments in Part II of this Update recharacterize the indefinite deferral of certain provisions of Topic 480 that now are presented as pending content in the Codification, to a scope exception. Those amendments do not have an accounting effect. For public business entities, the amendments in Part I of this Update are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. Early adoption is permitted for all entities, including adoption in an interim period. If an entity early adopts the amendments in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. The Company has chosen to adopt ASU 2017-11 as of April 1, 2018.

2. GOING CONCERN

Financial Condition

The Company’s financial statements for the six months ended June 30, 2018 have been prepared on a going concern basis, which contemplates the realization of assets and settlement of liabilities in the normal course of business. The Company has incurred net losses and as of June 30, 2018 has an accumulated deficit of $715,361 which raises substantial doubt about the Company’s ability to continue as a going concern. 

Management Plans to Continue as a Going Concern

CannAwake closed a reverse merger in April 2018. In the first quarter of 2018, CannAwake received $30,000 from two investors via convertible notes. In the second quarter of 2018, CannAwake received $165,000 from two investors via convertible notes. Additionally, the two investors have demonstrated interest in funding CannAwake’s operations up to $500,000 per investor throughout 2018. The Company’s continued existence is dependent upon management’s ability to develop profitable operations and its ability to obtain additional funding sources to provide capital and other resources for the further development of the Company’s business. The Company’s financial statements as of June 30, 2018 do not include any adjustments that might result from the outcome of this uncertainty.

3. RESTATEMENT

The Company restated the financial statements for the three and six months ended June 30, 2018 to correct the error in the accounting of a beneficial conversion feature in the Series A convertible preferred stock.

As disclosed in Note 11, the Company designated 160,000 shares of Series A convertible preferred stock with a par value of $0.0001 per share. The Company erroneously recognized a deemed dividend on the Series A convertible preferred stock due to a beneficial conversion feature. The Company later determined that it should not have recognized any beneficial conversion feature since this transaction is scoped out of ASC 470, “Debt”. This adjustment does not affect the June 30, 2018 consolidated balance sheet or the consolidated statement of cash flows for the six months ended June 30, 2018.

The following table summarizes the correction on the consolidated statements of operations for the period ended June 30, 2018.

4. DEPOSIT TOWARD T&M SALE

On January 3, 2017, Delta received the acceptance of its offer for the sale of SAHF’s interest in the Tartagal and Morillo (“T&M”) concessions from High Luck Group (“High Luck”). The consideration for 18% of Tartagal and Morillo will be $2,000,000 upon the transfer of the concessions, and 3% of gross revenues from the production of oil or gas of either concession up to an additional $2,000,000. Once the transfer occurs, the companies will sign a mutual release. The release of funds is also contingent on other external factors detailed on a Consulting Agreement signed between a third party (Consultant”) and High Luck. After speaking with the Consultant to High Luck on various occasions, Delta has taken the position that most of the Consultant’s duties have been fulfilled and the ones that have not require High Luck to present paperwork to the province and fulfill its commitments to the Province. On February 10, 2017, High Luck Group deposited the initial $2,000,000 in an Escrow account. On April 4, 2017, the Escrow Agent released $500,000 to Delta as a deposit towards the initial $2,000,000 payment which is reported as a “Deposit toward T&M sale” in the consolidated balance sheet as of June 30, 2018 pending closing of the sale. Management does not expect to collect the balance of the purchase price. This deposit was assumed by Nipton as part of the reverse merger.

5. NOTES RECEIVABLE

On May 25, 2017, Delta loaned $250,000 to SCO for the development of a gas field in northern California. SCO is using the funds provided to work over 2 wells and puncture in different pay zones, expecting close to virgin pressures.

The note carries a 9% interest, an 18-month maturity, and has an equity kicker of 3.5% in SCO which we determined to have a value of zero. The note will also be prepaid from 25% of the production in the new wells.

On July 26, 2017, Delta made a $50,000 loan to Landmaster for a term of 18 months and annual interest of 9% for the re-entry of two oil wells in Haskell County, Texas. The Company was also granted a 3.75% carried interest in the two wells with the option to participate at the same interest in future wells on the property. The 3.75% carried interest (3% NRI) in the two wells in the Kieke Lease with a fair value of $44,703 was recorded as an oil and gas property and a discount to the loan made to Landmaster and amortized over the term of the note.

During the six months ended June 30, 2018 the Company recorded a provision for bad debts of $275,490 related to the loans to SCO & Landmaster, and an impairment loss of $44,703 related to the Kieke Lease.

6. MORTGAGE NOTES PAYABLE

On September 12, 2017 American Green entered into a Purchase Agreement with Roxanne Lang as Trustee for the Freeman-Lang Revocable Trust, et al, Roxanne M. Lang, individually, N.T.P., Inc., and Provident Corporation to purchase all of the real estate and buildings (together, with the associated land and fixtures) comprising the unincorporated township of Nipton, California for $5,012,888. In connection with the acquisition, American Green paid $2,012,888, in cash and issued two promissory notes to Freeman-Lang Revocable Trust and Provident Corporation for $2,630,000 and $370,000, respectively. American Green subsequently made improvements to the Nipton Properties.

On March 6, 2018 American Green entered into a Purchase Agreement with Nipton, its wholly owned subsidiary, to purchase all of the real estate and buildings (together, with the associated land and fixtures) comprising the unincorporated township of Nipton, California in consideration for the assumption of the first and second deeds of trust and the acceptance of the third and fourth deeds of trust.

On March 14, 2018 the Company entered into a Securities Exchange Agreement with American Green and its wholly owned subsidiary Nipton. The Agreement was consummated on April 5, 2018 whereby the Company acquired 100% of the issued and outstanding common shares of Nipton. The Company acquired all of the assets comprised of land and improvements and assumed $5,775,979 of mortgage notes payable secured by four recorded deeds of trust within Nipton. At the consummation of the Securities Exchange Agreement, the Third Deed of Trust was canceled, and the Fourth Deed of Trust was created.

In connection with the acquisition, Nipton recognized the carrying value of the assets of $5,775,979 and assumed mortgage notes totaling $5,775,979, as follows:

As disclosed above, the $2,000,000 related to the third deed of trust was cancelled upon closing of the reverse merger and was recognized as a capital contribution from American Green.

Mortgage notes payable at June 30, 2018 consist of the following:

The First Deed of Trust accrues annual interest at 5% and requires quarterly payments of principal and interest of $149,438 until its maturity on October 1, 2022.

The Second Deed of Trust accrues annual interest at 5% and requires quarterly payments of principal and interest of $21,023 until its maturity on October 1, 2022.

The Fourth Deed of Trust accrues interest at 5% annually and matures on April 1, 2019. It requires quarterly interest payments until its maturity date.

All Trust Deeds are secured by the land and improvements at Nipton, California as shown on the consolidated balance sheet with a net book value of $5,759,929.

The following table schedules the principal payments on the mortgage notes payable for the next five years as of June 30, 2018

7. LINE OF CREDIT – RELATED PARTY

On March 14, 2018, the Company entered into a non-interest bearing $2,000,000 Revolving Line of Credit Agreement with American Green, Inc. The Line of Credit matures in one year with the Company retaining an option to extend the maturity six months, as long as it is not in default.

During the quarter ended June 30, 2018, American Green advanced $323,007 to the Company and Nipton. Of this amount, $179,120 was in the form of expenses paid by American Green on behalf of the Company, $115,400 was received in cash, and $28,487 was in the form of an asset acquired for the Company paid directly by American Green.

8. CONVERTIBLE NOTES

At March 31, 2018 Delta had $30,000 in outstanding convertible notes to two investors for $15,000 each. Each note has the same terms which are subject to annual interest of 6% maturing on March 20, 2021 and are convertible to common shares any time after 180 days from the issuance date at a price of $.02 per share. The notes include an antidilution provision when certain conditions are met, and each investor can’t convert into a certain number of common shares that would result in them owning more than 4.9% of the outstanding shares of the Company. These convertible notes were assumed by Nipton as part of the reverse merger.

During the quarter ended June 30, 2018, the Company issued notes to certain investors totaling to $165,000. The notes bear an annual interest rate of 6% maturing on June 26, 2021 and are convertible to common shares any time after 180 days from the issuance date at a price of $.02 per share. The notes include an antidilution provision when certain conditions are met, and the investor can’t convert into a certain number of common shares that would result in owning more than 4.9% of the outstanding shares of the Company.

As a result of the Company’s early adoption of ASU 2017-11, the anti-dilution provisions in the notes did not qualify for derivative accounting.

9. WARRANTS

Below is a table with a summary of warrant activity for the six months ended June 30, 2018.

During the quarter ended June 30, 2018, the Company issued 52,000 common shares and received $3,640 as part of a cash basis exercise of warrants.