NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(1)
Summary of Significant Accounting Policies
Basis
of Presentation and Organization
The
Company was incorporated in 1999 in the state of Utah under the name Datigen.com, Inc. On August 25, 2005, the Company changed
its state of incorporation from Utah to Nevada by the merger of the Company with and into its wholly-owned subsidiary, Canna Powder,
Inc., a Nevada corporation. As a result of such merger, the Company’s name was changed to Canna Powder, Inc. in order to
better reflect the Company’s business operations.
On
August 30, 2017, a new wholly-owned subsidiary was registered in Israel under the name of Canna Powder Ltd. (“CannaPowder
Israel” or the “Subsidiary”), with 100 common shares outstanding, 0.01 NIS par value (the “Subsidiary
Shares”), all of which were held in escrow on behalf of the Company by Israel attorney, Alon Nave. On September 27, 2017,
pursuant to board resolution, the 100 Subsidiary Shares held in escrow were transferred to the Company.
On
December 27, 2017, a board-resolution was adopted to issue an additional: (i) 800 Subsidiary Shares to the Company; and an additional
100 Subsidiary Shares to Rafi Ezra and, as a result, effective December 27, 2017, Canna Powder Ltd became a 90% owned subsidiary
of the Company and a minority interest of 10% owned by Rafi Ezra.
The
Subsidiary’s management includes Ariel Dor, its Chief Executive Officer, and Rafi Ezra, its CTO.
Development
is being conducted at the Hebrew University pursuant to the term of the Feasibility Study and Option Agreement under the supervision
of the inventor of the technology, Professor Shlomo Magdassi.
The Company currently expects that
the Development Program will be completed within three years, with commercial sales starting in 2021. However, there can
be no assurance that the Development Program will, in fact, be successful, nor can there be any assurance that the Company
may not require additional capital to fully implement its business plan and complete production of commercially viable products
based on its technology which is the subject of the Feasibility Study discussed below under “Planned Research and Development
and Current Trends.”
In
the commercial stage, the Company’s plan is to establish and operate several production facilities, each located in separate
territories determined by the Company according to their size and regulatory environment that permits studies applicable to other
activities prerequisite to commercial exploitation of medical cannabis generally and the Company’s plan to develop cannabis-based
powders for medical uses. While there can be no assurance, at present the Company believes that it will be able to produce cannabis
powders for medical uses at a significant cost advantage.
The
accompanying unaudited financial statements of the Company are presented in accordance with the requirements of Form 10-Q and
Article 10 of Regulation S-X. Certain information and footnote disclosures normally included in financial statements prepared
in accordance with accounting principles generally accepted in the United States of America (“US GAAP”) have been
condensed or omitted pursuant to such SEC rules and regulations. In the opinion of management, all adjustments (consisting of
normal recurring adjustments) considered necessary for an air presentation have been made. The results for these interim periods
are not necessarily indicative of the results for the entire year. The accompanying financial statements should be read in conjunction
with the Company’s audited financial statements for the year ended December 31, 2018 and the notes thereto included in the
Company’s Annual Report on Form 10-K filed with the SEC on April 1, 2019.
Cash
and Cash Equivalents
For
purposes of reporting within the statement of cash flows, the Company considers all cash on hand, cash accounts not subject to
withdrawal restrictions or penalties, and all highly liquid debt instruments purchased with a maturity of three months or less
to be cash and cash equivalents. As of March 31, 2019, and December 31, 2018, we had cash and cash equivalents of $707,395 and
$606,245 respectively.
Reclassifications
Certain
prior year amounts have been reclassified to conform to the current period presentation. These reclassifications had no impact
on net earnings, financial position or cash flows.
Discontinued
Operations
The
Company follows the policy of segregating the assets and liabilities of subsidiaries or lines of business on its Balance Sheet
from the assets liabilities of continuing subsidiaries or lines of businesses when it is decided to close or dispose of a subsidiary
or line of business. The Company also, follows the policy of separately disclosing the assets and liabilities and the net operations
of a subsidiary or line of business in its financial statements when it is decided to close or dispose of a subsidiary or line
of business.
Revenue
Recognition
The
Company recognizes revenue ratably over the term of the contract in accordance with ASC 606. In 2018, we implemented new internal
controls as part of our efforts to adopt the new revenue recognition standard and perform risk assessment process related to the
new revenue standard. These internal controls include providing global training to our finance team and holding regular meetings
with management to address risks associated with applying the five-step model for recognizing revenues. Additionally we established
monitoring controls to identify new sales arrangements and changes in our business environment that could impact risks associated
with the new revenue standard and our current accounting assessment process.
Loss
per Common Share
Basic
loss per share is computed by dividing the net loss attributable to the common stockholders by the weighted average number of
shares of common stock outstanding during the period. Fully diluted loss per share is computed similar to basic loss 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.
Income
Taxes
Income
taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are determined based on temporary
differences between the bases of certain assets and liabilities for income tax and financial reporting purposes. The deferred
tax assets and liabilities are classified according to the financial statement classification of the assets and liabilities generating
the differences.
The
Company maintains a valuation allowance with respect to deferred tax assets. The Company establishes a valuation allowance based
upon the potential likelihood of realizing the deferred tax asset and taking into consideration the Company’s financial
position and results of operations for the current period. Future realization of the deferred tax benefit depends on the existence
of sufficient taxable income within the carryforward period under the Federal tax laws.
Changes
in circumstances, such as the Company generating taxable income, could cause a change in judgment about the realizability of the
related deferred tax asset. Any change in the valuation allowance will be included in income in the year of the change in estimate.
Fair
Value of Financial Instruments
The
Company estimates the fair value of financial instruments using the available market information and valuation methods. Considerable
judgment is required in estimating fair value. Accordingly, the estimates of fair value may not be indicative of the amounts the
Company could realize in a current market exchange. As of March 31, 2019 and December 31 2018, the carrying value of accounts
payable and accrued liabilities approximated fair value due to the short-term nature and maturity of these instruments.
Deferred
Offering Costs
The
Company defers as other assets the direct incremental costs of raising capital until such time as the offering is completed. At
the time of the completion of the offering, the costs are charged against the capital raised. Should the offering be terminated,
deferred offering costs are charged to operations during the period in which the offering is terminated.
Impairment
of Long-Lived Assets
The Company evaluates the recoverability of
long-lived assets and the related estimated remaining lives when events or circumstances lead management to believe that the carrying
value of an asset may not be recoverable. As of March 31, 2019 and December 31, 2018, no events or circumstances occurred
for which an evaluation of the recoverability of long-lived assets was required.
Estimates
The
financial statements are prepared on the basis of accounting principles generally accepted in the United States. The preparation
of financial statements in conformity with generally accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities as of March 31, 2019 and December 31, 2018, and expenses
for the three-months ended March 31, 2019 and 2018. Actual results could differ from those estimates made by management.
There are no leases in the Company, thus the financial statements do not include estimates to recognize assets and liabilities
related to implementing the new leases standard ASC 842.
Impact
of Recently Issued Accounting Standards
On December 15, 2018 the Financial Accounting
Standards Board (FASB) Accounting Standards Update (ASU) 2016-02, Leases (Topic 842) issued on February 25, 2016 became effective.
Under the new provisions, all lessees will report a right-of-use asset and a liability for the obligation to make payments for
all leases with the exception of those leases with a term of 12 months or less. All other leases will fall into one of two categories:
Financing leases, similar to capital leases, will require the recognition of an asset and liability, measured at the present value
of the lease payments or Interest on the liability will be recognized separately from amortization of the asset. Principal repayments
will be classified as financing outflows and payments of interest as operating outflows on the statement of cash flows. Operating
leases will also require the recognition of an asset and liability measured at the present value of the lease payments. A single
lease cost, consisting of interest on the obligation and amortization of the asset, calculated such that the amortization of the
asset will increase as the interest amount decreases resulting in a straight-line recognition of lease expense. All cash outflows
will be classified as operating on the statement of cash flows.
In
August 2018, the FASB issued ASU 2018-13,
Fair Value Measurement (Topic 820), Disclosure Framework – Changes to the Disclosure
Requirements for Fair Value Measurement.
The amendments in this Update modify certain disclosure requirements of fair value
measurements and are effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after
December 15, 2019. Early adoption is permitted. The Company is currently unable to determine the impact on its financial statements
of the adoption of this new accounting pronouncement.
In
June 2018, the FASB issued Accounting Standards Update, or ASU 2018-07, Compensation - Stock Compensation (Topic 718), which simplifies
the accounting for non-employee share-based payment transactions. The new standard expands the scope of Topic 718 to include share-based
payment transactions for acquiring goods and services from non-employees. ASU 2018-07 is effective for fiscal years beginning
after December 15, 2018 (including interim periods within that fiscal year), with early adoption permitted. The Company adopted
the new standard in the second quarter of 2018 and determined that the application of the new standard did not have a material
impact on the Company’s unaudited condensed consolidated financial statements as of and for the three months ended March
31, 2019.
In
January 2017, the FASB issued ASU No. 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business. Public
business entities should apply the amendments in this Update to annual periods beginning after December 15, 2017, including interim
periods within those periods. All other entities should apply the amendments to annual periods beginning after December 15, 2018,
and interim periods within annual periods beginning after December 15, 2019.
In
March 2017, the FASB issued Update 2017-08—Receivables—Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium
Amortization on Purchased Callable Debt Securities. For public business entities, the amendments in this Update are effective
for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. For all other entities, the
amendments are effective for fiscal years beginning after December 15, 2019, and interim periods within fiscal years beginning
after December 15, 2020. Early adoption is permitted, including adoption in an interim period. If an entity early adopts the amendments
in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period.
In
March 2017, the FASB issued Update 2017-07—Compensation—Retirement Benefits (Topic 715): Improving the Presentation
of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost. Effective for public business entities for annual periods
beginning after December 15, 2017, including interim periods within those annual periods. For other entities, the amendments in
this Update are effective for annual periods beginning after December 15, 2018, and interim periods within annual periods beginning
after December 15, 2019. Early adoption is permitted as of the beginning of an annual period for which financial statements (interim
or annual) have not been issued or made available for issuance. That is, early adoption should be within the first interim period
if an employer issues interim financial statements. Disclosures of the nature of and reason for the change in accounting
principle are required in the first interim and annual periods of adoption.
Goodwill
and Intangible Assets
Goodwill
is tested for impairment at a minimum on an annual basis. Goodwill is tested for impairment at the reporting unit level by first
performing a qualitative assessment to determine whether it is more likely than not that the fair value of the reporting unit
is less than its carrying value. If the reporting unit does not pass the qualitative assessment, then the reporting unit’s
carrying value is compared to its fair value. The fair values of the reporting units are estimated using market and discounted
cash flow approaches. Goodwill is considered impaired if the carrying value of the reporting unit exceeds its fair value. The
discounted cash flow approach uses expected future operating results. Failure to achieve these expected results may cause a future
impairment of goodwill at the reporting unit.
Intangible
assets consist of patents and trademarks, purchased customer contracts, purchased customer and merchant relationships, purchased
trade names, purchased technology, and non-compete agreements. Intangible assets are amortized over the period of estimated benefit
using the straight-line method and estimated useful lives ranging from two to twenty years. No significant residual value is estimated
for intangible assets.
Note
(2) Going Concern
The
Company has limited operations. The accompanying financial statements have been prepared in conformity with accounting principles
generally accepted in the United States of America, which contemplate continuation of the Company as a going concern. The Company
has not yet generated any revenue to cover its operating costs, and as such, has incurred an operating loss since inception. These
and other factors raise substantial doubt about the Company’s ability to continue as a going concern. The accompanying financial
statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets
or the amounts and classification of liabilities that may result from the possible inability of the Company to continue as a going
concern
.
Note
(3) Prepaid expenses
Prepaid expenses of $19,448 at March 31, 2019 and $12,847 at December 31, 2018, consist of VAT paid to be
refunded from the Israel VAT authority.
Note
(4) Common Stock
Between
March 20, 2018 and March 29, 2018, the Company sold a total of 206,000 units for cash consideration of $123,600 at price of $.60,
each unit was comprised of one share of common stock and one class B warrant exercisable at $1.20 per share with a term
of 24 months. The relative fair value of the stock with embedded warrants was $44,454 for the common stock and $79,146 for the
class B Warrants.
Between
April 3, 2018 and May 14, 2018, the Company sold a total of 1,150,500 units for cash consideration of $690,300 at price of $.60,
each unit was comprised of one share of common stock and one class B warrant exercisable at $1.20 per share with a term
of 24 months. The relative fair value of the stock with embedded warrants was $290,996 for the common stock and $399,304 for the
class B Warrants.
Between
October 18, 2018 and October 22, 2018, the Company sold a total of 345,166 units for cash consideration of $207,004 at price of
$.60, each unit was comprised of one share of common stock and one class B warrant exercisable at $1.20 per share with
a term of 24 months. The relative fair value of the stock with embedded warrants was $64,431 for the common stock and $142,573
for the class B Warrants.
Between
November 5, 2018 and November 28, 2018, the Company sold a total of 187,483 units for cash consideration of $224,980 at price
of $1.20, each unit was comprised of one share of common stock and one class D warrant exercisable at $2.40 per share
with a term of 24 months. Of these shares, 12,500 shares were recorded as subscribed share capital. The relative fair value of
the stock with embedded warrants was $70,026 for the common stock and $154,954 for the class B Warrants
During
the year ended December 31, 2018 50,000 shares were issued to one officer for services provided to the Company. Such shares
were valued at $26,000.
On
May 1, 2018 one consultant was issued a two-year Class B Warrants to acquire an aggregate of 41,000 shares of common stock at
an exercise price of $1.20 per share.
The fair value of these
warrants is $26,731. The warrants were valued using the Black-Scholes model with volatility of 139% and discount rate of 2.50%.
The Class B warrants are fully vested and were accordingly included in expenses as stock based compensation.
On
December 10, 2018 three consultants were issued 750,000 Class J Warrants exercisable for a three-year period to acquire one (1)
share of common stock at a price of $0.30 per share; The fair value of these warrants is $1,199,643. The warrants were
valued using the Black-Scholes model with volatility of 390% and discount rate of 2.73%. The Class J warrants are fully vested
and were accordingly included in expenses as stock based compensation.
On
December 10, 2018 three consultants were issued 450,000 Class I Warrants exercisable for a two-year period to acquire one (1)
share of common stock at a price of $0.01 per share; The fair value of these warrants is $719,774. The warrants were valued
using the Black-Scholes model with volatility of 390% and discount rate of 2.72%. The Class I warrants are fully vested and were
accordingly included in expenses as stock based compensation.
On
November 1, 2018 two consultants were issued 200,000 Class E Warrants exercisable for a four-year period to acquire one share
of common stock at a price of $0.01 per share; The fair value of these warrants are $ 249,998. The warrants were
valued using the Black-Scholes model with volatility of 388% and discount rate of 2.94%. The Class E warrants are fully vested
and were accordingly included in expenses as stock based compensation.
On
November 1, 2018 one consultant was issued 100,000 Class F Warrants exercisable for a five-year period to acquire one share of
common stock at a price of $3.00 per share; The fair value of these warrants is $124,997. The warrants were valued
using the Black-Scholes model with volatility of 388% and discount rate of 2.96%. The Class F warrants are fully vested and were
accordingly included in expenses as stock based compensation.
On
November 1, 2018 one consultant was issued 200,000 Class G Warrants exercisable for a five-year period to acquire one share of
common stock at a price of $5.00 per share; The fair value of these warrants is $249,994. The warrants were valued
using the Black-Scholes model with volatility of 388% and discount rate of 2.96%. The Class G warrants are fully vested and were
accordingly included in expenses as stock based compensation.
On
November 1, 2018 one consultant was issued 100,000 Class H Warrants exercisable for a five-year period to acquire one share of
common stock at a price of $1.00 per share; The fair value of these warrants is $124,999. The warrants were valued
using the Black-Scholes model with volatility of 388% and discount rate of 2.96%. The Class H warrants are fully vested and were
accordingly included in expenses as stock based compensation.
On
December 12, 2018 one consultant was issued 50,000 Class C Warrants exercisable for a four-year period to acquire one share of
common stock at a price of $2.40 per share; The fair value of these warrants is $62,492. The warrants were valued
using the Black-Scholes model with volatility of 388% and discount rate of 2.94%.
On
December 12, 2018, one consultant was issued 75,000 Class E Warrants exercisable for a five-year period to acquire one share of
common stock at a price of $0.01 per share. The warrants are vesting equally over eight quarters, thus the fair
value of the vested amount recorded as expense as of March 31, 2019 was $9,439 in 2108 plus $35,655 in Q1 2019 out of $180,374
total value. The warrants were valued using the Black-Scholes model with volatility of 389% and discount rate of 2.22%.
On
January 1, 2019, the Company issued two officers in consideration for services 300,000 Class I Warrants exercisable for a period
of three years at an exercise price of $.01 per share and 300,000 Class J Warrants exercisable for a period of three years
at an exercise price of $.30 per share. The warrants vest one third immediately, one third on December 31, 2019 and one
third on December 31, 2020. Thus the fair value of the vested amount recorded as expense as of March 31, 2019 was $149,966 out
of $449,898 total value. The warrants were valued using the Black-Scholes model with volatility of 394% and discount rate of 2.47%.
On February 28, 2019, 100,000 class I warrants were converted to 99,576 shares of common stock in a cashless exercise.
On
January 24, 2019, the Company sold a total of 334,000 units for cash consideration of $334,000 at price of $1.00, each unit was
comprised of one share of common stock, one Class F warrant exercisable at $3.00 per share with a term of 36 months
and one Class G warrant exercisable at $5.00 per share with a term of 60 months. The relative fair value of the stock with
embedded warrants was $73,513 for the common stock and $260,187 for the class F and class G Warrants.
On
January 27, 2019, 12,500 shares subscribed for in 2018 and recorded as stock payable were issued to a shareholder who
the company sold common stock to on November 21, 2019 and recorded subscribed share capital for during the period ending December
31, 2018.
On
January 31, 2019 one consultant was issued 50,000 Class E Warrants exercisable for a four-year period to acquire one share of
common stock at a price of $0.01 per share; The fair value of these warrants are $94,999. The warrants were valued
using the Black-Scholes model with volatility of 390% and discount rate of 2.43%. The Class E warrants are fully vested and were
accordingly included in expenses as stock based compensation.
Following
is a table of warrant and options outstanding as of March 31, 2019 and exercisable along with the exercise price
and range of remaining term.
|
Type
|
|
Quantity
|
|
|
Exercise Price
|
|
|
Remaining Term
|
|
Warrants Class A
|
|
|
1,000,000
|
|
|
$
|
0.50
|
|
|
12 Months
|
|
Warrants Class B
|
|
|
1,599,166
|
|
|
$
|
1.20
|
|
|
12-18 Months
|
|
Warrants Class C
|
|
|
50,000
|
|
|
$
|
2.4
|
|
|
48 Months
|
|
Warrants Class D
|
|
|
330,983
|
|
|
$
|
2.4
|
|
|
8 Months
|
|
Warrants Class E
|
|
|
275,000
|
|
|
$
|
0.01
|
|
|
48 Months
|
|
Warrants Class F
|
|
|
100,000
|
|
|
$
|
3.00
|
|
|
36 Months
|
|
Warrants Class G
|
|
|
200,000
|
|
|
$
|
5.00
|
|
|
60 Months
|
|
Warrants Class H
|
|
|
100,000
|
|
|
$
|
1.00
|
|
|
60 Months
|
|
Warrants Class I
|
|
|
650,000
|
|
|
$
|
0.01
|
|
|
24 Months
|
|
Warrants Class J
|
|
|
1,050,000
|
|
|
$
|
0.30
|
|
|
36 Months
|
|
Total
|
|
|
4,855,149
|
|
|
|
|
|
|
|
On
March 31, 2019 and December 31, 2018 there were approximately 227 and 226 holders of record and 10,964,302 and 10,518,226
shares of the Company’s common stock par value $0.00001 per share, outstanding, respectively.
All shares of common stock are entitled to one vote per share in all matters submitted to the shareholders. No preferred
shares were issued and outstanding at March 31, 2019 and December 31, 2018.
Dividends
The
Company has not declared or paid any cash dividends on its common stock nor does it anticipate paying any in the foreseeable future.
Furthermore, the Company expects to retain any future earnings to finance its operations and expansion. The payment of cash dividends
in the future will be at the discretion of its Board of Directors and will depend upon its earnings levels, capital requirements,
any restrictive loan covenants and other factors the Board considers relevant.
Securities
Authorized for Issuance under Equity Compensation Plans – None.
Note
(5) Marketable Securities
Marketable
Securities of $224,174 at March 31, 2019 and $108,164 at December 31, 2018 consist of 200,000 shares of UNV Medicine Ltd. (“UNV”,
a public company organized under the laws of Israel). Canna Powder Ltd paid $274,531 to UNV for the Marketable Securities for
which in return UNV will finance and purchase a line of production equipment to be used for the production of the Canna Products,
based on the specifications that will be transferred to UNV by Canna Israel. Canna Ltd recorded an unrealized gain in marketable
securities of $116,010 as of March 31, 2019 and unrealized loss of $166,367 and as of December 31, 2018.
Note
(6) Income Taxes
The
provision (benefit) for income taxes for the periods ended March 31, 2019 and December 31, 2018, was as follows (assuming a 21%
effective tax rate in 2019 and 21% in 2018):
|
|
|
March 31, 2019
|
|
|
December 31, 2018
|
|
|
Current tax provision:
|
|
|
|
|
|
|
|
|
|
Federal-
|
|
|
|
|
|
|
|
|
|
Taxable income
|
|
$
|
-
|
|
|
$
|
-
|
|
|
Total current tax provision
|
|
$
|
-
|
|
|
$
|
-
|
|
The
Company had deferred income tax assets as of March 31, 2019 and December 31, 2018 as follows:
|
|
|
March 31, 2019
|
|
|
December 31, 2018
|
|
|
Loss carryforwards
|
|
$
|
850,993
|
|
|
$
|
750,409
|
|
|
Less- Valuation allowance
|
|
|
(850,993
|
)
|
|
|
(750,409
|
)
|
|
Total net deferred tax assets
|
|
$
|
-
|
|
|
$
|
-
|
|
The
Company provided a valuation allowance equal to the deferred income tax assets for the period ended March 31, 2019 and December
31, 2018, because it is not presently known whether future taxable income will be sufficient to utilize the loss carryforwards.
As
of March 31, 2019, and December 31, 2018, the Company had approximately $498,677 and $123,164, respectively, in tax loss carryforwards
that can be utilized in future periods to reduce taxable income, and expire by the year 2030.
The
Company did not identify any material uncertain tax positions that will be filed. The Company did not recognize any interest or
penalties for unrecognized tax benefits during the three months ended March 31, 2019 or the year ended December
31, 2018.
The
Company intends to file income tax returns in the United States. All tax years are closed by expiration of the statute of limitations.
Note
(7) Related Party Transactions
On
January 1, 2019, the Company issued one officer in consideration for services 300,000 Class I Warrants exercisable for a period
of three years at an exercise price of $.01 per share and 300,000 Class J Warrants exercisable for a period of three years
at an exercise price of $.30 per share. The warrants vest one third immediately, one third on December 31, 2019 and one
third on December 31, 2020. Thus the fair value of the vested amount recorded as expense as of March 31, 2019 was $149,966 out
of $449,898 total value. The warrants were valued using the Black-Scholes model with volatility of 394% and discount rate of 2.47%.
On February 28, 2019, 100,000 Class I warrants were converted to 99,576 common shares in a cashless exercise.
On
December 10, 2018 three consultants were issued 750,000 Class J Warrants exercisable for a three-year period to acquire one share
of common stock at a price of $0.30 per share; The fair value of these warrants is $1,199,643. The warrants were
valued using the Black-Scholes model with volatility of 390% and discount rate of 2.73%. The Class J warrants are fully vested
and were accordingly included in expenses as stock based compensation.
On
December 10, 2018 three consultants were issued 450,000 Class I Warrants exercisable for a two-year period to acquire one share
of common stock at a price of $0.01 per share; The fair value of these warrants is $719,774. The warrants were valued
using the Black-Scholes model with volatility of 390% and discount rate of 2.72%. The Class I warrants are fully vested and were
accordingly included in expenses as stock based compensation.
On
October 17, 2017 Amir Uziel, Attribute Ltd, Lavi Krasney and Kfir Silberman (controlling shareholder of L.I.A. Pure Capital Ltd.)
each purchased 650,000 shares of common stock at $0.01 per share for a total cash consideration of $26,000.
Note
(8) Subsequent Events
As
defined in FASB ASC 855-10, “Subsequent Events”, subsequent events are events or transactions that occur after the
balance sheet date but before financial statements are issued or available to be issued.
On
April 5, 2019 one officer converted 100,000 Class J warrants to 87,500 shares in a cashless exercise.
On
April 5, 2019 three principal shareholders converted 750,000 Class J warrants to 656,250 shares.
On
April 5, 2019 three principal shareholders converted 450,000 Class I warrants to 448,125 shares.
On
April 18, 2019, a group of persons and entities owning shares in the Company, sold 6,000,000 shares of Common Stock to MNSCO LLC,
BHMNSCO LLC and One of a Kind Kamami LLC, entities which are more than 10% owned by Shai Cohen.
On May 7, 2019 Liron Carmel resigned as the
Company’s Chief Executive Officer and sole director and Shai Cohen, a more than 10% shareholder was appointed as
the Company’s Chief Executive Officer and sole director.
The
Company evaluated all transactions and events that occurred subsequent to the balance sheet date and prior to the date on which
the financial statements contained in this report were issued and determined that no such events or transactions necessitated
disclosure.
ITEM
2. MANAGEMENT’S DISCUSSION AND ANALYSIS AND PLAN OF OPERATION
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FORWARD-LOOKING
STATEMENTS
Certain
statements that the Company may make from time to time, including all statements contained in this report that are not statements
of historical fact, constitute “forward-looking statements” within the meaning of the Private Securities Litigation
Reform Act of 1995 and the safe harbor provisions set forth in Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934. Forward-looking statements may be identified by words such as “plans,” “expects,”
“believes,” “anticipates,” “estimates,” “projects,” “will,” “should,”
and other words of similar meaning used in conjunction with, among other things, discussions of future operations, financial performance,
product development and new product launches, market position and expenditures. The Company assumes no obligation to update any
forward-looking statements. Additional information concerning factors which could cause differences between forward-looking statements
and future actual results is discussed under the heading “Risk Factors” in the Company’s Annual Report on Form
10-K, as filed with the SEC on April 30, 2018.
The
following Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”)
is intended to help you understand our historical results of operations during the periods presented and our financial condition.
This MD&A should be read in conjunction with our consolidated financial statements and the accompanying notes to consolidated
financial statements and contains forward-looking statements that involve risks and uncertainties. See section entitled “Forward-Looking
Statements” above.
Plan
of Operation
On
August 30, 2017, the Company formed a subsidiary in Israel under the name of Canna Powder Ltd (“Canna Israel” or
the “Subsidiary”) which is 90% owned by the Company and the remaining 10% is owned by Rafi Ezra, co-founder and CTO
of Canna Powder Ltd.
On
September 14, 2017, the Canna Powder Israel entered into a Feasibility Study and Option Agreement (the “Feasibility Study”)
with Yissum Research Development Company of the Hebrew University of Jerusalem (“Yissum”), under the supervision of
the inventor of the technology, Professor Shlomo Magdassi.
On
May 2, 2018, Canna Powder Israel entered into a Research Agreement with Yissum. The purpose of the Research Agreement and the
objective of CannaPowder Israel, is to develop nano-cannabis powder, standardized from cannabis oil in a known cannabinoid composition,
with the view to applying it to enable the commercial production of cannabis powder to treat a myriad of medical conditions (the
“Cannabis Powder Products”).
The
Company currently expects that the development program under the Research Agreement will be completed within three years, with
commercial sales of Cannabis Powder Products expected to commence in 2021. However, there can be no assurance that the development
program will, in fact, be successful, that research will be completed by 2021 or that commercially viable Cannabis Powder Products
will be developed and be accepted by the market in a timely manner, if at all.
In
addition, on May 2, 2018 the Company entered into a separate License Agreement with Yissum under which Canna Powder Israel was
granted the exclusive license to commercially exploit any technology related to the Cannabis Powder Products resulting from the
efforts under the Research Agreement (the “License”). The License shall expire on the latter of: (i) the date of expiration
in such country of the last to expire Licensed Patent included in the Licensed Technology; (ii) the date of expiration of any
exclusivity on the Product granted by a regulatory or government body in such country; or (iii) twenty years from the date of
the first commercial sale in such country. Should the periods referred to in Subsections (i) or (ii) expire in a particular country
prior to the period referred to in Subsection (iii), above, the license in that country or those countries shall be deemed a license
to the Know-How during such post-expiration period. The License Agreement further provides that Canna Powder Israel shall pay
Yissum the following during the term of the agreement: (i) a royalty equal to 4% of net sales of the Cannabis Powder Products;
and (ii) a sublicense fee equal to 20% of any sublicense consideration received by Canna Powder Israel, as defined in the License
Agreement.
The
Subsidiary commenced efforts to develop the formulation and process to produce medical products using new technology involving
nano-powder derived from cannabis oil. Development of Canna Products is being conducted at the Hebrew University pursuant to the
term of the Feasibility Study and Option Agreement under the supervision of the inventor of the technology, Professor Shlomo Magdassi.
Products will be supplied to producers of medical cannabis products.
In
addition, the Company has signed a binding memorandum of understating with UNV Medicine Ltd. (“UNV”, a public company
organized under the laws of Israel), under which Canna Powder Ltd paid $274,531 to UNV and in return UNV will finance and purchase
a line of production equipment to be used for the production of the Canna Products, based on the specifications that will be transferred
to UNV by Canna Israel. In addition, Canna Ltd received 200,000 UNV Shares on which it recorded an unrealized gain in marketable
securities of $116,010 as of March 31, 2019 and unrealized loss of $166,367 as of December 31, 2018.
The
Company currently expects that the research and development program under the Agreement will be completed within three years,
with commercial sales starting in 2021, However, there can be no assurance that the development of the technology will be successful
or if successful in the anticipated timeframe. Additionally, there can be no assurance that the Company may not require additional
capital to fully implement its business plan and complete production of commercially viable products based on the technology being
developed.
In
the commercial stage, the Company’s plan is to establish and operate several facilities for the production of medical cannabis
and cannabis-based powders for medical use, in locations to be determined by the Company according to their size and regulatory
environment. While there can be no assurance, at present the Company believes that it will be able to produce cannabis powders
for medical uses at a significant cost advantage.
Results
of Operations during the three months ended March 31, 2019 as compared to the three months ended March 31, 2018.
Revenues
We have not generated any revenues in the
three months ended March 31, 2019 and March 31, 2018.
Operating Expenses
Total operating expenses for the three
months ended March 31, 2019 were $489,5475 as compared to total operating expenses of $105,995 for the three months ended March
31, 2017. Our research and development expenses during the three months ended March 31, 2019 were $30,405 as compared to the
three months ended March 31, 2018 in which the research and development expenses were $38,812. The decrease was due to research
and development activities of the new subsidiary.
Our
general and administrative expenses during the three months ended March 31, 2019 were $459,070, respectively as compared to the
three months ended March 31, 2018 in which we had general and administrative expense of $67,183. The increase was due to general
and administrative expenses incurred in the subsidiary.
We
incurred a net loss attributable to the Company of $478,968 during the three months ended March 31, 2019 compared $98,043
during the same period in the prior year.
The
loss attributable to non-controlling interest for the three months ended March 31, 2019 was $10,507, compared to $7,952 during
the same period in the prior year.
Liquidity
and Capital Resources
As
of March
31, 2019 we had $951,017 in total assets consisting
of cash and cash equivalents of $707,395, marketable securities of $224,174 and prepaid assets of $19,448.
We
had positive working capital of $946,017 as of March 31, 2019 compared to $702,097 at December 31, 2018. Such working capital
has been sufficient to sustain our operations to date. Our total liabilities as of March 31, 2019 were $5,000 compared to $25,159
at December 31, 2018.
Net
Cash Used in Operating Activities
During
the three months ended March 31, 2019, we used $235,615 in our operating activities. This resulted from a net loss of $478,968
attributable to Canna Powder, Inc. $10,507 loss attributable to non-controlling interest, decrease of $20,159 in accounts payable
and accrued liabilities and increase in prepaid expenses of $6,601, offset by non-cash compensation of $280,620.
During
the three months ended March 31, 2018, we used $119,260 in our operating activities. This resulted from a net loss of $98,043
attributable to Canna Powder, Inc. $7,952 loss attributable to non-controlling interest and increase in prepaid expenses of $13,265.
Net
Cash Provided by Financing Activities
During
the three months ended March 31, 2019, we financed our negative cash flow by financing activities through sale of common stock
in the amount of $334,000.
During
the three months ended March 31, 2018, we financed our negative cash flow by financing activities through sale of common stock
in the amount of $123,600, offset by principal payment on debt in the amount of $2,687.
During
the three months ended March 31, 2018 and three months ended March 2019 there were no investment activities.
While
management of the Company believes that the Company will be successful in its current and planned operating activities, there
can be no assurance that the Company will be successful in developing and commercializing it planned products or if successful
in generating sufficient revenues to earn a profit and sustain the operations of the Company. The Company intends to finance its
operations by the sale of equity or debt securities unless and until we begin to generate revenues from licensing our products
which are in development.
Our
ability to create sufficient working capital to sustain us over the next twelve-month period, and beyond, is dependent on our
entering into additional licensing agreements and on our success in issuing additional debt or equity or entering into strategic
arrangements with a third party. There can be no assurance that sufficient capital will be available to us, and if available on
favorable terms. We currently have no agreements, arrangements or understandings with any person to obtain funds through bank
loans, lines of credit or any other sources.
ITEM
3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
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We
are a smaller reporting company and are not required to provide this information.
ITEM
4. CONTROLS AND PROCEDURES
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Evaluation
of disclosure controls and procedures.
Under
the supervision and with the participation of our management, including our principal executive officer and principal financial
officer, as of March 31, 2019, we conducted an evaluation of our disclosure controls and procedures, as such term is defined under
Rule 13a-15(e) and Rule 15d-15(e) promulgated under the Securities Exchange Act of 1934, as amended. Based on this evaluation,
our principal executive officer and principal financial officer have concluded that, based on the material weaknesses discussed
below, our disclosure controls and procedures were not effective as of such date to ensure that information required to be disclosed
by us in reports filed or submitted under the Securities Exchange Act were recorded, processed, summarized, and reported within
the time periods specified in the Securities and Exchange Act Commission’s rules and forms and that our disclosure controls are
not effectively designed to ensure that information required to be disclosed by us in the reports that we file or submit under
the Securities Exchange Act is accumulated and communicated to management, including our principal executive officer and principal
financial officer, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.
Our internal controls are not effective
for the following reasons: (i) there is an inadequate segregation of duties consistent with control objectives as management is
comprised of only two persons, one of which is the Company’s principal executive officer and principal financial officer and,
(ii) the Company does not have a formal audit committee with a financial expert, and thus the Company lacks the board oversight
role within the financial reporting process.
Changes
in internal controls.
During the quarterly period covered by this report, no changes occurred in our internal control over
financial reporting that materially affected, or is reasonably likely to materially affect, our internal control over financial
reporting.