NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
For
the Years Ended December 31, 2021 and 2020
(Expressed
in US Dollars, except where noted)
AgriFORCE
Growing Systems Ltd. (the “Company”) was incorporated as a private company by Articles of Incorporation issued pursuant to
the provisions of the Business Corporations Act (British Columbia) on December 22, 2017. The Company’s registered and records office
address is at 300 – 2233 Columbia Street, Vancouver, British Columbia, Canada, V5Y 0M6. On February 13, 2018, the Company changed
its name from 1146470 B.C. Ltd to Canivate Growing Systems Ltd. On November 22, 2019 the Company changed its name from Canivate Growing
Systems Ltd. to AgriFORCE Growing Systems Ltd.
The
Company is an innovative agriculture-focused technology company that delivers reliable, financially robust solutions for high value crops
through our proprietary facility design and automation Intellectual Property to businesses and enterprises globally. The Company intends
to operate in the plant based pharmaceutical, nutraceutical, and other high value crop markets using its unique proprietary facility
design and hydroponics based automated growing system that enable cultivators to effectively grow crops in a controlled environment.
The Company calls its facility design and automated growing system the “AgriFORCE grow house”. The Company has designed its
AgriFORCE grow house to produce in virtually any environmental condition and to optimize crop yields to as near their full genetic potential
possible whilst substantially eliminating the need for the use of pesticides and/or irradiation.
Basis
of Presentation
The
accompanying consolidated financial statements (the “financial statements”) have been prepared in accordance with accounting
principles generally accepted in the United States of America (“U.S. GAAP”).
The
financial statements and accompanying notes are the representations of the Company’s management, who is responsible for their integrity
and objectivity. In the opinion of the Company’s management, the financial statements reflect all adjustments, which are normal
and recurring in nature, necessary for fair financial statement presentation.
Principal
of Consolidation
Our
consolidated financial statements include the accounts of our wholly owned subsidiaries. We consolidate variable interest entities (VIEs)
when we have variable interests and are the primary beneficiary.
All
inter-company balances and transactions have been eliminated on consolidation. These consolidated financial statements include the accounts
of the Company and its wholly owned subsidiaries:
SCHEDULE OF CONSOLIDATED FINANCIAL STATEMENTS
Name
of entity: |
|
Country
of Incorporation |
|
Purpose |
|
Date
of Incorporation |
|
AgriFORCE
Growing Systems Ltd. |
|
Canada |
|
Parent
Company |
|
Dec
22, 2017 |
|
Canivate
Growing Solutions Ltd.** |
|
Canada |
|
Management
Company |
|
May
22, 2018 |
|
Daybreak
Ag Systems Ltd. |
|
Canada |
|
Intellectual
Property Development |
|
Dec
4, 2019 |
|
AgriFORCE
Holdings Inc.* |
|
United
States |
|
Intellectual
Property |
|
Aug
31, 2018 |
|
West
Pender Holdings, Inc. |
|
United
States |
|
Real
Estate Holding and Development Company |
|
Sep
1, 2018 |
|
AgriFORCE
Investments Inc. |
|
United
States |
|
Holding
Company |
|
Apr
9, 2019 |
|
West
Pender Management Co. |
|
United
States |
|
Management
Advisory Services |
|
Jul
9, 2019 |
|
AGI
IP Co. |
|
United
States |
|
Intellectual
Property |
|
Mar
5, 2020 |
|
* |
AgriFORCE Holdings Inc. was dissolved during the year ended December 31, 2020. |
** |
Canivate Growing Solutions Ltd. was dissolved during the year ended December 31,
2021. |
During
the year ended December 31, 2019, AgriFORCE Investments Inc., West Pender Holdings, Inc. and AgriFORCE Holdings Inc., wholly owned subsidiaries
of the Company, commenced operations and their financial results are consolidated into the results of the Company. West Pender Management
Co., a wholly owned subsidiary commenced operations in 2021 and its results are consolidated into the results of the Company. All other
subsidiaries have been created and did not have any operating activities or Financial Statements as at December 31, 2021 and 2020.
Functional
and Reporting Currency
The
functional currency for each entity included in these consolidated financial statements is the currency of the primary economic environment
in which the entity operates. These consolidated financial statements are presented in United States dollars (“U.S. dollars”).
Currency conversion to U.S. dollars is performed in accordance with ASC 830, Foreign Currency Matters.
Use
of Estimates
The
preparation of our financial statements in accordance with U.S. generally accepted accounting principles requires us to make estimates
and assumptions that affect the amounts reported in our consolidated financial statements and accompanying notes. Significant estimates
reflected in these financial statements include, but are not limited to, accounting for share-based compensation, valuation of warrant
liability, as well as depreciation method. Actual results could differ from these estimates and those differences could be material.
Going Concern
The
Company has incurred substantial operating losses since its inception and expects to continue to incur significant operating losses for
the foreseeable future. As reflected in the financial statements for the year ended December 31, 2021, the Company had a net loss of
$6.6 million, $5.1 million of net cash used in operating activities, and the Company had working capital of $5.8 million.
The
accompanying financial statements have been prepared on a going concern basis, which contemplates the realization of assets and satisfaction
of liabilities in the normal course of business. The financial statements do not include any adjustments relating to the recoverability
and classification of recorded asset amounts or the amounts and classification of liabilities that might result from the outcome of this
uncertainty. The Company is at the stage of development of its first facility and other Intellectual Property. As such it is likely that
additional financing will be needed by the Company to fund its operations and to develop and commercialize its technology. These factors
raise substantial doubt about the Company’s ability to continue as a going concern. For the next twelve months from issuance of
these financial statements, the Company will seek to obtain additional capital through the sale of debt or equity financings or other
arrangements to fund operations; however, there can be no assurance that the Company will be able to raise needed capital under acceptable
terms, if at all. The sale of additional equity may dilute existing shareholders and newly issued shares may contain senior rights and
preferences compared to our currently outstanding common shares. Issued debt securities may contain covenants and limit the Company’s
ability to pay dividends or make other distributions to shareholders. If the Company is unable to obtain such additional financing, future
operations would need to be scaled back or discontinued. Due to the uncertainty in the Company’s ability to raise capital, management
believes that there is substantial doubt in the Company’s ability to continue as a going concern for twelve months from the issuance
of these financial statements.
Reverse
Stock Split
On
November 29, 2020, the Company effectuated a one-for-4.75 reverse stock split of the Company’s common shares (the “Reverse
Split”). As a result of the Reverse Split, every 4.75 shares of the Company’s old common shares were converted into one share
of the Company’s new common shares. Fractional shares resulting from the reverse split were rounded to the nearest whole number.
The Reverse Split automatically and proportionately adjusted, based on the 1:4.75 split ratio, all issued and outstanding shares of the
Company’s common shares, as well as common shares underlying convertible preferred shares, convertible debentures, stock options
and warrants outstanding at the time of the effectiveness of the Reverse Split. The exercise price on outstanding equity based-grants
was proportionately increased, while the number of shares available under the Company’s equity-based plans was also proportionately
reduced. Share and per share data (except par value) for the periods presented reflect the effects of the Reverse Split. References to
numbers of common shares and per share data in the accompanying financial statements and notes thereto for periods ended prior to November
29, 2020 have been adjusted to reflect the Reverse Split on a retroactive basis.
3.
|
SIGNIFICANT
ACCOUNTING POLICIES |
Cash
The
Company’s cash consists of cash maintained in checking and interest-bearing accounts. The Company accounts for financial instruments
with original maturities of three months or less at the date of purchase as cash equivalents. The Company held no cash equivalents as
of December 31, 2021 and 2020.
Property
and Equipment
Property
and equipment are initially recognized at acquisition cost or manufacturing cost, including any costs directly attributable to bringing
the assets to the location and condition necessary for them to be capable of operating in the manner intended by the Company’s
management. Property, plant and equipment are subsequently measured at cost less accumulated depreciation and impairment losses.
Depreciation
is recognized on a straight-line basis to write down the cost less estimated residual value of computer equipment and furniture and fixtures.
The following useful lives are applied:
SCHEDULE OF ESTIMATED RESIDUAL VALUE OF COMPUTER EQUIPMENT AND FURNITURE AND FIXTURES
Computer
equipment |
3
years |
Furniture
and fixtures |
7
years |
Gains
or losses arising on the disposal of property, plant and equipment are determined as the difference between the disposal proceeds and
the carrying amount of the assets and are recognized in profit or loss within other income or other expenses.
Construction
in progress includes construction progress payments, deposits, engineering costs, interest expense for debt financing on long-term construction
projects and other costs directly related to the construction of the facilities. Expenditures are capitalized during the construction
period and construction in progress is transferred to the relevant class of property and equipment when the assets are available for
use, at which point the depreciation of the asset commences.
Impairment
of Long-Lived Assets
The
Company reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying value of an asset
may not be recoverable. In order to determine if assets have been impaired, assets are grouped and tested at the lowest level for which
identifiable independent cash flows are available (“asset group”). An impairment loss is recognized when the sum of projected
undiscounted cash flows is less than the carrying value of the asset group. The measurement of the impairment loss to be recognized is
based on the difference between the fair value and the carrying value of the asset group. Fair value can be determined using a market
approach, income approach or cost approach. The reversal of impairment losses is prohibited.
Deferred
IPO Costs
Deferred
IPO costs represent legal, accounting and other direct costs related to the Company’s efforts to raise capital through an initial
public offering of the Company’s common stock (“IPO”). There were no IPO costs incurred prior to 2020. The Company
completed the IPO in July 2021 and accordingly all deferred IPO costs, except for the portion allocated to warrant liability, were reclassified
to additional paid-in capital as a reduction of the IPO proceeds. The portion allocated to warrant liability was expensed in the statement
of comprehensive loss.
Revenue
Recognition
The
Company has not recorded any revenues since its inception. However, in the future, the Company expects to generate returns from any or
all the revenue sources below from its customers:
● |
Rental
income from facilities. |
● |
Intellectual
property income from the license of the facilities |
● |
Management
and advisory fees from management service contracts and |
On
January 1, 2018, the Company early adopted ASU No. 2014-09, Revenue from Contracts with Customers and all related amendments (“ASC
606” or “the new revenue standard”). ASC 606 is a single comprehensive model for entities to use in accounting for
revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance.
The new revenue standard is based on the principle that an entity should recognize revenue to depict the transfer of 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.
To achieve this core principle, ASC 606 provides that an entity should apply the following steps: (1) identify the contract(s) with a
customer, (2) identify the performance obligations in the contract, (3) determine the transaction price, (4) allocate the transaction
price to the performance obligations in the contract and (5) recognize revenue when (or as) the entity satisfies a performance obligation.
The new revenue standard also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows
arising from customer contracts, and costs to obtain or fulfill contracts. The Company will apply ASC 606 prospectively to all contracts.
Loss
per Common Share
The
Company presents basic and diluted loss per share data for its common shares. Basic loss per common share is calculated by dividing the
profit or loss attributable to common shareholders of the Company by the weighted average number of common shares outstanding during
the year. Diluted loss per common share is calculated by adjusting the weighted average number of common shares outstanding to assume
conversion of all potentially dilutive share equivalents, such as stock options and warrants and assumes the receipt of proceeds upon
exercise of the dilutive securities to determine the number of shares assumed to be purchased at the average market price during the
year. Diluted net loss attributable to common shareholders per share does not differ from basic net loss attributable to common shareholders
per share for the years ended December 31, 2021 and December 31, 2020, since the effect of the Company’s stock options and warrants
are anti-dilutive.
Research
and Development
Expenditure
on research and development activities, undertaken with the prospect of gaining new scientific or technical knowledge and understanding,
is recognized as expense when incurred.
Foreign
Currency Transactions
The
financial statements of the Company and its subsidiaries whose functional currencies are the local currencies are translated into
U.S. dollars for consolidation as follows: assets and liabilities at the exchange rate as of the balance sheet date, shareholders’
equity at the historical rates of exchange, and income and expense amounts at the average exchange rate for the period. Translation adjustments
resulting from the translation of the subsidiaries’ accounts are included in “Accumulated other comprehensive income”
as equity in the consolidated balance sheets. Transactions denominated in currencies other than the applicable functional currency are
converted to the functional currency at the exchange rate on the transaction date. At period end, monetary assets and liabilities are
remeasured to the reporting currency using exchange rates in effect at the balance sheet date. Non-monetary assets and liabilities are
remeasured at historical exchange rates. Gains and losses resulting from foreign currency transactions are included within non-operating
expenses.
Fair
value of Financial Instruments
The
fair value of the Company’s accounts receivable, accounts payable and other current liabilities approximate their carrying amounts
due to the relative short maturities of these items.
As
part of the issuance of debentures on March 24, 2021, the Company issued warrants having strike price denominated in U.S. Dollars. This
creates an obligation to issue shares for a price that is not denominated in the Company’s functional currency and renders the
warrants not indexed to the Company’s stock, and therefore, must be classified as a derivative liability and measured at fair value.
On the same basis, the Series A Warrants and the representative warrants issued as part of the IPO are also classified as a derivative
liability and measured at fair value.
The
fair value of the Company’s warrants is determined in accordance with FASB ASC 820, “Fair Value Measurement,” which
establishes a fair value hierarchy that prioritizes the assumptions (inputs) to valuation techniques used to price assets or liabilities
that are measured at fair value. The hierarchy, as defined below, gives the highest priority to unadjusted quoted prices in active markets
for identical assets or liabilities and the lowest priority to unobservable inputs. The guidance for fair value measurements requires
that assets and liabilities measured at fair value be classified and disclosed in one of the following categories:
● |
Level
1: Defined as observable inputs, such as quoted (unadjusted) prices in active markets for identical assets or liabilities. |
|
|
● |
Level
2: Defined as observable inputs other than quoted prices included in Level 1. This includes quoted prices for similar assets or liabilities
in active markets, quoted prices for identical or similar assets and liabilities in markets that are not active, or other inputs
that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
|
|
|
● |
Level
3: Defined as unobservable inputs to the valuation methodology that are supported by little or no market activity and that are significant
to the measurement of the fair value of the assets or liabilities. Level 3 assets and liabilities include those whose fair value
measurements are determined using pricing models, discounted cash flow methodologies or similar valuation techniques, as well as
significant management judgment or estimation. |
As
of December 31, 2021, the Company’s warrant liability related to IPO warrants and representative’s warrant amounting to $1,418,964
(December 31, 2020 - $nil) is reported at fair value and categorized as Level 1 inputs. Whereas, the fair value of warrant liability
related to Bridge warrants that were issued and exercised during the year was categorized as level 3 inputs. (See Note 9 and Note 11)
Reclassifications
The
Company has reclassified certain amounts in the 2020 consolidated financial statements to comply with the 2021 presentation.
Income
Taxes
Current
tax expense is the expected tax payable on the taxable income for the period, using tax rates enacted at period-end.
Deferred
tax assets, including those arising from tax loss carryforwards, requires management to assess the likelihood that the Company will generate
sufficient taxable earnings in future periods in order to utilize recognized deferred tax assets. Assumptions about the generation of
future taxable profits depend on management’s estimates of future cash flows. In addition, future changes in tax laws could limit
the ability of the Company to obtain tax deductions in future periods. To the extent that future cash flows and taxable income differ
significantly from estimates, the ability of the Company to realize the net deferred tax assets recorded at the reporting date could
be impacted.
The
Company operates in various tax jurisdictions and is subject to audit by various tax authorities.
The
Company records uncertain tax positions based on a two-step process whereby (1) a determination is made as to whether it is more likely
than not that the tax positions will be sustained based on the technical merits of the position and (2) for those tax positions that
meet the more-likely-than-not recognition threshold the Company recognizes the largest amount of tax benefit that is greater than 50%
likely to be realized upon ultimate settlement with the related tax authority. The Company’s policy is to recognize interest and
penalties accrued on any unrecognized tax benefits as a component of income tax expense. Significant judgment is required in the identification
of uncertain tax positions and in the estimation of penalties and interest on uncertain tax positions.
There
were no material uncertain tax positions as of December 31, 2021 and 2020.
Share
Based Compensation
The
Company generally uses the straight-line method to allocate compensation cost to reporting periods over each optionee’s requisite
service period, which is generally the vesting period, and estimates the fair value of stock-based awards to employees and directors
using the Black-Scholes option-valuation model (the “Black-Scholes model”). The Black-Scholes model requires the input of
subjective assumptions, including volatility, the expected term and the fair value of the underlying common shares on the date of grant,
among other inputs. The Company recognizes any forfeitures as they occur.
Recent
Accounting Pronouncements
The
Company is an “emerging growth company,” as defined in Section 2(a) of the Securities Act of 1933, as amended, as modified
by the Jumpstart Our Business Start-ups Act of 2012, (the “JOBS Act”). Section 107 of the JOBS Act provides that an emerging
growth company can take advantage of the extended transition period provided in Section 13(a) of the Securities Exchange Act of 1934,
as amended, for complying with new or revised accounting standards applicable to public companies. In other words, an emerging growth
company can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies.
Effective
January 1, 2021, the Company adopted ASU 2019-12, “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes.”
ASU 2019-12 simplifies the accounting for income taxes by removing exceptions within the general principles of Topic 740 regarding the
calculation of deferred tax liabilities, the incremental approach for intra-period tax allocation, and calculating income taxes in an
interim period. In addition, the ASU adds clarifications to the accounting for franchise tax (or similar tax). which is partially based
on income, evaluating tax basis of goodwill recognized from a business combination, and reflecting the effect of any enacted changes
in tax laws or rates in the annual effective tax rate computation in the interim period that includes the enactment date. The adoption
of this new guidance did not have a material impact to these financial statements.
In
August 2020, the FASB issued ASU 2020-06 “Debt – Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives
and Hedging – Contracts in Entity’s Own Equity” (“ASU 2020-06”). The intention of ASU 2020-06 is to address
the complexities in accounting for certain financial instruments with a debt and equity component. Under ASU 2020-06, the number of accounting
models for convertible notes will be reduced and entities that issue convertible debt will be required to use the if-converted method
for the computation of diluted “Earnings per share” under ASC 260. ASC 2020-06 is effective for fiscal years beginning after
December 15, 2021 and may be adopted through either a modified retrospective method of transition or a fully retrospective method of
transition. We are currently assessing the impact this guidance will have on our financial statements.
In
May 2021, the FASB issued ASU 2021-04 - Earnings Per Share (Topic 260), Debt - Modifications and Extinguishments (Subtopic 470-50), Compensation
- Stock Compensation (Topic 718), and Derivatives and Hedging - Contracts in Entity’s Own Equity (Subtopic 815-40): Issuer’s
Accounting for Certain Modifications or Exchanges of Freestanding Equity-Classified Written Call Options (a consensus of the FASB Emerging
Issues Task Force). ASU 2021-04 clarifies and reduces diversity in an issuer’s accounting for modifications or exchanges of freestanding
equity-classified written call options that remain equity classified after modification or exchange. Modifications and exchanges should
be treated as an exchange of the original instrument for a new instrument. The amendment requires entities to measure the effect as the
difference between the fair value of the modified or exchanged written call option and the fair value of that written call option immediately
before it is modified or exchanged if the modification or the exchange that is a part of or directly related to a modification or an
exchange of an existing debt instrument or line-of-credit or revolving-debt arrangements.
For
all other modifications or exchanges, the effect should be measured as the excess, if any, of the fair value of the modified or exchanged
written call option over the fair value of that written call option immediately before it is modified or exchanged for all other modifications
or exchanges. The amendments require entities to recognize the effect on the basis of the substance of the transaction, in the same manner
as if cash had been paid as consideration. The amendments also require entities to recognize the effect in accordance with the guidance
in Topic 718, Compensation - Stock Compensation. ASU No. 2021-04 is effective for fiscal years beginning after December 15, 2021, including
interim periods within those fiscal years. ASU 2021-04 will be adopted on January 1, 2022 and will not have a material impact to these
financial statements.
In
June 2016, the FASB issued ASU 2016-13, “Financial Instruments - Credit Losses.” The standard, including subsequently issued
amendments, requires a financial asset measured at amortized cost basis, such as accounts receivable and certain other financial assets,
to be presented at the net amount expected to be collected based on relevant information about past events, including historical experience,
current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. This ASU is effective
for fiscal years beginning after December 15, 2023, and interim periods within those fiscal years, and requires the modified retrospective
approach. Early adoption is permitted. Based on the composition of the Company’s trade receivables and other financial assets,
current market conditions, and historical credit loss activity, the Company is currently in the process of evaluating the impact of this
guidance on our financial statements.
In
February 2016, the FASB issued ASU 2016-02, Leases, and has subsequently issued several supplemental and/or clarifying ASU’s (collectively,
“Topic 842”), which requires a dual approach for lease accounting under which a lessee would account for leases as finance
leases or operating leases. Both finance leases and operating leases may result in the lessee recognizing a right of use asset and a
corresponding lease liability. For finance leases, the lessee would recognize interest expense and amortization of the right-of-use asset,
and for operating leases, the lessee would recognize lease expense on a straight-line basis. This ASU is effective for fiscal years beginning
after December 15, 2021, and interim periods within those fiscal years, and allows a modified retrospective approach. Early adoption
is permitted. The Company is currently in the process of evaluating the impact of this guidance on our financial statements.
In
October 2021, the Financial Accounting Standards Board (“FASB”) issued ASU 2021-08, Business Combinations (Topic 805): Accounting
for Contract Assets and Contract Liabilities from Contracts with Customers. Under ASU 2021-08, an acquirer must recognize and measure
contract assets and contract liabilities acquired in a business combination in accordance with Topic 606. The guidance is effective for
interim and annual periods beginning after December 15, 2022, with early adoption permitted. The Company is currently in the process
of evaluating the impact of this guidance on our financial statements.
Other
accounting standards that have been issued or proposed by FASB that do not require adoption until a future date are not expected to have
a material impact on the consolidated financial statements upon adoption. The Company does not discuss recent pronouncements that are
not anticipated to have an impact on or are unrelated to its financial condition, results of operations, cash flows or disclosures.
4. |
PROPERTY
AND EQUIPMENT |
Property
and equipment consist of the following:
SCHEDULE OF PROPERTY AND EQUIPMENT
| |
December 31, 2021 | | |
December 31, 2020 | |
Computer equipment | |
$ | 22,708 | | |
$ | 13,473 | |
Furniture and fixtures | |
| 39,997 | | |
| 36,323 | |
Total property and equipment | |
| 62,705 | | |
| 49,796 | |
Less: Accumulated depreciation | |
| (21,734 | ) | |
| (21,353 | ) |
Property and equipment, net | |
$ | 40,971 | | |
$ | 28,443 | |
Depreciation
expense on property and equipment, was $11,797 and $9,059 for the years ended December 31, 2021 and 2020, respectively.
5. |
CONSTRUCTION
IN PROGRESS |
The
Company engaged outside contractors to begin construction work on its first facility. As of December 31, 2021, $2,079,914 (December 31,
2020 – $2,071,093) represents progress payments related to facility construction.
6. |
PREPAID
EXPENSES AND DEPOSITS |
SCHEDULE OF PREPAID EXPENSES AND OTHER CURRENT ASSETS
| |
December 31, 2021 | | |
December 31, 2020 | |
Deposits | |
$ | 32,000 | | |
$ | 170,000 | |
Legal retainer | |
| 33,692 | | |
| 43,038 | |
Prepaid expenses | |
| 214,445 | | |
| - | |
Others | |
| 28,903 | | |
| - | |
Prepaid Expense and Other
Assets | |
$ | 309,040 | | |
$ | 213,038 | |
During
the year ended December 31, 2020, the Company entered into a land purchase agreement in relation to construction of a facility in Coachella,
California. A deposit of $170,000 has been paid and the balance of the purchase price is subject to financing. On April 6, 2021, the
scheduled close of escrow was extended to April 30, 2021 and the purchase price was increased to $4.4 million. The Company wrote off
the non-refundable portion of the deposit amounting to $150,000 as the close of escrow period has lapsed; however the Company is currently
renegotiating the terms of the agreement.
Others
include an office lease deposit amounting to $77,774, of which $50,608 is recorded under non-current assets. (December 31, 2020 - $Nil).
Intangible
asset represents $1,477,237 of Intellectual Property (“IP”) acquired under an Asset purchase agreement from Manna
Nutritional Group, LLC (“MNG”) on September 10, 2021. The IP encompasses patent-pending technologies to naturally
process and convert grain, pulses and root vegetables, resulting in low-starch, low-sugar, high-protein, fiber-rich baking flour
products, as well as a wide range of breakfast cereals, juices, natural sweeteners and baking enhancers. The terms of the agreement
are as below:
The
aggregate purchase price for the Purchased Assets (the “Purchase Price”) is up to $14,475,000, and shall consist of the following,
subject to the terms and conditions of this Agreement, as follows:
|
(i) |
The
number of shares of Company’s common stock (rounded up to the nearest whole number), restricted as to resale under Section
4(a)(2) of the Securities Act, equal to the quotient of (i) $5,000,000 divided by (ii) a per share price equal to the average of
the volume weighted average price (“VWAP”) of the Company’s common shares for the ten trading days immediately
preceding the Due Diligence Deadline (as defined below) (the “Closing Shares”). The Closing Shares, to be due on the
Closing Date, which Closing Shares are restricted as to resale and issued under a private placement exempt from registration under
Section 4(a) (2) of the Securities Act, are subject to release of restriction and lockup on a quarterly basis over ten quarters commencing
on the Closing Date in equal amounts of shares over ten consecutive calendar quarters. The Closing Shares are due and will be issued
to MNG upon the date that is 180 days from the Effective Date (September 10, 2021) (the “Due Diligence Deadline”), with
such due diligence being comprised of (the following three bullet points are the key performance indicators “KPIs”): |
|
● |
Receipt
and Tasting of Flours and Sweeteners by the Company; |
|
● |
Independent
Lab Testing of Flours and Sweeteners by the Company to confirm fiber, protein, and starch content of such products meets the specifications
provided by MNG; and |
|
● |
Completion
by the Company of Third-Party Engineering Process Analysis, included in the scope of work outlined by Covert Engineers, dated August
11, 2021, for conceptual and preliminary plant design for a Pilot Manufacturing Facility. |
|
(ii) |
$1,475,000
in cash, minus any amounts paid to MNG under (iii), payable to MNG at Closing; |
|
(iii) |
$725,000
in cash payable follows: (a) $225,000 payable on the Effective Date; and (b) $500,000 payable within 120 days after the Effective
Date, to reimburse MNG for, without limitation, satisfaction of all the secured debt as listed in Section 2.04 of the Disclosure
Schedules to the Agreement (the “Secured Debt”). |
|
(iv) |
The
number of shares of Company’s common stock (rounded up to the nearest whole number) to be issued in two tranches that equals
(i) $8,000,000 divided by (ii) a per share price equal to the VWAP of the Company’s common shares for the ten trading days
immediately before the issuance date of those shares (“Post Closing Shares”). $5,000,000 of the Post-Closing Shares will
be issued on June 30, 2022, to be held in Escrow. $3,000,000 of the Post-Closing Shares will be issued to MNG on December 31, 2022,
to be held in Escrow. All distributions and dividends attributable to the Post-Closing Shares (collectively, “Dividends”)
will accrue for the benefit of MNG and will be held in Escrow pending release of the Post-Closing Shares, in which case all Dividends
will be released to MNG at the same time as the Post-Closing Shares are so released. Until Post-Closing Shares are released from
Escrow, all voting rights thereto shall be exercised as directed by the Company’s Board of Directors. If a Patent is issued
within 24 months of the Closing Date, and such Patent is transferred to the Company free and clear of all encumbrances, then the
Post-Closing Shares shall be released from Escrow in four equal amounts commencing on the date of issuance of the Patent and then
for the three subsequent three-month anniversaries thereof. |
In
the event that after 24 months from the closing date, a Patent does not issue from the IP, Buyer’s obligation to issue the Post-Closing
Shares and Dividends to MNG will be deemed null and void ab initio and will no longer be due and owing to MNG, and the Post-Closing Shares
shall be released from escrow and returned to the Company, and the Purchase Price shall be adjusted downward dollar for dollar.
Based
on the terms above and in conformity with US GAAP, the Company accounted for purchase as an asset acquisition and has deemed the asset
purchased as an in-process research and development. The Company has further deemed the asset to be of indefinite life until the completion
of the associated research and development (“R&D”) activities. Once completed and commercialized, the asset will be amortized
over its useful life. The recognition of the IP asset is based on the payments made to date of $225,000 and contingent consideration
that is probable and reasonably estimable as of the reporting date. Subsequent changes in contingent consideration are recorded against
cost. As of December 31, 2021, the company has recorded $500,000 under accrued expenses, related to reimbursement for satisfaction of
secured debt of seller. Further, the company has recorded $753,727 as contingent consideration, which is considered probable and due
on closing. The remaining amounts payable as described above were not deemed to be probable at December 31, 2021, and accordingly have
not been accrued for.
Subsequent
to the year end, the Company paid $500,000 to satisfy the secured debt of seller.
8. |
ACCOUNTS
PAYABLE AND ACCRUED LIABILITIES |
SCHEDULE OF ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
| |
December 31, 2021 | | |
December 31, 2020 | |
Accounts payable | |
$ | 414,117 | | |
$ | 991,565 | |
Accrued expenses | |
| 981,027 | | |
| 905,629 | |
Others | |
| 137,168 | | |
| 33,794 | |
Accounts Payable
and Accrued Liabilities | |
$ | 1,532,312 | | |
$ | 1,930,988 | |
Accounts
payable includes $Nil (December 31, 2020 - $744,191) payable to outside contractor in relation to facility construction. Accrued expenses
include bonus payable of $Nil (December 31, 2020 - $487,983), withholding taxes payable $89,236 (December 31, 2020 - $Nil) and Directors
fees payable of $39,309 (December 31, 2020 - $128,448). Accounts payable and accrued liabilities include a total unpaid IPO cost of $Nil
(December 31, 2020 - $297,437).
9. |
SENIOR
SECURED DEBENTURES |
On
March 24, 2021, the Company entered into a securities purchase agreement with certain accredited investors for the purchase of $750,000
in principal amount ($600,000 subscription amount) of senior secured debentures originally due June 24, 2021 (the “Bridge Loan”).
The imputed interest rate is encompassed within the original issue discount of the debentures and no additional cash interest shall be
due. The debentures were issued pursuant to Section 4(a)(2) of the Securities Act of 1933, as amended, to certain purchasers who are
accredited investors within the meaning of Rule 501 under the Securities Act of 1933, as amended. Transaction costs of $69,000 have been
recorded in connection with the Bridge Loan.
On
June 24, 2021, the due date was extended, for which the Company paid an extension fee of 10,000 common shares with a fair value of $60,000.
The senior secured debentures were repaid in full on July 13, 2021.
As
part of the bridge loan, the debenture holder was issued warrants (the “Bridge Warrants”) to purchase 93,938 common shares
with a strike price of $3.99 per share. The term of the warrants was three years. In accordance with U.S. GAAP, the fair value of the
warrants was initially recorded as a liability in the balance sheet using Black-Scholes option-pricing model. The Company remeasures
the fair value of the warrants liability at each reporting date until the warrants are exercised or have expired. Changes in the fair
value of the warrants liability is reported in the statements of comprehensive income / (loss) as income or expense. The fair value of
the warrants liability is subject to significant fluctuation based on changes in the inputs to the Black-Scholes option-pricing model,
including our common stock price, expected volatility, expected term, the risk-free interest rate and dividend yield. The market price
for our common stock may be volatile. Consequently, future fluctuations in the price of our common stock may cause significant increases
or decreases in the fair value of the warrants.
The
changes in the fair value of the Bridge Warrants amounting to $203,456 is charged to the statement of comprehensive income / (loss).
The warrants were exercised on October 27, 2021 and accordingly, the warrant liability was extinguished. The fair value of the warrants
prior to exercise was estimated at $64,992, determined using the Black-Scholes option pricing model and the following assumptions; stock
price $2.16, dividend yield – nil, expected volatility 73%, risk free rate of return 0.94%, expected term of 3 years.
During
the year ended December 31, 2020, the Company entered into a loan agreement with Alterna Bank for a principal amount of $31,417
(CAD$ 40,000)
under the Canada Emergency Business Account Program (the “Program”).
The
Program, as set out by the Government of Canada, requires that the funds from this loan shall only be used by the Company to pay non-deferrable
operating expenses including, without limitation, payroll, rent, utilities, insurance, property tax and regularly scheduled debt service,
and may not be used to fund any payments or expenses such as prepayment/refinancing of existing indebtedness, payments of dividends,
distributions and increases in management compensation.
The
loan is interest free for an initial term that ends on December 31, 2023. Repaying the loan balance on or before December 31, 2023 will
result in loan forgiveness of up to a third of loan value (up to CAD $20,000). Any outstanding loan after initial term carries an interest
rate of 5% per annum, payable monthly during the extended term i.e. January 31, 2024 to December 31, 2025.
In
April 2021, the Company applied for additional loan with Alterna Bank under the Program and received $15,909 (CAD$20,000). The expansion
loan is subject to the original terms and conditions of the Program.
As
of December 31, 2021, the warrant liability represents aggregate fair value of publicly traded 3,088,198 Series A Warrants and 135,999
representative’s warrants.
The
representative’s warrant is exercisable one year from the effective date of the registration statement for the IPO and will expire
three years after the effective date. The exercise price of the representative’s warrant is $6 per share. The warrants have been
deemed compensation by FINRA and are therefore subject to a 180-day lock-up pursuant to Rule 5110(e)(1) of FINRA. The underwriter (or
permitted assignees under Rule 5110(e)(1)) will not sell, transfer, assign, pledge, or hypothecate these warrants or the securities underlying
these warrants, nor will they engage in any hedging, short sale, derivative, put, or call transaction that would result in the effective
economic disposition of the warrants or the underlying securities for a period of 180 days from the date of this prospectus. The exercise
price and number of shares issuable upon exercise of the warrants may be adjusted in certain circumstances including in the event of
a stock dividend, extraordinary cash dividend or recapitalization, reorganization, merger or consolidation.
The
change in fair value on the warrant liability amounting to $1,191,383 is recorded in the statement of comprehensive loss for the year
ended December 30, 2021. This includes change in fair value related to the Bridge Warrants amounting to $203,456.
|
a) |
Authorized
Share Capital |
On
March 1, 2019, the Company changed its share structure with a Directors’ resolution to replace Class – A voting shares with
Common voting Shares, and to eliminate Class-B non-voting shares (where nil were issued), and created a new series of Preferred shares
with no par value and unlimited number of shares. Holders of Preferred shares shall be entitled to receive distribution ahead of holders
of Common shares. In addition, Preferred shareholders are also entitled to a fixed premium (if specifically provided in the special rights
and restrictions attached to a specific series of Preferred shares), prior to any distributions to holders of Common shares in the event
of dissolution, liquidation or winding-up of the Company.
The
Company had the following common share transactions during the year ended December 31, 2020:
|
● |
On
May 2, 2020, the Company declared and issued 86,739 common shares at $3.37 (CAD $4.75) (412,008 common shares at $0.71 (CAD $1.00)
before the Reverse Split) as stock dividend to holders of Series A Preferred shares issued on May 2, 2019. |
|
|
|
|
● |
On
May 10, 2020, the Company declared and issued 48,791 common shares at $3.42 (CAD $4.75) (231,758 common shares at $0.72 (CAD $1.00)
before the Reverse Split) as stock dividend to holders of Series A Preferred shares issued on May 10, 2019. |
|
|
|
|
● |
On
November 2, 2020, the Company declared and issued 86,739 common shares at $3.56 (CAD $4.75) (412,008 common shares at $0.75 (CAD
$1.00) before the Reverse Split) as stock dividend to holders of Series A Preferred shares issued on May 2, 2019. |
|
|
|
|
● |
On
November 10, 2020, the Company declared and issued 48,791 common shares at $3.66 (CAD $4.75) (231,758 common shares at $0.77 (CAD
$1.00) before the Reverse Split) as stock dividend to holders of Series A Preferred shares issued on May 10, 2019. |
|
|
|
|
● |
During
the year ended December 31, 2020, 365,113 (1,734,285 before the Reverse Split) warrants were exercised at a price of CAD $2.38 (CAD
$0.50 before the Reverse Split). |
|
|
|
|
● |
At
various times during the year ended December 31, 2020, the Company issued 100,237 common shares (476,126 before the Reverse Split)
to various consultants for services rendered. |
The
Company had the following common share transactions during the year ended December 31, 2021:
|
● |
On
March 29, 2021, the Company issued 30,000 common shares with a fair value of $179,700 against consulting services from a third party. |
|
|
|
|
● |
On
May 10, 2021, the Company declared, and on May 11, 2021 issued, 86,739 common shares as stock dividend to holders of Series A Preferred
shares issued on May 2, 2019. |
|
|
|
|
● |
On
May 10, 2021, the Company declared, and on May 11, 2021 issued, 48,791 common shares as stock dividend to holders of Series A Preferred
shares issued on May 10, 2019. |
|
|
|
|
● |
On
May 27, 2021, the Company issued to consultants a total of 7,237 common shares. |
|
|
|
|
● |
On
May 27, 2021, the Company issued 820,029 common shares as a result of 1,113,701 stock options exercised on a cashless basis at various
exercise prices. |
|
● |
On
May 28, 2021, the Company’s officers opted to receive a total of 98,356 common shares as bonus compensation for services rendered
and accrued for in 2019 and 2020. |
|
|
|
|
● |
On
June 24, 2021, the Company issued to a consultant working with the senior secured debentures holders, a total of 10,000 common shares
on their behalf, for the term extension of the Bridge Loan (see Note 6). |
|
|
|
|
● |
On
July 12, 2021, the Company completed its IPO whereby it sold a total of 3,127,998 units, each consisting of one common share and
one Series A warrant to purchase one common share, at a public offering price of $5.00 for gross proceeds of $15,639,990. The Company
received net proceeds from the IPO of $14,388,791, after deducting underwriting discounts and commissions of 1,251,199. |
|
|
|
|
● |
On
July 12, 2021, with the closing of the IPO, 2,258,826 common shares were issued upon the conversion of all of its issued and outstanding
Series A Preferred Shares. |
|
|
|
|
● |
On
July 13, 2021, the Company declared and issued, 53,474 common shares as final stock dividend to the holders of Series A Preferred
shares. |
|
|
|
|
● |
On
July 13, 2021, the Company issued to consultants a total of 15,000 common shares. |
|
|
|
|
● |
On
July 15, 2021, the Company issued 39,800 common shares as a result of exercise of 39,800 Series A warrants on cash basis at an exercise
price of $6 per warrant. |
|
|
|
|
● |
On
July 28, 2021, 93,938 common stock purchase warrants were issued to the purchaser of the senior secured debentures, with a term of
three years and a strike price per share of $3.99. |
|
|
|
|
● |
On
September 01, 2021, the Company issued to Directors 19,992 common shares as settlement of accrued directors’ fee. |
|
|
|
|
● |
On
October 1, 2021, the company issued 36,379 common share as part of compensation to Company’s officers and executives. |
|
|
|
|
● |
On
October 1, 2021, the Company issued to a consultant 3,188 common shares against services. |
|
|
|
|
● |
On
October 27, 2021, the Company issued 36,275 common shares as a result of cashless exercise of 93,938 common stock purchase warrants
related to the senior secured debentures. |
|
|
|
|
● |
On
November 27, 2021, the Company issued 7,018 common shares on as a result of exercise of 7,018 stock options at an exercise price
of $1.30 (CAD $1.66). |
|
|
|
|
● |
On
December 31, 2021, the Company issued 35,979 common share as part of compensation to Company’s officers. |
The
Company has adopted a stock option plan (the “Plan”) for its directors, officers, employees and consultants to acquire common
shares of the Company. The terms and conditions of the stock options are determined by the Board of Directors.
On
May 28, 2019, at the Company’s annual general meeting, shareholders approved an amendment to the Stock Option Plan to increase
the number of authorized shares subject to the stock option plan to 15% of the issued and outstanding shares of the Company (including
any unconverted Series A Preferred Shares).
For
the year ended December 31, 2021, the Company recorded aggregate share-based compensation expense of $796,141 (December 31, 2020 - $571,210)
for all stock options on a straight-line basis over the vesting period.
As
of December 31, 2021, 717,019 (December 31, 2020 - 1,450,918) Stock Options were outstanding at a weighted average exercise price of
$5.63 (CAD 7.14) [December 31, 2020 - $2.01 (CAD 2.56)], of which 280,938 (December 31, 2020 - 1,161,726) were exercisable.
The
amounts recognized as share-based payments and stock options are included in share-based compensation on the Statement of Loss and Comprehensive
Loss.
As
of December 31, 2021, there was $634,626 (December 31, 2020 - $275,150) of total unrecognized compensation cost related to non-vested
share-based compensation arrangements granted under the stock option plan; that cost is expected to be recognized over a period of 3
years (December 31, 2020 – 2 years).
The
following summarizes stock option activity during the years ended December 31, 2021 and 2020:
SCHEDULE OF STOCK OPTION ACTIVITY
| |
Number of Options* | | |
Weighted Average Exercise Price* | | |
Weighted Average Remaining Life
(years) | |
| |
| | |
| | |
| |
Balance at December 31, 2019 | |
| 1,106,711 | | |
$ | 1.35 | | |
| 4.98 | |
Granted | |
| 387,760 | | |
$ | 3.73 | | |
| 5.46 | |
Forfeited | |
| (25,132 | ) | |
$ | 1.31 | | |
| - | |
Cancelled | |
| (18,421 | ) | |
$ | 1.31 | | |
| - | |
Balance at December 31, 2020 | |
| 1,450,918 | | |
$ | 2.01 | | |
| 4.38 | |
Granted | |
| 509,788 | | |
$ | 7.00 | | |
| 4.47 | |
Exercised | |
| (1,120,719 | ) | |
| 3.23 | | |
| - | |
Forfeited | |
| (28,947 | ) | |
$ | 4.75 | | |
| - | |
Cancelled | |
| (94,021 | ) | |
$ | 6.70 | | |
| - | |
Balance at December 31, 2021 | |
| 717,019 | | |
$ | 5.84 | | |
| 4.48 | |
* |
reflects the 1:4.75 reverse stock split effected on November 29, 2020. |
The
Company’s outstanding and exercisable stock options at December 31, 2021 were:
SCHEDULE OF OUTSTANDING AND EXERCISABLE STOCK OPTIONS
| |
Outstanding Options* | | |
Exercisable Options* | |
Expiry Date | |
Number | | |
Weighted Average Remaining Life (years) | | |
Weighted Average Exercise Price | | |
Weighted Average Exercise Price | | |
Number | | |
Weighted Average Exercise Price | |
| |
| | | |
| | | |
| CAD
$ | | |
| $ | | |
| | | |
| $ | |
January 31, 2026 | |
| 921 | | |
| 4.09 | | |
| 4.75 | | |
| 3.75 | | |
| 921 | | |
| 3.75 | |
June 30, 2026 | |
| 255,594 | | |
| 4.50 | | |
| 4.75 | | |
| 3.75 | | |
| 211,993 | | |
| 3.75 | |
May 31, 2026 | |
| 355,775 | | |
| 4.42 | | |
| 8.87 | | |
| 7.00 | | |
| 59,296 | | |
| 7.00 | |
July 15, 2026 | |
| 55,445 | | |
| 4.54 | | |
| 8.87 | | |
| 7.00 | | |
| 4,620 | | |
| 7.00 | |
September 30, 2026 | |
| 49,284 | | |
| 4.75 | | |
| 8.87 | | |
| 7.00 | | |
| 4,108 | | |
| 7.00 | |
Total Share Options | |
| 717,019 | | |
| 4.48 | | |
| 7.40 | | |
| 5.84 | | |
| 280,938 | | |
| 4.53 | |
* |
reflects the 1:4.75 reverse stock split effected on November 29, 2020. |
Stock-based
compensation expense recognized is based on options expected to vest, the fair value of each employee option grant during the years ended
December 31, 2021 and 2020 was estimated on the date of grant using the Black-Scholes option pricing model with the following weighted
average assumptions:
SCHEDULE OF WEIGHTED AVERAGE ASSUMPTIONS
| |
December 31, 2021 | | |
December 31, 2020 | |
Expected volatility | |
| 80.00 | % | |
| 79.60 | % |
Expected term (in years) | |
| 3.31 | | |
| 3.44 | |
Risk-free interest rate | |
| 0.92 | % | |
| 0.45 | % |
Fair value of options | |
$ | 2.59 | | |
$ | 1.90 | |
The
Company’s outstanding warrants as of December 31, 2021 were:
SCHEDULE OF OUTSTANDING WARRANTS
| |
Number of warrants* | | |
Weighted average exercise price* | | |
Weighted average exercise price* | | |
Expiry Date |
| |
| | | |
| CAD | | |
| $ | | |
|
| |
| | | |
| | | |
| | | |
|
Outstanding, December 31, 2019 | |
| 3,398,996 | | |
| 7.70 | | |
| 6.05 | | |
|
Exercised during quarter 4, 2020 | |
| (365,112 | ) | |
| 2.38 | | |
| 1.87 | | |
December 21, 2021** |
Expired during quarter 4, 2020 | |
| (63,157 | ) | |
| 2.38 | | |
| 1.87 | | |
October 15, 2021** |
Expired during quarter 4, 2020 | |
| (163,610 | ) | |
| 2.38 | | |
| 1.87 | | |
December 21, 2021** |
Expired during quarter 4, 2020 | |
| (33,684 | ) | |
| 1.66 | | |
| 1.30 | | |
December 31, 2021** |
Expired during quarter 4, 2020 | |
| (210,526 | ) | |
| 2.38 | | |
| 1.87 | | |
January 16, 2022** |
Expired during quarter 4, 2020 | |
| (16,842 | ) | |
| 1.66 | | |
| 1.30 | | |
January 21, 2022** |
Outstanding, December 31, 2020 | |
| 2,546,065 | | |
| 9.50 | | |
| 7.46 | | |
|
Granted during quarter 3, 2021 | |
| 3,263,997 | | |
| 7.48 | | |
| 6.00 | | |
July 12, 2024 |
Granted during quarter 3, 2021 | |
| 93,938 | | |
| 4.98 | | |
| 3.99 | | |
July 28, 2024 |
Exercised during quarter 3, 2021 | |
| (39,800 | ) | |
| 7.48 | | |
| 6.00 | | |
July 12, 2024 |
Exercised during quarter 4, 2021 | |
| (93,938 | ) | |
| 4.98 | | |
| 3.99 | | |
July 28, 2024 |
Outstanding, December 31, 2021 | |
| 5,770,262 | | |
| 7.49 | | |
| 5.91 | | |
|
* | | reflects the
1:4.75 reverse stock split effected on November 29, 2020. |
** | | pursuant to
the terms of the warrants, the warrants were accelerated to expire on October 10, 2020 due to |
occurrence
of an acceleration event. Accordingly, any unexercised warrants were terminated.
** |
|
pursuant to the terms of the warrants, the warrants were accelerated to expire on October
10, 2020 due to occurrence of an acceleration event. Accordingly, any unexercised warrants were terminated. |
For
the year ended December 31, 2021 and 2020, loss before income tax provision consisted of the following:
SUMMARY
OF INCOME TAX PROVISION
| |
December
31, 2021 | | |
December
31, 2020 | |
| |
| | |
| |
Domestic operations - Canada | |
$ | (6,202,837 | ) | |
$ | (2,732,888 | ) |
Foreign operations - United States | |
| (440,279 | ) | |
| (488,638 | ) |
Total loss before taxes | |
$ | (6,643,116 | ) | |
$ | (3,221,526 | ) |
Income
tax expense (benefit) consists of the following for the years ended December 31, 2021 and December 31, 2020:
SCHEDULE
OF COMPONENTS OF INCOME TAX
| |
December 31, 2021 | | |
December 31, 2020 | |
| |
| | |
| |
Loss before taxes | |
$ | ) | |
$ | ) |
Statutory tax rate | |
| 27.00 | % | |
| 27.00 | % |
Income taxes at the statutory rate | |
$ | (1,793,641 | ) | |
$ | (869,812 | ) |
Change in fair value of warrants | |
| (321,674 | ) | |
| - | |
Other permanent differences | |
| 93,375 | | |
| - | |
Stock-based compensation | |
| 253,556 | | |
| 154,227 | |
Share issue costs | |
| (112,812 | ) | |
| (45,854 | ) |
Others | |
| 18,499 | | |
| (41,388 | ) |
Total | |
$ | (1,862,697 | ) | |
$ | (720,051 | ) |
| |
| | | |
| | |
Change in valuation Allowance | |
$ | 1,862,697 | | |
$ | 720,051 | |
Total income tax expense (benefit) | |
$ | - | | |
$ | - | |
The Company is subject to Canadian federal and
provincial tax for the estimated assessable profit for the years ended December 31, 2020 and 2021 at a rate of 27%.
Deferred
income taxes reflect the net tax effect of temporary differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. A valuation allowance is provided for deferred tax assets if it is more
likely than not that we will not realize those tax assets through future operations. Significant components of the Company’s deferred
taxes are as follows:
SCHEDULE
OF DEFERRED TAX ASSETS AND LIABILITIES
| |
December 31, 2021 | | |
December 31, 2020 | |
Deferred tax assets: | |
| | | |
| | |
Unused net operating losses carry forward - Canada and United States | |
$ | 4,459,457 | | |
$ | 2,669,781 | |
Unused capital losses carry forward | |
| 40,962 | | |
| - | |
Share issue costs | |
| 174,377 | | |
| 142,318 | |
Property and equipment | |
| - | | |
| - | |
Total deferred tax assets | |
$ | 4,674,796 | | |
$ | 2,812,099 | |
Deferred tax asset not recognized | |
| - | | |
| - | |
| |
| | | |
| | |
Net deferred tax assets | |
| 4,674,796 | | |
| 2,812,099 | |
| |
| | | |
| | |
Deferred tax liability: | |
| | | |
| | |
| |
| | | |
| | |
Total deferred tax liability | |
| - | | |
| - | |
| |
| | | |
| | |
Valuation Allowance | |
$ | (4,674,796 | ) | |
$ | (2,812,099 | ) |
Net deferred tax assets (liabilities) | |
$ | - | | |
$ | - | |
The
Company has Non-Capital Losses of $15.7 million
as of December 31, 2021 and $9.3 million
as of December 31, 2020, which are due to expire
between 2039 and 2041 and which can
be used to offset future taxable income in Canada. For foreign operations in United States, aggregate net operating losses are
$0.9 million
as of December 31, 2021 (2020 - $0.6 million)
which can be carried forward indefinitely. The Company has Capital Losses of $0.2 million as of December 31, 2021 and $Nil as of
December 31, 2020, which expires after 5 years and can be used to offset future taxable capital gains in the United States.
Non-Capital Losses in Canada can be carried forward after change of ownership, if the particular business which gave rise to the
loss is carried on by the company for profit or with a reasonable expectation of profit. Certain accumulated net operating losses in
United States are subject to an annual limitation from equity shifts, which constitute a change of ownership as defined under
Internal Revenue Code (“IRC”) Section 382. These rules will limit the utilization of the losses.
The Company files income tax returns in Canada
and the United States and is subject to examination in these jurisdictions for all years since the Company’s inception in 2017.
As at December 31, 2021, no tax authority audits are currently underway.
The Company currently has no uncertain tax position
and is therefore not reflecting any adjustments.
14. |
RELATED
PARTY TRANSACTIONS |
Key
management personnel include those persons having the authority and responsibility of planning, directing, and executing the activities
of the Company. The Company has determined that its key management personnel consist of the Company’s officers and directors.
SCHEDULE
OF RELATED PARTY TRANSACTIONS
| |
December 31, 2021 | | |
December 31, 2020 | |
Accounting fees (included in professional) | |
$ | 3,473 | | |
$ | 15,225 | |
As
of December 31, 2021, $47,461 (December 31, 2020 - $3,223) in total was owing to officers and directors or to companies owned by officers
and directors of the Company for services and expenses. These amounts owing have been included in accounts payable and accrued liabilities.
During
the year ended December 31, 2021 and 2020, the Company incurred $66,246 and $38,395, respectively, to our U.S. general counsel firm,
D R Welch against legal services, a corporation controlled by a director of the Company. An aggregate of 13,158 shares (62,500 shares
before the Reverse Split) were issued to David Welch as part of the payment.
During
the year ended December 31, 2021 and December 31, 2020, the Company paid $Nil and $8,862, respectively, for consulting services to 0902550
BC Ltd. where Don Nicholson, former Chairman of the Board, is the principal consultant.
On
May 1, 2019, the Company entered into a 12 months consulting agreement with Arni Johannson to provide Investor Relations services for
a monthly fee of CAD 10,000. As of December 31, 2020, the Company owed $nil pursuant to the said agreement.
There
were no other payments to related parties for the year ended December 31, 2021 and 2020 other than expense reimbursements in the ordinary
course of business.
15. |
RESEARCH
AND DEVELOPMENT |
During
the year ended December 31, 2021, the Company spent $474,338 (December 31, 2020 - $123,915) in research and development costs in relation
to the development of a biosphere facility and product development in relation to the IP asset purchase from Manna Nutritional Group,
LLC (see Note 7). The following represents the breakdown of research and development activities:
SCHEDULE
OF RESEARCH AND DEVELOPMENT COSTS
| |
December 31, 2021 | | |
December 31, 2020 | |
Architectural fees | |
$ | - | | |
$ | 28,397 | |
Engineering consultants | |
| - | | |
| 16,962 | |
Design and construction | |
| 177,407 | | |
| 4,406 | |
Product development | |
| 296,931 | | |
| 74,150 | |
Research and
development costs | |
$ | 474,338 | | |
$ | 123,915 | |
The
Company recorded Scientific Research and Experimental Development (“SR&ED”) tax incentive income of $Nil during the year
ended December 31, 2021 (December 31, 2020 - $106,195). SR&ED tax incentive income is recognized when there is reasonable assurance
that the income will be received, the relevant expenditure has been incurred, and the consideration can be reliably measured. The Company’s
SR&ED tax incentive income has been recognized as other income as it is not indicative of the core operating activities or revenue
producing goals of the Company.
16. |
COMMITMENTS
AND CONTINGENCIES |
Lease
commitments
The
Company entered into an operating lease for office space. The minimum future payments under the lease for our continuing operations in
each of the years ending December 31 is as follows:
SCHEDULE
OF FUTURE PAYMENTS UNDER LEASE
| |
| | |
2022 | |
$ | 283,952 | |
2023 | |
$ | 289,628 | |
2024 | |
$ | 299,563 | |
2025 | |
$ | 316,593 | |
2026 | |
$ | 316,593 | |
Subsequent years | |
$ | 870,631 | |
Total | |
$ | 2,376,960 | |
Contingencies
Litigation
During
the years ended December 31, 2021 and December 31, 2019, the Company had no new contingencies to disclose.
During
the year ended December 31, 2018, the Company entered into a purchase agreement with certain parties representing proprietary technology.
As consideration for the purchase of the technology and attendant intellectual property rights, the Company issued an aggregate of 5,263,158
(25,000,000 before the Reverse Split) Class A common voting shares (the “Class A Shares”).
An
additional 105,263 (500,000 before the Reverse Split) Class A Shares was issued for consulting services to assist with application of
the proprietary technology to the Company’s business.
Subsequent
to the execution of these agreements, the Company was notified as to certain issues relating to the transaction agreements that were
executed and the intellectual property risks that were purportedly transferred. After several months of analysis with various professionals,
the Company determined that the technology was in fact invalid and therefore without any value.
On
May 15, 2019, a claim by HydroHaus Horticulture, Inc., Stuart Brazier and Christopher Gielnik was filed in BC Supreme Court. The basic
allegations against AgriFORCE Growing Systems Ltd. are:
|
1. |
The
Company breached the manufacturing agreement under which HydroHaus Horticulture claims it had the exclusive right to build hydro
houses for the Company; |
|
|
|
|
2. |
The
Company advised HydroHaus Horticulture that it was in breach of the licensing agreement relating to its project to build a hydro
house for the Nak’azdli causing HydroHaus Horticulture to spend approximately $130,000 to change the way it was to perform
that contract; |
|
3. |
The
Company owes approximately $100,000 for expenses paid for by HydroHaus Horticulture, which has not been accrued for at this time
as management does not believe the merits are valid. Should any amounts be required to be paid as a result of the claim, the Company
will appropriately record at that time; and |
|
|
|
|
4. |
The
Company wrongfully rescinded its agreements with HydroHaus Horticulture. |
The
plaintiffs are seeking general and special damages, alternatively rescission of the agreements or specific performance of those agreements
and payment for expenses incurred by HydroHaus Horticulture for the benefit of the Company. The plaintiffs are also seeking an order
that the Hydrohaus IP (allegedly comprising certain cladding materials and methods of insulating greenhouses, regulating humidity, moving
growing plants, and managing the movement of air, and any derivative works), and an associated patent application, be transferred to
the them. The Plaintiffs are also seeking an order prohibiting the Company from using the words, “Canivate”, “ the
Canivate Way”, “HydroFilm”, “Hydrohouse” and “Hydrohaus”.
On
May 24, 2019, the Company filed a Response to the claim. That response denies the allegations in the claim, raises the defense that the
plaintiffs wrongfully purported to sell intellectual property which they falsely stated they had invented and owned and states that the
intellectual property was unworkable to build greenhouses. The Company also alleges that the plaintiffs falsely represented that their
work for the Kak’adzdli would benefit the Company when it would not. The Response asks that the claim be dismissed.
The
Company has also filed a Counterclaim based upon its allegations that the plaintiffs wrongfully induced the Company to enter agreements
with the plaintiffs based on fraudulent misrepresentations regarding the existence of ownership of intellectual property. Further, the
counterclaim alleges that Mr. Brazier breached his fiduciary duties to Canivate in preferring the interests of Hydrohaus over those of
the Company.
The
counterclaim seeks a declaration that the agreements which the Company rescinded were properly rescinded based upon the misrepresentations
of the plaintiffs as well as general, special, aggravated and punitive damages, an accounting for profits, and legal costs.
The
Company evaluated subsequent events through March 29, 2022, the date on which these financial statements were available to be issued,
to ensure that this filing includes appropriate disclosure of events both recognized in the financial statements as of December 31, 2021,
and events which occurred subsequent to December 31, 2021 but were not recognized in the financial statements. Except as disclosed below,
there were no events that required recognition, adjustment to or disclosure in the financial statements.
On
February 10, 2022, the Company signed a definitive agreement to acquire Delphy Groep BV (“Delphy”), a Netherlands-based AgTech
consultancy firm, for $26 million through a combination of cash and stock. The closing of the transaction is expected to occur within
60 days of the signing date.