NOTES
TO THE CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
For
the six months ended June 30, 2021 and 2020 (unaudited)
(Expressed
in US Dollars, except where noted)
1. NATURE OF OPERATIONS AND BASIS OF PREPARATION
Business
Overview
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 Condensed Consolidated Interim Financial Statements (the “interim financial statements”) and related financial
information of AgriFORCE Growing Systems Ltd. (the “Company”) should be read in conjunction with the audited financial statements
and the related notes thereto for the years ended December 31, 2020 and 2019 included in the Company’s Registration Statement on
Form S-1/A (File No. 333-251380), which was filed with the Securities Exchange Commission (“SEC”) on June 30, 2021. These
unaudited interim financial statements have been prepared in accordance with the rules and regulations of the United States Securities
and SEC for interim financial information. Accordingly, they do not include all of the information and footnotes required by the accounting
principles generally accepted in the United States of America (“U.S. GAAP”) for complete financial statements.
The
accompanying interim financial statements as of June 30, 2021 and for the three and six months ended June 30, 2021 and 2020, and the
related interim information contained within the notes to the interim financial statements, are unaudited. The interim financial statements
have been prepared in accordance with U.S. GAAP and on the same basis as the audited financial statements. In the opinion of management,
the accompanying interim condensed financial statements contain all adjustments which are necessary to state fairly the Company’s
financial position as of June 30, 2021, and the results of its operations and cash flows for the six months ended June 30, 2021 and 2020.
Such adjustments are of a normal and recurring nature. The results for the six months ended June 30, 2021 are not necessarily indicative
of the results to be expected for the full fiscal year ending December 31, 2021, or for any future period.
Liquidity
and Management’s Plan
In
accordance with Accounting Standards Update No. 2014-15, Presentation of Financial Statements – Going Concern (Subtopic 205-40),
the Company’s management evaluates whether there are conditions or events, considered in the aggregate, that raise substantial
doubt about the Company’s ability to continue as a going concern within one year after the date that the financial statements are
issued.
As of June 30, 2021, the Company had cash of $157,051.
During the three and six months ended June 30, 2021, the Company incurred a net loss of $1,206,983 and $2,091,589,
respectively, and used $799,682
of cash in operating activities during the
six months ended June 30, 2021. At June 30, 2021, the Company had an accumulated deficit of $15,145,791
and currently does not expect to experience positive
cash flows from operating activities in the near future as it continues expanding the organization to support planned growth while also
continuing to invest in research and development and other commercialization efforts of its technology that is currently in development.
We also expect to incur significant additional expenditures as a public company.
Although
it is difficult to predict the Company’s liquidity requirements, as of June 30, 2021, and based upon the Company’s current
operating plan and the net proceeds received from its July 2021 initial public offering (“IPO”) (see Note 9), the Company
believes that it will have sufficient cash to meet its projected operating requirements for at least the next 12 months following the
issuance of the interim financial statements based on the balance of cash and the IPO proceeds.
2. SIGNIFICANT ACCOUNTING POLICIES
Recent
Accounting Pronouncements
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 interim 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 condensed consolidated 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.
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.
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 agreed to issue 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.
The
fair value of the Company’s warrants are 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.
|
|
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●
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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 June 30, 2021, all the Company’s $270,669 obligation to issue warrants reported at fair value is categorized as Level 3 inputs (see Note
5).
Reclassifications
The Company has reclassified certain amounts in
the 2020 consolidated financial statements to comply with the 2021 presentation.
3. PREPAID EXPENSES AND OTHER CURRENT ASSETS
SCHEDULE OF PREPAID EXPENSES AND OTHER CURRENT ASSETS
|
|
June 30, 2021
|
|
|
December 31, 2020
|
|
Deposits
|
|
$
|
170,000
|
|
|
$
|
170,000
|
|
Legal retainer
|
|
|
54,513
|
|
|
|
43,038
|
|
Others
|
|
|
5,318
|
|
|
|
-
|
|
Total
|
|
$
|
229,831
|
|
|
$
|
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 is currently renegotiating the final terms of the debt financing related to the purchase of land before completing the
purchase.
4. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
SCHEDULE OF ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
|
|
June 30, 2021
|
|
|
December 31, 2020
|
|
Accounts payable
|
|
$
|
1,255,637
|
|
|
$
|
991,565
|
|
Accrued expenses
|
|
|
1,002,078
|
|
|
|
905,629
|
|
Others
|
|
|
47,711
|
|
|
|
33,794
|
|
Accounts Payable and Accrued Liabilities
|
|
$
|
2,305,426
|
|
|
$
|
1,930,988
|
|
Accounts
payable includes $744,191 (December
31, 2020 - $744,191)
payable to an outside contractor in relation to facility construction. Accrued expenses include bonus payable of $nil
(December 31, 2020 - $487,983)
and Directors fees payable of $172,293
(December 31, 2020 - $128,448).
Accounts payable and accrued liabilities include a total unpaid IPO cost of $803,694
(December 31, 2020 - $297,437).
5. 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.
Each
debenture holder is entitled to receive a warrant to purchase 93,938 common shares with a strike price of $3.99 per share. The term of the warrants
is three years. In accordance with U.S. GAAP, the fair value of the
warrants was recorded as a liability in the accompanying balance sheet at June 30, 2021 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.
There
were no significant changes in the fair value of warrants from March 24, 2021 to June 30, 2021.
The fair value of the warrants estimated at $270,669
determined using the Black-Scholes option pricing
model was based on the following assumptions; stock price $5.99,
dividend yield – nil,
expected volatility 80%,
risk free rate of return 0.5%,
expected term of 3
years.
6. LONG TERM LOAN
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 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, 2022. Repaying the loan balance on or before December 31, 2022 will
result in loan forgiveness of 25% (up to CAD $10,000). Any outstanding loan after initial term carries an interest rate of 5% per annum,
payable monthly during the extended term i.e. January 31, 2023 to December 31, 2025.
In
April 2021, the Company applied for additional loan with Alterna Bank under the Program and received $15,932 (CAD$20,000). The expansion
loan is subject to the original terms and conditions of the Program.
7. SHARE CAPITAL
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
May 31, 2021, the Company granted a total of 405,059
stock options to directors, officers, employees,
and consultants of the Company. The stock options will vest over the next three
years following the grant date with the first
vesting date of three-month anniversary after the grant date. The stock options are exercisable for a five-year
period at an exercise price of $7.00.
The fair value of the options was estimated at $1.48
million determined using the Black-Scholes option
pricing model was based on the following assumptions; stock price $6.00,
dividend yield – nil, expected volatility 80%,
risk free rate of return 0.98%,
expected term of 3
years.
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 Bride Loan (see Note 5).
8. COMMITMENTS AND CONTINGENCIES
Litigation
During
the six months ended June 30, 2021 and the year ended December 31, 2020, 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 were
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.
During
the six months ended June 30, 2021 and the year ended December 31, 2020, there has been no further activity in the lawsuit. Based on
Company’s litigation counsel’s opinion, management does not believe the potential monetary damages to be material based on
the damages sought by the plaintiff.
9. SUBSEQUENT EVENTS
The
Company evaluated subsequent events through August 2, 2021,
the date on which these interim financial statements were available to be issued, to ensure that this filing includes appropriate disclosure
of events both recognized in the interim financial statements as of June 30, 2021, and events which occurred subsequent to June 30, 2021
but were not recognized in the interim financial statements. Except for events previously disclosed in the notes to the financial statements,
as disclosed below and the extension of scheduled close of escrow related to purchase of land as disclosed in Note 3 and the term extension
and repayment of Bridge Loan disclosed in Note 5, there were no events that required recognition, adjustment to or disclosure in the
interim financial statements.
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.
Concurrent
with the closing of the IPO, the 2,258,826 common shares were issued upon the conversion of all of its issued and outstanding Series
A Preferred Shares.
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.
The
company will issue a final common shares dividend to the holders of Series A Preferred Shares from the date of last dividend issued to
the IPO closing date.