NOTES
TO THE CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
For
the nine months ended September 30, 2022 and 2021 (unaudited)
(Expressed
in US Dollars, except where noted)
1.
NATURE OF OPERATIONS AND BASIS OF PREPARATION
Business
Overview
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.
At
AgriFORCE, our purpose is clear: to positively transform farm, food, and family every day, everywhere. With years of in-depth research
and development experience, we are pioneers, ready to deliver integrated, practical, and sustainable solutions that can be applied throughout
multiple verticals in AgTech. We drive our business through two operating divisions, AgriFORCE Solutions and AgriFORCE Brands.
Our
two divisions—AgriFORCE Solutions and AgriFORCE Brands—work in partnership to address some of the existential challenges
being faced by the world today—climate change, extreme weather, food security and sovereignty, the environmental impact of industrial
and commercial farming—working towards providing better tasting, more nutritious plant-based foods and other products to consumers
on a global level.
Basis
of Presentation
The
accompanying Unaudited Condensed Consolidated Interim Financial Statements (the “interim financial statements”) and related
financial information of AgriFORCE Growing Systems Ltd. should be read in conjunction with the audited financial statements and the related
notes thereto for the years ended December 31, 2021 and 2020 included in the Company’s Annual Report on Form 10-K filed with the
Securities and Exchange Commission (“SEC”) on March 30, 2022. 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.
In
the opinion of management, the accompanying interim financial statements contain all adjustments which are necessary to state fairly
the Company’s financial position as of September 30, 2022 and December 31, 2021, and the results of its operations during the three
and nine months ended September 30, 2022 and 2021 and cash flows for the nine months ended September 30, 2022 and 2021. Such adjustments
are of a normal and recurring nature. The results for the three and nine months ended September 30, 2022 are not necessarily indicative
of the results to be expected for the full fiscal year ending December 31, 2022, or for any future period.
Liquidity
and Management’s Plan
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 interim financial statements for the nine months ended September 30, 2022, the Company had
a net loss of $10.1 million, $8.9 million of net cash used in operating activities, and the Company had working capital of $2.2 million.
The
accompanying interim 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 interim 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 interim 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. 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 interim financial statements.
2.
SIGNIFICANT ACCOUNTING POLICIES
Recent
Accounting Pronouncements
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, 2023 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
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
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.
Convertible
Instruments
The
Company evaluates and accounts for conversion options embedded in its convertible instruments in accordance with ASC 815, Derivatives
and Hedging (“ASC 815”), which provides that if three criteria are met, the Company is required to bifurcate conversion options
from their host instruments and account for them as free-standing derivative financial instruments. These three criteria include circumstances
in which;
(a)
the economic characteristics and risks of the embedded derivative instrument are not clearly and closely related to the economic characteristics
and risks of the host contract;
(b)
the hybrid instrument that embodies both the embedded derivative instrument and the host contract is not re-measured at fair value under
otherwise applicable generally accepted accounting principles with changes in fair value reported in earnings as they occur; and
(c)
a separate instrument with the same terms as the embedded derivative instrument would be considered a derivative instrument.
ASC
815 also provides an exception to this rule when the host instrument is deemed to be conventional as defined under professional standards
as “The Meaning of Conventional Convertible Debt Instrument.”
The
Company accounts for convertible instruments (when it has determined that the embedded conversion options should not be bifurcated from
their host instruments) in accordance with professional standards when “Accounting for Convertible Securities with Beneficial Conversion
Features,” as those professional standards pertain to “Certain Convertible Instruments.” Accordingly, the Company records,
when necessary, discounts to convertible notes for the intrinsic value of conversion options embedded in debt instruments based upon
the differences between the fair value of the underlying common stock at the commitment date of the note transaction and the effective
conversion price embedded in the note. Debt discounts under these arrangements are amortized over the term of the related debt to their
earliest date of redemption. The Company also records when necessary deemed dividends for the intrinsic value of conversion options embedded
in preferred shares based upon the differences between the fair value of the underlying common stock at the commitment date of the note
transaction and the effective conversion price embedded in the note. ASC 815 provides that, among other things, generally, if an event
is not within the entity’s control could or require net cash settlement, then the contract shall be classified as an asset or a
liability.
Fair
Value of Financial Instruments
The
fair value of the Company’s other receivable, accounts payable and other current liabilities approximate their carrying amounts
due to the relative short maturities of these items.
The
Company issued warrants having a strike price denominated in U.S. dollars, which creates an obligation to issue shares for a price that
is not denominated in the Company’s functional currency, Canadian dollars, and renders the warrants not indexed to the Company’s
stock. The Series A warrants, representative warrants issued as part of the IPO, and convertible debt warrants are thus classified as
derivative liabilities and are measured at fair value.
The
convertible debentures also have a conversion feature whereby the debt holders can convert their outstanding debentures into common shares
of the Company. The conversion price has a strike price denominated in U.S. dollars and accordingly, the conversion feature is 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. |
|
|
● |
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. |
3.
PREPAID EXPENSES, OTHER CURRENT ASSETS AND LAND DEPOSIT
SCHEDULE OF PREPAID EXPENSES AND OTHER CURRENT ASSETS
| |
September 30, 2022 | | |
December 31, 2021 | |
Deposits | |
$ | 12,000 | | |
$ | 32,000 | |
Legal retainer | |
| 12,228 | | |
| 33,692 | |
Prepaid expenses | |
| 334,734 | | |
| 214,445 | |
Others | |
| 25,992 | | |
| 28,903 | |
| |
$ | 384,954 | | |
$ | 309,040 | |
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 was 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 on December 31, 2021. During the nine months ended September 30, 2022, the Company was returned
the remaining $20,000 of the deposit.
On August 31, 2022, the Company
signed a purchase and sale agreement with Stronghold Power Systems, Inc. (“Stronghold”), to purchase approximately
seventy acres of land located in the City of Coachella as well as the completion of certain permitting, zoning, and infrastructure
work by Stronghold for a total purchase price of $4,300,000. The purchase price consists of:
|
(i) |
$1,500,000
in cash due on March 31, 2023. |
|
|
|
|
(ii) |
A
first stock deposit of $1,700,000 in prefunded warrants. The Company issued 695,866 prefunded warrants on September 9, 2022 to Stronghold.
|
|
|
|
|
(iii) |
A
second stock deposit $1,100,000 in prefunded warrants. The Company issued 450,266 prefunded warrants on September 9, 2022 to Stronghold. |
At September 30, 2022 the $2,085,960 of prefunded
warrants was recorded under land deposit in relation to the Stronghold agreement. The prefunded warrants shall be void if closing of the
transaction does not occur by March 31, 2023.
4.
INTANGIBLE ASSET
Intangible
asset represents $9,860,617 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, which can be made
into a wide range of breakfast cereals, juices, natural sweeteners and baking enhancers. The terms of the agreement, including the amendments
agreed by the parties on May 10, 2022, 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) |
Prefunded Warrants (“Closing
Prefunded Warrants”), which will be immediately exercisable into common shares of the Company upon each of the vesting events
set forth below, equal to the number of shares of Purchaser’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 (a)(i) $3,500,000 divided by (ii) a per share
price equal to the average of the volume weighted average price (“VWAP”) of the Purchaser’s common shares for the
ten trading days immediately preceding March 10, 2022 (or $1.79 per share) (“Closing Tranche 1”) (issued), and (b)(i)
$1,500,000 divided by (ii) a per share price equal to the average of the VWAP of the Purchaser’s common shares for the ten
trading days immediately preceding the date on which patent resubmission work for the patents set forth in the Agreement is completed
(“Closing Tranche 2”). Closing Tranche 1 of the Prefunded Warrants will be issued immediately upon shareholder approval
of the transactions contemplated by the Agreement and Amendment, in compliance with all SEC and Nasdaq rules and regulations (“Shareholder
Approval”). Closing Tranche 2 of the Prefunded Warrants will be issued immediately following the date on which patent resubmission
work for the patents set forth in the Agreement is completed. In each case, the Closing Prefunded Warrants will be paid in full upon
issuance. The Closing Prefunded Warrants and any shares issued upon exercise of the Closing Prefunded Warrants are restricted as
to resale and issued under a private placement exempt from registration under Section 4(a)(2) of the Securities Act, and will vest
on a quarterly basis over eight quarters commencing on the three-month anniversary of the Closing Date in equal amounts over eight
consecutive calendar quarters; |
|
|
|
|
(ii) |
$1,475,000 in cash ($750,000
paid October 11, 2022), 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 (paid); and (b) $500,000 payable within 120 days after the Effective Date (paid),
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”); and |
|
|
|
|
(iv) |
Prefunded Warrants (“Post-Closing
Prefunded Warrants,” and collectively with the Closing Prefunded Warrants, the “Prefunded Warrants”), which will
be immediately exercisable into common shares of the Company upon the vesting events set forth below, equal to the number of shares
of Purchaser’s common stock (rounded up to the nearest whole number), restricted as to resale under Section 4(a)(2) of the
Securities Act, 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
Purchaser’s common shares for the ten trading days immediately before the issuance date of those Post-Closing Prefunded Warrants
(or $2.43 per share). $5,000,000 of the Post Closing Prefunded Warrants will be issued to Seller on June 30, 2022 (issued). $3,000,000
of the Post-Closing Prefunded Warrants will be issued to Seller on December 31, 2022. In each case, the Post-Closing Prefunded Warrants
will be paid in full upon issuance. If a Patent is issued within 24 months of the Closing Date, and such Patent is transferred to
the Purchaser free and clear of all Encumbrances, then the Post-Closing Prefunded Warrants will vest and become exercisable in four
equal amounts commencing on the date of issuance of the Patent and then for the three subsequent three-month anniversaries thereof.
If a Patent does not issue from the CERES-MNG Patent Application within 24 months from the Closing Date, the Post-Closing Prefunded
Warrants will be returned to the Purchaser, and the Purchase Price shall be adjusted downward dollar for dollar. All Post-Closing
Prefunded Warrants are subject to Shareholder Approval before vesting can occur. |
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 $725,000, prefunded warrants issued and
contingent consideration that is probable and reasonably estimable as of the reporting date. Subsequent changes in contingent consideration
are recorded against cost. Further, the company has recorded $750,000 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 September 30, 2022, and accordingly have
not been accrued for.
5.
ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
SCHEDULE
OF ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
| |
September 30, 2022 | | |
December 31, 2021 | |
Accounts payable | |
$ | 445,186 | | |
$ | 414,117 | |
Accrued expenses | |
| 350,698 | | |
| 981,027 | |
Others | |
| 200,637 | | |
| 137,168 | |
Accounts payable and accrued liabilities | |
$ | 996,521 | | |
$ | 1,532,312 | |
Accrued
expenses include professional fee payable of $72,955
(December 31, 2021 - $66,408),
interest expense of $22,935
(December 31, 2021 – $24,797),
Directors’ fees payable of $30,286
(December 31, 2021 - $39,309),
withholding tax payable of $75,282
(December 31, 2021 - $89,236)
legal expense payable of $149,240
(December 31, 2021 - $174,598,)
and other items aggregating nil
(December 31, 2021 - $86,679).
Accrued expenses as of December 31, 2021, also included $500,000
related to reimbursement for satisfaction of secured debt of seller of IP asset.
6.
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. 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 Bridge Loan was 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. The fair value of the warrants were recorded as a liability
in the balance sheet using the Black-Scholes option-pricing model. The Company remeasured the fair value of the warrant liability at
each reporting date until the warrants were exercised on October 27, 2021. 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.
On
June 30, 2022, the Company executed the definitive agreement with arm’s length accredited institutional investors (the “Investors”)
for a $14,025,000 principal debentures with a 10% original issue discount (the “Debentures”) for gross proceeds of $12,750,000.
The interest rates on the Debentures are 5% for the first 12 months, 6% for the subsequent 12 months, and 8% per annum thereafter. Principal
repayments will be made in 25 equal installments and began on September 1, 2022. The Debenture may be extended by six months at the election
of the Company by paying a sum equal to six months interest on the principal amount outstanding at the end of the 18th month,
at the rate of 8% per annum. The Debentures are convertible into common shares at $2.22 per share. The Investors have the right to purchase
additional tranches of $5,000,000 each, up to a total additional principal amount of $33,000,000. In addition, the Investors received
4,106,418 warrants at a strike price of $2.442, which expire on December 31, 2025 (the “Debenture Warrants”). The Debenture
Warrants and Debentures each have down round provisions whereby the conversion and strike prices will be adjusted downward if the Company
issues equity instruments at lower prices. The Debenture Warrants strike price and the Debenture conversion price will be adjusted down
to the effective conversion price of the issued equity instruments. Due to the currency of these features being different from the Company’s
functional currency the Debenture Warrants and Debentures’ convertible features were classified as derivative liabilities and are
further discussed in Note 8. The transaction costs incurred in relation to the Debentures were $1,634,894.
The
cash proceeds were received on July 7, 2022.
The
following table summarizes our outstanding debentures as of the dates indicated:
SCHEDULE
OF OUTSTANDING DEBENTURES
| |
Maturity | |
Cash Interest Rate | | |
September 30, 2022 | |
Principal (initial) | |
12/31/2024 | |
| 5.00% - 8.00 | % | |
$ | 14,025,000 | |
Repayments and conversions | |
| |
| | | |
| (1,272,000 | ) |
Debt issuance costs and discounts (Note 6 & 8) | |
| |
| | | |
| (8,670,613 | ) |
Total Debentures (current) | |
| |
| | | |
$ | 4,082,387 | |
During
the nine months ended September 30, 2022, the Investors converted $150,000
of convertible debentures into 67,568
shares of the Company resulting in a $93,973
gain on the conversion of convertible debentures.
7.
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
existing terms of CEBA loans require that the outstanding balance (other than the amount available to be forgiven) be repaid on or before
December 31, 2022, to be eligible for partial loan forgiveness. The Government of Canada has recently announced the December 31, 2022
forgiveness repayment date will be extended to December 31, 2023 for eligible CEBA loan holders in good standing.
The
loan is interest free for an initial term that ends on December 31, 2023 (originally December 31, 2022). Repaying the loan balance on
or before December 31, 2023 will result in loan forgiveness of up to 33% (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 of January 1, 2024 to December 31, 2025 (previously
January 1, 2023 to December 31, 2024).
In
April 2021, the Company applied for additional loan with Alterna Bank under the Program and received $15,145 (CAD$20,000). The expansion
loan is subject to the original terms and conditions of the Program.
The balance at September 30, 2022 was $43,773, adjusted
for foreign currency exchange adjustments of $3,553.
8.
DERIVATIVE LIABILITIES
Warrant
Liabilities
As
of September 30, 2022, the warrant liabilities represent aggregate fair value of publicly traded 3,088,198
Series A warrants, 135,999
representative’s warrants and 4,106,418
Debenture Warrants. The fair value of the IPO
warrants and representative’s warrants amount to $692,877
(December 31, 2021 - $1,418,964)
and were categorized as a Level 1 financial instrument. The fair value of the Debenture Warrants amounted to $3,650,000 (June 30, 2022
- $4,080,958)
and were categorized as a Level 3 financial instrument. As at September 30, 2022 the Company utilized the Monte Carlo option-pricing
model (June 30, 2022 – Black-Scholes option-pricing model) for the Debenture Warrants using the following assumptions: stock price
$1.50 (June 30, 2022 - $2.31),
dividend yield – nil
(June 30, 2022 – nil),
expected volatility 90.0% (June 30, 2022 – 58.3%),
risk free rate of return 4.25% (June 30, 2022 - 3.14%),
and expected term of 3.25 years (June 30, 2022 – expected term of 3.5
years).
The
representative’s warrants are 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 six-month 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 six-month 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
fair value change on the IPO and representative’s warrant liabilities amounted to $640,540
and is recorded in the statement of comprehensive loss for the nine months ended September 30, 2022.
Debenture
Convertible Feature
On
June 30, 2022, the Company issued Debentures with an equity conversion feature, see Note 6. The fair value of the Debentures’
convertible features were $2,249,000
on September 30, 2022 (June 30, 2022 - $3,336,535) and were categorized as a Level 3 financial instrument. As at September 30, 2022
the Company utilized the Monte Carlo option-pricing model (June 30, 2022 – Black-Scholes option-pricing model) for the
convertible feature using the following assumptions: stock price $1.50 (June 30, 2022 - $2.31),
dividend yield – nil
(June 30, 2022 – nil),
expected volatility 90.0% (June 30, 2022 – 101.0%),
risk free rate of return 4.22% (June 30, 2022 - 3.14%),
discount rate 18.93% (June 30, 2022 – not applicable), and expected term of 2.25
year (June 30, 2022 – 1
year).
Changes in the fair value of Company’s Level
3 financial instruments for the nine months ended September 30, 2022 were as follows:
SCHEDULE OF CHANGES IN THE FAIR VALUE OF COMPANY'S LEVEL 3 FINANCIAL INSTRUMENTS
| |
| | |
| | |
| |
| |
Debenture Warrants | | |
Debenture
Convertible
Feature | | |
Total | |
Beginning balance | |
$ | - | | |
$ | - | | |
$ | - | |
Additions | |
| 4,080,958 | | |
| 3,336,535 | | |
| 7,417,493 | |
Conversions | |
| - | | |
| (63,723 | ) | |
| (63,723 | ) |
Change in fair value | |
| (191,957 | ) | |
| (850,992 | ) | |
| (1,042,949 | ) |
Effect of exchange rate changes | |
| (239,001 | ) | |
| (172,820 | ) | |
| (411,821 | ) |
Balance at September 30, 2022 | |
$ | 3,650,000 | | |
$ | 2,249,000 | | |
$ | 5,899,000 | |
The fair value of the debenture warrants and debenture
convertible feature includes the volatility and risk-free rate.
9.
SHARE CAPITAL
SCHEDULE
OF SHARE CAPITAL
| |
Nine months ended September 30,
2022
| |
| |
# of shares | | |
Amount | |
Common shares issued for bonuses and compensation | |
| 184,563 | | |
$ | 432,054 | |
Common shares issued for conversion of convertible debt | |
| 67,568 | | |
| 131,532 | |
Common shares issued to consultants | |
| 259,767 | | |
| 801,457 | |
Total common shares issued | |
| 511,898 | | |
$ | 1,365,043 | |
| |
Nine months ended September 30, 2021 | |
| |
# of shares | | |
Amount | |
Common shares issued for cash | |
| 3,127,998 | | |
$ | 13,262,712 | |
Common shares issued for conversion of series A preferred stock | |
| 2,258,826 | | |
| 6,717,873 | |
Common shares issued on exercise of warrants | |
| 39,800 | | |
| 238,800 | |
Common shares issued on cashless exercise of options | |
| 820,029 | | |
| - | |
Common shares issued for bonus | |
| 98,356 | | |
| 514,066 | |
Common shares issued for consulting services | |
| 62,237 | | |
| 349,809 | |
Common shares issued for settlement of accrued director’s fee | |
| 19,992 | | |
| 46,783 | |
Common shares issued for dividend on preferred shares | |
| 189,004 | | |
| 735,932 | |
Share issue costs | |
| - | | |
| (2,099,842 | ) |
Total common shares issued | |
| 6,616,242 | | |
$ | 19,766,133 | |
Potentially
dilutive securities that are not included in the calculation of diluted net loss per share because their effect is anti-dilutive are
as follows (in common equivalent shares):
SCHEDULE
OF POTENTIALLY DILUTIVE SECURITIES
| |
September 30, 2022 | | |
September 30, 2021 | |
Warrants | |
| 9,876,680 | | |
| 5,864,200 | |
Options | |
| 635,569 | | |
| 724,037 | |
Convertible debentures | |
| 5,744,595 | | |
| - | |
Total anti-dilutive weighted average shares | |
| 16,256,844 | | |
| 6,588,237 | |
10.
LEASES
Upon
adoption of Topic 842 effective January 1, 2022, the Company recognized operating lease liabilities of $1,776,599 and corresponding right-of-use
(“ROU”) assets of $1,837,782. The difference between operating lease liabilities and right-of-use assets recognized is due
to prepaid rent and deferred rent recorded under prior lease accounting standards. Topic 842 requires such balances to be reclassified
against right-of-use assets at transition. In future periods such balances will not be presented separately.
The
components of lease expenses were as follows:
SCHEDULE
OF LEASE EXPENSES
| |
Nine months ended September 30, 2022 | |
Operating lease cost | |
$ | 226,098 | |
Short-term lease cost | |
| 12,630 | |
Total lease expenses | |
$ | 238,728 | |
The
Company has an operating lease for its office lease in Canada with a remaining lease term of seven years. The discount rate was 7.0%. The
Company has no finance leases.
11.
COMMITMENTS AND CONTINGENCIES
Lease
commitment
The
Company entered 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
| |
| | |
Remaining 2022 | |
$ | 66,677 | |
2023 | |
| 267,886 | |
2024 | |
| 277,074 | |
2025 | |
| 292,826 | |
2026 | |
| 292,826 | |
Subsequent years | |
| 805,272 | |
Total minimum lease payments | |
| 2,002,561 | |
Less: imputed interest | |
| (481,693 | ) |
Total lease liability | |
| 1,520,868 | |
Current portion of lease liability | |
| (244,358 | ) |
Non-current portion of lease liability | |
$ | 1,276,510 | |
Debenture
principal repayments
The
following table summarizes the future principal payments related to our outstanding debt as of September 30, 2022:
SUMMARY OF FUTURE PRINCIPAL
PAYMENTS OUTSTANDING
| |
| | |
2022 | |
$ | 1,683,000 | |
2023 | |
| 6,732,000 | |
2024 | |
| 4,338,000 | |
Long
Term Debt | |
$ | 12,753,000 | |
Contingencies
Litigation
As at September 30, 2022, the Company had no contingencies to disclose.
12.
SUBSEQUENT EVENTS
The
Company evaluated subsequent events through November 10, 2022, 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 and subsequent to September 30, 2022, but were not recognized in the interim financial statements. Except as disclosed below, there
were no events that required recognition, adjustment or disclosure in the financial statements.
On
October 1, 2022, the Company issued to a consultant a total of 25,000 common shares.