NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
AS OF AND FOR THE YEARS THEN ENDED DECEMBER 31, 2020 AND
2019
Target Group Inc. (“Target Group”
or “the Company”) was incorporated on July 2, 2013 under the laws of the state of Delaware to engage in any lawful
corporate undertaking, including, but not limited to, selected mergers and acquisitions.
Target Group Inc. is a diversified and vertically
integrated, progressive company with focus on both national and international presence. The Company owns and operates Canary Rx Inc, Canadian
licensed producer, regulated under The Cannabis Act. Canary Rx Inc, operates a 44,000 square foot facility located in Norfolk County,
Ontario, and has partnered with Dutch breeder, Serious Seeds, to cultivate exclusive & world class proprietary genetics. The
Company has begun structuring multiple international production and distribution platforms and intends to continue rapidly expanding its
global footprint as it focuses on building an iconic brand portfolio whose focus aims at developing cutting edge Intellectual Property
among the medical and recreational cannabis markets. Target Group is committed to building industry-leading companies that transform the
perception of cannabis and responsibly elevate the overall consumer experience.
The Company’s current business is
to produce, manufacture, distribute, and conduct sales of cannabis products. As of the current year end, the company has produced
and sold cannabis products in the amount of $108,930 through its investment in a joint venture.
On July 3, 2018, the Company filed
an amendment in its Articles of association to change its name to Target Group Inc. The Company was able to secure an OTC Bulletin
Board symbol CBDY from Financial Industry Regulatory Authority (FINRA).
On June 27, 2018, the Company entered
into an Agreement and Plan of Share Exchange (“Exchange Agreement”) with Visava Inc., a private Ontario, Canada corporation
(“Visava”). Visava owns 100% of Canary Rx Inc., a Canadian corporation that holds a leasehold interest in a parcel
of property located in Ontario’s Garden Norfolk County for the production of cannabis.
The Exchange Agreement provides that, subject
to its terms and conditions, the Company issued to the Visava shareholders an aggregate of 25,500,000 shares of the Company’s
Common Stock in exchange for all of the issued and outstanding common stock held by the Visava shareholders. In addition of its
Common Stock, the Company issued to the Visava shareholders, prorata Common Stock Purchase Warrants purchasing an aggregate of
25,000,000 shares of the Company’s Common Stock at a price per share of $0.10 for a period of two years following the issuance
date of the Warrants. Upon the closing of the Exchange Agreement, the Visava shareholders held approximately 46.27% of the issued
and outstanding Common Stock of the Company and Visava will continue its business operations as a wholly-owned subsidiary of the
Company. The transaction was closed effective August 2, 2018. During the quarter ended, September 30, 2020, all of the
warrants expired, none were exercised.
Effective January 25, 2019, the Company
entered into an Agreement and Plan of Share Exchange (“Exchange Agreement”) with CannaKorp Inc., a Delaware corporation
(“CannaKorp”). Company had previously entered into a Letter of Intent with CannaKorp dated November 30, 2018 which
was disclosed in the Company’s report on Form 8-K filed December 4, 2018.
The Exchange Agreement provides that, subject
to its terms and conditions, the Company issued to the CannaKorp shareholders an aggregate of 30,407,412 shares of the Company’s
common stock, based on a price per share of $0.10, in exchange for 100% of the issued and outstanding common stock of CannaKorp
held by the CannaKorp shareholders. In addition, the Company will issue Common Stock Purchase Warrants (“Warrants”)
in exchange for all outstanding and promised CannaKorp stock options. The Warrants will grant the holders thereof the right to
purchase up to approximately 7,211,213 shares of the Company’s common stock. The Company will also assume all outstanding
liabilities of CannaKorp. Upon the closing of the Exchange Agreement, CannaKorp will continue its business operations as a subsidiary
of the Company. The transaction was closed effective March 1, 2019.
Effective August 8, 2019, the Company
entered into an Exclusive License Agreement (“License Agreement”) with cGreen, Inc., a Delaware corporation (“cGreen”).
The License Agreement grants to the Company an exclusive license to manufacture and distribute the patent-pending THC antidote
True Focus™ in the United States, Europe and the Caribbean. The term of the license was ten (10) years and four (4) months
from the effective date of August 8, 2019. In consideration of the license, the Company would issue 10,000,000 shares of its
common stock as follows: (i) 3,500,000 within ten (10) days of the effective date; (ii) 3,500,000 shares on January 10,
2020; and (iii) 3,000,000 shares not later than June 10, 2020. In addition, the Company would pay cGreen royalties of
7% of the net sales of the licensed products and 7% of all sublicensing revenues collected by the Company. The Company would pay
cGreen an advance royalty of $300,000 within ten (10) days of the effective date; $300,000 on January 10, 2020; and $400,000
on or before June 10, 2020 and $500,000 on or before November 10, 2020. All advance royalty payments would be credited
against the royalties owed by the Company through December 31, 2020. During the quarter ended December 31, 2019, the
intangible asset was written off based on management’s review and evaluation of its recoverability. During the quarter ended
June 30, 2020, the Company was in arbitration with cGreen for the breaches of the terms of the License Agreement, however,
through an early mediation, both companies reached to a settlement agreement to settle the breaches of the contract on July 27,
2020 (“Effective Date”). As per the settlement agreement, the License Agreement has been terminated and the Company
does not have to issue the 10 million shares nor pay the outstanding royalty payable in the amount of $1,191,860. As consideration,
the Company paid $130,000 within 30 days of the Effective Date and will pay $100,000 in monthly installments of $10,000 commencing
in April 2021 to cGreen resulting in a gain on settlement in the amount of $1,704,860.
Effective September 17, 2019, CannaKorp
entered into a Purchase, Licensing and Distribution Agreement (“Agreement”) with Nabis Arizona Property LLC
of Scottsdale, Arizona (“Nabis”) concerning the distribution of CannaKorp’s Wisp™
Vaporizer and Wisp™ Pods in Arizona. The term of the Agreement is three (3) years with automatic renewals
for additional one-year periods unless the Agreement is terminated pursuant to its terms. Nabis is required to pay CannaKorp $45,000
for the equipment needed to manufacture the WISP™ Pods, of which $4,500 will be paid within three (3) calendar
days of Nabis obtaining regulatory approval of its vertically integrated license and the balance of $40,500 within 180 days of
the effective date of the Agreement.
Under the Agreement, Nabis is licensed
to manufacture the WISP™ Pods and to sell the WISP™ Pods in conjunction with the sale of the WISP™
Vaporizer. Nabis is required to meet minimum quarterly orders of two hundred (200) WISP™ Vaporizers and five thousand
(5,000) WISP™ Pods cartridges. Nabis is licensed to sell the WISP™ Vaporizer and the WISP™
Pods to end users in Arizona, excluding Amazon, eBay, Walmart or other multistate/national brick and mortar or online sales.
CannaKorp has granted Nabis a right of first refusal to obtain an exclusive license in Michigan and in Washington for the same
rights granted to Nabis in Arizona.
During the year ended December 31,
2020, the equipment to Nabis has been shipped and the Company has provided Nabis an additional 360 days before invoicing Nabis
for the equipment. Once when the additional period has passed, the Company will invoice Nabis. Additionally, the first quarter
of the Nabis agreement minimums were shipped and invoiced (200 Wisp Units and 5000 Pod Assemblies to enable Nabis to manufacture
5000 complete Wisp Pods) for online and retail distribution in the Arizona Market.
Due to financial strain and difficulties
during the pandemic Nabis was forced to restructure their company in its entirety. This has caused strain on the financial position
of Nabis and has affected their ability to fulfill their commitments in the agreement signed with CannaKorp. At this time, the
partnership has since been terminated and all of CannaKorp’s CannaMatic machinery has now been sent back to CannaKorp. As of the date of this report, the Company does not have any operations, employees or corporate offices based in United States.
Effective May 14, 2020, Canary entered
into a Joint Venture Agreement (“Joint Venture”) with 9258159 Canada Inc., a corporation organized under the laws of
the Province of Ontario, Canada (referred to as “Thrive”) and 2755757 Ontario Inc., a corporation organized under the
laws of the Province of Ontario, Canada (referred to as “JVCo”). Canary and Thrive each hold 50% of the voting equity
interest in JVCo. The term of the Joint Venture is five (5) years from its effective date of May 14, 2020.
On June 15, 2020, the Company, its
first–tier subsidiaries Visava Inc. (“Visava”) CannaKorp Inc. (“CannaKorp”), and the Company’s
second-tier subsidiary, Canary Rx Inc. (“Canary”), entered into a Debt Purchase and Assignment Agreement (“Agreement”)
with CL Investors Inc. (“CLI”), a corporation organized under the laws of the Province of Ontario, Canada. June 15th
was preliminary date of the agreement and the agreement was not finalized until the later date as indicated below. The CEO of the
Company, is the Secretary of CLI, a director of the Company, is a shareholder of CLI and the brother of CEO, is the President and
sole director of CLI therefore the below loan from CLI is classified under related party transactions.
Pursuant to the Agreement, CLI purchased
from the Company for the sum of $2,277,660, (CAD $2,900,000) a debt obligation owing from Canary to the Company in the principal
balance of $8,325,240 (CAD $10,600,000 (“Canary Debt”)). Upon receipt of the consideration, the Company loaned the
full sum to Canary under terms of an unsecured, non-interest-bearing promissory note, subject to a covenant by the Company not
to take any collection action so long as the Canary Debt remains unpaid to CLI. As at December 31, 2020, $78,540 (CAD $100,000)
is still outstanding from CLI which is presented as other receivable on the consolidated balance sheet.
As a condition of the closing of the Agreement,
the terms of the Canary Debt were amended to provide for interest at 5% per annum with a maturity date of 60 months from the date
of the Agreement (“Term”). The Canary Debt will be repaid according to the following schedule:
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a)
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In the first year of the Term, Canary will pay CLI the greater of $887,502 (CAD $1,130,000) and fifty percent (50%) of the Net Revenue (hereinafter defined), provided that where the latter amount exceeds the former amount, Canary will, by the end of such first year, pay CLI no less than the former amount and Canary will, within thirty (30) days following the end of such first year, pay CLI the balance of such amount owing for such first year;
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b)
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In the second year of the Term, Canary will pay CLI the greater of $1,649,340 (CAD $2,100,000) and fifty percent (50%) of the Net Revenue, by way of twelve (12) consecutive monthly installments payable on the 14th day of each month commencing on August 14, 2021, provided that where the latter amount exceeds the former amount, Canary will, within thirty (30) days following the end of such second year, pay CLI the balance of such amount owing for such second year;
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c)
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In the third year
of the Term, Canary will pay CLI the greater of $2,528,988 (CAD $3,220,000) and fifty percent (50%) of the Net Revenue, by
way of twelve (12) consecutive monthly installments payable on the 14th day of each month commencing on August 14, 2022,
provided that where the latter amount exceeds the former amount, Canary will, by the end of such third year, pay CLI no less
than the former amount and Canary will, within thirty (30) days following the end of such third year, pay CLI the balance of
the such payments owing for such third year;
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d)
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In the fourth year of the Term, Canary will pay CLI the greater of $2,419,032 (CAD $3,080,000) and fifty percent (50%) of the Net Revenue, by way of twelve (12) consecutive monthly installments payable on the 14th day of each month commencing on August 14, 2023, provided that where the latter amount exceeds the former amount, Canary will Canary will, within thirty (30) days following the end of such fourth year, pay CLI the balance of such amount owing for such fourth year; and
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e)
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In the fifth year of the Term, Canary will pay CLI the balance owing under this Note, by way of twelve (12) consecutive monthly installments payable on the 14th day of each month commencing on August 14, 2024 for an amount calculated by dividing twelve (12) into the sum of all amounts owing under this Note at the beginning of the fifth year of the Term on account of Principal and Interest, provided that where there are further amounts owing under this Note at the end of such fifth year, Canary will pay CLI all such further amounts within five (5) days following the end of such fifth year.
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For the purposes of this Note, “Net
Revenue” will mean any and all revenue generated from Canary’s Licensed Facility (hereinafter defined) to which it
is entitled net of applicable taxes and third-party expenses.
The repayment of the Canary Debt, as amended,
is guaranteed by Visava and the Company’s wholly-owned subsidiary CannaKorp Inc. and secured by (i) a general security
interest in the assets of the Company, Canary, Visava and CannaKorp Inc., respectively; and (ii) a pledge by the Company of
all of the issued and outstanding common stock of Canary, Visava and CannaKorp Inc. held by the Company. In addition to the foregoing
guarantees, security interest and stock pledge, CLI has been granted an option, in lieu of repayment of the amended Canary Debt,
to demand, in its sole and absolute discretion the transfer, assignment and conveyance of 75% of the issued and outstanding capital
stock of Visava and Canary. Furthermore, the President and sole director of CLI has been granted an option to acquire the remaining
25% of the issued and outstanding capital stock of Visava and Canary.
Effective August 14, 2020, the Agreement
was amended (“Amendment”) to provide that CLI will purchase from Rubin Schindermann, a director of the Company, 500,000
shares of the Company’s Series A Preferred Stock in consideration of the payment by CLI to Rubin Schindermann of $78,540
(CAD $100,000) and the issuance to Schindermann of 10,000,000 shares of the Company’s common stock. In consideration of the
foregoing, Mr., Schindermann resigned as a director of the Company and from any and all administrative and executive positions
with the Company’s subsidiaries Visava Inc., Canary Rx Inc. and CannaKorp Inc., respectively. In addition, the Company issued
Common Stock Purchase Warrant for 10,000,000 shares of Target common stock to CLI as consideration for the Agreement. Refer to
Note 14 for additional details on warrants. The combined impact of both transactions resulted in debt issuance cost of $251,518.
This debt issuance cost will be amortized over the term of the debt on straight line basis.
The transactions contemplated by the Agreement
and the Amendment closed on August 14, 2020.
2.
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BASIS OF PRESENTATION AND CONSOLIDATION
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The summary of significant accounting policies
presented below is designed to assist in understanding the Company’s consolidated financial statements. Such consolidated
financial statements and accompanying notes are the representations of the Company’s management, who are responsible for
their integrity and objectivity. These accounting policies conform to accounting principles generally accepted in the United States
of America (“GAAP”) in all material respects and have been consistently applied in preparing the accompanying consolidated
financial statements.
The consolidated financial statements include
the accounts of the Company and its wholly-owned subsidiary, Visava Inc. and CannaKorp, Inc. Significant intercompany accounts
and transactions have been eliminated upon consolidation.
The Company has minimal revenue since inception
to date and has sustained operating losses during the year ended December 31, 2020. The Company had working capital deficit of
$4,118,770 and an accumulated deficit of $26,536,495 as of December 31, 2020. The Company’s continuation as a going concern
is dependent on its ability to generate sufficient cash flows from operations to meet its obligations and/or obtaining additional
financing from its members or other sources, as may be required.
The accompanying consolidated financial
statements have been prepared assuming that the Company will continue as a going concern; however, the above condition raises substantial
doubt about the Company’s ability to do so. The consolidated financial statements do not include any adjustments to reflect
the possible future effects on the recoverability and classification of assets or the amounts and classifications of liabilities
that may result should the Company be unable to continue as a going concern.
In order to maintain its current level
of operations, the Company will require additional working capital from either cash flow from operations, sale of its equity or
issuance of debt. However, the Company currently has no commitments from any third parties for the purchase of its equity. If the
Company is unable to acquire additional working capital, it will be required to significantly reduce its current level of operations.
4.
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SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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USE OF ESTIMATES
The preparation of consolidated financial
statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets
and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements, and the
reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates.
CASH
Cash and cash equivalents include cash
on hand and on deposit at banking institutions as well as all highly liquid short-term investments with original maturities of
90 days or less. The Company did not have cash equivalents as of December 31, 2020 and 2019.
Restricted cash represents deposits made to the Company’s bank as a requirement to use the bank’s credit card which not available
for immediate or general business use.
ACCOUNT RECEIVABLE
Account receivable consists of amounts
due to the Company from customers as a result of the Company’s normal business activities. Account receivable is reported
on the balance sheets net of an estimated allowance for doubtful accounts. The Company establishes an allowance for doubtful accounts
for estimated uncollectible receivables based on historical experience, assessment of specific risk, review of outstanding invoices,
and various assumptions and estimates that are believed to be reasonable under the circumstances, and recognizes the provision
as a component of selling, general and administrative expenses. Uncollectible accounts are written off against the allowance after
appropriate collection efforts have been exhausted and when it is deemed that a balance is uncollectible. As of December 31,
2020, the Company expects to collect these balances completely and therefore has not created any allowance for it.
INVENTORY
Inventory is stated at the lower of cost
or net realizable value, cost being determined on a weighted average cost basis, and market being determined as the lower of cost
or net realizable value. The Company records write-downs of inventory that is obsolete or in excess of anticipated demand or market
value based on consideration of product lifecycle stage, technology trends, product development plans and assumptions about future
demand and market conditions. Actual demand may differ from forecasted demand, and such differences may have a material effect
on recorded inventory values. Inventory write-downs are charged to cost of revenue and establish a new cost basis for the inventory.
The cost is determined on the basis of the average cost or first-in, first-out methods.
FIXED ASSETS
Fixed assets are reported at cost, less
accumulated depreciation. Depreciation is calculated using the straight-line method over the estimated useful lives of assets,
commencing when the assets become available for productive use, based on the following estimated useful lives:
Depreciation is calculated using the following
terms and methods:
Furniture & office equipment
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Straight-line
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7 years
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Machinery & equipment
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Straight-line
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3-5 years
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Software
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Straight-line
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3 years
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Leasehold improvements
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Straight-line
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Lease period
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An item of equipment is derecognized upon disposal or when no
future economic benefits are expected from its use. Any gain or loss arising from derecognition of the asset (calculated as the
difference between the net disposal proceeds and the carrying value of the asset) is included in the profit or loss in the period
the asset is derecognized. The assets’ residual values, useful lives and methods of depreciation are reviewed at each reporting
date, and adjusted prospectively, if appropriate.
GOODWILL AND INTANGIBLE ASSETS
Goodwill and other identifiable intangible
assets with indefinite lives that are not being amortized, such as trade names, are tested at least annually for impairment and
are written down if impaired. Identifiable intangible assets with finite lives are amortized over their estimated useful lives
and are reviewed for impairment whenever facts and circumstances indicate that their carrying values may not be fully recoverable.
The Company evaluates the recoverability
of the infinite-lived intangible assets for possible impairment whenever events or circumstances indicate that the carrying amount
of such assets may not be recoverable. Recoverability of these assets is measured by a comparison of the carrying amounts to the
future undiscounted cash flows the assets are expected to generate. If such review indicates that the carrying amount of intangible
assets is not recoverable, the carrying amount of such assets is reduced to fair value.
REVENUE RECOGNITION
The Company adopted ASC 606 effective January 1,
2019, using the modified retrospective method after electing to delay the adoption of the accounting standard as the Company qualified
as an “emerging growth company”. Since the Company did not have any contracts as of the effective day, therefore, there
was no material impact on the consolidated financial statements upon adoption of the new standard. Revenue is recognized when performance
obligations under the terms of the contracts with our customers are satisfied. Our performance obligation generally consists of
the promise to sell our finished products to our customers, wholesalers, distributors or retailers. Control of the finished products
is transferred upon shipment to, or receipt at, our customers' locations, as determined by the specific terms of the contract.
Once control is transferred to the customer, we have completed our performance obligation, and revenue is recognized.
The Company generated revenue of $30,000
during year ended December 31, 2020 as compared to $nil revenue during year ended December 31, 2019. The revenue represents
the sale of Wisp™ vaporizer and pod units and since the customer have received the units and there are no further obligations
as per the agreement, revenue was recognized.
In addition, Canary generated revenue of
$108,930 (though its investment in JVCo) during the quarter end of December 31, 2020 and is represented as share of losses
from joint venture on the consolidated statement of operations. The entire revenue was sold to one customer. The revenue represents
the sale of cannabis product. Since the customer have received the product and there are no further obligations as per the agreement,
revenue was recognized. Refer to Note 11 for additional details.
Deferred revenue is due to a shipment sent
to one of the Company’s distributors. However, since control has not been transferred and the performance obligation has
not been completed, revenue has not been recognized and proceeds received are classified as deferred revenue.
FOREIGN CURRENCY TRANSLATION
The functional currency of the Company’s
Canadian-based subsidiary is the Canadian dollar and the US-based parent is the U.S. dollar. In addition, effective April 1,
2019, the Company changed its functional currency from United States Dollar to Canadian Dollar thereby having an impact on additional
paid in capital and accumulated comprehensive income (loss). The presentation currency of the Company has remained unchanged at
United States Dollar. Transactions denominated in currencies other than the functional currency are translated into the functional
currency at the exchange rates prevailing at the dates of the transaction. Monetary assets and liabilities denominated in foreign
currencies are translated using the exchange rate prevailing at the balance sheet date. Non-monetary assets and liabilities are
translated using the historical rate on the date of the transaction. All exchange gains or losses arising from translation of these
foreign currency transactions are included in net income (loss) for the year. In translating the consolidated financial statements
of the Company and its Canadian subsidiaries from their functional currency into the Company’s reporting currency of United
States dollars, balance sheet accounts are translated using the closing exchange rate in effect at the balance sheet date and income
and expense accounts are translated using an average exchange rate prevailing during the reporting period. Adjustments resulting
from the translation, if any, are included in cumulative other comprehensive income (loss) in stockholders’ equity. The Company
has not, to the date of these consolidated financial statements, entered into derivative instruments to offset the impact of foreign
currency fluctuations.
CONCENTRATION OF RISK
Financial instruments that potentially
subject the Company to concentrations of credit risk consist principally of cash. The Company places its cash with high quality
banking institutions. The Company did not have a cash balances in excess of the Federal Deposit Insurance Corporation limit as
of December 31, 2020 and 2019.
INCOME TAXES
Under ASC 740, “Income Taxes,”
deferred tax assets and liabilities are recognized for the future tax consequences attributable to temporary differences between
the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets
and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. Valuation allowances are established when it is more likely than not that
some or all of the deferred tax assets will not be realized. As of December 31, 2020, there were no deferred taxes due to
the uncertainty of the realization of net operating loss or carry forward prior to expiration.
OPERATING LEASES
The Company leases office space and the
production facility under operating lease agreements. The lease term begins on the date of initial possession of the leased property
for purposes of recognizing lease expense on a straight-line basis over the term of the lease. Lease renewal periods are considered
on a lease-by-lease basis and are generally not included in the initial lease term.
LOSS PER COMMON SHARE
FASB ASC 260, Earnings Per Share provides
for calculations of “basic” and “diluted” earnings per share. Basic earnings (loss) per common share excludes
dilution and is computed by dividing net income (loss) available to common stockholders by the weighted average common shares outstanding
for the period. Diluted earnings (loss) per common share reflect the potential dilution of securities that could occur if securities
or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock
that then shared in the income (loss) of the Company. Diluted EPS excludes all dilutive potential shares if their effect is anti-dilutive.
Convertible promissory notes, warrants
and preferred stock as at December 31, 2020 are likely to be converted into shares of common stock, however, due to losses,
their effect would be antidilutive. Refer to Note 18 for further details.
CONVERTIBLE NOTES PAYABLE AND DERIVATIVE INSTRUMENTS
The Company has adopted the provisions
of ASU 2017-11 to account for the down round features of warrants issued with private placements effective as of January 1,
2017. In doing so, warrants with a down round feature previously treated as derivative liabilities in the consolidated balance
sheet and measured at fair value are henceforth treated as equity, with no adjustment for changes in fair value at each reporting
period. The Company accounted for conversion options embedded in convertible notes in accordance with ASC 815. ASC 815 generally
requires companies to bifurcate conversion options embedded in convertible notes from their host instruments and to account for
them as free-standing derivative financial instruments. ASC 815 provides for an exception to this rule when convertible notes,
as host instruments, are deemed to be conventional, as defined by ASC 815-40. The Company accounts for convertible notes deemed
conventional and conversion options embedded in non-conventional convertible notes which qualify as equity under ASC 815, in accordance
with the provisions of ASC 470-20, which provides guidance on accounting for convertible securities with beneficial conversion
features. Accordingly, the Company records, as a discount to convertible notes, the intrinsic value of such conversion options
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.
STOCK BASED COMPENSATION
The Company accounts for stock based payments
in accordance with the provision of ASC 718, which requires that all share-based payments issued to acquire goods or services,
including grants of employee stock options, be recognized in the statement of operations based on their fair values, net of estimated
forfeitures. ASC 718 requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods
if actual forfeitures differ from those estimates. Compensation expense related to share-based awards is recognized over the requisite
service period, which is generally the vesting period.
The Company accounts for stock based compensation
awards issued to non-employees for services, as prescribed by ASC 718-10, at either the fair value of the services rendered or
the instruments issued in exchange for such services, whichever is more readily determinable.
The Company issues compensatory shares for services including, but not limited to, executive, management, accounting, operations,
corporate communication, financial and administrative consulting services.
MARKETING EXPENSES
Marketing, advertising and promotion expenditures
are expensed in the annual period in which the expenditure is incurred.
IMPAIRMENT OF LONG-LIVED ASSETS
In accordance with ASC 360-10, the Company,
on a regular basis, reviews the carrying amount of long-lived assets for the existence of facts or circumstances, both internally
and externally, that suggest impairment. The Company determines if the carrying amount of a long-lived asset is impaired based
on anticipated undiscounted cash flows, before interest, from the use of the asset. In the event of impairment, a loss is recognized
based on the amount by which the carrying amount exceeds the fair value of the asset. Fair value is determined based on appraised
value of the assets or the anticipated cash flows from the use of the asset or asset group, discounted at a rate commensurate with
the risk involved.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company follows guidance for accounting
for fair value measurements of financial assets and financial liabilities and for fair value measurements of nonfinancial items
that are recognized or disclosed at fair value in the consolidated financial statements on a recurring basis. Additionally, the
Company adopted guidance for fair value measurement related to nonfinancial items that are recognized and disclosed at fair value
in the consolidated financial statements on a nonrecurring basis. The guidance establishes a fair value hierarchy that prioritizes
the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices
in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to measurements involving
significant unobservable inputs (Level 3 measurements).
The three levels of the fair value hierarchy are as follows:
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Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date.
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Level 2 inputs are inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly.
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Level 3 inputs are unobservable inputs for the asset or liability. The carrying amounts of financial assets such as cash approximate their fair values because of the short maturity of these instruments.
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The estimated fair value of cash, accounts
payable, and accrued liabilities approximate their carrying values due to the short-term maturity of these instruments. The derivative
liabilities of the promissory convertible notes are valued Level 3, refer to Note 17 for further details.
EQUITY METHOD INVESTMENTS
The Company uses the equity method of accounting
for investments when the Company has the ability to significantly influence, but not control, the operations or financial activities
of the investee. As part of this evaluation, the Company considers the participating and protective rights in the venture as well
as its legal form. The Company records the equity method investments at cost and subsequently adjust their carrying amount each
period for the Company’s share of the earnings or losses of the investee and other adjustments required by the equity method
of accounting. Distributions received from the equity method investments are recorded as reductions in the carrying value of such
investments and are classified on the consolidated statements of cash flows pursuant to the cumulative earnings approach. Under
this approach, distributions received are considered returns on investment and are classified as cash inflows from operating activities
unless the cumulative distributions received, less distributions received in prior periods that were determined to be returns of
investment, exceed the cumulative equity in earnings recognized from the investment. When such an excess occurs, the current period
distributions up to this excess are considered returns of investment and are classified as cash inflows from investing activities.
The Company monitors equity method investments
for impairment and record reductions in their carrying values if the carrying amount of an investment exceeds its fair value. An
impairment charge is recorded when such impairment is deemed to be other-than-temporary. To determine whether an impairment is
other-than-temporary, we consider our ability and intent to hold the investment until the carrying amount is fully recovered. Circumstances
that indicate an impairment may have occurred include factors such as decreases in quoted market prices or declines in the operations
of the investee. The evaluation of an investment for potential impairment requires us to exercise significant judgment and to make
certain assumptions. The use of different judgments and assumptions could result in different conclusions. The Company has recorded
impairment losses related to our equity method investments of $nil during the year ended December 31, 2020.
5.
|
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
|
The Company qualifies as an “emerging
growth company” (EGC) under the 2012 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 7(a)(2)(B) of the Securities Act for complying
with new or revised accounting standards. As an emerging growth company, management can delay the adoption of certain accounting
standards until those standards would otherwise apply to private companies. The management has elected to take advantage of the
benefits of this extended transition period.
From time to time, new accounting pronouncements
are issued by the Financial Accounting Standards Board (FASB) or other standard setting bodies that are adopted by the Company
as of the specified effective date.
In February 2016, the FASB issued
ASU No. 2016-02, Leases (Topic 842). In July 2018, the FASB issued ASU No. 2018-10, Codification Improvements to
Topic 842, Leases (ASU 2018-10), which provides narrow amendments to clarify how to apply certain aspects of the new lease standard,
and ASU No. 2018-11, Leases (Topic 842)—Targeted Improvements (ASU 2018-11), which addressed implementation issues related
to the new lease standard. These and certain other lease-related ASUs have generally been codified in ASC 842. ASC 842 supersedes
the lease accounting requirements in ASC Topic 840, Leases (ASC 840). ASC 842 establishes a right-of-use model that requires a
lessee to record a right-of-use asset and a lease liability on the balance sheet for all leases. Under ASC 842, leases are classified
as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. ASU 2016-02
was effective for annual reporting periods beginning after December 15, 2018 and interim periods within that reporting period
(for “emerging growth company” from January 1, 2020). The Company adopted ASC 842 on January 1, 2020 using
the effective date transition method. Prior period results continue to be presented under ASC 840 based on the accounting standards
originally in effect for such periods.
The Company has elected certain practical
expedients permitted under the transition guidance within ASC 842 to leases that commenced before January 1, 2020, including
the package of practical expedients. The election of the package of practical expedients resulted in the Company not reassessing
prior conclusions under ASC 840 related to lease identification, lease classification and initial direct costs for expired and
existing leases prior to January 1, 2020. The Company elected the practical expedient to not record short-term leases on its
consolidated balance sheet. The adoption of ASU 2016-02 did not have a significant impact on the Company’s consolidated results
of operations or cash flows. See Note 16 for additional information.
In August 2018, the FASB issued ASU
2018-13, “Changes to Disclosure Requirements for Fair Value Measurements”, which will improve the effectiveness of
disclosure requirements for recurring and nonrecurring fair value measurements. The standard removes, modifies, and adds certain
disclosure requirements, and is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15,
2019 (for “emerging growth company” beginning after December 15, 2020). The Company will be evaluating the impact
this standard will have on the Company’s consolidated financial statements.
In June 2018, the FASB issued an accounting
pronouncement (FASB ASU 2018-07) to expand the scope of ASC Topic 718, Compensation - Stock Compensation, to include share-based
payment transactions for acquiring goods and services from nonemployees. The pronouncement is effective for fiscal years, and for
interim periods within those fiscal years, beginning after December 15, 2018, with early adoption permitted (for “emerging
growth company” beginning after December 15, 2019). The Company has adopted this standard effective from January 1,
2020 and the adoption of this standard did not have any significant impact on the consolidated financial statements.
The FASB recently issued ASU 2020-06, Debt
– Debt with Conversion and Other Options (Subtopic 470- 20) and Derivatives and Hedging – Contracts in Entity’s
Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity, to reduce complexity
in applying GAAP to certain financial instruments with characteristics of liabilities and equity. The guidance in ASU 2020-06 simplifies
the accounting for convertible debt instruments and convertible preferred stock by removing the existing guidance in ASC 470-20,
Debt: Debt with Conversion and Other Options, that requires entities to account for beneficial conversion features and cash conversion
features in equity, separately from the host convertible debt or preferred stock. The guidance in ASC 470-20 applies to convertible
instruments for which the embedded conversion features are not required to be bifurcated from the host contract and accounted for
as derivatives. In addition, the amendments revise the scope exception from derivative accounting in ASC 815-40 for freestanding
financial instruments and embedded features that are both indexed to the issuer’s own stock and classified in stockholders’
equity, by removing certain criteria required for equity classification. These amendments are expected to result in more freestanding
financial instruments qualifying for equity classification (and, therefore, not accounted for as derivatives), as well as fewer
embedded features requiring separate accounting from the host contract. The amendments in ASU 2020-06 further revise the guidance
in ASC 260, Earnings Per Share, to require entities to calculate diluted earnings per share (EPS) for convertible instruments by
using the if-converted method. In addition, entities must presume share settlement for purposes of calculating diluted EPS when
an instrument may be settled in cash or shares. The amendments in ASU 2020-06 are effective for public entities for fiscal years
beginning after December 15, 2021 with early adoption permitted (for “emerging growth company” beginning after
December 15, 2023). The Company will be evaluating the impact this standard will have on the Company’s consolidated
financial statements.
At December 31, 2020, the Company
had prepaid expenses of $46,775 compared to $37,702 as at December 31, 2019. The balance represents the security deposit for
the leased land of the subsidiary’s facility.
At December 31, 2020, the Company
had $95,386 of gross sales tax recoverable compared to $48,744 as at December 31, 2019. This is due to sales tax paid by the
subsidiary on expenses incurred during the year which are recoverable from the government.
The Company has recorded an allowance in
the amount of $19,924 (2019: $12,186) stemming from the potential uncollectible balances within the outstanding sales tax recoverable
amount.
At December 31, 2020, the inventory
in the amount of $99,000 (2019: $124,000) consists of finished goods and is held at a third-party location as at December 31,
2020.
During the year ended December 31,
2019, the Company recorded a write-down of inventory to its net realizable value, in the amount of $51,640 due to decrease in inventory
value and recorded an impairment in the amount of $150,954 due to obsolete inventory bringing the total inventory impairment amounting
to $202,594.
In addition, the inventory in the amount
of $99,000 (2019: $124,000) is secured against the loan provided by a related party and the Company’s shareholder. Refer
to Note 14 for further details.
Effective August 8, 2019, the Company
entered into an Exclusive License Agreement (“License Agreement”) with cGreen, Inc., a Delaware corporation (“cGreen”).
The License Agreement granted the Company an exclusive license to manufacture and distribute the patent-pending THC antidote True
Focus™ in the United States, Europe and the Caribbean. The term of the license were ten (10) years and four (4) months
from the effective date of August 8, 2019. In consideration of the license, the Company would issue 10,000,000 shares of its
common stock as follows: (i) 3.500,000 within ten (10) days of the effective date; (ii) 3,500,000 shares on January 10,
2020; and (iii) 3,000,000 shares not later than June 10, 2020. In addition, the Company would pay cGreen royalties of
7% of the net sales of the licensed products and 7% of all sublicensing revenues collected by the Company. The Company would pay
cGreen an advance royalty of $300,000 within ten (10) days of the effective date; $300,000 on January 10, 2020; and $400,000
on or before June 10, 2020 and $500,000 on or before November 10, 2020. All advance royalty payments would be credited
against the royalties owed by the Company through December 31, 2020. During the quarter ended December 31, 2019, the
intangible asset was written off in the amount of $2,149,613 based on management’s review and evaluation of its recoverability.
Additionally, during the quarter ended
June 30, 2020, the Company was in arbitration with cGreen for the breaches of the terms of the License Agreement, however,
through an early mediation, both companies reached to a settlement agreement to settle the breaches of the contract on July 27,
2020 (“Effective Date”). As per the settlement agreement, the License Agreement has been terminated and the Company
does not have to issue the 10 million shares nor pay the outstanding royalty payable in the amount of $1,191,860. As consideration,
the Company paid $130,000 within 30 days of the Effective Date and will pay $100,000 in monthly installments of $10,000 commencing
in April 2021 to cGreen.
10.
|
FIXED ASSETS AND CAPITAL WORK IN PROGRESS
|
The Company’s subsidiary, Canary,
initiated construction on its 44,000 square foot cannabis cultivation facility in September of 2017. Since then, extensive
demolition and structural upgrades have been carried out at the site. During the year ended December 31, 2020, the Company
has capitalized $42,505 (2019: $3,510,401) in payments to multiple vendors for the upgrade and renovation of the facility.
On May 1, 2019, the Company completed
the construction of its 44,000 square foot cannabis cultivation facility and on May 14, 2019, the Company submitted a Site
Evidence Package to Health Canada as part of the steps to obtain the license to cultivate cannabis at the Company’s facility.
On October 8, 2019, the Company was granted licenses to cultivate, process and sell cannabis pursuant to the Cannabis
Act (Bill C-45). It has recorded depreciation expense of $225,585 during the year ended December 31, 2020 (2019: $nil).
The Company’s other subsidiary, CannaKorp,
has been utilizing its assets throughout the year and accordingly, has recorded depreciation expense of $78,618 during the year
ended December 31, 2020 (2019: $29,025).
Below is a breakdown of the consolidated
fixed asset, category wise:
|
|
Furniture &
fixture
|
|
|
Machinery &
Equipment
|
|
|
Software
|
|
|
Leasehold
improvements
|
|
|
Total
|
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
Cost
|
|
|
757,797
|
|
|
|
772,306
|
|
|
|
43,643
|
|
|
|
7,141,818
|
|
|
|
8,715,564
|
|
Accumulated depreciation
|
|
|
(31,892
|
)
|
|
|
(652,417
|
)
|
|
|
(41,483
|
)
|
|
|
(195,774
|
)
|
|
|
(921,567
|
)
|
|
|
|
725,905
|
|
|
|
119,889
|
|
|
|
2,160
|
|
|
|
6,946,044
|
|
|
|
7,793,997
|
|
Effective May 14, 2020, Canary entered
into a Joint Venture Agreement (“Joint Venture”) with 9258159 Canada Inc., a corporation organized under the laws of
the Province of Ontario, Canada (referred to as “Thrive Cannabis”) and 2755757 Ontario Inc., a corporation organized
under the laws of the Province of Ontario, Canada (referred to as “JVCo”). Canary and Thrive Cannabis each hold 50%
of the voting equity interest in JVCo. The term of the Joint Venture is five (5) years from its effective date of May 14,
2020.
Under the Joint Venture, JVCo is permitted
to use a portion, consisting of seven (7) rooms of Canary’s licensed cannabis cultivation facilities located in Simcoe,
Ontario, Canada ("Licensed Site Portion”) for the purpose of operating and managing the Licensed Site Portion for the
cultivation and process of cannabis pursuant to Canary’s license issued by Health Canada. During the term of the Joint Venture,
JVCo will be responsible for the administration, operation and management of the Licensed Site Portion and all proceeds from the
sale of the cannabis and related cannabis products cultivated therein will be payable to the JVCo.
In addition, Canary, Thrive Cannabis, and
JVCo entered into a Unanimous Shareholder Agreement dated May 14, 2020 governing the management and administration of the
business of JVCo.
As per the Joint Venture, Canary will provide
the JVCo with a Hard Cost Loan with the maximum amount of $942,480 (CAD $1,200,000). This loan bears an interest rate of 7% per
annum, matures in 12 months from effective date, and is be secured against the personal property of the JVCo and Thrive will guarantee
one-half (1/2) of the outstanding balance of the loan. As at December 31, 2020, the loan advanced amounts to $263,109 (CAD
$335,000) and interest income charged for the year ended in amount of $8,074 (CAD $10,280) is included in other income on the consolidated
statement of operations and comprehensive loss and interest receivable in the amount of the same amount is included in receivable
from joint venture on the consolidated balance sheet.
The JVCo will reimburse Canary for certain
expenses incurred by Canary for the cultivation and processing of cannabis products. As at December 31, 2020, the total eligible
recoverable expenses were $1,123,731 (CAD $1,430,776) leading to a recoverable amount of $1,091,834 (CAD $1,390,163). The JVCo
recorded sales of $108,930 (CAD $138,694) during the quarter end of December 31, 2020. The entire revenue was sold to one customer.
The JVCo shall make payments out of the revenues,
net of applicable taxes and expenses (“Net Income”), in accordance with the following order of priority:
|
a)
|
First, the payment of recoverable expenses, explained below;
|
|
b)
|
Second, to the repayment of the Hard Cost Loan until repaid in full;
|
|
c)
|
Third, to the repayment of the Soft Costs (costs of services and materials provide by Thrive Cannabis)
until repaid in full;
|
|
d)
|
Finally, any remaining Net Income shall be distributed, on a monthly basis, as follows:
|
|
(i)
|
For the first two (2) years following execution of this Agreement, Canary shall receive 60% and Thrive
Cannabis shall receive 40%; and
|
|
(ii)
|
For the three (3) years following such period, Canary shall receive 57.5% and Thrive shall receive 42.5%.
|
The net equity of the JVCo as at December 31,
2020 was negative $523,496 (CAD $666,534) resulting in a loss of equity for $261,748 (CAD $333,267). The JV had liabilities of
$1,363,018 (CAD $1,735,444) and assets of $839,522 (CAD $1,068,910).
Business Acquisition
ASC Topic 805, “Business Combinations”
requires that all business combinations be accounted for using the acquisition method and that certain identifiable intangible
assets acquired in a business combination be recognized as assets apart from goodwill. ASC Topic 350, “Intangibles-Goodwill
and Other” (“ASC 350”) requires goodwill and other identifiable intangible assets with indefinite useful lives
not be amortized, such as trade names, but instead tested at least annually for impairment (which the Company tests each year end,
absent any impairment indicators) and be written down if impaired. ASC 350 requires that goodwill be allocated to its respective
reporting unit and that identifiable intangible assets with finite lives be amortized over their useful lives.
CannaKorp Inc.
Effective January 25, 2019, the Company
entered into an Agreement and Plan of Share Exchange (“Exchange Agreement”) with CannaKorp Inc., a Delaware corporation
(“CannaKorp”). Company had previously entered into a Letter of Intent with CannaKorp dated November 30, 2018 which
was disclosed in the Company’s report on Form 8-K filed December 4, 2018.
The Exchange Agreement provides that, subject
to its terms and conditions, the Company issued to the CannaKorp shareholders an aggregate of 30,407,412 shares of the Company’s
common stock, based on a price per share of $0.10, in exchange for 100% of the issued and outstanding common stock of CannaKorp
held by the CannaKorp shareholders. In addition, the Company will issue Common Stock Purchase Warrants (“Warrants”)
in exchange for all outstanding and promised CannaKorp stock options. The Warrants will grant the holders thereof the right to
purchase up to approximately 7,211,213 shares of the Company’s common stock. The Company will also assume all outstanding
liabilities of CannaKorp. Upon the closing of the Exchange Agreement, CannaKorp will continue its business operations as a subsidiary
of the Company. The transaction was closed effective March 1, 2019.
Due to the publicly traded nature of the
Company’s shares of the common stock, the equity issuance of the shares was considered to be a more reliable measurement
of fair market value of the transaction compared to having a separate valuation of the net assets.
This acquisition was accounted for using
the acquisition method of accounting. The fair value of assets, liabilities and intangible assets and the purchase price allocation
as of March 1, 2019 was as follows:
|
|
Allocation of
Purchase Price
|
|
|
|
$
|
|
Cash
|
|
|
18,961
|
|
Accounts Receivable
|
|
|
2,068
|
|
Inventory
|
|
|
326,595
|
|
Prepaid and other receivables
|
|
|
89,585
|
|
Property and equipment, net
|
|
|
88,129
|
|
Total assets
|
|
|
525,338
|
|
|
|
|
|
|
Accounts payable
|
|
|
(1,365,790
|
)
|
Accrued expenses and other current liabilities
|
|
|
(286,435
|
)
|
Deferred revenue
|
|
|
(128,158
|
)
|
Payable to related parties
|
|
|
(753,738
|
)
|
Total liabilities
|
|
|
(2,534,121
|
)
|
Net liabilities
|
|
|
(2,008,783
|
)
|
Goodwill
|
|
|
6,071,627
|
|
Total net assets acquired
|
|
|
4,062,844
|
|
The purchase consideration of 30,407,412 shares and 7,211,213
warrants of the Company’s common stock valued as detailed below:
|
|
$
|
|
Number of Common Stock
|
|
|
30,407,712
|
|
Market price on the date of issuance
|
|
|
0.108
|
|
Fair value of Common Stock
|
|
|
3,284,033
|
|
|
|
$
|
|
Number of warrants
|
|
|
7,211,213
|
|
Fair value price per warrant
|
|
|
0.108
|
|
Fair value of warrant
|
|
|
778,811
|
|
|
|
|
|
|
Fair value of Common Stock
|
|
|
3,284,033
|
|
Fair value of warrant
|
|
|
778,811
|
|
Purchase consideration
|
|
|
4,062,844
|
|
The fair value of these warrants was measured
at the date of acquisition using the Black-Scholes option pricing model using the following assumptions:
|
·
|
Forfeiture rate of 0%;
|
|
·
|
Stock price of $0.108 per share;
|
|
·
|
Exercise price between the range of $0.13 to $0.15 per share
|
|
·
|
Volatility at 635.49%
|
|
·
|
Risk free interest rate of 2.55%;
|
|
·
|
Expected life of 2 years; and
|
|
·
|
Expected dividend rate of 0%
|
During the quarter ended December 31,
2019, the goodwill was revaluated after the completion of CannaKorp’s audit of the year ended December 31, 2018. This
resulted in changing the balance on acquisition date, March 1, 2019 thereby increasing the goodwill by $369,315 to $6,071,627.
During the year ended, December 31,
2019, the Company identified circumstances which would call for evaluation of goodwill impairment and therefore impaired $1,485,925
reducing the goodwill related to the CannaKorp to $4,585,702.
During the year ended, December 31, 2020, the Company identified
circumstances which would call for evaluation of goodwill impairment and therefore impaired the remaining balance of goodwill related
to the CannaKorp to $nil.
Refer to Note 18 for details on warrants.
Visava Inc./Canary Rx Inc.
On June 27, 2018, the Company entered
into an Agreement and Plan of Share Exchange (“Exchange Agreement”) with Visava Inc., a private Ontario, Canada corporation
(“Visava”). Visava owns 100% of Canary Rx Inc., a Canadian corporation that holds a leasehold interest in a parcel
of property located in Ontario’s Garden Norfolk County for the production of cannabis.
Pursuant to the Agreement, the Company
acquired 100% of the issued and outstanding shares of Visava Inc. in exchange for the issuance of 25,500,000 shares of the Company’s
Common Stock and will issue to the Visava shareholders, prorata Common Stock Purchase Warrants purchasing an aggregate of 25,000,000
shares of the Company’s Common Stock at a price per share of $0.10 for a period of two years following the issuance date
of the Warrants. As a result of this transaction, Visava Inc. became a wholly owned subsidiary of the Company and the former shareholders
of Visava Inc. owned approximately 46.27% of the Company’s shares of Common Stock. The transaction was closed effective August 2,
2018. During the quarter ended, September 30, 2020, all of the warrants expired, none were exercised.
This acquisition was accounted for using
the acquisition method of accounting. The fair value of assets, liabilities and intangible assets and the purchase price allocation
as of August 2, 2018 was as follows:
|
|
Allocation of
Purchase Price
|
|
|
|
$
|
|
Prepaid and other receivables
|
|
|
15,368
|
|
Sales tax recoverable
|
|
|
133,614
|
|
Furniture and equipment
|
|
|
897
|
|
Capital work in progress
|
|
|
898,422
|
|
Total assets
|
|
|
1,048,301
|
|
|
|
|
|
|
Bank overdraft
|
|
|
(63,693
|
)
|
Accounts payable
|
|
|
(1,158,164
|
)
|
Payable to related parties
|
|
|
(101,797
|
)
|
Total liabilities
|
|
|
(1,323,654
|
)
|
Net liabilities
|
|
|
(275,353
|
)
|
Goodwill
|
|
|
3,594,195
|
|
Total net assets acquired
|
|
|
3,318,842
|
|
|
|
$
|
|
Number of Common Stock
|
|
|
25,500,000
|
|
Market price on the date of issuance
|
|
|
0.067
|
|
Fair value of Common Stock
|
|
|
1,695,750
|
|
|
|
$
|
|
Number of warrants
|
|
|
25,000,000
|
|
Fair value price per warrant
|
|
|
0.065
|
|
Fair value of warrant
|
|
|
1,623,092
|
|
|
|
|
|
|
Fair value of Common Stock
|
|
|
1,695,750
|
|
Fair value of warrant
|
|
|
1,623,092
|
|
Purchase consideration
|
|
|
3,318,842
|
|
The fair value of these warrants was measured
at the date of acquisition using the Black-Scholes option pricing model using the following assumptions:
|
·
|
Forfeiture rate of 0%;
|
|
·
|
Stock price of $0.067 per share;
|
|
·
|
Exercise price of $0.10 per share
|
|
·
|
Volatility at 329%
|
|
·
|
Risk free interest rate of 2.66%;
|
|
·
|
Expected life of 2 years; and
|
|
·
|
Expected dividend rate of 0%
|
Refer to Note 18 for details on warrants.
During the year ended December 31,
2020 and 2019, the Company has identified no circumstances which would call for further evaluation of goodwill impairment related
to Canary.
Goodwill
The Company tests for impairment of goodwill
at the reporting unit level. In assessing whether goodwill is impaired, the Company utilize the two-step process as prescribed
by ASC 350. The first step of this test compares the fair value of the reporting unit, determined based upon discounted estimated
future cash flows, to the carrying amount, including goodwill. If the fair value exceeds the carrying amount, no further work is
required and no impairment loss is recognized. If the carrying amount of the reporting unit exceeds the fair value, the goodwill
of the reporting unit is potentially impaired and step two of the goodwill impairment test would need to be performed to measure
the amount of an impairment loss, if any. In the second step, the impairment is computed by comparing the implied fair value of
the reporting unit’s goodwill with the carrying amount of the goodwill. If the carrying amount of the reporting unit’s
goodwill is greater than the implied fair value of its goodwill, an impairment loss in the amount of the excess is recognized and
charged to statement of operations.
13.
|
ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
|
Accounts payable amounting to $1,809,120
as at December 31, 2020, primarily represents consulting and construction services related to capital work in progress amounting
to 141,935, interest on promissory notes and loans amounting to $403,865, and outstanding plus accrued professional fees of $1,002,098.
Accounts payable amounting to $2,494,588
as at December 31, 2019, primarily represents consulting and construction services related to capital work in progress amounting
to $1,079,498, interest on promissory notes and loan amounting to $53,945, and outstanding plus accrued professional fees of $951,000.
14.
|
RELATED PARTY TRANSACTIONS AND BALANCES
|
During the year ended December 31,
2020, the Company expensed $286,978 (December 31, 2019: $1,481,284) in management service fee for services provided by the
current key officers of the company.
The breakdown of the related party balance
as at December 31, 2020 in the amount of $9,934,960 (December 31, 2019: $431,660) is below:
Debt purchase by CL Investors Inc.
On June 15, 2020, the Company
and its subsidiaries, entered into a Debt Purchase and Assignment Agreement (“Agreement”) with CL Investors Inc. (“CLI).
June 15th was preliminary date of the agreement and the agreement was not finalized until the later date as indicated below.
The CEO of the Company, is the
Secretary of CLI, a director of the Company, is a shareholder of CLI and the brother of CEO, is the President and sole director
of CLI therefore the loan from CLI is classified under related party transactions.
Pursuant to the Agreement, CLI
purchased from the Company for the sum of $2,277,660, (CAD $2,900,000) a debt obligation owing from Canary to the Company in the
principal balance of $8,325,240 (CAD $10,600,000 (“Canary Debt”)). Upon receipt of the consideration, the Company loaned
the full sum to Canary under terms of an unsecured, non-interest-bearing promissory note, subject to a covenant by the Company
not to take any collection action so long as the Canary Debt remains unpaid to CLI. As at December 31, 2020, $78,540 (CAD
$100,000) is still outstanding from CLI which is presented as other receivable on the consolidated balance sheet.
The Canary debt owed to CLI from
Canary bears an interest at 5% per annum and matures on August 14, 2025. The repayment of the debt is guaranteed by the Company
and its subsidiaries plus secured by a general security interest in the assets of the Company and its subsidiaries and a pledge
by the Company of all of the issued and outstanding common stock of Canary, Visava and CannaKorp Inc. held by the Company. In addition
to the above, CLI has been granted an option, in lieu of repayment of the amended Canary Debt, to demand, in its sole and absolute
discretion the transfer, assignment and conveyance of 75% of the issued and outstanding capital stock of Visava and Canary. Furthermore,
the President and sole director of CLI has been granted an option to acquire the remaining 25% of the issued and outstanding capital
stock of Visava and Canary. Interest expense charged for the year ended in amount of $158,411 (CAD $201,694) is included in interest and bank charges on the consolidated
statement of operations and comprehensive loss and accrued interest of same the amount is included in accounts payable and accrued liabilities
on the consolidated balance sheet.
The repayment schedule of the
minimum principal payments is shown below:
2021
|
|
$
|
1,031,320
|
|
2022
|
|
$
|
1,676,423
|
|
2023
|
|
$
|
2,244,683
|
|
2024
|
|
$
|
2,144,931
|
|
2025
|
|
$
|
1,227,883
|
|
Total
|
|
$
|
8,325,240
|
|
Current portion
|
|
$
|
(1,031,320
|
)
|
Non-current portion
|
|
$
|
7,293,920
|
|
Effective August 14, 2020,
the Agreement was amended (“Amendment”) to provide that CLI will purchase from Rubin Schindermann, a director of the
Company, 500,000 shares of the Company’s Series A Preferred Stock in consideration of the payment by CLI to Rubin Schindermann
of $78,540 (CAD $100,000) and the issuance to Mr. Schindermann of 10,000,000 shares of the Company’s common stock. In
consideration of the foregoing, Mr., Schindermann resigned as a director of the Company and from any and all administrative and
executive positions with the Company’s subsidiaries. In addition, the Company issued Common Stock Purchase Warrant for 10,000,000
shares of Target common stock to CLI as consideration for the Agreement. Refer to Note 18 for additional details on warrants. The
combined impact of both transactions resulted in debt issuance cost of $263,495. This debt issuance cost will be amortized over
the term of the debt on straight line basis. As at December 31, 2020, the balance is $243,440 of which $52,845 is current
while $190,595 is non-current.
Shareholder loan
On December 20, 2019, one
of the Company’s shareholders provided a loan up to $785,400 (CAD $1,000,000). The loan bears an annual interest rate of
16%, is secured by all assets owned by the Company and its subsidiaries including leasehold improvements and matures in one year
that is December 20, 2020. During the year ended December 31, 2020, the loan maximum was increased by $785,400 (CAD $1,000,000).
This additional loan bears an annual interest rate of 43% and has a lender fee of 10%. Due to above amendment, the maximum loan
which the company can borrow is $1,570,800 (CAD $2,000,000) which is also the outstanding balance as at December 31, 2020.
Interest expense charged for the year ended in amount of $336,503 (CAD $428,448) is included in interest and bank charges on the
consolidated statement of operations and comprehensive loss and accrued interest in the amount of $196,257 (CAD $249,882) is included
in accounts payable and accrued liabilities on the consolidated balance sheet.
Shareholder promissory note
Effective April 20, 2020,
the Company issued its promissory note (“Note”) to one of the Company’s shareholders in the principal amount
of $236,993. The Note contained an original issue discount of $15,300 resulting in net proceeds to the Company of $221,693. The
Note carried interest at the rate of 12% per annum and the note matured on April 20, 2021. During the quarter ended, September 30,
2020, the Company paid the outstanding balance and accrued interest in full, in the amount of $251,213.
Outstanding management service fee
The balance owing to key officers of
the Company is $217,359 (December 31, 2019: $134,580). The outstanding balance are primarily outstanding management service fee.
During the year ended December 31, 2020, nil shares (December 31, 2019: 17,834,850 shares) were issued for these services performed
as of and for the year ended December 31, 2020.
Balances outstanding related to subsidiaries
On February 22, 2020, Randal
MacLeod, who is shareholder in the Company and former President of the subsidiary, Visava terminated his employment agreement and
during the year ended December 31, 2020, $54,307 (December 31, 2019: $196,991) was paid as remuneration for management
services included in salaries and wages. As at December 31, 2020, the balance owing is $nil (December 31, 2019: $18,582).
During the year ended December 31,
2019, the Company settled with the loan holders provided to the Company's subsidiary, CannaKorp. Total amount subject to settlement
was $817,876 which includes accrued interest and accrued payroll. The company settled by paying $954,374 as consideration of cash,
920,240 shares (recorded in shares to be issued) and warrants of 920,240 shares with an exercise price of $0.15 per share. This
resulted in a settlement loss of $136,498. Of the total settlement amount, as at December 31, 2020 and 2019, $65,000 was outstanding
to be paid. This amount includes late payment penalties of $25,000.
During the year ended December 31, 2020,
the Company has purchased $nil of consulting services from GTA Angel Group which is partially owned by the Company’s CEO’s
brother. The balance outstanding as at December 31, 2020 is $26,625 and is included in accounts payable and accrued liabilities.
During the year ended December 31, 2020,
the Company has purchased consulting services amounting to $14,782 from BaK Consulting which is owned by one of the Company’s director.
The balance outstanding as at December 31, 2020 is $nil.
During the year ended December 31,
2020, the Company leases its principal executive office premise from Norlandam Marketing Inc., a company owned by one of directors
and rent payments amounted to $25,600. The outstanding balance as at December 31, 2020 is balance of $5,379.
15.
|
SHAREHOLDER ADVANCES AND RECEIVABLE
|
Shareholder advances represent expenses
paid by the owners from personal funds. The amount is non-interest bearing, unsecured and due on demand. The amount of advance
as at December 31, 2020 and 2019 were $nil while the amount of receivable as at December 31, 2020 and 2019 were $nil
and $2,025, respectively. The amounts repaid during the year ended December 31, 2020 and 2019 were $nil and $203,945, respectively.
During the year ended December 31, 2020 and 2019, $nil and $133,423 was settled through issuance of shares of common stock.
Refer to Note 14 for details.
16.
|
OPERATING LEASE RIGHT-OF-USE ASSETS AND LEASE LIABILITY
|
The Company adopted ASC 842 as of
January 1, 2019, using a modified retrospective approach and applying the standard’s transition provisions at
January 1, 2020, the effective date. The Company made an accounting policy election to exclude from balance sheet
reporting those leases with initial terms of 12 months or less. The Company determines if an arrangement is a lease at
inception. This determination generally depends on whether the arrangement conveys to the Company the right to control the
use of an explicitly or implicitly identified fixed asset for a period of time in exchange for consideration. Control of an
underlying asset is conveyed to the Company if the Company obtains the rights to direct the use of and to obtain
substantially all of the economic benefits from using the underlying asset. The Company has lease agreements which include
lease and non-lease components, which the Company has elected to account for as a single lease component for all classes of
underlying assets. Lease expense for variable lease components is recognized when the obligation is probable.
Right-of-use assets and liabilities are
recognized at commencement date based on the present value of lease payments over the lease term. ASC 842 requires a lessee to
discount its unpaid lease payments using the interest rate implicit in the lease or, if that rate cannot be readily determined,
its incremental borrowing rate. As an implicit interest rate is not readily determinable in the Company’s leases, the incremental
borrowing rate is used based on the information available at adoption date in determining the present value of lease payments.
The lease term for all of the Company’s leases includes the non-cancellable period of the lease plus any additional periods
covered by either a Company option to extend (or not to terminate) the lease that the Company is reasonably certain to exercise,
or an option to extend (or not to terminate) the lease controlled by the lessor. Options for lease renewals have been excluded
from the lease term (and lease liability) for the majority of the Company’s leases as the reasonably certain threshold is
not met.
The Company does not own any real property.
It currently leases two office/facility spaces. For accounting purposes, this lease is treated as an operating lease. Upon
adoption of ASC 842, the Company recognized $1,773,600 (CAD $2,258,212) of right-to-use assets as operating leases and operating
lease obligations. The right-to-use asset was reduced by $1,641,424 (CAD $2,089,921) due to recognition of the prior deferred
rent liability which was eliminated upon adoption of ASC 842. Details of these leases are detailed below:
The Company is a party to a 5-year lease
agreement (initiated on September 2018) with respect to its office premises. Total minimum rent for the premises is $872 (CAD
$1,100) plus applicable taxes per month. On the first anniversary date, the minimum rent per month will increase to $894 (CAD $1,138)
plus applicable taxes, on the second anniversary date, the minimum rent per month will increase to $915 (CAD $1,166) plus applicable
taxes, on the third anniversary date, the minimum rent per month will increase to $937 (CAD $1,193) plus applicable taxes, on the
fourth anniversary date, the minimum rent per month will increase to $959 (CAD $1,221) plus applicable taxes.
The Company’s subsidiary, Canary, is a party
to a 10-year lease agreement (initiated on July 2014) with respect to its facility to produce Craft Cannabis at Scale. The lease
agreement was amended effective January 1, 2020, where the amended 10-year term starts on May 1, 2020 and provides the Company
an option to extend for three (3) additional terms of ten (10) years. Additionally, effective January 1, 2020, the amended
agreement increased the minimum rent to $27,489 (CAD $35,000) plus applicable taxes per
month and on each anniversary date, commencing from January 1, 2021, the minimum rent will increase by 1.00%. Furthermore, only the
current 10-year term has been factored into the calculation of the lease liability. Effective May 1, 2020, due to the implementation
of the new lease, $737,467 (CAD $988,293) was forgiven by the landlord and one vendor.
These leases will expire between 2023 and
2030. The weighted average discount rate used for these leases were 16% (average borrowing rate of the Company). Maturities
of lease liabilities were:
|
|
$
|
|
2021
|
|
|
344,240
|
|
2022
|
|
|
347,834
|
|
2023
|
|
|
347,538
|
|
2024
|
|
|
343,262
|
|
Thereafter
|
|
|
1,889,951
|
|
Total lease payment
|
|
|
3,272,825
|
|
Less imputed interest
|
|
|
(1,567,263
|
)
|
Present value of lease liabilities
|
|
|
1,705,562
|
|
Current portion
|
|
|
(83,196
|
)
|
Non-current portion
|
|
|
1,622,366
|
|
Below is the reconciliation of the net
operating lease presented on the consolidated statement of operations:
|
|
For the
|
|
|
|
year ended
|
|
|
|
December 31, 2020
|
|
|
|
$
|
|
Gross operating lease expense
|
|
|
289,083
|
|
Gross rent and utilities expenses
|
|
|
270,366
|
|
Recoverable expenses from JVCo related to rent and utilities
|
|
|
(429,269
|
)
|
|
|
|
130,180
|
|
As explained in Note 11, the JVCo reimburses
certain percentage of gross expenses incurred by Canary which includes rent and utilities. Due to this unique circumstance and
since operating lease expense are related to rent expenses, the Company has decided to group the operating lease expenses, all
lease related expenses and the recoverable amount from JVCo to show a net operating lease expense.
17.
|
CONVERTIBLE PROMISSORY NOTES
|
Below lists the convertible promissory
notes the Company has issued:
Convertible promissory note issued on October 18,
2019, amounting to $168,300 (Note R).
The key terms/features of the convertible
note are as follows:
|
1.
|
The maturity date of the Note was April 18, 2021.
|
|
|
|
|
2.
|
Interest on the unpaid principal balance of this Note accrued at the rate of 12% per annum.
|
|
|
|
|
3.
|
In the event the Note holder exercised the right of conversion, the conversion price would be equal to 75% of the lowest closing bid price of the Company’s common stock for the fifteen (15) trading days prior to the date of conversion.
|
|
|
|
|
4.
|
The Company was not obligated to accept any conversion request before six months from the date of the note.
|
|
|
|
|
5.
|
Conversion was limited to the holder beneficially holding not more than 4.99% of the Company’s then issued and outstanding common stock after the conversion.
|
During the quarter ended June 30,
2020, the Company settled the outstanding balance of Note R in full with a cash payment and recorded a loss of $43,156 as settlement
of debt in the consolidated statement of operations. The loss is due to the prepayment penalty as per the note agreement.
Convertible promissory note issued on February 16,
2019, amounting to $103,000 (Note Q).
The key terms/features of the convertible
note are as follows:
|
1.
|
The maturity date of the Note was August 16, 2020.
|
|
|
|
|
2.
|
Interest on the unpaid principal balance of this Note accrued at the rate of 12% per annum.
|
|
|
|
|
3.
|
In the event the Note holder exercised the right of conversion, the conversion price would be equal to 61% of the lowest closing bid price of the Company’s common stock for the fifteen (15) trading days prior to the date of conversion.
|
|
|
|
|
4.
|
The Company was not obligated to accept any conversion request before six months from the date of the note.
|
|
|
|
|
5.
|
Conversion was limited to the holder beneficially holding not more than 4.99% of the Company’s then issued and outstanding common stock after the conversion.
|
During the quarter ended June 30,
2019, the Company settled the outstanding balance in full with a cash payment and recorded a loss of $35,173 as settlement of debt
in the consolidated statement of operations. The loss is due to the prepayment penalty as per the note agreement.
Convertible promissory note issued on December 24,
2018, amounting to $83,000 (Note P).
The key terms/features of the convertible
note are as follows:
|
1.
|
The maturity date of the Note was June 24, 2020.
|
|
2.
|
Interest on the unpaid principal balance of this Note accrued at the rate of 12% per annum.
|
|
3.
|
In the event the Note holder exercised the right of conversion, the conversion price would be equal to 61% of the average of the three (3) lowest trading price of the Company’s common stock for the fifteen (15) trading days prior to the date of conversion.
|
|
4.
|
The Company was not obligated to accept any conversion request before six months from the date of the note.
|
|
5.
|
Conversion was limited to the holder beneficially holding not more than 4.99% of the Company’s then issued and outstanding common stock after the conversion.
|
During the quarter ended June 30,
2019, the Company settled the outstanding balance in full with a cash payment and recorded a loss of $36,085 as settlement of debt
in the consolidated statement of operations. The loss is due to the prepayment penalty as per the note agreement.
Convertible promissory note issued on November 28,
2018, amounting to $75,000 (Note O).
The key terms/features of the convertible
note are as follows:
|
1.
|
The maturity date of the Note was November 28, 2019.
|
|
2.
|
Interest on the unpaid principal balance of this Note accrued at the rate of 10% per annum.
|
|
3.
|
In the event the Note holder exercised the right of conversion, the conversion price would be equal to 52% of the lowest trading price of the Company’s common stock for the twenty (20) trading days prior to the date of conversion.
|
|
4.
|
Conversion was limited to the holder beneficially holding not more than 4.99% of the Company’s then issued and outstanding common stock after the conversion.
|
During the quarter ended June 30,
2019, the Company settled the outstanding balance in full with a cash payment and recorded a loss of $27,526 as settlement of debt
in the consolidated statement of operations. The loss is due to the prepayment penalty as per the note agreement.
Convertible promissory note issued on September 5,
2018, amounting to $103,000 (Note N).
The key terms/features of the convertible
note are as follows:
|
1.
|
The maturity date of the Note was December 5, 2019.
|
|
2.
|
Interest on the unpaid principal balance of this Note accrued at the rate of 12% per annum.
|
|
3.
|
In the event the Note holder exercised the right of conversion, the conversion price would be equal to 61% of the average of the three (3) lowest trading price of the Company’s common stock for the fifteen (15) trading days prior to the date of conversion.
|
|
4.
|
The Company was not obligated to accept any conversion request before six months from the date of the note.
|
|
5.
|
Conversion was limited to the holder beneficially holding not more than 4.99% of the Company’s then issued and outstanding common stock after the conversion.
|
During the quarter ended March 31,
2019, the Company settled the outstanding balance in full with a cash payment and recorded a loss of $27,368 as settlement of debt
in the consolidated statement of operations. The loss is due to the prepayment penalty as per the note agreement.
Convertible promissory note issued on August 9,
2018, amounting to $65,000 (Note M).
The key terms/features of the convertible
note are as follows:
|
1.
|
The maturity date of the Note was September 9, 2019.
|
|
2.
|
Interest on the unpaid principal balance of this Note accrued at the rate of 10% per annum.
|
|
3.
|
In the event the Note holder exercised the right of conversion, the conversion price would be equal to 52% of the lowest closing bid price of the Company’s common stock for the twenty (20) trading days prior to the date of conversion.
|
|
4.
|
Conversion was limited to the holder beneficially holding not more than 4.99% of the Company’s then issued and outstanding common stock after the conversion.
|
During the quarter ended March 31,
2019, the Company settled the outstanding balance in full with a cash payment and recorded a loss of $23,342 as settlement of debt
in the consolidated statement of operations. The loss is due to the prepayment penalty as per the note agreement.
Convertible promissory note issued on January 16,
2018, amounting to $28,000 (Note L).
The key terms/features of the convertible
note are as follows:
|
1.
|
The maturity date of the Note was October 30, 2018.
|
|
2.
|
Interest on the unpaid principal balance of this Note accrues at the rate of 12 % per annum.
|
|
3.
|
In the event the Note holder exercises the right of conversion, the conversion price will be equal to 58% of the lowest closing bid price of the Company’s common stock for the fifteen (15) trading days prior to the date of conversion.
|
|
4.
|
As maturity date has passed, the Company is now obligated to accept all conversion requests on the note.
|
|
5.
|
Conversion is limited to the holder beneficially holding not more than 4.99% of the Company’s then issued and outstanding common stock after the conversion.
|
During the year ended December 31,
2017, the Company issued convertible promissory notes, details of which are as follows:
Convertible Redeemable note issued on November 28,
2017, amounting to $33,000 (Note K).
The key terms/features of the convertible
note are as follows:
|
1.
|
The maturity date of the Note was March 10, 2019.
|
|
2.
|
Interest on the unpaid principal balance of this Note shall accrue at the rate of 12 % per annum.
|
|
3.
|
In the event the Note holder exercises the right of conversion, the conversion price will be equal to 58% of the lowest closing bid price of the Company’s common stock for the twenty (15) trading days prior to the date of conversion. During June 2018, an amendment to the note was executed where by the conversion price was fixed at $0.0151 per share.
|
|
4.
|
As maturity date has passed, the Company is now obligated to accept all conversion requests on the note.
|
|
5.
|
Conversion is limited to the holder beneficially holding not more than 4.99% of the Company’s then issued and outstanding common stock after the conversion.
|
Convertible promissory note issued on January 31,
2017 amounting to $33,000 (Note I).
The key terms/features of the convertible
note are as follows:
|
1.
|
The maturity date of the note was November 5, 2017
|
|
2.
|
Interest on the unpaid principal balance of this note accrued at the rate of 12% per annum.
|
|
3.
|
In the event the Note holder exercised the right of conversion, the conversion price would be equal to 58% of the average of the three (3) lowest closing bid price of the Company’s common stock for the fifteen (15) trading days prior to the date of conversion.
|
|
4.
|
As maturity date has passed, the Company is now obligated to accept all conversion requests on the note.
|
|
5.
|
Conversion was limited to the holder beneficially holding not more than 4.99% of the Company’s then issued and outstanding common stock after the conversion.
|
The Company converted the outstanding principal
and accrued interest balance of Note I during quarter ended June 30, 2020.
Convertible Redeemable notes issued on
October 18, 2016, amounting to $100,000 and $25,000 (Notes F and G).
The key terms/features of the convertible
note are as follows:
|
1.
|
The maturity date of the Note was July 18, 2017.
|
|
2.
|
Interest on the unpaid principal balance of this Note accrues at the rate of 7 % per annum.
|
|
3.
|
In the event the Note holder exercises the right of conversion, the conversion price will be equal to 57.5% of the lowest trading price of the Company’s common stock for the twenty (20) trading days prior to the date of conversion.
|
|
4.
|
As maturity dates has passed, the Company is now obligated to accept all conversion requests on the note.
|
|
5.
|
Conversion is limited to the holder beneficially holding not more than 9.99% of the Company’s then issued and outstanding common stock after the conversion.
|
During the six months ended June 30,
2018, the Company entered into a Debt Exchange Agreement with the holder of the convertible note F and G. The outstanding principal
amounts of the notes were extinguished and settled by issuance of 2,500,000 common shares of the Company. The Company recorded
a loss of $267,522 as a result of this settlement.
Convertible promissory note issued on May 13,
2016, amounting to $75,000 (Note D).
The key terms/features of the convertible
note are as follows:
|
1.
|
The maturity date of the note was May 13, 2017.
|
|
2.
|
Interest on the unpaid principal balance of this note accrues at the rate of 8 % per annum.
|
|
3.
|
In the event the Note holder exercises the right of conversion, the conversion price will be equal to 52% of the lowest closing bid price of the Company’s common stock for the twenty (20) trading days prior to the date of conversion.
|
|
4.
|
As maturity date has passed, the Company is now obligated to accept all conversion requests on the note.
|
|
5.
|
Conversion is limited to the holder beneficially holding not more than 4.99% of the Company’s then issued and outstanding common stock after the conversion.
|
Interest amounting to $12,182 was accrued
for the year ended December 31, 2020 (2019: $75,348).
Principal amount outstanding as at December 31,
2020 and 2019 was $3,128 and $200,488, respectively. As at December 31, 2020, the entire balance was current while in comparison,
as at December 31, 2019, $32,188 is current portion while $168,300 is the non-current portion.
All notes maturing prior to the date of
this report are outstanding.
Derivative liability
During the year ended December 31,
2020, holders of convertible promissory notes converted principal and interest amounting to $29,060 and $11,710, (2019: $159,908
and $77,353), respectively. The Company recorded and fair valued the derivative liability as follows:
|
|
Derivative
liability as at
December 31,
2019
|
|
|
Conversions / Redemption
during the
period
|
|
|
Change due to
Issuances
|
|
|
Fair value
adjustment
|
|
|
Derivative
liability as at
December 31,
2020
|
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
Note D
|
|
|
1,257
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(191
|
)
|
|
|
1,066
|
|
Note F
|
|
|
9,864
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(2,000
|
)
|
|
|
7,864
|
|
Note G
|
|
|
3,583
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(726
|
)
|
|
|
2,857
|
|
Note I
|
|
|
32,049
|
|
|
|
(20,639
|
)
|
|
|
—
|
|
|
|
(11,410
|
)
|
|
|
—
|
|
Note K
|
|
|
783
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(502
|
)
|
|
|
281
|
|
Note R
|
|
|
103,298
|
|
|
|
(91,009
|
)
|
|
|
—
|
|
|
|
(12,289
|
)
|
|
|
—
|
|
|
|
|
150,834
|
|
|
|
(111,648
|
)
|
|
|
—
|
|
|
|
(27,118
|
)
|
|
|
12,068
|
|
Key assumptions used for the valuation
of convertible notes
Derivative element of the convertible notes
was fair valued using multinomial lattice model. Following assumptions were used to fair value these notes as at December 31,
2020:
|
·
|
Projected annual volatility of 182.3%;
|
|
·
|
Risk free interest rate of 0.06%;
|
|
·
|
Stock price of $0.014;
|
|
·
|
Liquidity term of 0.25 years;
|
|
·
|
Dividend yield of 0%; and
|
|
·
|
Exercise price of a range between $0.0055 to $0.0151.
|
On July 3, 2017, the Company filed
an amended Certificate of Incorporation in Delaware to increase its authorized common stock to 20,000,000,000 shares. The Company’s
authorized preferred stock remained at 20,000,000 shares. 1,000,000 shares of Preferred Stock having a par value of $0.0001 per
share shall be designated as Series A Preferred Stock (“Series A Stock”).
Effective September 25, 2018, the
Company filed an amended Certificate of Incorporation in Delaware to decrease its authorized common stock to 850,000,000 shares.
The Company’s authorized preferred stock remained at 20,000,000 shares.
Capitalization
The Company is authorized to issue 850,000,000
shares of common stock, par value $0.0001, of which 573,277,094 shares are outstanding as at December 31, 2020 (at December 31,
2019: 571,145,968 shares of common stock issued and outstanding). The Company is also authorized to issue 20,000,000 shares of
preferred stock, par value $0.0001, of which 1,000,000 shares were outstanding as at December 31, 2020 and 2019.
As of December 31, 2020, convertible
notes, warrants and preferred stock warrants outstanding could be converted into 6,928,486 (2019: 27,535,127), 364,891,384 (2019:
412,654,530) and 100,000,000 (2019: 100,000,000) shares of common stock, respectively. These together will exceed the authorized
common share limit; however, majority of the warrants are unlikely to be exercised due to the depressed share price.
Preferred Stock
Shares of preferred stock may be issued
from time to time in one or more series as may be determined by the board of directors. The board of directors may fix the designation,
powers, preferences and rights of the shares of each such series and the qualifications, limitations or restrictions thereof without
any further vote or action by the stockholders of the Company, except that no holder of preferred stock shall have pre-emptive
rights. Any shares of preferred stock so issued would typically have priority over the common stock with respect to dividend or
liquidation rights. The board of directors does not at present intend to seek stockholder approval prior to any issuance of currently
authorized stock, unless otherwise required by law or otherwise.
Series A Preferred Stock (“Series A
Stock”)
Dividends shall be declared and set aside
for any shares of Series A Stock in the same manner and amount as for the Common Stock. Series A Stock, as a class, shall
have voting rights equal to a multiple of 2X the number of shares of Common Stock issued and outstanding that are entitled to vote
on any matter requiring shareholder approval. The Series A Stock holders shall not vote as a separate class but shall vote
together with the common stock on all matters, including any amendment to increase or decrease the authorized capital stock. Upon
the voluntary or involuntary dissolution, liquidation or winding up of the corporation, the assets of the Company available for
distribution to its shareholders shall be distributed to the holders of common stock and the holders of the Series A Stock
ratably without any preference to the holders of the Series A Stock. Shares of Series A Stock can be converted at any
time into fully-paid and nonassessable shares of Common Stock at the rate of One Hundred (100) shares of Common Stock for each
One (1) share of Series A Stock.
Common Stock
Holders of shares of common stock are entitled
to one vote for each share on all matters to be voted on by the stockholders. Holders of common stock do not have cumulative voting
rights.
Subject to preferences that may be applicable
to any outstanding shares of preferred stock, the holders of common stock are entitled to share ratably in dividends, if any, as
may be declared from time to time by the board of directors in its discretion from funds legally available therefore.
Holders of common stock have no pre-emptive
rights to purchase the Company’s common stock. There are no conversion or redemption rights or sinking fund provisions with
respect to the common stock. The Company may issue additional shares of common stock which could dilute its current shareholder's
share value.
2020
During the quarter ended December 31,
2019, the Company had found an error in issuing in the incorrect private placement and therefore had recorded a subscription receivable
in the amount of $220,000 based on the cash proceeds of the private placement and this was offset by shares to be issued, therefore,
a net zero effect on equity. During quarter ended March 31, 2020, the incorrect number of shares, 11,000,000, were cancelled.
During the quarter ended March 31,
2020, 15,624 shares of common stock to be issued as consideration of the intellectual property rights granted by Smit to the Company’s
subsidiary, Canary. These were recorded at fair value of $193, based on the market price of the Company’s stock on the date
of agreement. These are currently recorded under shares to be issued and will be allocated between common stock and additional
paid in capital once the shares are issued.
During the quarter ended June 30,
2020, the Company issued 3,131,126 shares of common stock to individual on conversion of a convertible promissory note amounting
to $40,770 (including principal balance and accrued interest). In addition, 5,208 shares of common stock to be issued as consideration
of the intellectual property rights granted by Smit to the Company’s subsidiary, Canary. These were recorded at fair value
of $42, based on the market price of the Company’s stock on the date of agreement. These are currently recorded under shares
to be issued and will be allocated between common stock and additional paid in capital once the shares are issued.
As explained in Note 14, during the quarter
ended September 30, 2020, the Company issued 10,000,000 shares of common stock to a director of the company pursuant to Amendment
to the Debt Purchase and Assignment Agreement (“Agreement”) with CLI. These were recorded at fair value of $130,000,
based on the market price of the Company’s stock on the date of agreement. In addition, 26,040 shares of common stock to
be issued as consideration of the intellectual property rights granted by Smit to the Company’s subsidiary, Canary. These
were recorded at fair value of $353, based on the market price of the Company’s stock on the date of agreement. These are
currently recorded under shares to be issued and will be allocated between common stock and additional paid in capital once the
shares are issued. In addition, CLI purchased 500,000 shares of the Company’s Series A Preferred Stock from a director of the company, Rubin Schindermann,
thus gaining voting control.
During the quarter ended December 31,
2020, the Company issued 15,624 shares of common stock to be issued as consideration of the intellectual property rights granted
by Smit to the Company’s subsidiary, Canary. These were recorded at fair value of $215, based on the market price of the
Company’s stock on the date of agreement. These are currently recorded under shares to be issued and will be allocated between
common stock and additional paid in capital once the shares are issued.
2019
During the quarter ended March 31,
2019, the Company issued 588,237 shares of common stock to individuals on conversion of convertible promissory notes amounting
to $30,000. Additionally, the Company issued 30,407,412 shares of common stock to shareholders of CannaKorp Inc. as per the Exchange
Agreement mentioned in Note 1.
During the quarter ended March 31,
2019, the Company sold 226,441,371 shares of common stock as consideration for private placements. These were recorded at fair
value of $4,558,282, based on the cash proceeds received by the Company. As part of consideration for the private placement, the
Company also agreed to issue warrants to purchase 226,554,129 shares of common stock.
Effective April 1, 2019, the Company
changed its functional currency from United States Dollar to Canadian Dollar thereby having an impact on prepaid expenses, additional
paid in capital and accumulated comprehensive income (loss) in the amount of $600, $339,007 and $339,607. The presentation currency
of the Company has remained unchanged at United States Dollar.
During the quarter ended June 30,
2019, the Company issued 10,562,252 shares of common stock to individuals on conversion of convertible promissory notes amounting
to $159,490.
250,000 shares of common stock to be issued
as consideration of the intellectual property rights granted by Smit to the Company’s subsidiary, Canary. These were recorded
at fair value of $27,000, based on the market price of the Company’s stock on the date of agreement. These were initially
recorded under shares to be issued and allocated between common stock and additional paid in capital during the quarter ended June 30,
2019 when the shares were issued.
During the quarter ended June 30,
2019, the Company issued 6,600,000 and 8,234,850 shares of common stock to Rubin Schindermann and Alexander Starr, respectively,
as consideration to settle outstanding management fee and shareholder advances recorded at fair value of $1,665,329. Plus, 3,000,000
shares of common stock were issued as a bonus for completing the facility’s construction, fair valued in the amount of $294,000.
In addition, 500,000 shares were issued as consideration for consulting services amounting to $48,000.
During the quarter ended, June 30,
2019, Saul Niddam, Chief Operating Officer of the subsidiary, CannaKorp purchased 1,666,667 shares (December 31, 2018: nil
shares) as consideration for private placement. These were recorded at fair value in the amount of $37,385 based on the cash proceeds
received by the Company.
During the quarter ended June 30,
2019, the Company sold 126,109,709 shares of common stock as consideration for private placements. These were recorded at fair
value of $4,194,665, based on the cash proceeds received by the Company. As part of consideration for the private placement, the
Company also agreed to issue warrants to purchase 81,139,987 shares of common stock.
During the quarter ended June 30,
2019, the Company issued 358,520,843 shares for past and current private placements. Refer below for additional details regarding
the warrant issued under the subheading “Warrants”. Additionally, proceeds of $358,074 were received as consideration
for private placements, however signed agreements were not executed as at June 30, 2019 and these have therefore been classified
as a liability. Subsequently, during the quarter ended September 30, 2019, the agreements were executed and shares were issued,
therefore, transfer to equity.
During the quarter ended September 30,
2019, the Company issued 1,324,503 shares of common stock to an individual on conversion of convertible promissory notes amounting
to $20,000.
During the quarter ended September 30,
2019, the Company sold 3,879,524 shares of common stock as consideration for private placements. These were recorded at fair value
of $229,545 based on the cash proceeds received by the Company. As part of consideration for the private placement, the Company
also agreed to issue warrants to purchase 8,724,327 shares of common stock.
During the quarter ended September 30,
2019, the Company issued 18,459,885 shares for past and current private placements. Refer below for additional details regarding
the warrant issued under the subheading “Warrants”.
During the quarter ended December 31,
2019, the Company issued 1,243,107 shares of common stock to two individuals on conversion of convertible promissory notes amounting
to $18,771.
During the quarter ended December 31,
2019, the Company sold 454,545 shares of common stock as consideration for private placements. These were recorded at fair value
of $7,576 based on the cash proceeds received by the Company.
During the quarter ended December 31,
2019, the Company issued 4,876,691 shares for past and current private placements. Refer below for additional details regarding
the warrant issued under the subheading “Warrants”.
Shares to be issued include the following:
|
|
Shares
|
|
|
Amount
|
|
|
Description
|
Services
|
|
|
115,000
|
|
|
$
|
73,000
|
|
|
80,000 shares of common stock to be issued
as compensation to advisers and consultants. These were recorded at fair value of $52,000, based on the market price of the Company’s
stock on the date of issue.
35,000 to be issued as settlement of amount
due for website development services amounting to $247,306. The fair value of the shares on the date of settlement was $21,000,
resulting in gain on settlement amounting to $226,306 during year ended December 31, 2017.
|
Private placements
|
|
|
703,439
|
|
|
$
|
37,480
|
|
|
Consideration for private placements with
the fair value based on cash proceeds received. Proper allocation between common stock and additional paid in capital of the amount
received will be completed in the period when the shares are issued.
During the period ended June 30, 2020,
the Company found the allocation between shares to be issued and additional paid in capital was not performed correctly when the
shares were issued for the past private placements. This has been corrected in this period and as a result of this reclassification,
there was no impact on total equity.
|
Settlement of
CannaKorp's loans
|
|
|
930,240
|
|
|
$
|
80,838
|
|
|
Refer Note 14 for details.
|
Agreement with
Serious Seeds
|
|
|
62,496
|
|
|
$
|
803
|
|
|
As consideration for intellectual property rights granted by Smit. The fair value is based on the market price of the Company’s stock on the date of issue as per the agreement.
|
License Agreement
with cGreen
|
|
|
–
|
|
|
$
|
–
|
|
|
During the period ended June 30, 2020, 6,500,000 shares with a fair value of $482,950 to be issued in connection with License Agreement with cGreen (as explained in detail in annual year ended December 31, 2019 10-K) were transferred to equity. However, upon execution of the settlement agreement as detailed in Note 1, these shares were no longer required to be issued due to the termination of the License Agreement.
|
|
|
|
1,811,175
|
|
|
$
|
192,121
|
|
|
|
Warrants
As further explained in Note 20, the warrants
(with exercise price in United States Dollar) were re-classified as liability as at December 31, 2019 and therefore have been revalued
on each quarter end. The fair value of the warrants was measured on reporting dates using the Black-Scholes option pricing model using
the following assumptions:
|
|
As at
December 31, 2020
|
|
As at
September 30, 2020
|
|
As at
June 30, 2020
|
|
As at
March 31, 2020
|
|
As at
December 31, 2019
|
Forfeiture rate
|
|
0%
|
|
0%
|
|
0%
|
|
0%
|
|
0%
|
Stock price
|
|
$0.014 per share
|
|
$0.011 per share
|
|
$0.018 per share
|
|
$0.010 per share
|
|
$0.020 per share
|
Exercise price
|
|
$0.023 to $0.200
per share
|
|
$0.023 to $0.200
per share
|
|
$0.023 to $0.200
per share
|
|
$0.023 to $0.200
per share
|
|
$0.023 to $0.200
per share
|
Volatility
|
|
238% to 293%
|
|
244% to 306%
|
|
215% to 298%
|
|
195% to 286%
|
|
170% to 382%
|
Risk free interest rate
|
|
0.13% to 2.48%
|
|
0.13% to 2.48%
|
|
0.16% to 2.66%
|
|
0.23% to 2.66%
|
|
1.58% to 2.66%
|
Expected life
|
|
0.15 to 1.93 years
|
|
0.01 to 1.93 years
|
|
0.01 to 2.12 years
|
|
0.24 to 2.37 years
|
|
0.49 and 2.66 years
|
Expected dividend rate
|
|
0%
|
|
0%
|
|
0%
|
|
0%
|
|
0%
|
The fair value of the warrants issued during
the year issued was measured at the date of acquisition using the Black-Scholes option pricing model using the following assumptions:
2020
|
|
During quarter ended
December 31, 2020
|
|
During quarter ended
September 30, 2020
|
|
During quarter ended
June 30, 2020
|
|
During quarter ended
March 31, 2020
|
Forfeiture rate
|
|
0%
|
|
0%
|
|
0%
|
|
0%
|
Stock price
|
|
$0.012 to $0.014 per share
|
|
$0.008 to $0.018 per share
|
|
$0.008 per share
|
|
$0.010 to $0.014 per share
|
Exercise price
|
|
$0.200 per share
|
|
$0.037 to $0.200 per share
|
|
$0.200 per share
|
|
$0.150 to $0.200 per share
|
Volatility
|
|
293%
|
|
295% to 753%
|
|
305%
|
|
312%
|
Risk free interest rate
|
|
0.14% to 0.16%
|
|
0.11% to 0.27%
|
|
0.27%
|
|
1.61%
|
Expected life
|
|
2
|
|
2 to 5 years
|
|
2 years
|
|
2 years
|
Expected dividend rate
|
|
0%
|
|
0%
|
|
0%
|
|
0%
|
Fair value of warrants
|
|
$545
|
|
$132,357
|
|
$177
|
|
$3,137
|
2019
|
|
During quarter
ended
December 31,
2019
|
|
During quarter
ended
September 30,
2019
|
|
During quarter
ended
June 30,
2019
|
|
During quarter
ended
March 31,
2019
|
Forfeiture rate
|
|
0%
|
|
0%
|
|
0%
|
|
0%
|
Stock price
|
|
$0.087 per share
|
|
$0.067 to $0.110 per share
|
|
$0.080 to $0.149 per share
|
|
$0.080 to $0.120 per share
|
Exercise price
|
|
$0.150 per share
|
|
$0.05 to $0.150 per share
|
|
$0.023 to $0.200 per share
|
|
$0.050 per share
|
Volatility
|
|
312%
|
|
606% to 671%
|
|
605% to 679%
|
|
690%
|
Risk free interest rate
|
|
2.27%
|
|
1.53% to 2.51%
|
|
1.69% to 2.54%
|
|
2.26% to 2.60%
|
Expected life
|
|
2 years
|
|
2 and 3 years
|
|
2 and 3 years
|
|
3 years
|
Expected dividend rate
|
|
0%
|
|
0%
|
|
0%
|
|
0%
|
Fair value of warrants
|
|
$78,006
|
|
$830,890
|
|
$8,873,292
|
|
$23,305,826
|
Breakdown of warrants outstanding as at
December 31, 2020 and 2019 are details below:
|
|
Warrants
outstanding as at
December 31,
2020
|
|
|
Warrants
outstanding as at
December 31, 2019
|
|
|
Remaining
contractual life term
as at
December 31,
2020
(years)
|
|
|
Remaining
contractual life term
as at
December 31, 2019
(years)
|
|
Acquisition of Canary
|
|
|
─
|
|
|
|
25,000,000
|
|
|
|
N/A
|
|
|
|
0.59
|
|
Acquisition of CannaKorp
|
|
|
7,211,213
|
|
|
|
7,211,213
|
|
|
|
0.16
|
|
|
|
1.16
|
|
Private placements
|
|
|
346,233,258
|
|
|
|
375,809,374
|
|
|
|
0.15 to 1.62
|
|
|
|
0.49 to 2.62
|
|
Settlement of CannaKorp loans
|
|
|
930,240
|
|
|
|
930,240
|
|
|
|
0.24
|
|
|
|
1.24
|
|
Serious Seeds
|
|
|
416,671
|
|
|
|
416,671
|
|
|
|
1.01 to 1.26
|
|
|
|
N/A
|
|
CLI
|
|
|
10,100,002
|
|
|
|
─
|
|
|
|
4.62
|
|
|
|
N/A
|
|
Total
|
|
|
364,891,384
|
|
|
|
409,367,498
|
|
|
|
|
|
|
|
|
|
During year ended December 31, 2020,
54,576,116 warrants expired (related to private placements and acquisition of Canary).
19.
|
CONTINGENCIES AND COMMITMENTS
|
Contingencies
During the year ended December 31,
2019, a terminated employee of Canary has filed a lawsuit against the Company amounting to approximately $1,649,340 (CAD $2,100,000)
in Ontario, Canada. Currently, the Company is defending its position and believes that the ultimate decision will be in favor of
the Company. Due to the uncertainty of timing and the amount of estimated future cash flows, if any, relating to this claim, no
provision has been recognized.
During the year ended December 31,
2019, a terminated employee of Canary had delivered a demand letter claiming wrongful dismissal. A settlement was reached in the
amount of $5,792 (CAD $7,375) which were due within 30 days of the execution of the settlement agreement. During the quarter ended
June 30, 2020, the Company has paid the settlement amount in full.
During the year ended December 31,
2019, a terminated employee of Canary had delivered a demand letter claiming wrongful dismissal plus unpaid wages, expenses and
vacation pay for a minimum amount of $54,516 (CAD $69,412). During quarter ended June 30, 2020, the Company settled with the
employee in the amount of $7,495 (CAD $9,543).
A complaint for damages in the amount of
$150,000 was lodged against CannaKorp by the former Chief Financial Officer of the CannaKorp for outstanding professional fees.
No claim has been registered and is working with management for a settlement. The Management are of the view that no material losses
will arise in respect of the legal claim at the date of these consolidated financial statements. As at December 31, 2020,
$188,865 has been recorded in the CannaKorp’s payable based on past accruals and outstanding invoices. Due to the uncertainty
of timing and the amount of estimated future cash flows, if any, relating to this claim, no further amount has been recognized.
A complaint for damages was lodged against
the Company by cGreen for missed payment of the January 2020, non-issuance of 7 million shares as promised in the agreement
and loss in the share value. During the quarter ended June 30, 2020, the Company was in arbitration with cGreen for the breaches
of the terms of the License Agreement, however, through an early mediation, both companies reached to a settlement agreement to
settle the breaches of the contract on July 27, 2020 (“Effective Date”). As per the settlement agreement, the
License Agreement has been terminated and the Company does not have to issue the 10 million shares nor pay the outstanding royalty
payable in the amount of $1,191,860. As consideration, the Company paid $130,000 within 30 days of the Effective Date and will
pay $100,000 in monthly installments of $10,000 commencing in April 2021 to cGreen resulting in a gain on settlement in the
amount of $1,704,860.
In April 2020, an employee of Canary,
who had previously resigned from the company, filed a claim that their bonus, that had been promised in their employment agreement
was unpaid and had filled a claim with the Ministry of Labour in Ontario. While the Ministry of Labour deemed the bonus owed as
a valid payment, the matter has since progressed to the Ontario Labour Relations Board (OLRB) in which the company is disputing
this bonus due to several contractual factors that the company believes will allow this ruling to be overturned and revised in
the company’s favor. Due to the uncertainty of timing and the amount of estimated future cash flows, if any, relating to
this claim, no further amount has been recognized.
A claim for damages in the amount of $1,463,047
(CAD $1,862,805) was lodged against Company and its directors by the former Chief Financial Officer of the Company for wrongful
dismissal. The management are of the view that no material losses will arise in respect of the legal claim at the date of these
consolidated financial statements. As at December 31, 2020, $11,540 has been recorded in the Target’s payable based
on past accruals. Due to the uncertainty of timing and the amount of estimated future cash flows, if any, relating to this claim,
no further amount has been recognized.
During the year ended December 31,
2020, a claim for damages in the amount of $102,713 (CAD $130,778) was lodged against Canary by a vendor for breach of contract.
The management are of the view that no material losses will arise in respect of the legal claim at the date of these consolidated
financial statements. As at December 31, 2020, $108,503 (CAD $138,150) has been recorded in the Canary’s payable based
on past accruals. Due to the uncertainty of timing and the amount of estimated future cash flows, if any, relating to this claim,
no further amount has been recognized.
Covid-19 Pandemic
On March 11, 2020, the World Health Organization
declared the ongoing COVID-19 outbreak as a global health emergency. This resulted in governments worldwide enacting emergency measures
to combat the spread of the virus, including the closure of certain non-essential businesses.
During the year ended December 31, 2020, the pandemic
did not have a material impact on the Company’s operations. As at December 31, 2020, the Company did not observe any material impairment
of its assets or a significant change in the fair value of assets due to the COVID-19 pandemic. The Company has taken steps to minimize
the potential impact of the pandemic including safety measures with respect to personal protective equipment, the reduction in travel
and the implementation of a virtual office including regular video conference meetings and participation in virtual customer meetings
and other virtual events.
Due to the rapid developments and uncertainty surrounding COVID-19,
it is not possible to predict the impact that COVID-19 will have on the Company’s business, balance sheet and operating results
in the future. In addition, it is possible that estimates in the Company’s financial statements will change in the near term as
a result of COVID-19 and the effect of any such changes could be material, which could result in, among other things, impairment of long-lived
assets including goodwill. The Company is closely monitoring the impact of the pandemic on all aspects of its business.
Commitments
As per the Distribution, Collaboration
and Licensing Agreement (“Agreement”) entered with Serious Seeds B.V. (“Serious Seeds”),
effective December 6, 2018, the Company will issue to Serious Seeds B.V. each month 5,208 shares of common stock, beginning
on the thirteen (13th) month following the effective date of the Agreement and continuing through the sixtieth (60th)
month of the initial term. Furthermore, Serious Seeds B.V. will be issued warrants in each of the foregoing months to purchase
16,667 shares of Target common stock at varying exercise prices ranging from $0.20 to $0.35 per share. All of the warrants must
be exercised on or before the two (2) year anniversary date of each of the warrant issuance dates. As at December 31,
2020, none of the above shares have been issued.
In consideration of the Company’s
appointment as Serious’ exclusive distributor in Canada, the Company will pay Serious certain royalties as follows:
|
1st year:
|
2.00% of gross sales
|
|
2nd year:
|
2.25% of gross sales
|
|
3rd year:
|
2.50% of gross sales
|
|
4th year:
|
2.75% of gross sales
|
|
5th and following years:
|
3.00% of gross sales
|
During quarter ended March 31, 2020,
the Company identified that due to the change in functional currency of the Company from United States Dollar to Canadian Dollar
during year ended December 31, 2019, the outstanding warrants as at December 31, 2019 no longer meet the scope exception
of ASC 815 and therefore, should not be considered indexed to its own stock and as a result, these warrants should be re-classified
from additional paid-in-capital to liability as at December 31, 2019.
As a result of this restatement, the following
line items were restated in the comparative balance sheet as at December 31, 2019:
|
|
Balance as
previously
reported
|
|
|
Adjustments
|
|
|
Restated
balance
|
|
|
|
$
|
|
|
$
|
|
|
$
|
|
Warrant liability
|
|
|
—
|
|
|
|
6,146,116
|
|
|
|
6,146,116
|
|
Total liability
|
|
|
6,529,359
|
|
|
|
6,146,116
|
|
|
|
12,675,475
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional paid-in capital
|
|
|
29,846,004
|
|
|
|
(6,146,116
|
)
|
|
|
23,699,888
|
|
Total equity
|
|
|
9,935,137
|
|
|
|
(6,146,116
|
)
|
|
|
3,789,021
|
|
Income
taxes
The Tax Cuts and Jobs Act (the “Act”)
enacted on December 22, 2017 reduces the US federal corporate tax rate from 35% to 21% and requires companies to pay a one-time
transition tax on earnings of certain foreign subsidiaries that were previously tax deferred and creates new taxes on certain foreign
sourced earnings. As of December 31, 2020, the Company has not completed the accounting for the tax effects of enactment of
the Act; however, as described below, it has made a reasonable estimate of the effects on existing deferred tax balances. These
amounts are provisional and subject to change.
The provision for income taxes is calculated
at US corporate tax rate of approximately 21% (2019: 21%) as follows:
|
|
2020
|
|
|
2019
|
|
|
|
$
|
|
|
$
|
|
Expected income tax recovery from net loss
|
|
|
1,485,513
|
|
|
|
2,177,211
|
|
Tax effect of expenses not deductible for income tax:
|
|
|
|
|
|
|
|
|
Annual effect of book/tax differences
|
|
|
(32,473
|
)
|
|
|
(693,407
|
)
|
Change in valuation allowance
|
|
|
(1,453,040
|
)
|
|
|
(1,483,804
|
)
|
|
|
|
—
|
|
|
|
—
|
|
Deferred tax assets
Deferred taxes are provided on a liability
method whereby deferred tax assets are recognized for deductible temporary differences and operating loss and tax credit carryforwards
and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between
the reported amounts of assets and liabilities and their tax bases. Deferred tax assets are reduced by a valuation allowance when,
in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized.
Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment.
Net deferred tax assets consist of the
following components as of December 31:
|
|
2020
|
|
|
2019
|
|
|
|
$
|
|
|
$
|
|
Tax effect of NOL Carryover
|
|
|
3,500,297
|
|
|
|
2,047,257
|
|
Less valuation allowance
|
|
|
(3,500,297
|
)
|
|
|
(2,047,257
|
)
|
|
|
|
—
|
|
|
|
—
|
|
At December 31, 2020, the Company performed
a comprehensive analysis of its tax estimates and revised comparative figures accordingly, which had no net impact on deferred
tax recorded. The Company had net operating loss carry forwards of approximately $16,668,080 (2019: $9,748,843) that may be offset
against future taxable income from the year by 2040. No tax benefit has been reported in the December 31, 2020 consolidated financial
statements since the potential tax benefit is offset by a valuation allowance of the same amount. The Company is taxed in
the United States at the Federal level. All tax years since inception are open to examination because no tax returns have been
filed.
The Company’s management has evaluated subsequent
events up to March 30, 2021, the date the consolidated financial statements were issued, pursuant to the requirements of ASC 855 and has
determined there are no material subsequent events to report.