Item
1. Financial Statements
AGRIFORCE
GROWING SYSTEMS LTD.
CONDENSED
CONSOLIDATED INTERIM BALANCE SHEETS
(Expressed
in US dollars)
The
accompanying notes are an integral part of these Unaudited Condensed Consolidated Interim Financial Statements.
AGRIFORCE
GROWING SYSTEMS LTD.
CONDENSED
CONSOLIDATED INTERIM STATEMENTS OF COMPREHENSIVE LOSS (Unaudited)
(Expressed
in US dollars)
The
accompanying notes are an integral part of these Unaudited Condensed Consolidated Interim Financial Statements.
AGRIFORCE
GROWING SYSTEMS LTD.
CONDENSED
CONSOLIDATED INTERIM STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (unaudited)
(Expressed
in US dollars, except share numbers)
For
the three months ended March 31, 2023
The
accompanying notes are an integral part of these Unaudited Condensed Consolidated Interim Financial Statements.
AGRIFORCE
GROWING SYSTEMS LTD.
CONDENSED
CONSOLIDATED INTERIM STATEMENTS OF CASH FLOWS (Unaudited)
(Expressed
in US Dollars)
The
accompanying notes are an integral part of these Unaudited Condensed Consolidated Interim Financial Statements.
NOTES
TO THE CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
For
the three months ended March 31, 2023 and 2022 (unaudited)
(Expressed
in US Dollars, except where noted)
1.
NATURE OF OPERATIONS AND BASIS OF PREPARATION
Business
Overview
AgriFORCE
Growing Systems Ltd. (“AgriFORCE” or the “Company”) was incorporated as a private company
by Articles of Incorporation issued pursuant to the provisions of the Business Corporations Act (British Columbia) on
December 22, 2017. The Company’s registered and records office address is at 300 – 2233 Columbia Street, Vancouver,
British Columbia, Canada, V5Y 0M6.
The
Company is an innovative agriculture-focused technology company that delivers reliable, financially robust solutions for high value crops
through our proprietary facility design and automation Intellectual Property to businesses and enterprises globally through our AgriFORCE™
Solutions division (“Solutions”) and delivers nutritious food products through our AgriFORCE™ Brands division (“Brands”).
Solutions
intends to operate in the plant based pharmaceutical, nutraceutical, and other high value crop markets using its unique proprietary
facility design and hydroponics based automated growing system that enable cultivators to effectively grow crops in a controlled
environment (“FORCEGH+™”). The Company has designed FORCEGH+™ facilities to produce in virtually any
environmental condition and to optimize crop yields to as near their full genetic potential possible whilst substantially
eliminating the need for the use of pesticides and/or irradiation.
Brands
is focused on the development and commercialization of plant-based ingredients and products that deliver healthier and more nutritious
solutions. We will market and commercialize both branded consumer product offerings and ingredient supply.
Basis
of Presentation
The
accompanying Unaudited Condensed Consolidated Interim Financial Statements and related
financial information of AgriFORCE Growing Systems Ltd. should be read in conjunction with the audited financial statements and the related
notes thereto for the years ended December 31, 2022 and 2021 included in the Company’s Annual Report on Form 10-K filed with the
Securities and Exchange Commission (“SEC”) on March 13, 2023. These unaudited interim financial statements have been prepared
in accordance with the rules and regulations of the United States Securities and SEC for interim financial information. Accordingly,
they do not include all of the information and footnotes required by the accounting principles generally accepted in the United States
of America (“U.S. GAAP”) for complete financial statements.
In the opinion of management, the accompanying interim financial statements
contain all adjustments which are necessary to state fairly the Company’s financial position as of March 31, 2023 and December 31,
2022, and the results of its operations and cash flows during the three months ended March 31, 2023 and 2022. Such adjustments are of
a normal and recurring nature. The results for the three months ended March 31, 2023 are not necessarily indicative of the results to
be expected for the full fiscal year ending December 31, 2023, or for any future period.
Liquidity
and Management’s Plan
The
Company has incurred substantial operating losses since its inception and expects to continue to incur significant operating losses for
the foreseeable future. As reflected in the interim financial statements for the three months ended March 31, 2023, the Company had a
net loss of $1.7 million, $2.6 million of net cash used in operating activities, and the Company had working capital deficit of $2.1
million.
The
accompanying interim financial statements have been prepared on a going concern basis, which contemplates the realization of assets and
satisfaction of liabilities in the normal course of business. The interim financial statements do not include any adjustments relating
to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might result
from the outcome of this uncertainty. The Company is at the stage of development of its first facility and other intellectual property.
As such it is likely that additional financing will be needed by the Company to fund its operations and to develop and commercialize
its technology. These factors raise substantial doubt about the Company’s ability to continue as a going concern. For the next
twelve months from issuance of these interim financial statements, the Company will seek to obtain additional capital through the sale
of debt or equity financings or other arrangements to fund operations; however, there can be no assurance that the Company will be able
to raise needed capital under acceptable terms, if at all. The sale of additional equity may dilute existing shareholders and newly issued
shares may contain senior rights and preferences compared to our currently outstanding common shares. If the Company is unable to obtain
such additional financing, future operations would need to be scaled back or discontinued. Due to the uncertainty in the Company’s
ability to raise capital, management believes that there is substantial doubt in the Company’s ability to continue as a going concern
for twelve months from the issuance of these interim financial statements.
2.
SIGNIFICANT ACCOUNTING POLICIES
Recent
Accounting Pronouncements
In June 2016, the FASB issued ASU 2016-13, “Financial Instruments
– Credit Losses.” The standard, including subsequently issued amendments, requires a financial asset measured at amortized
cost basis, such as accounts receivable and certain other financial assets, to be presented at the net amount expected to be collected
based on relevant information about past events, including historical experience, current conditions, and reasonable and supportable forecasts
that affect the collectability of the reported amount. This ASU is effective for fiscal years beginning after December 15, 2022, and interim
periods within those fiscal years, and requires the modified retrospective approach. ASU 2016-13 was adopted by the Company on January
1, 2023. Based on the composition of the Company’s affected financial assets, current market conditions, and historical credit loss
activity, the adoption did not have a material impact to these interim financial statements.
In August 2020, the FASB issued ASU 2020-06 “Debt – Debt with
Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging – Contracts in Entity’s Own Equity” (“ASU
2020-06”). The intention of ASU 2020-06 is to address the complexities in accounting for certain financial instruments with a debt
and equity component. Under ASU 2020-06, the number of accounting models for convertible notes will be reduced and entities that issue
convertible debt will be required to use the if-converted method for the computation of diluted “Earnings per share” under
ASC 260. ASC 2020-06 is effective for fiscal years beginning after December 15, 2023 and may be adopted through either a modified retrospective
method of transition or a fully retrospective method of transition. ASU 2020-06 was adopted by the Company on January 1, 2023. Since the
Company had a net loss for the three months ended March 31, 2023 and its convertible debentures were determined to be anti-dilutive, there
was no material impact to its basic and diluted net loss per share for the period as a result of adopting ASU 2020-06.
In October 2021, the Financial Accounting Standards Board (“FASB”)
issued ASU 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers.
Under ASU 2021-08, an acquirer must recognize and measure contract assets and contract liabilities acquired in a business combination
in accordance with Topic 606. The guidance is effective for interim and annual periods beginning after December 15, 2022, with early adoption
permitted. ASU 2021-08 was adopted on January 1, 2023 and did not have a material impact to these interim financial statements.
Other
accounting standards that have been issued or proposed by FASB that do not require adoption until a future date are not expected to have
a material impact on the consolidated financial statements upon adoption. The Company does not discuss recent pronouncements that are
not anticipated to have an impact on or are unrelated to its financial condition, results of operations, cash flows or disclosures.
Convertible
Instruments
The
Company evaluates and accounts for conversion options embedded in its convertible instruments in accordance with ASC 815, Derivatives
and Hedging (“ASC 815”), which provides that if three criteria are met, the Company is required to bifurcate conversion options
from their host instruments and account for them as free-standing derivative financial instruments. These three criteria include circumstances
in which;
(a)
the economic characteristics and risks of the embedded derivative instrument are not clearly and closely related to the economic characteristics
and risks of the host contract;
(b)
the hybrid instrument that embodies both the embedded derivative instrument and the host contract is not re-measured at fair value under
otherwise applicable generally accepted accounting principles with changes in fair value reported in earnings as they occur; and
(c)
a separate instrument with the same terms as the embedded derivative instrument would be considered a derivative instrument.
ASC
815 also provides an exception to this rule when the host instrument is deemed to be conventional as defined under professional standards
as “The Meaning of Conventional Convertible Debt Instrument.”
The
Company accounts for convertible instruments (when it has determined that the embedded conversion options should not be bifurcated from
their host instruments) in accordance with professional standards when “Accounting for Convertible Securities with Beneficial Conversion
Features,” as those professional standards pertain to “Certain Convertible Instruments.” Accordingly, the Company records,
when necessary, discounts to convertible notes for the intrinsic value of conversion options embedded in debt instruments based upon
the differences between the fair value of the underlying common stock at the commitment date of the note transaction and the effective
conversion price embedded in the note. Debt discounts under these arrangements are amortized over the term of the related debt to their
earliest date of redemption. The Company also records when necessary deemed dividends for the intrinsic value of conversion options embedded
in preferred shares based upon the differences between the fair value of the underlying common stock at the commitment date of the note
transaction and the effective conversion price embedded in the note. ASC 815 provides that, among other things, generally, if an event
is not within the entity’s control could or require net cash settlement, then the contract shall be classified as an asset or a
liability.
Definite
Lived Intangible Asset
Definite
lived intangible asset consists of a granted patent. Amortization is computed using the straight-line method over the estimated useful
life of the asset. The estimated useful life of the granted patent is 20 years and the patent was available for use starting January 2023.
Fair
Value of Financial Instruments
The
fair value of the Company’s other receivable, accounts payable and other current liabilities approximate their carrying amounts
due to the relative short maturities of these items.
The
Company issued warrants having a strike price denominated in U.S. dollars, which creates an obligation to issue shares for a price that
is not denominated in the Company’s functional currency, Canadian dollars, and renders the warrants not indexed to the Company’s
stock. The Series A warrants, representative warrants issued as part of the IPO, and convertible debt warrants are thus classified as
derivative liabilities and are measured at fair value.
The
convertible debentures also have a conversion feature whereby the debt holders can convert their outstanding debentures into common shares
of the Company. The conversion price has a strike price denominated in U.S. dollars and accordingly, the conversion feature is classified
as a derivative liability and measured at fair value.
The
fair value of the Company’s warrants are determined in accordance with FASB ASC 820, “Fair Value Measurement,” which
establishes a fair value hierarchy that prioritizes the assumptions (inputs) to valuation techniques used to price assets or liabilities
that are measured at fair value. The hierarchy, as defined below, gives the highest priority to unadjusted quoted prices in active markets
for identical assets or liabilities and the lowest priority to unobservable inputs. The guidance for fair value measurements requires
that assets and liabilities measured at fair value be classified and disclosed in one of the following categories:
● |
Level
1: Defined as observable inputs, such as quoted (unadjusted) prices in active markets for identical assets or liabilities. |
|
|
● |
Level
2: Defined as observable inputs other than quoted prices included in Level 1. This includes quoted prices for similar assets or liabilities
in active markets, quoted prices for identical or similar assets and liabilities in markets that are not active, or other inputs
that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
|
|
|
● |
Level
3: Defined as unobservable inputs to the valuation methodology that are supported by little or no market activity and that are significant
to the measurement of the fair value of the assets or liabilities. Level 3 assets and liabilities include those whose fair value
measurements are determined using pricing models, discounted cash flow methodologies or similar valuation techniques, as well as
significant management judgment or estimation. |
3.
PREPAID EXPENSES, OTHER CURRENT ASSETS AND LAND DEPOSIT
SCHEDULE OF PREPAID EXPENSES AND OTHER CURRENT ASSETS
| |
March 31, 2023 | | |
December 31, 2022 | |
Deposits | |
$ | - | | |
$ | 12,000 | |
Legal retainer | |
| 11,460 | | |
| 24,457 | |
Prepaid expenses | |
| 383,582 | | |
| 436,496 | |
Deferred offering costs | |
| 100,418 | | |
| 100,337 | |
Others | |
| 25,072 | | |
| 25,052 | |
Prepaid expenses, other
current assets | |
$ | 520,532 | | |
$ | 598,342 | |
The
Company wrote off a non-refundable deposit amounting to $12,000 which was related to a previous land purchase agreement.
On
August 31, 2022, the Company signed a purchase and sale agreement with Stronghold Power Systems, Inc. (“Stronghold”), to
purchase approximately seventy acres of land located in the City of Coachella as well as to have Stronghold complete certain
permitting, zoning, and infrastructure work for a total purchase price of $4,300,000.
The purchase price consists of:
|
(i) |
$1,500,000
in cash due on March 31, 2023. |
|
|
|
|
(ii) |
A
first stock deposit of $1,700,000 in prefunded warrants. The Company issued 695,866 prefunded warrants on September 9, 2022 to Stronghold.
|
|
|
|
|
(iii) |
A
second stock deposit $1,100,000 in prefunded warrants. The Company issued 450,266 prefunded warrants on September 9, 2022 to Stronghold. |
As
at December 31, 2022 the $2,085,960
of prefunded warrants were recorded under land deposit in relation to the Stronghold agreement.
As at March 31, 2023 the prefunded warrants issued were rescinded and the
warrants were rendered null and void as the Company presented a termination notice to Stronghold and the value under land deposit also
reversed.
4.
INTANGIBLE ASSET
Intangible
asset represents $12,936,264
(December 31, 2022 - $13,089,377)
for intellectual property (“Manna IP”) acquired under an asset purchase agreement with Manna Nutritional Group, LLC
(“Manna”) dated September 10, 2021. The Manna IP encompasses patented technologies to naturally process and convert
grain, pulses, and root vegetables, resulting in low-starch, low-sugar, high-protein, fiber-rich baking flour products, as well as a
wide range of breakfast cereals, juices, natural sweeteners, and baking enhancers. The Company paid $1,475,000
in cash and issued 7,379,969
prefunded warrants valued at $12,106,677
(the “Purchase Price”) adjusted for foreign exchange differences of $481,663
(December 31, 2022 - $492,300).
Subject to a 9.99%
stopper and SEC Rule 144 restrictions, the prefunded warrants will vest in tranches up until March 10, 2024. When vested the tranches
of prefunded warrants are convertible into an equal number of common shares.
On
January 3, 2023, Manna satisfied all of its contractual obligations when the patent was approved by the US Patents Office and the
title was transferred to the Company. The Company issued 1,637,049
shares in relation to this transaction on January 3, 2023. As at March 31, 2023, there were 5,742,920
unconverted prefunded warrants outstanding.
Based
on the terms above and in conformity with US GAAP, the Company accounted for purchase as an asset acquisition and has deemed the asset
purchased as an in-process research and development. The asset was completed and will be amortized over its useful life of 20 years.
The Company recorded $163,750 in amortization expense related to the Manna IP for the three months ended March 31, 2023.
The
estimated annual amortization expense for the next five years are as follows:
SCHEDULE
OF FUTURE AMORTIZATION EXPENSE
Year ending December 31: |
|
Amount |
Remaining 2023 |
|
$ |
491,251 |
2024 |
|
|
655,001 |
2025 |
|
|
655,001 |
2026 |
|
|
655,001 |
2027 |
|
|
655,001 |
Subsequent years |
|
|
9,825,009 |
Total |
|
$ |
12,936,264 |
5.
ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
SCHEDULE OF ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
| |
March 31, 2023 | | |
December 31, 2022 | |
Accounts payable | |
$ | 125,596 | | |
$ | 498,188 | |
Accrued expenses | |
| 298,037 | | |
| 365,521 | |
Payroll liabilities | |
| 344,010 | | |
| - | |
Other | |
| 45,566 | | |
| 284,030 | |
Accounts payable and accrued liabilities | |
$ | 813,209 | | |
$ | 1,147,739 | |
6.
DEBENTURES
On
June 30, 2022, the Company executed the definitive agreement with arm’s length accredited institutional investors (the
“Investors”) for a $14,025,000
principal debentures with a 10%
original issue discount (“First Tranche Debentures”) for gross proceeds of $12,750,000.
The First Tranche Debentures are convertible into common shares at $2.22
per share. In addition, the Investors received 4,106,418
warrants at a strike price of $2.442,
which expire on December
31, 2025 (the “First Tranche Warrants”). The First Tranche Warrants and First Tranche Debentures each have down
round provisions whereby the conversion and strike prices will be adjusted downward if the Company issues equity instruments at
lower prices. The First Tranche Warrants strike price and the First Tranche Debenture conversion price will be adjusted down to the
effective conversion price of the issued equity instruments. The transaction costs incurred in relation to first tranche were $1,634,894.
The
Investors have the right to purchase additional tranches of $5,000,000 each, up to a total additional principal amount of $33,000,000.
On
January 17, 2023, the Investors purchased an additional tranche of $5,076,923
with a 10%
original issue discount for gross proceeds of $4,615,385
(the “Second Tranche Debenture”). The Second Tranche Debentures are convertible into common shares at $1.24
per share and the Investors received an additional 2,661,289
warrants at a strike price of $1.24,
which expire on December
31, 2025 (the “Second Tranche Warrants”). The issuance of the additional tranche triggered the down round
provision, adjusting the exercise prices of the First Tranche Debentures and the First Tranche Warrants to $1.24.
The transaction costs incurred in relation to second tranche were $325,962.
The
First Tranche and Second Tranche Debentures (the “Debentures”) have an interest rate of 5%
for the first 12 months, 6%
for the subsequent 12 months, and 8%
per annum thereafter. Principal repayments will be made in 25 equal installments which began on September 1, 2022 for the First
Tranche Debentures and on July 1, 2023 for the Second Tranche Debentures. The Debentures may be
extended by six months at the election of the Company by paying a sum equal to six months interest on the principal amount
outstanding at the end of the 18th month, at the rate of 8%
per annum.
Due
to the currency of the above noted features being different from the Company’s functional currency, the First Tranche Warrants
and Second Tranche Warrants (the “Debenture Warrants), as well as the Debentures’ convertible features were classified as derivative liabilities and are further discussed in Note 8.
The
following table summarizes our outstanding debentures as of the dates indicated:
SCHEDULE
OF OUTSTANDING DEBENTURES
| |
Maturity | |
Cash Interest
Rate | | |
March 31, 2023 | |
|
December 31,
2022 |
|
Principal
(First Tranche Debentures) | |
12/31/2024 | |
| 5.00% - 8.00 | % | |
$ | 14,025,000 | |
|
$ |
14,025,000 |
|
Principal (Second
Tranche Debentures) | |
17/07/2025 | |
| 5.00% - 8.00 | % | |
| 5,076,923 | |
|
|
- |
|
Repayments and conversions | |
| |
| | | |
| (5,017,350 | ) |
|
|
(2,955,000 |
) |
Debt issuance costs and discounts (Note 6 & 8) | |
| |
| | | |
| (9,817,784 | ) |
|
|
(7,128,084 |
) |
Total Debentures (current) | |
| |
| | | |
$ | 4,266,789 | |
|
$ |
3,941,916 |
|
During
the three months ended March 31, 2023, the Investors converted $881,400 of convertible debentures into shares of the Company resulting
in a $419,703 loss on the conversion of convertible debentures.
7.
LONG TERM LOAN
During
the year ended December 31, 2020, the Company entered into a loan agreement with Alterna Bank for a principal amount of $29,557 (December
31, 2022 - $29,533) (CAD$40,000) under the Canada Emergency Business Account Program (the “Program”).
The
Program, as set out by the Government of Canada, requires that the funds from this loan shall only be used by the Company to pay non-deferrable
operating expenses including, without limitation, payroll, rent, utilities, insurance, property tax and regularly scheduled debt service,
and may not be used to fund any payments or expenses such as prepayment/refinancing of existing indebtedness, payments of dividends,
distributions and increases in management compensation.
In
April 2021, the Company applied for an additional loan with Alterna Bank under the Program and received $14,779 (CAD$20,000) (December
31, 2022 - $14,767). The expansion loan is subject to the original terms and conditions of the Program.
The
loan is interest free for an initial term that ends on December 31, 2023. Repaying the loan balance on or before December 31, 2023 will
result in loan forgiveness of up to a third of loan value (up to CAD $20,000). Any outstanding loan after initial term carries an interest
rate of 5% per annum, payable monthly during the extended term i.e. January 31, 2024 to December 31, 2025.
The
balance at March 31, 2023 was $44,336 (CAD $60,000) (December 31, 2022 - $44,300 (CAD $60,000)).
8.
DERIVATIVE LIABILITIES
Warrant
Liabilities
As
of March 31, 2023, the Warrant Liabilities represent aggregate fair value of publicly traded 3,088,198 Series A warrants (“IPO
Warrants”), 135,999 representative’s warrants (“Rep Warrants”), 4,106,418 First Tranche Warrants and 2,661,289 Second Tranche Warrants.
The
fair value of the IPO Warrants and Rep Warrants amount to $383,676 (December 31, 2022 - $275,115) and were categorized as a Level 1 financial
instrument. The Rep Warrants are exercisable one year from the effective date of the IPO registration statement and will expire three
years after the effective date.
The
fair value of the First Tranche Warrants amounted to $1,364,000
(December 31, 2022 - $2,917,000)
and were categorized as a Level 3 financial instrument. As at March 31, 2023 the Company utilized the Monte Carlo option-pricing model
to value the First Tranche Warrants using the following assumptions: stock price $0.68
(December 31, 2022 - $1.13),
dividend yield – nil
(December 31, 2022 – nil),
expected volatility 70.0%
(December 31, 2022 – 95.0%),
risk free rate of return 3.81%
(December 31, 2022 – 4.22%),
and expected term of 2.75
years (December 31, 2022 – expected term
of 3
years).
On January 17, 2023 the Company issued Second Tranche
Warrants. As at March 31, 2023 the Second Tranche Warrants had a fair value that amounted to $945,000 (January 17, 2023 - $2,378,000)
and were categorized as a Level 3 financial instrument. As at March 31, 2023 the Company utilized the Monte Carlo option-pricing model
to value the Second Tranche Warrants using the following assumptions: stock price $0.68 (January 17, 2023 - $1.21), dividend yield –
nil (January 17, 2023 – nil), expected volatility 70.0% (January 17, 2023 – 95.0%), risk free rate of return 3.81% (January
17, 2023 – 3.80%), and expected term of 3.30 years (January 17, 2023 – expected term of 3.5 years).
Debenture
Convertible Feature
On
June 30, 2022, the Company issued First Tranche Debentures with an equity conversion feature, see Note 6. As at March 31, 2023 the fair
value of the First Tranche Debentures’ convertible feature amounted to $1,331,000
(December 31, 2022 - $1,457,000)
and were categorized as a Level 3 financial instrument. As at March 31, 2023 the Company utilized the Monte Carlo option-pricing model
for valuing the convertible feature using the following assumptions: stock price $0.68
(December 31, 2022 - $1.13),
dividend yield – nil
(December 31, 2022 – nil),
expected volatility 70.0%
(December 31, 2022 – 95.0%),
risk free rate of return 4.06%
(December 31, 2022 – 4.41%),
discount rate 17.60%
(December 31, 2022 – 13.65%),
and expected term of 1.75
years (December 31, 2022 – 2
years).
On January 17, 2023, the Company issued Second Tranche
Debentures with an equity conversion feature, see Note 6. As at March 31, 2023 the fair value of the Second Tranche Debentures’
convertible feature amounted to $1,043,000 (January 17, 2023 - $1,599,000) and were categorized as a Level 3 financial instrument. As
at March 31, 2023 the Company utilized the Monte Carlo option-pricing model for valuing the convertible feature using the following assumptions:
stock price $0.68 (January 17, 2023 - $1.21), dividend yield – nil (January 17, 2023 – nil), expected volatility 70.0% (January
17, 2023 – 95.0%), risk free rate of return 4.06% (January 17, 2023 – 4.02%), discount rate 17.60% (January 17, 2023 –
11.65%), and expected term of 2.30 years (January 17, 2023 – 2.50 years).
Changes
in the fair value of Company’s Level 3 financial instruments for the three months ended March 31, 2023 and 2022 were as
follows:
SCHEDULE OF CHANGES IN THE FAIR VALUE OF COMPANY'S LEVEL 3 FINANCIAL INSTRUMENTS
| |
Level 1 | | |
Level 3 | | |
Level 3 | | |
| |
| |
IPO and Rep
Warrants | | |
Debenture
Warrants | | |
Debenture Convertible Feature | | |
Total | |
Balance at January 1, 2023 | |
$ | 275,115 | | |
$ | 2,917,000 | | |
$ | 1,457,000 | | |
$ | 4,649,115 | |
Additions | |
| - | | |
| 2,378,000 | | |
| 1,599,000 | | |
| 3,977,000 | |
Conversions | |
| - | | |
| | | |
| (111,597 | ) | |
| (111,597 | ) |
Change in fair value | |
| 107,159 | | |
| (2,930,015 | ) | |
| (551,176 | ) | |
| (3,374,032 | ) |
Effect of exchange rate changes | |
| 1,402 | | |
| (55,985 | ) | |
| (19,227 | ) | |
| (73,810 | ) |
Balance at March 31, 2023 | |
$ | 383,676 | | |
$ | 2,309,000 | | |
$ | 2,374,000 | | |
$ | 5,066,676 | |
| |
Level 1 | |
| |
IPO and Rep
Warrants | |
Balance at January 1, 2022 | |
$ | 1,418,964 | |
Beginning balance | |
$ | 1,418,964 | |
Additions | |
| - | |
Change in fair value | |
| 457,042 | |
Effect of exchange rate changes | |
| 26,592 | |
Balance at March 31, 2022 | |
$ | 1,902,598 | |
Ending balance | |
$ | 1,902,598 | |
Due
to the expiry date of the warrants and conversion feature being greater than one year,
the liabilities have been classified as non-current.
9.
SHARE CAPITAL
The
Company had the following common share transactions for the three months ended March 31, 2023:
SCHEDULE
OF SHARE CAPITAL
| |
Three months ended March 31, 2023 | |
| |
# of shares | | |
Amount | |
Common shares issued for conversion of convertible debt | |
| 710,807 | | |
$ | 1,048,573 | |
Common shares issued for compensation | |
| 155,898 | | |
| 105,512 | |
Common shares issued for consulting services | |
| 15,000 | | |
| 27,735 | |
Common shares issued on conversion of vested prefunded warrants | |
| 1,637,049 | | |
| 2,959,108 | |
Total common shares issued | |
| 2,518,754 | | |
$ | 4,140,928 | |
The
Company had the following common share transactions for the three months ended March 31, 2022:
| |
Three months ended March 31, 2022 | |
| |
# of shares | | |
Amount | |
Common shares issued for consulting services | |
| 40,997 | | |
$ | 88,071 | |
Common shares issued for compensation | |
| 29,317 | | |
| 97,121 | |
Total common shares issued | |
| 70,314 | | |
$ | 185,192 | |
Basic
and diluted net loss per share represents the loss attributable to shareholders divided by the weighted average number of shares and
prefunded warrants outstanding during the period on an as converted basis.
Potentially
dilutive securities that are not included in the calculation of diluted net loss per share because their effect is anti-dilutive are
as follows (in common equivalent shares):
SCHEDULE
OF ANTI-DILUTIVE SECURITIES EXCLUDED FROM COMPUTATION OF EARNINGS PER SHARE
| |
March 31, 2023 | | |
March 31, 2022 | |
Warrants | |
| 12,537,969 | | |
| 5,770,262 | |
Options | |
| 1,382,629 | | |
| 717,019 | |
Convertible debentures | |
| 11,358,526 | | |
| - | |
Total anti-dilutive weighted average shares | |
| 25,279,124 | | |
| 6,487,281 | |
10.
LEASES
The
Company has entered into an operating lease for office space. As at March 31, 2023, the remaining lease term is seven years and the discount
rate is 7.0%. The Company has no finance leases.
The
components of lease expenses were as follows:
SCHEDULE
OF LEASE EXPENSES
| |
Three months ended March 31, 2023 | | |
Three months ended March 31, 2022 | |
Operating lease cost | |
$ | 72,643 | | |
$ | 76,354 | |
Short-term lease cost | |
| 3,437 | | |
| 4,583 | |
Total lease expenses | |
$ | 76,080 | | |
$ | 80,937 | |
The
minimum future payments under the lease for our continuing operations in each of the years ending December 31 is as follows:
SCHEDULE
OF FUTURE PAYMENTS UNDER LEASE
| |
| | |
Remaining 2023 | |
$ | 203,830 | |
2024 | |
| 280,637 | |
2025 | |
| 296,591 | |
2026 | |
| 296,591 | |
2027 | |
| 296,591 | |
Subsequent years | |
| 519,034 | |
Total minimum lease payments | |
| 1,893,274 | |
Less: imputed interest | |
| (411,966 | ) |
Total lease liability | |
| 1,481,308 | |
Current portion of lease liability | |
| (272,659 | ) |
Non-current portion of lease liability | |
$ | 1,208,649 | |
11.
COMMITMENTS AND CONTINGENCIES
Debenture
principal repayments
The
following table summarizes the future principal payments related to our outstanding debt as of March 31, 2023:
SUMMARY OF FUTURE PRINCIPAL
PAYMENTS OUTSTANDING
| |
| | |
Remaining 2023 | |
$ | 6,470,538 | |
2024 | |
| 6,395,573 | |
2025 | |
| 1,218,462 | |
Long
Term Debt | |
$ | 14,084,573 | |
Contingencies
Litigation
As
at March 31, 2023, the Company had no contingencies to disclose.
12.
SUBSEQUENT EVENTS
The
Company evaluated subsequent events through May 9, 2023, the date on which these interim financial statements were available to be issued,
to ensure that this filing includes appropriate disclosure of events both recognized in the interim financial statements as of and subsequent
to March 31, 2023, but were not recognized in the interim financial statements. Except as disclosed below, there were no events that
required recognition, adjustment or disclosure in the financial statements.
On
April 1, 2023, the Company issued 12,500
common shares to a consultant in a private placement transaction exempt from registration under Section 4(a)(2) under the Securities Act of 1933,
as amended.
On
April 1, 2023, the Company issued 193,823
common shares to Manna upon exercise of their vested prefunded warrants (Note 4).
Item
2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Prospective
investors should read the following discussion and analysis of our financial condition and results of operations together with our financial
statements and the related notes and other financial information included elsewhere in this Annual Report. Some of the information contained
in this discussion and analysis or set forth elsewhere in this Annual Report, including information with respect to our plans and strategy
for our business, includes forward-looking statements that involve risks and uncertainties. See “Cautionary Note Regarding Forward-Looking
Statements.” You should review the “Risk Factors” section of this Annual Report for a discussion of important factors
that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained
in the following discussion and analysis.
Company
History and Our Business
AgriFORCE
Growing Systems Ltd. (“AgriFORCE™” or the “Company”) was incorporated as a private company by Articles
of Incorporation issued pursuant to the provisions of the Business Corporations Act (British Columbia) on December 22, 2017. The Company’s
registered and records office address is at 300 – 2233 Columbia Street, Vancouver, BC, Canada, V5Y 0M6.
AgriFORCE™
is dedicated to positively transforming farm, food, and family every day, everywhere. We aim to achieve this goal by providing novel
agriculturally focused consulting, facility solutions, and products & services through our Solutions division, and by leveraging
innovative technologies and processes to deliver healthier more nutritious food to consumers through our Brands division.
The
AgriFORCE™ Solutions division is dedicated to transforming modern agricultural development “Building from the Seed to Deliver
sustainable, Efficient, and Healthier crops” through our integrated Agtech platform 2.0 combining knowledge and IP with CEA equipment
solutions, including our FORCEGH+™” solution, implementing solutions that are best suited to the crops and environment chosen.
Our
AgriFORCE™ Brands division is focused on the development and commercialization of plant-based ingredients and products that deliver
more nutritious “Food to Table”. We will market and commercialize both branded consumer product offerings and ingredient
supplies.
AgriFORCE
Solutions
Understanding
Our Approach – The AgriFORCE™ Precision Growth Method
Traditional
farming includes three fundamental approaches: outdoor, greenhouse and indoor. AgriFORCE™ introduces a unique fourth method, the
AgriFORCE™ precision growth method, which is informed by cutting-edge science and leveraging the latest advances in artificial
intelligence (AI) and Internet of Things (IoT).
With
a carefully optimized approach to facility design, IoT, AI utilization, nutrient delivery, and micro-propagation, we have devised an
intricate, scientific and high success-oriented approach designed to produce much greater efficacy yields using fewer resources. This
method is intended to outperform traditional growing methods using a specific combination of new and traditional techniques required
to attain this efficiency. We call it precision growth. The AgriFORCE™ precision growth method focuses on addressing some of the
most important legacy challenges in agriculture: environmental impact, operational efficiency and yield volumes.
The
AgriFORCE™ precision growth method presents a tremendous opportunity to positively disrupt all corners of the industry. The market
size of just the nutraceutical and plant-based pharmaceutical and vaccine/therapeutics market is over $500 billion. Including the traditional
hydroponics high value crops and controlled-environment food markets, the addressable market approaches nearly $1 trillion. (1)(2)(3).
The
AgriFORCE™ Model – Managing the Difficulties of Agricultural Verticals with Modern Technology and Innovation
Our
intellectual property combines a uniquely engineered facility design and automated growing system to provide a clear solution to the
biggest problems plaguing most high value crop agricultural verticals. It delivers a clean, self-contained environment that maximizes
natural sunlight and offers near ideal supplemental lighting. It also limits human intervention and – crucially – it was
designed to provide superior quality control. It was also created to drastically reduce environmental impact, substantially decrease
utility demands, as well as lower production costs, while delivering customers daily harvests and higher crop yields.
Plants
grow most robustly and flavorfully in full natural sunlight. While it may seem counterintuitive to some, even the clearest of glass greenhouses
inhibit the full light spectrum of the sun. However, new translucent and transparent membrane materials have emerged recently that enable
the near-full-transmission of the sun’s light spectrum.
(1)
https://home.kpmg/pl/en/home/insights/2015/04/nutraceuticals-the-future-of-intelligent-food.html
(2)
https://link.springer.com/article/10.1057/jcb.2010.37
(3)
https://medium.com/artemis/lets-talk-about-market-size-316842f1ab27
Our
Position in the Ag-Tech Sector
The
Ag-Tech sector is severely underserved by the capital markets, and we see an opportunity to acquire global companies who have provided
solutions to the industry and are leading innovation moving forward. We are creating a separate corporate office to aggressively pursue
such acquisitions. The robustness of our engagement with potential targets has confirmed our belief and desire to be part of a larger
integrated Ag-Tech solutions provider, where each separate element of the business has its existing legacy business and can leverage
across areas of expertise to expand their business footprint. We believe that there is currently no one that we are aware of who is pursuing
this model in the US capital markets environment at this time.
The
AgriFORCE™ Grow House
The
Company is an agriculture-focused technology company that delivers innovative and reliable, financially robust solutions for high value
crops through our proprietary facility design and automation IP to businesses and enterprises globally. The Company intends to operate
in the plant based pharmaceutical, nutraceutical, and high value crop markets using its unique patented facility design and hydroponics
based automated growing system that enable cultivators to effectively grow crops in a controlled environment (“FORCEGH+™”).
The Company has designed FORCEGH+™ facilities to produce in virtually any environmental condition and to optimize crop yields to
as near their full genetic potential possible while substantially eliminating the need for the use of pesticides, fungicides and/or irradiation.
The
Company continues to develop its solution for fruits and vegetables focusing on the integration of its current structure with a new form
of vertical grow technology.
BUSINESS
PLAN
PHASE
1 (COMPLETED):
|
● |
Conceptualization,
engineering, and design of facility and systems. (completed) |
|
● |
Completed
selection process of key environmental systems with preferred vendors. (completed) |
|
● |
Selection
and Land Purchase agreement in Coachella, CA subject to financing. (completed) |
|
● |
ForceFilm
material ordered. (completed) |
PHASE
2:
|
● |
Complete
the timing of financing for, and purchase of, the selected parcel in Coachella, CA, subject to market conditions, |
|
● |
Complete
feasibility study for new contracts’ structures for facilities with new independent operators. |
|
● |
Identify
procurement of AgriFORCE™ IP specific automated grow system, supplemental grow lighting and controls systems, and manufacture
of the building envelope materials. |
|
● |
Conceptualization
and design of vertical grow solutions. |
|
● |
Initiate
the design of an R&D facility for food solutions and plant-based pharma. |
PHASE
3:
|
● |
Complete
the delivery and installation of facilities. Proof of quantitative and qualitative benefits will drive both sales pipeline acceleration
for subsequent years. |
|
● |
Complete
the design of an R&D facility for food solutions and plant-based pharma. Commence engagement with universities and pharmaceutical
companies. |
|
● |
Review
potential licensing opportunities for the Solutions patent portfolio. |
PHASE
4:
|
● |
Focus
on delivery and installation of additional facilities. |
|
● |
Expand
geographic presence into other geographies by introducing the FORCEGH+™ to other international markets with a view to securing
additional locations and markets. |
AgriFORCE
Brands
The
Company purchased Intellectual Property (“IP”) from Manna Nutritional Group, LLC (“Manna”), a privately held
firm based in Boise, Idaho on September 10, 2021. The IP encompasses a granted patent to naturally process and convert grain, pulses
and root vegetables, resulting in low-starch, low-sugar, high-protein, fiber-rich baking flour as well as produces a natural sweetener
juice. The core process is covered under the Patent Nr. 11,540,538 in the U.S. and key international markets. The all-natural process
is designed to unlock nutritional properties, flavors, and other qualities in a range of modern, ancient and heritage grains, pulses and
root vegetables to create specialized all-natural baking and all-purpose flours, sweeteners, juices, naturally sweet cereals and other
valuation products, providing numerous opportunities for dietary nutritional, performance and culinary applications.
During the period ended March 31, 2023, the Company
has achieved significant milestones towards the commercialization of our Awakened Grains™ flour, the Company’s first brand
to utilize the Manna IP. Management has defined and tested its quality controls and safety protocols for production, and produced several
multi-ton batches of germinated grains, refining and scaling production processes with our partners in Canada. We are also in the process
of qualifying partners in the US Pacific Northwest to establish additional production hubs which will support growth and reduce logistics
costs for customers in the region. Additionally, we have established our supply chain logistics with a contracted shipping company and
two warehouses in Canada and the US. Our commercial team made progress in defining pricing and is conducting advanced customer R&D
trials to understand how to integrate the product into food suppliers’ manufacturing processes. Online sales logistics and advertising
materials were developed during the period to support the establishment of the direct-to-consumer sales channel. Lastly, the Company has
developed over 100 recipes for the application of Awakened Grains™ flour for both customers and consumers.
With our R&D
partners, the Company is developing several finished product prototypes including a line of pancake mixes, which are ready for consumer
testing.
Wheat
and Flour Market
Modern
diet is believed to be a contributor to health risks such as heart disease, cancer, diabetes and obesity, due in part to the consumption
of highly processed foods that are low in natural fiber, protein and nutrition; and extremely high in simple starch, sugar and calories.
These “empty carbs” produce glycemic swings that may cause overeating by triggering cravings for food high in sugar, salt
and starch. As an example, conventional baking flour is low in natural fiber (~ 2-3%), low-to-average in protein (~ 9%), and very high
in starch (~ 75%)(4). Whole wheat flour is only marginally better.
(4)
Based on protein, fiber, and starch content figures from a nationally certified independent laboratory, as compared to standard all-purpose
flour.
In
contrast, foods high in fiber help to satiate hunger, suppress cravings and raise metabolism(5). They also assist in weight
loss, lower cholesterol, and may reduce the risk of cancer, heart disease and diabetes.
Advantages
of the UN(THINK)™ Foods IP
The
Controlled Enzymatic Reaction & Endothermic Saccharification with Managed Natural Germination (“CERES-MNG”)
patented process allows for the development and manufacturing of all-natural flours that are significantly higher in fibers, nutrients
and proteins and significantly lower in carbohydrates and calories than standard baking flour.
CERES-MNG
baking flour produced from soft white wheat has 40 times more fiber, three (3) times more protein and 75% less net carbohydrates than
regular all- purpose flour8 (6).
Source:
Independent analysis by Eurofins Food Chemistry Testing Madison, Inc, February 2022
The
CERES-MNG patent will help develop new flours and products from modern, ancient and heritage grains, seeds, legumes and tubers/root vegetables.
(5)
https://my.clevelandclinic.org/health/articles/14400-improving-your-health-with-fiber
(6)
Based on protein, fiber, and starch content figures from a nationally certified independent laboratory, as compared to standard all-purpose
flour.
Products
that AgriFORCE™ intends to develop for commercialization from the CERES-MNG patented process under the UN(THINK)™ foods brand:
|
- |
High
protein, high fiber, low carb modern, heritage and ancient grain flours (for use in breads, baked goods, doughs, pastry, snacks,
and pasta) |
|
- |
Protein
flours and protein additives |
|
- |
High
protein, high fiber, low carb cereals and snacks |
|
- |
High
protein, high fiber, low carb oat based dairy alternatives |
|
- |
Better
tasting, cleaner label high protein, high fiber, low carb nutrition bars |
|
- |
High
protein, high fiber low carb nutrition juices |
|
- |
Sweeteners
– liquid, granulated |
|
- |
High
protein, high fiber, low carb pet foods and snacks |
We
intend to commercialize these products behind three (3) main sales channels:
|
- |
Ingredients
|
|
- |
Branded
ingredients |
|
- |
Consumer
brand |
The
business opportunity for AgriFORCE™ to successfully commercialize premium specialized products from the UN(THINK)™ foods
IP – by capturing a conservatively very small percentage share of the category it is targeting to enter in the premium segments.
We estimate these revenues to be between $500 million and $1 billion by 2030 (excluding any potential revenues from the Maltose-Power
Juice applications).
|
|
Breads
&Bakery |
|
|
Functional
Flours |
|
|
Pulse
Flours |
|
|
Dairy
Alternatives |
|
|
Nutrition
Bars |
|
|
Total |
|
Global
market size of target categories |
|
$ |
222B |
|
|
$ |
48B |
|
|
$ |
17B |
|
|
$ |
6B |
|
|
$ |
45B |
|
|
|
|
|
Potential
market share |
|
|
0.1 |
% |
|
|
1 |
% |
|
|
1 |
% |
|
|
1 |
% |
|
|
0.1 |
% |
|
|
|
|
AgriFORCE™
potential net revenues |
|
$ |
100-200M |
|
|
$ |
200-480M |
|
|
$ |
100-
170M |
|
|
$ |
30-60M |
|
|
$ |
20-40M |
|
|
$ |
450-950M |
|
Sources:
Grand View Research Reports, San Francisco CA, 2018 Estimates.
While
we are working on setting up a pilot plant in Canada to produce the UN(THINK)™ power wheat flour for the end of 2023, our patented
process allows us to develop a gold-standard sprouted wheat flour, which we have qualified and have made available for sale through brokers
as of January 2023 in Canada and the USA, under the UN(THINK)™ Awakened Grains™ brand. This new Awakened Grains™ flour
will provide enhanced nutrition with over five times more fiber, up to two times more protein and 77% of net carbs versus conventional
all purpose flour (source: Eurofins Food Chemistry Madison, Inc, December 2022).
BUSINESS
PLAN
AgriFORCE™’s
organic growth plan is to actively establish and deploy the commercialization of products, following the acquisition of the Manna IP,
is focused on four distinct phases:
PHASE
1 (COMPLETED):
|
● |
Product
and process testing and validation. (completed) |
|
● |
Filing
of US and international patent. (completed) |
|
● |
Conceptual
engineering and preliminary budgeting on commercial pilot plant. (completed) |
|
● |
Creation
of the UN(THINK)™ foods brand. (completed) |
|
● |
Qualification
and operational and commercial set up of the Awakened Grains™ line of products (completed) |
PHASE
2:
|
● |
Launch
of the UN(THINK)™ Awakened Grains™ sprouted flour range of products in business to business (“B2B”) and direct
to consumers (“D2C”) channels. |
|
● |
Design,
build, start-up, and operation of the pilot plant for the fully processed and patented flours |
|
● |
Develope
range of finished products behind the wheat grain flours, qualify patented process for pulse/legume, and rice based protein flours. |
|
● |
Collaborate
with Nutritional Flour Medical Research Institute (an IRS section 501(c)(3) Medical Research Organization) funded by private &
public research grants. |
PHASE
3:
|
● |
Launch
first range of fully patent processed products in US/Canada (UN(THINK)™ power wheat flour. |
|
● |
Drive
business with finished products in D2C, retail, food service. |
|
● |
Drive
business as ingredients for bakery, snack and plant based protein products manufacturers. |
|
● |
Develop
manufacturing base through partnerships and licensing. |
|
● |
Conceptual
engineering and preliminary budgeting on large-scale processing plant. |
PHASE
4:
|
● |
Expand
product range in US/Canada. |
|
● |
Expand
business to other geographies internationally. |
|
● |
Design,
build, start-up, and operation of large-scale processing plan. |
Merger
and Acquisition (“M&A”)
With
respect to M&A growth, the Company is aggressively pursuing acquisitions in the agriculture technology space. The Company believes
that a buy and build strategy will provide unique opportunities for innovation across each segment of the Ag-Tech market we serve. Our
unique IP combined with the know-how and IP of acquired companies will create additional value if the way we grow or produce crops. The
Company believes there is currently no other public traded publicly in the United States pursing this model.
Manna
Nutritional Group Asset Acquisition
On
September 10, 2021, the Company signed a definitive asset purchase agreement to acquire food production and processing IP from Manna.
On
May 10, 2022, the Company completed an amendment to its asset purchase agreement with Manna Nutritional Group LLC, dated September 10,
2021. The amendment required the issuance of prefunded warrants instead of shares over several tranches and contained covenants to obtain
shareholder approval of the acquisition transactions before the prefunded warrants can be exercised into Company common shares.
The
transaction was fully approved by the shareholders on December 15, 2022. The Company paid consideration of $1,475,000 in cash and issued
7,379,969 prefunded warrants valued at $12,106,677 adjusted for foreign exchange differences of $492,300. Subject to a 9.99% stopped
and SEC Rule 144 restrictions, the prefunded warrants will vest in tranches up until March 10, 2024. When vested the tranches of prefunded
warrants will be converted into an equal number of common shares.
On
January 3, 2023, Manna satisfied all its contractual obligations when the patent was approved by the US Patents Office and title was
transferred to the Company. The Company issued 1,637,049 and 193,823 shares upon exercise of vested tranches of Manna’s prefunded
warrants in relation to this transaction on January 3, 2023 and April 1, 2023, respectively.
Delphy
Groep BV Acquisition
On
February 10, 2022, the Company signed a definitive share purchase agreement (the “Delphy Agreement”) to acquire Delphy, a
Netherlands-based AgTech consultancy firm, for €23.5 million through a combination of cash and stock. The definitive agreement follows
the binding letter of intent as previously announced in the Company’s press release in October 2021. Delphy, which optimizes production
of plant-based foods and flowers, has multinational operations in Europe, Asia, and Africa, with approximately 200 employees and consultants.
Delphy’s client list includes agriculture companies, governments, universities, and leading AgTech suppliers, who turn to the company
to drive agricultural innovation, solutions, and operational expertise. The Delphy Agreement was negotiated at arm’s length and
is not a related party transaction.
On
September 22, 2022, the Company entered an amendment to the Delphy Agreement, pursuant to which the parties agreed to reduce the total
purchase from €$23.5 million to €17.7 million, plus a potential earnout of up to €6.0 million over two (2) years, based
on achieving future performance milestones. The Company also agreed to pay interest in the amount of €0.2 million on the purchase
price and additional interest from November 15, 2022 up to January 15, 2023 (the “Long Stop Date”).
Management
is currently in negotiating an amendment which will extend the Long Stop Date past January 15, 2023.
Deroose
Plants NV Binding Letter of Intent
On
February 23, 2022, the Company signed a binding letter of intent (the “Deroose LOI”) with Deroose Plants NV (“Deroose”),
one of the largest tissue culture propagation companies in the world with a leadership position in horticulture, plantation crops, and
fruit and vegetables. Founded in 1980, Deroose has multi-national operations in Europe, North America, and Asia, and over 800 employees.
The
Deroose LOI is subject to completion of standard due diligence and entry into a definitive purchase agreement, which shall include commercially
standard terms and conditions, including, but not limited to, representations and warranties, covenants, events of default and conditions
to closing.
The
net purchase price by the Company is expected to be approximately €61 million. The purchase price represents approximately €41
million for the Deroose business on a cash and debt free basis and €20 million for the genetic IP portfolio.
The
parties are working through the Letter of Intent. Neither party has provided notice to terminate the agreement.
Stronghold
Land Acquisition
On
August 30, 2022, the Company entered into a Purchase and Sale Agreement (“PSA”) with Stronghold Power Systems, Inc.
(“Stronghold”) to purchase approximately 34 acres of land in Coachella California. The purchase price is $4,300,000,
payable as follows: (i) $1,500,000 in cash and (ii) $2,800,000 in restricted shares of common stock of the Company. The stock is
being issued in the form of prefunded warrants in two tranches: (i) $1,700,000 (695,866 prefunded warrants) issued within five days
of entry into the PSA, and (ii) $1,100,000 (450,266 prefunded warrants) at closing of the transaction. The first tranche shall be
void if closing of the transaction does not occur by March 31, 2023. The prefunded warrants per share exercise price is $2.443 which
is subject to certain adjustments. Issuance of all securities in this transaction are exempt from registration under Section 4(a)(2)
of the Securities Act of 1933, as amended. Under the terms of the agreement, Stronghold must have completed certain permitting,
zoning, and infrastructure work by March 31, 2023, to close the transaction.
As
at March 31, 2023 the prefunded warrants issued were rescinded and the warrants were rendered null and void as the Company presented
termination notice to Stronghold.
Berry
People LLC Binding Letter of Intent
On
January 24, the Company announced it has entered into a binding letter of intent (“BP LOI”) to acquire Berry People LLC,
(“Berry People”), a berry business with an increasingly international footprint and a scalable business model. The acquisition
bolsters the AgriFORCE™ Brands division and allows the Company to realize commercial synergies with UN(THINK)™.
Berry
People was founded in 2017 by berry industry veterans to create a new platform to meet market demand for a branded, year-round supply
of organic and conventional berries. Berry People quickly established a recognized global trade brand and scalable operations, comprised
of over 200 retail and foodservice clients and over 100 grower and exporter clients across the US, Canada, Mexico, and Peru. Berry People
had net revenues of USD $37 (unaudited) million for the year ended December 31, 2022.
The
BP LOI states, among other things that:
|
● |
the
transaction will be subject to completion of due diligence to the Company’s satisfaction and, after satisfactory due diligence,
the reaching of agreement on the terms of the purchase pursuant to a definitive purchase agreement, including conditions precedent
for closing of the transaction; |
|
● |
the
parties will sign the definitive purchase agreement no later than April 30, 20237, unless agreed to by both parties; and |
|
● |
Berry
People will not enter into any negotiations with other parties for a period of three months following the execution of the BP LOI. |
(7) Berry People and the
Company mutually agreed to be amended the long stop date to June 30, 2023
The
BP LOI sets forth a purchase price of $28.0 million, consisting of $18.2 million in cash and $9.8 million in AgriFORCE™ restricted
shares, will be paid at closing to acquire 70% of Berry People’s equity interests. Berry People will have the opportunity for future
earnouts during the five years after closing based on future revenue and EBITDA targets associated with agreed upon growth targets.
In
collaboration with AgriFORCE™, Berry People aims to further develop backward integration into agricultural production via farming
joint ventures and deploy licensed and developed IP as part of a scalable franchising model. The berries market was $9.65 billion in
2021 in the U.S. alone, with growth rates of around 10% or more each year since 20198— a trend that is expected to continue.
(8)
As per IRI Integrated Fresh, Latest 52 WE 3/20/2022
Status
as an Emerging Growth Company
On
April 5, 2012, the Jumpstart Our Business Startups Act of 2012, or the JOBS Act, was enacted. 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 of 1933, as amended, or the Securities Act, for complying with new or revised accounting standards. In other words, an “emerging
growth company” can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies.
We have irrevocably elected to avail ourselves of this extended transition period and, as a result, we will adopt new or revised accounting
standards on the relevant dates on which adoption of such standards is required for private companies.
We
are in the process of evaluating the benefits of relying on other exemptions and reduced reporting requirements provided by the JOBS
Act. Subject to certain conditions set forth in the JOBS Act, as an “emerging growth company,” we intend to rely on certain
of these exemptions from, without limitation, (i) providing an auditor’s attestation report on our system of internal controls
over financial reporting pursuant to Section 404(b) of the Sarbanes-Oxley Act and (ii) complying with any requirement that may be adopted
by the Public Company Accounting Oversight Board (PCAOB) regarding mandatory audit firm rotation or a supplement to the auditor’s
report providing additional information about the audit and the financial statements, known as the auditor discussion and analysis. We
will remain an “emerging growth company” until the earliest of (a) the last day of our fiscal year following the fifth anniversary
of the closing of the initial public offering, (b) the last day of the first fiscal year in which our annual gross revenues exceed $1.07
billion, (c) the last day of our fiscal year in which we are deemed to be a “large accelerated filer” as defined in Rule
12b-2 under the Securities Exchange Act of 1934, or Exchange Act (which would occur if the market value of our equity securities that
is held by non-affiliates exceeds $700 million as of the last business day of our most recently completed second fiscal quarter), or
(d) the date on which we have issued more than $1 billion in nonconvertible debt during the preceding three-year period.
FOR
THE THREE MONTHS ENDED MARCH 31, 2023 AND 2022
Results
of Operations
The
following discussion should be read in conjunction with the condensed unaudited financial statements for the interim periods ended March
31, 2023 and 2022 respectively, included in this report.
Revenues
The
Company has generated no revenue since inception.
Operating
Expenses
Operating
expenses increased in the three months ended March 31, 2023 as compared to March 31, 2022 by $62,029 or 2%, primarily due to the following:
● |
Wages
and salaries increased by $232,405 due to increased headcount for the Company’s expansion of operations including UN(THINK)™.
|
● |
Professional
fees increased by $186,297 due to increased legal and financial services fees incurred for M&A activity. |
● |
Depreciation
and amortization increased by $165,233 due to the amortization of the IP intangible asset
which became available for use in January 2023. |
This
was partially offset by the following:
● |
Research
and development decreased by $360,404 due to a license agreement as well as design and construction fees that were incurred in 2022. |
● |
Consulting
decreased by $153,980 due to the completion of the Manna acquisition in 2022. |
● |
All
other items aggregate to $7,522 |
Other
(Income) / Expenses
Other income for the three months ended March 31,
2023 increased primarily due the change in fair value of derivative liabilities of $3,831,074 from issuance of the Second Tranche Debentures
as well as a significant decrease in securities price. This was offset by the accretion interest on debentures of $1,872,470 and the loss
on debt conversions of $419,703. All other items aggregate to $84,361.
Liquidity
and Capital Resources
The Company’s primary need for liquidity is
to fund working capital requirements, capital expenditures, and for general corporate purposes. The Company’s ability to fund operations
and make planned capital expenditures and debt service obligations depends on future operating performance and cash flows, which are subject
to prevailing economic conditions, financial markets, business and other factors. We have recorded a net loss of $1,720,053 for the three
months ended March 31, 2023, and a net loss of $3,281,286 for the three months ended March 31, 2022. We have recorded an accumulated deficit
of $34,494,147 as of March 31, 2023 and $32,774,094 as of December 31, 2022. Net cash used in operating activities for the three months
ended March 31, 2023 and March 31, 2022 was $2,647,873 and $2,870,654, respectively.
We
had $2,732,050 in cash at March 31, 2022 as compared to $2,269,320 at December 31, 2022.
Our
future capital requirements will depend on many factors, including:
● |
the
cost and timing of our regulatory activities, especially the process to obtain regulatory approval for our intellectual properties
in the U.S. and in foreign countries |
● |
the
costs of R&D activities we undertake to further develop our technology |
● |
the
costs of constructing our grow houses, including any impact of complications, delays, and other unknown events |
● |
the
costs of commercialization activities, including sales, marketing and production |
● |
the
level of working capital required to support our growth |
● |
our
need for additional personnel, information technology or other operating infrastructure to support our growth and operations as a
public company |
● |
completion
of planned acquisitions |
The
accompanying financial statements have been prepared on a going concern basis, which contemplates the realization of assets and satisfaction
of liabilities in the normal course of business. The financial statements do not include any adjustments relating to the recoverability
and classification of recorded asset amounts or the amounts and classification of liabilities that might result from the outcome of this
uncertainty. The Company is at the stage of development of its first facility and other IP. As such it is likely that additional financing
will be needed by the Company to fund its operations and to develop and commercialize its technology. These factors raise substantial
doubt about the Company’s ability to continue as a going concern.
For
the next twelve months from issuance of these financial statements, the Company will seek to obtain additional capital through the sale
of debt or equity financings or other arrangements to fund operations; however, there can be no assurance that the Company will be able
to raise needed capital under acceptable terms, if at all. The sale of additional equity may dilute existing shareholders and newly issued
shares may contain senior rights and preferences compared to currently outstanding common shares. Issued debt securities may contain
covenants and limit the Company’s ability to pay dividends or make other distributions to shareholders. If the Company is unable
to obtain such additional financing, future operations would need to be scaled back or discontinued. Due to the uncertainty in the Company’s
ability to raise capital, management believes that there is substantial doubt in the Company’s ability to continue as a going concern
for twelve months from the issuance of these financial statements.
Cash
Flows
The net cash used by operating activities for the
three months ended March 31, 2023 was $2,647,873 compared to $2,870,654 for the three months ended March 31, 2022. The change of $222,781
was primarily due to a favorable change in working capital of $190,809 driven by prepayments made for an international patent application
as well as legal services to secure debt financing in the three months ended March 31, 2022. Such payments did not occur in the three
months ended March 31, 2023. All other items aggregate to $31,972.
There was $nil cash used in investing activities for the three months ended
March 31, 2023. The
net cash used in investing activities for three months ended March 31, 2022 was related to the payment against acquisition of IP intangible
asset of $500,000.
Net
cash used in financing activities for the three months ended March 31, 2023 represents net proceeds from debentures of $4,615,385.
This was partially offset by repayments and interest paid on convertible debentures of $1,180,950 and financing costs of debentures
of $325,962. There were no financing activities in the first quarter of 2022.
Recent
Financings
On January 17, 2023, the
Debenture Investors purchased an additional tranche of $5,076,923 and received 2,661,289 warrants. The convertible Debentures and Debenture
Warrants were issued with an exercise price of $1.24. The issuance of the additional tranche triggered the down round provision, adjusting
the exercise prices of the Debentures and the Debenture Warrants to $1.24.
Off
Balance Sheet Arrangements
None.
Significant
Accounting Policies
See
the footnotes to our unaudited financial statements for the three months ended March 31, 2023 and 2022, included with this quarterly
report.