The information and financial data discussed below is derived from the unaudited
condensed consolidated interim financial statements of the Target Group Inc.
("we," "us" or the "Company") for the three months ended March 31, 2023 and were
prepared and presented in accordance with generally accepted accounting
principles in the United States.
Forward Looking Statements
Some of the statements contained in this Quarterly Report on Form 10-Q that are
not historical facts are "forward-looking statements" which can be identified by
the use of terminology such as "estimates," "projects," "plans," "believes,"
"expects," "anticipates," "intends," or the negative or other variations, or by
discussions of strategy that involve risks and uncertainties. We urge you to be
cautious of the forward-looking statements, that such statements, which are
contained in this Quarterly Report, reflect our current beliefs with respect to
future events and involve known and unknown risks, uncertainties and other
factors affecting our operations, market growth, services, products and
licenses. No assurances can be given regarding the achievement of future
results, as actual results may differ materially as a result of the risks we
face, and actual events may differ from the assumptions underlying the
statements that have been made regarding anticipated events. Factors that may
cause actual results, our performance or achievements to differ materially from
those contemplated by such forward-looking statements include without
limitation:
? Our ability to raise capital when needed and on acceptable terms and
conditions;
? Our ability to attract and retain management;
? Our ability to enter into long-term supply agreements for the mineralized
material;
? General economic conditions; and
? Other factors are discussed in Risk Factors.
All forward-looking statements made in connection with this Quarterly Report are
attributable to us or persons acting on our behalf are expressly qualified in
their entirety by these cautionary statements. Given the uncertainties that
surround such statements, you are cautioned not to place undue reliance on such
forward-looking statements.
Overview
Target Group Inc. ("Target Group" or "the Company") was incorporated in the
State of Delaware on July 2, 2013, under our original name of River Run
Acquisition Corporation. Effective May 13, 2014, the Company changed its name to
Chess Supersite Corporation. On July 3, 2018, we filed an amendment in our
Certificate of Incorporation to change our name to Target Group Inc.
Effective October 18, 2018, our common stock became eligible for quotation on
the OTCQB platform operated by OTC Markets Group Inc, under the symbol "CBDY".
During the first quarter of 2023, the global spread of Coronavirus (COVID-19)
continued to have a significant impact on the Canadian and global economy and
customer purchasing behavior, while equity markets remained volatile. However,
these factors have not impacted the Company's operations, financial results for
the quarter.
Business and Plan of Operations
Cannabis Business-Canada
We are now engaged in the cultivation, processing and distribution of curated
cannabis products for the adult-use medical and recreational cannabis market in
Canada and, where legalized by state legislation, in the United States. We
believe that there is a shift in the public's perception of cannabis from a
state of prohibition to a state of legalization. In October 2018, Canada became
the first major industrialized nation to legalize adult-use cannabis at the
national federal level. Cannabis is still heavily regulated. However, the
medical use of cannabis is now permitted in up to 29 countries and many more
countries have reformed, or are considering reforming, their cannabis uses laws
to include the recreational use of cannabis.
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In the 2016 publication by Deloitte, Insights and Opportunities Recreational
Marijuana, the project size of the Canadian adult-use market ranged from CDN$4.9
billion to CDN$8.7 billion annually. In the 2018 publication by Deloitte, A
Society in Transition, an Industry Ready to Boom, the projected size of the
Canadian adult-use market in 2019 ranged from CDN$1.8 billion to CDN$4.3
billion. The Canadian medical cannabis industry experienced substantial growth
since 2014. Health Canada projects the Canadian cannabis market will reach
CDN$1.3 billion in annual value by 2024.
We intend to position ourselves with a core emphasis on wholesale & co-packaging
services to accommodate all consumer-packaged goods required for the
sophisticated cannabis market in Canada and internationally. This will integrate
cannabinoid research, analytical testing, product development and manufacturing.
Our product manufacturing will include, but will not be limited to the
following:
? Cannabis flower pods for vaporizer use
? Cannabis extract pods for vaporizer use
? Cannabis pre-rolls
? K-Cup infused coffee and tea pods
? Infused cannabis beverages
? Infused cannabis edibles
? Infused topical products and CBD wellness products.
As of the date of this report, the Company (i.e., Target Group Inc. and its
subsidiaries) does not have any operations, employees or corporate offices based
in United States.
Acquisitions
To take advantage of the opportunity resulting from the legalization of
adult-use cannabis in Canada, we completed several strategic acquisitions and
entered into several significant agreements as follows:
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, ("Canary"), a
Canadian corporation that operates a 44,000 square foot facility located in
Ontario's Garden Norfolk County for the production of cannabis. Canary is a
Canadian Licensed Producer under Health Canada's Cannabis Act ("Bill C-45").
Canary expects to grow up to 4 million grams of cannabis annually out of its
Simcoe facility once it is at full capacity. The Company is now growing premium
cannabis in indoor grow rooms and each 2,200 square feet room gets up to 5.4
turns annually.
Pursuant to the Exchange Agreement, 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 to its Common Stock, the Company issued to the Visava
shareholders, pro rata Common Stock Purchase Warrants to purchase 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. The
transactions contemplated by the Exchange Agreement closed effective August 2,
2018. Visava continues its business operations as a first-tier wholly-owned
subsidiary of the Company with Canary operating as our second-tier subsidiary.
During the year ended, December 31, 2020, all of the warrants expired, none were
exercised.
CannaKorp Inc.
Pursuant to the terms of an Agreement and Plan of Share Exchange dated January
25, 2019 ("Exchange Agreement"), on March 1, 2019, we completed the acquisition
of Massachusetts -based CannaKorp Inc., a Delaware corporation ("CannaKorp").
CannaKorp has developed a single-use pre-measured pod and vaporizer system for
consumers interested in vaporizing natural herbs, including cannabis. The
patent-pending system is known as The Wisp(TM) and Wisp Pods(TM). The Wisp(TM)
vaporizer system extracts the medically beneficial compounds more efficiently
while simultaneously offering a much safer and more enjoyable experience than
other alternatives.
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Under the terms of the Exchange Agreement, we issued 30,407,712 shares of our
common stock to the exchanging CannaKorp shareholders in exchange for 99.8% of
the outstanding common stock held by the CannaKorp shareholders. CannaKorp
continues to operate as our subsidiary. During the year ended, December 31,
2021, all of the warrants expired, none were exercised.
Agreements
Serious Seeds B.V.
Effective December 6, 2018, the Company and Canary entered into a Distribution,
Collaboration and Licensing Agreement ("Agreement") with Serious Seeds B.V.
("Serious Seeds"), incorporated in the Netherlands, and Simon Smit ("Smit"),
President of Serious Seeds. Under the Agreement, Canary was appointed the
exclusive distributor in Canada and all other legal markets globally of Serious'
proprietary cannabis seed strains and Serious' cannabis cuttings, dried flowers,
extracts and seeds. In addition, under the Agreement Canary Rx and Serious will
develop certain "Collaborative Products" defined as cannabis seed strains
created collaboratively using Serious' intellectual property. During the term of
the Agreement, Canary will own all of the intellectual property related to the
Collaborative Products.
Under the Agreement, Smit has granted Canary an exclusive license in Canada and
all legal markets globally to Serious' intellectual property including the right
to use the service mark of Serious Seeds and all of the names of Serious'
proprietary cannabis seed strains including but not limited to Chronic, AK-47,
White Russian, Bubble Gum, Kali Mist, Warlock, Double Dutch, Biddy, Early,
Motavation and Strawberry-AKeil.
The initial term of the Agreement will be five (5) years and will be
automatically renewed for consecutive five (5) terms subject to rights of
termination upon one hundred and eighty (180) days prior notice. In
consideration of the intellectual property rights granted by Smit to Canary, the
Company will issue to Smit 250,000 shares of the Company's common stock on the
effective date of the Agreement. In addition, on the thirteenth (13) month
following the effective date of the Agreement of the initial term, the Company
will issue to Smit 5,208 shares of common stock and warrants to purchase 200,000
shares of Target common stock at an exercise price of $0.15 per share.
Thereafter, from the fourteenth (14) month following the effective date of the
Agreement and continuing through the sixtieth (60) month of the initial term,
the Company will issue Smit 5,208 shares of common stock and warrants to
purchase 16,667 shares of Target common stock, each month, at varying exercise
prices ranging from $0.20 to $0.35 per share. All of the above warrants must be
exercised on or before the two (2) year anniversary date of each of the warrant
issuance dates. As of March 31, 2023, none of the above shares have been issued.
In consideration of Canary Rx's appointment as Serious' exclusive distributor in
Canada, Canary Rx will pay Serious Seeds 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
On October 8, 2019, Canary was granted licenses to cultivate, process and sell
cannabis pursuant to the Cannabis Act (Bill C-45). These Standard Licenses
enable Canary to produce approximately 3,600kg of dried cannabis flower per
year. Canary has curated a bank of 3,500 seeds, comprised of more than 125
strains, including the entire Serious Seeds collection. The Company has the
capacity to grow 8 different strains at a time, within the facility's 8 indoor
separate flower rooms.
Cannavolve Inc. Sales Agency Agreement
Effective December 13, 2018, the Company appointed Cannavolve Inc., an Ontario,
Canada corporation based in Toronto ("Cannavolve"), under the terms of a
Licensed Producer/Licensed Processor Sales Agency Agreement ("Agency
Agreement"), as the Company's exclusive agent in Canada to market and sell the
CannaKorp Wisp(TM) vaporizer, the Serious Seeds(TM)products and Canary branded
cannabis in the recreational cannabis markets (collectively the "Products").
Cannavolve is an independent recreational cannabis sales and marketing Company
established to represent licensed producers and licensed processors in Canada of
cannabis and cannabis accessories. Cannavolve operates in Canada with offices in
Halifax, Montreal, Calgary and Vancouver.
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Under the Agency Agreement, Cannavolve will be paid a commission of 6% of net
sales based on the wholesale prices of the Products. The initial term of the
Agency Agreement is two (2) years from December 13, 2018 subject to a renewal
term of two (2) additional years. In addition to customary termination
provisions based upon the material default of either the Company or Cannavolve,
we can terminate the Agency Agreement without cause upon ninety (90) days prior
written notice. The Agency Agreement was renewed on December 13, 2020 for an
additional two (2) years, but was not renewed on December 13, 2022 and expired
on that date.
cGreen, Inc. Exclusive License Agreement
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(TM)in the
United States, Europe and the Caribbean. The term of the license is ten
(10) years and four (4) months from the effective date of August 8, 2019. In
consideration of the license, the Company will 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 will 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 will 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 will 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.
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 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 paid $100,000
in monthly installments of $10,000 commenced in April 2021 to cGreen resulting
in a gain on settlement of $1,704,860. As at March 31, 2023, there was no
outstanding balance, the balance has been paid in full and the claim is closed
during the quarter ended March 31, 2022 (December 31, 2021: $10,000).
Joint Venture Agreement
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 JVC. 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 all eight (8) rooms, of
Canary's licensed cannabis cultivation facilities located in Simcoe, Ontario,
Canada ("Licensed Site Portion") to operate and manage 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 $886,680 (CAD 1,200,000). This loan bears an interest
rate of 7% per annum, matures in 12 months from the effective date, and is
secured against the personal property of the JVCo and Thrive will guarantee
one-half (1/2) of the outstanding balance of the loan. As of March 31, 2023, the
loan advanced amounts to $247,532 (CAD 335,000) and interest income charged for
the three months ended in the amount of $4,275 (CAD 5,782) is included in other
income on the unaudited condensed consolidated interim statement of operations
and comprehensive loss and interest receivable in the amount of $46,523 (CAD
62,963) is included in receivable from joint venture on the unaudited condensed
consolidated interim balance sheet.
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The JVCo will reimburse Canary for certain expenses incurred by Canary for the
cultivation and processing of cannabis products. Below is the table which
summarizes the activity of the period:
Three months ended March 31, 2023 2022
CAD USD CAD USD
Sales 271,356 200,641 1,369,887 1,081,937
Cost of goods sold 123,317 91,180 713,168 563,260
Gross profit 148,040 109,461 656,719 518,677
Operation expenses 266,955 197,386 539,918 426,427
Net income (loss) (118,915) (87,925) 116,801 92,250
Eligible recoverable expenses 1,063,212 785,607 1,086,622 869,624
Recoverable amount
1,063,212 785,607 1,086,622 869,624
Income (loss) on equity (59,458) (43,963) 58,401 46,125
During the three months ended March 31, 2023, revenue was sold to two customers
(2022: six).
The JVCo shall make payments out of the revenues, net of applicable taxes and
expenses ("Net Income"), per the following order of priority:
a) First, the payment of recoverable expenses;
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
provided by Thrive Cannabis) until repaid in full;
d) Finally, any remaining Net Income shall be distributed monthly, as follows:
(i) For the first two (2) years following the 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%.
Below is the position of the JVCo as at:
As of March 31, 2023 December 31, 2022
CAD USD CAD USD
Assets 11,863,655 8,766,054 10,913,576 8,057,493
Liabilities 12,250,071 9,051,578 11,181,077 8,254,989
Deficit (386,417) (285,523) (267,501) (197,496)
CL Investors Debt Purchase and Assignment Agreement
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 the
preliminary date of the agreement and the agreement was not finalized until the
later date as indicated below.
The CEO (and also a director) of the Company is the secretary and a shareholder
of CLI plus the CEO's brother is the President and sole director of CLI
therefore the loan from CLI is classified under related party transactions.
CLI purchased from the Company for the sum of $2,142,810 (CAD 2,900,000) a debt
obligation owing from Canary, the Company's second-tier subsidiary, to the
Company in the principal balance of $7,832,340 (CAD 10,600,000 ("Canary Debt")).
Upon receipt of the monetary 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 of March 31, 2023, $3,695 (CAD
5,000) is still outstanding from CLI which is presented as other receivable on
the consolidated balance sheet.
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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:
In the first year of the Term, Canary will pay CLI the greater of $834,957
(CAD 1,130,000) and fifty percent (50%) of the Net Revenue (hereinafter
a) 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;
In the second year of the Term, Canary will pay CLI the greater of $1,551,690
(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
b) 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;
In the third year of the Term, Canary will pay CLI the greater of $2,379,258
(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
c) 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 such payments owing for such
third year;
In the fourth year of the Term, Canary will pay CLI the greater of $2,275,812
(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
d) commencing on August 14, 2023, provided that where the latter amount exceeds
the former amount, 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
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
e) 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 further amounts are 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.
For this Note, "Net Revenue" will mean any revenue generated from Canary's
Licensed Facility (hereinafter defined) to which it is entitled to the 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 $73,890 (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 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
11 for additional details on warrants. The combined impact of both transactions
resulted in a debt issuance cost of $251,518. This debt issuance cost will be
amortized over the term of the debt on a straight-line basis.
The transactions contemplated by the Agreement and the Amendment closed on
August 14, 2020.
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Forward Looking Relating to Future Operations of the Company.
Currently, the company and its senior management are is exploring several new,
additional opportunities at its Simcoe, Ontario cultivation facility to expand
the Company's product offerings in other cannabis-related consumer packaged
goods ("CPG") product categories.
Employees
As of March 31, 2023, we had 51 employees which include Anthony Zarcone, Chief
Executive Officer.
We have contracted several independent contractors and consultants to provide a
range of information technology and marketing services who do not receive cash
compensation but receive shares of our common stock as compensation. This
mitigates any need for full or part-time employees for these services.
Intellectual Property Protection
Our subsidiary CannaKorp Inc. holds the following patents:
International Patent Application No. PCT/US20115/013778
Title: METHODS AND APPARATUS FOR PRODUCING HERBAL VAPO
Filing Date: January 30, 2015
Ref. No.: B1411.70000WO00
U.S. Provisional Application No.: 61/934.255
Title: CONTAINER POD AND DELIVERY SYSTEM
Filing Date: January 31, 2014
Ref. No.: B1411.70000US00
In addition, CannaKorp has proprietary rights to certain trade names, trademarks
and service marks which include WISP PODTM; cPODTM; CANNACUPTM; and WISPTM.
CannaKorp also has certain proprietary formulas and processes involving herbal
formulas and flavors, proprietary herbal production processes and an herbal base
developed to suspend active ingredients for optimal vaporization.
At present, CannaKorp has failed to meet its annuities payments as well as
maintenance fees on the 2 referenced patents. Although there has been a lapse
and these patents remain unmaintained, there remains the possibility of
CannaKorp reinstating these patents if done so in a reasonable amount of time.
At this time, management is determining the value maintaining these patents will
provide the Company. Once management has completed their assessment, the Company
will proceed accordingly and advance in that determined direction moving
forward. Additionally, CannaKorp is actively seeking a joint venture partner
and/ or a licensor to assist in both marketing and launching the Wisp Vaporizer
and Wisp Pods in both the US and Canadian legal cannabis or hemp markets.
Results of Operations
We have not generated significant revenue to date and consequently, our
operations are subject to all of the risks inherent in the establishment of a
new business enterprise. Our analysis on the performance of the Company is as
follows:
Balance sheet - As of March 31, 2023 and December 31, 2022
Cash and Restricted Cash
On March 31, 2023, we had cash of $49,335 (excluding restricted cash of $8,498)
compared to $223,843 (excluding restricted cash of $8,490) as of December 31,
2022. The decrease is due to investment in joint venture which includes payment
of salaries, rent and other operating expenses in addition payments made for the
outstanding payables.
The change in restricted cash is due to foreign exchange conversion of balances
in Canadian Dollars into United States Dollar.
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Prepaid asset
On March 31, 2023, we had prepaid expenses of $41,748 compared to $41,714 as of
December 31, 2022. The balance represents the security deposit for the leased
land for the facility to produce medical marijuana.
Sales tax recoverable and payable
On March 31, 2023 the gross sales tax recoverable is $15,088 compared to
December 31, 2022 $nil while the gross sales tax payable as of March 31, 2023 is
$nil.
Recoverable is due to the sales tax paid by the Company on expenses incurred
during the year which are recoverable from the government while payable is due
to the sales tax received (after deducting sales tax paid on expenses incurred
by the Company) during the year which are payable from the government due to
sales conducted by the Joint Venture.
Sales tax recoverable allowance on March 31, 2023 is $nil (December 31, 2022:
$nil).
Goodwill
Goodwill represents the excess of the cost of an acquisition over the fair value
of the Company's share of the net identifiable assets of our subsidiaries at the
date of acquisition.
Fixed assets
The Company initiated construction on its 44,000 square foot cannabis
cultivation facility in September of 2017. 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). On June 4,
2021, Canary received its Sales License amendment from Health Canada.
Accounts payable and accrued liabilities
Accounts payable amounting to $2,613,318 as of March 31, 2023, primarily
represents consulting and construction services related to capital work in
progress and fixed asset additions amounting to $163,535, interest on promissory
notes and loans amounting to $1,035,483, and outstanding, accrued professional
fees amounting to $950,764.
Accounts payable amounting to $2,296,935 as of December 31, 2022, primarily
represents consulting and construction services related to fixed asset additions
amounting to $154,811, interest on promissory notes and loans amounting to
$739,130, outstanding and accrued professional fees amounting to $906,596.
Payable to related parties
As of March 31, 2023, the Company had $10,969,691 payable to related parties as
compared to $10,346,465 as of December 31, 2022. The balance primarily
represents loans provided by the Company's shareholder and a related party, CLI,
management services fee outstanding to the managers of the company, and
outstanding amount of $65,000 to be paid to a former shareholder of CannaKorp as
part of the settlement agreement.
For additional details, refer to Note 8 in the unaudited condensed consolidated
interim financial statements.
Convertible promissory notes payable
Interest amounting to $10 was accrued for the three months ended March 31, 2023
(March 31, 2022: $8).
The principal amount outstanding as of March 31, 2023 and December 31, 2022 was
$480. At both reporting dates, the entire balance was current.
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Statement of Operations - For the three months ended March 31, 2023 and 2022:
Revenue
The Company did not generate revenue during the current or the comparable
quarter ended in 2023. However, Canary generated revenues of $200,641 (though
its investment in JVCo) during the period ended March 31, 2023 (quarter ended
March 31, 2022: $1,096,321) and is represented as a share of income from joint
venture on the unaudited condensed consolidated interim statement of operations.
The revenue represents the sale of cannabis product and the revenue was
concentrated to two customers (2022: six).
Expenses
Our expenses are classified primarily into advisory and consultancy fees,
management fees, salaries and wages, legal and professional fees, and
depreciation expense. The decrease in operating expenses during the current
quarter ended compared to comparable prior quarter ended is due to significant
decrease in consulting fee and professional fees in the current period. Other
than that, the expense level has remained similar on an overall level due to the
management's continuous efforts to control and reduce expenses.
Expenses primarily represented consulting fees of $223 (2022: $11,239),
management fees of $78,324 (2022: $27,885), legal and professional charges of
$57,940 (2022: $66,944) comprising legal, review, accounting and Edgar agent
fee, depreciation expense amounting to $212,686 (2022: $227,624).
Changes in other income and expenses were due to: (1) the revaluation of the
warrant and convertible debt liabilities on each quarter-end which reduced
significantly in magnitude since a significant number of warrants expired during
the current period ended; (2) increase in the principal balance of higher
interest rate bearing loans led to increased interest expense; (3) Losses from
the joint venture, as a result, the share of income has increased significantly
and (4) and significant decrease in exchange income during the quarter due to
unfavorable exchange rate.
Other income and expenses comprised, change in fair value of derivative and
warranty liability amounting to positive $2,975 (2022: positive $17,646),
interest and bank charges amounting to $353,606 (2022: $288,688), exchange loss
$2,275 (2022: $34,034) other income of $4,275 (2022: 60,185), share of loss from
joint venture of $43,963 (2022: gain of $46,125) and debt issuance cost of
$12,403 (2022: $13,249).
Liquidity and Capital Resources
As of March 31, 2023, we had a working capital deficit of $6,996,419 (December
31, 2022: $6,017,434). We are actively seeking various financing opportunities
to meet the deficit capital requirements.
We have relied on equity financing and personal funds for our operations. The
proceeds may not be sufficient to effectively develop our business to the
fullest extent to allow us to maximize our revenue potential, in which case, we
will need additional capital.
We will need capital to allow us to invest in development. The Company
anticipates that its future operations will generate positive cash flows
starting in 2023 provided that it is successful in obtaining additional
financing in the foreseeable future.
Statement of Cash Flow - For the three months ended March 31, 2023 and 2022:
Operating activities
Operating activities used cash of $186,276 compared to cash provided of $148,043
for the corresponding period of the prior year. This is primarily due to the
payments of a number of outstanding balances in accounts payable and accrued
liabilities.
Investing activities
Investing activities used cash of $538,911 in the year 2023 compared to $138,324
cash used in the corresponding period of the prior year. The current period cash
utilization represents improvements to Canary's facility to increase its
efficiency and increase cannabis production, and investment made in the JVCo by
way of paying operating expenses such as salaries, rent, utilities, etc., which
will be reimbursed by the JVCo in the future.
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Financing activities
Financing activities provided cash of $554,550 in 2023 compared to cash provided
of $68,980 in the year 2022. Cash was provided by a loan advance from a related
party in the current and prior period.
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements that have or are reasonably likely to
have a current or future effect on our financial condition, changes in financial
condition, revenues or expenses, results of operations, liquidity, capital
expenditures or capital resources that are material to stockholders.
Critical Accounting Policies
All critical accounting policies are described in the Company's Form 10-K for
the year ended December 31, 2022.
Subsequent Events
The Company's management has evaluated subsequent events up to May 8, 2023, the
date the unaudited condensed consolidated interim financial statements were
issued, pursuant to the requirements of ASC 855 and has the following subsequent
events to report:
A settlement agreement has been reached between Canary, the Joint Venture and
Thrive, effective April 30, 2023. As per the terms of the agreement, the JV
Contracts are terminated, Thrive is no longer part of the Joint Venture and
Thrive and Aurora owe Canary certain monetary and purchase order obligations.
This means that Thrive transferred all of it's right, title and interest in the
Joint Venture to Canary.
Description of Property
We do not own any properties at this time and do not have presently any
agreements to acquire any properties.
Our principal executive office is located at 20 Hempstead Drive, Hamilton,
Ontario, Canada.
Our subsidiary, Canary, leases a 44,000 square foot facility located in Norfolk
County, Ontario to produce medical and recreational cannabis.
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