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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

(Mark One)    
     

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACMT OF 1934

For the quarterly period ended March 31, 2024

 
     
  or  
     

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _____ to _____

 

 

Commission File Number: 001-40578

 

 

 

AGRIFORCE GROWING SYSTEMS LTD.

(Exact name of registrant as specified in its charter)

 

 

British Columbia   Not Applicable

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

     

800 – 525 West 8th Avenue

Vancouver, BC, Canada

  V5Z 1C6
(Address of principal executive offices)   (Zip Code)

 

(604) 757-0952

(Registrant’s telephone number, including area code)

 

N/A

(Former name or former address and former fiscal year, if changed since last report)

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class   Trading Symbol(s)   Name of each exchange on which registered
Common Shares   AGRI   NASDAQ Capital Market
Series A Warrants, every 50 warrants exercisable for one share of Common Stock at an exercise price of $300.00 per share of Common Stock.   AGRIW   NASDAQ Capital Market

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” “non-accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

  Large accelerated filer ☐ Accelerated filer ☐
     
  Non-accelerated filer Smaller reporting company
     
    Emerging growth company

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to section 13(a) of the Exchange Act.

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No

 

As of May 15, 2024, the registrant has 26,036,516 shares of common stock, no par value per share, outstanding.

 

 

 

 
 

 

TABLE OF CONTENTS

 

PART I — FINANCIAL INFORMATION  
     
Item 1. Financial Statements 4
     
  Condensed Consolidated Balance Sheets as of March 31, 2024 (unaudited) and December 31, 2023 4
     
  Unaudited Condensed Consolidated Statements of Comprehensive Loss for the three months ended March 31, 2024 and March 31, 2023 5
     
  Unaudited Condensed Consolidated Statement of Changes in Shareholders’ Equity for the three months ended March 31, 2024 and March 31, 2023 6
     
  Unaudited Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2024 and March 31, 2023 7
     
  Notes to Unaudited Condensed Financial Statements 8
     
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 18
     
Item 3. Quantitative and Qualitative Disclosures About Market Risk 27
     
Item 4. Controls and Procedures 27
     
PART II — OTHER INFORMATION  
     
Item 1. Legal Proceedings 28
     
Item 1A. Risk Factors 28
     
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 28
     
Item 3. Defaults Upon Senior Securities 29
     
Item 4. Mine Safety Disclosures 29
     
Item 5. Other Information 29
     
Item 6. Exhibits 29

 

2
 

 

Cautionary Note Regarding Forward-Looking Information

 

This Quarterly Report on Form 10-Q contains certain “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). These forward-looking statements represent our expectations, beliefs, intentions or strategies concerning future events, including, but not limited to, any statements regarding our assumptions about financial performance; the continuation of historical trends; the sufficiency of our cash balances for future liquidity and capital resource needs; the expected impact of changes in accounting policies on our results of operations, financial condition or cash flows; anticipated problems and our plans for future operations; and the economy in general or the future of the agriculture technology industry, all of which were subject to various risks and uncertainties.

 

When used in this Quarterly Report on Form 10- Q and other reports, statements, and information we have filed with the Securities and Exchange Commission (“Commission” or “SEC”), in our press releases, in our periodic reports on Forms 10-K and 10-Q, in oral statements made by or with the approval of an executive officer, the words or phrases “believes,” “may,” “will,” “expects,” “should,” “continue,” “anticipates,” “intends,” “will likely result,” “estimates,” “projects” or similar expressions and variations thereof are intended to identify such forward-looking statements. However, any statements contained in this Quarterly Report on Form 10-Q that are not statements of historical fact may be deemed to be forward-looking statements. We caution that these statements by their nature involve risks and uncertainties, certain of which are beyond our control, and actual results may differ materially depending on a variety of important factors.

 

We do not assume the obligation to update any forward-looking statement. You should carefully evaluate such statements in light of factors described in this annual report. In this Quarterly Report on Form 10-Q, AgriFORCE Growing Systems Ltd. has identified important factors that could cause actual results to differ from expected or historic results. You should understand that it is not possible to predict or identify all such factors. Consequently, you should not consider any such list to be a complete list of all potential risks or uncertainties.

 

3
 

 

PART I — FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

AGRIFORCE GROWING SYSTEMS LTD.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Expressed in US dollars)

 

   Note  March 31, 2024 (Unaudited)   December 31, 2023 
            
ASSETS             
              
Current             
Cash     $2,863,391   $3,878,578 
Other receivable      47,166    30,859 
Prepaid expenses and other current assets  3   395,277    272,872 
Inventories  4   -    38,857 
Total current assets      3,305,834    4,221,166 
              
Non-current             
Property and equipment, net      4,604    11,801 
Intangible asset, net  5   12,265,856    12,733,885 
Lease deposit      79,691    63,708 
Construction in progress      112,046    113,566 
Investment  6   218,449    223,801 
Total assets     $15,986,480   $17,367,927 
              
LIABILITIES AND SHAREHOLDERS’ EQUITY             
              
Current             
Accounts payable and accrued liabilities  7  $1,937,831   $1,942,011 
Debentures  8   2,070,745    4,084,643 
Contract liabilities  9   29,815    15,336 
Total current liabilities      4,038,391    6,041,990 
              
Non-current             
Lease deposit      25,070    25,684 
Derivative liabilities  11   2,939,296    2,690,308 
Long term loan  10   44,280    45,365 
Total liabilities      7,047,037    8,803,347 
Commitments and contingencies  14   -      
              
Shareholders’ equity             
Common shares, no par value per share - unlimited shares authorized; 22,573,938 and 5,841,045 shares issued and outstanding at March 31, 2024 and December 31, 2023, respectively*  12   53,880,259    49,828,942 
Additional paid-in-capital      3,456,475    3,472,444 
Obligation to issue shares  12   44,214    97,094 
Accumulated deficit      (47,835,004)   (44,507,304)
Accumulated other comprehensive loss      (606,501)   (326,596)
Total shareholders’ equity      8,939,443    8,564,580 
              
Total liabilities and shareholders’ equity     $15,986,480   $17,367,927 

 

*   reflects the 1:50 reverse stock split effected on October 11, 2023.

 

The accompanying notes are an integral part of these Unaudited Condensed Consolidated Interim Financial Statements.

 

4
 

 

AGRIFORCE GROWING SYSTEMS LTD.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS (Unaudited)

(Expressed in US dollars)

 

   2024   2023 
   Three Months Ended March 31, 
   2024   2023 
         
OPERATING EXPENSES          
Wages and salaries  $388,604   $915,534 
Office and administrative   295,202    335,761 
Professional fees   170,392    287,366 
Depreciation and amortization   166,998    168,760 
Consulting   102,915    209,115 
Shareholder and regulatory   55,964    70,395 
Lease expense   44,170    76,080 
Inventory write-off   38,470    - 
Share based compensation   25,340    281,491 
Investor and public relations   25,280    267,918 
Sales and marketing   25,228    100,578 
Travel and entertainment   4,683    72,644 
Research and development   3,585    36,123 
Operating loss   (1,346,831)   (2,821,765)
           
OTHER EXPENSES          
           
Accretion of interest on debentures (Note 8)   1,364,205    1,872,470 
Loss on conversion of convertible debt (Note 8)   272,732    419,703 
Loss on debt extinguishment (Note 8)   410,433    - 
Change in fair value of derivative liabilities (Note 11)   23,769    (3,374,032)
Foreign exchange (gain) loss   (54,631)   6,620 
Other loss   4,252      
Write-off of deposit   -    12,000 
Other income   (39,891)   (38,473)
           
Net loss  $(3,327,700)  $(1,720,053)
           
Other comprehensive loss          
           
Foreign currency translation (loss) income   (279,905)   114,886
           
Comprehensive loss attributable to common shareholders  $(3,607,605)  $(1,605,167)
           
Basic and diluted net loss attributed to common shares  $(0.26)  $(3.62)
           
Weighted average number of common shares outstanding – basic and diluted*   12,650,304    474,573 

 

*   reflects the 1:50 reverse stock split effected on October 11, 2023.

 

The accompanying notes are an integral part of these Unaudited Condensed Consolidated Interim Financial Statements.

 

5
 

 

AGRIFORCE GROWING SYSTEMS LTD.

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (unaudited)

(Expressed in US dollars, except share numbers)

 

   # of Shares   Amount   capital   shares   deficit   income   equity 
   For the three months ended March 31, 2024     
   Common shares   Additional paid-in-   Obligation to issue   Accumulated   Accumulated other comprehensive   Total shareholders’ 
   # of Shares*   Amount   capital   shares   deficit   income   equity 
                             
Balance, January 1, 2024      5,841,045   $49,828,942   $3,472,444   $97,094   $(44,507,304)  $(326,596)  $8,564,580 
Shares issued for conversion of convertible debt   16,493,602    3,973,437    -    -    -    -    3,973,437 
Shares issued for compensation   112,645    52,880    -    (52,880)   -    -    - 
Shares issued for consulting services   126,646    25,000    -    -    -    -    25,000 
Share based compensation   -    -    (15,969)   -    -    -    (15,969)
Net loss   -    -    -    -    (3,327,700)   -    (3,327,700)
Foreign currency translation   -    -    -    -    -    (279,905)   (279,905)
Balance, March 31, 2024   22,573,938   $53,880,259   $3,456,475   $44,214   $(47,835,004)  $(606,501)  $8,939,443 

 

    For the three months ended March 31, 2023      
    Common shares    

Additional paid-in-

    

Obligation to issue 

    Accumulated    

Accumulated other comprehensive

    

Total shareholders’

 
    # of Shares*    Amount    

capital

    

shares

    

deficit

    

income

    

equity

 
                                    
Balance, January 1, 2023   315,916   $27,142,762   $16,816,695   $-   $(32,774,094)  $(642,710)  $10,542,653 
Shares issued for conversion of convertible debt   14,216    1,048,573    -    -    -    -    1,048,573 
Shares issued for bonus and compensation   3,118    105,512    -    -    -    -    105,512 
Shares issued for consulting services   300    27,735    -    -    -    -    27,735 
Shares issued on conversion of vested prefunded warrants   32,741    2,959,108    (2,959,108)   -    -    -    - 
Cancelled prefunded warrants   -    -    (2,085,960)   -    -    -    (2,085,960)
Share based compensation   -    -    175,979    -    -    -    175,979 
Net loss   -    -    -    -    (1,720,053)   -    (1,720,053)
Foreign currency translation   -    -         -    -    114,886    114,886 
Balance, March 31, 2023   366,291   $31,283,690   $11,947,606   $-   $(34,494,147)  $(527,824)  $8,209,325 

 

*   reflects the 1:50 reverse stock split effected on October 11, 2023.

 

The accompanying notes are an integral part of these Unaudited Condensed Consolidated Interim Financial Statements.

 

6
 

 

AGRIFORCE GROWING SYSTEMS LTD.

CONDENSED CONSOLIDATED INTERIM STATEMENTS OF CASH FLOWS (Unaudited)

(Expressed in US Dollars)

 

        2024   2023 
       

For the three months ended

March 31,

 
    Note   2024   2023 
              
CASH FLOWS FROM OPERATING ACTIVITIES               
Net loss for the period       $(3,327,700)  $(1,720,053)
Adjustments to reconcile net loss to net cash used in operating activities:               
Depreciation and amortization        166,998    168,760 
Share based compensation        (15,969)   175,979 
Shares issued for consulting services        25,000    27,735 
Shares issued for compensation and bonuses        -    105,512 
Amortization of debt issuance costs        1,238,955    1,738,825 
Change in fair value of derivative liabilities   11    23,769    (3,374,032)
Loss on debt conversion   8    272,732    419,703 
Loss on debt extinguishment   8    410,433    - 
Loss on disposal of fixed assets        4,252    - 
Write-off of deposit        -    12,000 
Changes in operating assets and liabilities:               
Other receivables        (16,307)   22,621 
Prepaid expenses and other current assets        (122,405)   65,810 
Inventories        38,470    - 
Accounts payable and accrued liabilities        (4,180)   (294,655)
Lease deposit asset        (18,382)   - 
Contract liabilities        15,000    - 
Right-of-use asset        -    43,784 
Lease liabilities        -    (39,862)
Net cash used in operating activities        (1,309,334)   (2,647,873)
                
CASH FLOWS FROM FINANCING ACTIVITIES               
Proceeds from debentures – net of discount  

8

   1,000,000    4,615,385 
Repayment of convertible debentures  

8

   (668,568)   (1,180,950)
Financing costs of debentures  

8

   (50,000)   (325,962)
Net cash provided by financing activities        281,432    3,108,473 
                
Effect of exchange rate changes on cash and cash equivalent        12,715    2,130 
Change in cash        (1,015,187)   462,730
Cash, beginning of period        3,878,578    2,269,320 
Cash, end of period       $2,863,391   $2,732,050 
                
Supplemental cash flow information:               
Cash paid during the period for interest       $32,370   $133,645 
                
Supplemental disclosure of non-cash investing and financing transactions               
Initial fair value of debenture warrants (“Fifth Tranche Warrants”)       $564,000    - 
Initial fair value of conversion feature of debentures (“Fifth Tranche Debentures”)       $359,000    - 
Shares issued for conversion of convertible debt       $

3,973,437

   $1,048,573 
Reclassified accrued construction in progress fees       $-   $39,875 

 

The accompanying notes are an integral part of these Unaudited Condensed Consolidated Interim Financial Statements.

 

7
 

 

NOTES TO THE CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

For the three months ended March 31, 2024 and 2023 (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 800 – 525 West 8th Avenue, Vancouver, British Columbia, Canada, V5Z 1C6.

 

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”). During 2023, the Company launched its UN(THINK) Awakened Flour™ flour, which is a nutritious flour that provides many health advantages over traditional flour.

 

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. The Company also has a global license to sell and distribute hydroxyl devices. During 2023, the Company completed sales and deliveries of its hydroxyl devices.

 

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, 2023 and 2022 included in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission (“SEC”) on April 1, 2024. 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, 2024 and December 31, 2023, and the results of its operations and cash flows during the three months ended March 31, 2024 and 2023. Such adjustments are of a normal and recurring nature. The results for the three months ended March 31, 2024 are not necessarily indicative of the results to be expected for the full fiscal year ending December 31, 2024, 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, 2024, the Company had a net loss of $3.3 million, $1.3 million of net cash used in operating activities, and the Company had a working capital deficit of $0.7 million.

 

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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 development stage of its business plan. 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.

 

Reverse Stock Split

 

On October 11, 2023, the Company executed a one-for-fifty reverse stock split of the Company’s common shares (the “Reverse Split”). As a result of the Reverse Split, every 50 shares of the Company’s old common shares were converted into one share of the Company’s new common shares. Fractional shares resulting from the reverse split were rounded up to the nearest whole number. The Reverse Split automatically and proportionately adjusted all issued and outstanding shares of the Company’s common shares, as well as convertible debentures, convertible features, prefunded warrants, stock options and warrants outstanding at the time of the date of the Reverse Split. The exercise price on outstanding equity based-grants was proportionately increased, while the number of shares available under the Company’s equity-based plans was proportionately reduced. Share and per share data (except par value) for the periods presented reflect the effects of the Reverse Split. References to numbers of common shares and per share data in the accompanying financial statements and notes thereto for periods ended prior to October 11, 2023 have been adjusted to reflect the Reverse Split on a retroactive basis.

 

2. SIGNIFICANT ACCOUNTING POLICIES

 

Recent Accounting Pronouncements

 

The Company is an “emerging growth company,” as defined in Section 2(a) of the Securities Act of 1933, as amended, as modified by the Jumpstart Our Business Start-ups Act of 2012, (the “JOBS Act”). Section 107 of the JOBS Act provides that an emerging growth company can take advantage of the extended transition period provided in Section 13(a) of the Securities Exchange Act of 1934, as amended, for complying with new or revised accounting standards applicable to public companies. In other words, an emerging growth company can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies.

 

In November 2023, FASB issued ASU 2023-07, “Segment Reporting (Topic 820): Improvements to Reportable Segment Disclosures.” ASU 2023-07 provides guidance to improve reportable segment disclosure requirements, primarily through enhanced disclosures about significant segment expenses. ASU 2023-07 is effective for fiscal years beginning after December 15, 2023. We are currently assessing the impact this guidance will have on our financial statements.

 

In December 2023, the FASB issued ASU 2023-09, “Income Taxes (Topic 740): Improvements to Income Tax Disclosures.” ASU 2023-09 requires companies to provide enhanced rate reconciliation disclosures, including disclosure of specific categories and additional information for reconciling items. The standard also requires companies to disaggregate income taxes paid by federal, state and foreign taxes. ASU 2023-09 is effective for fiscal years beginning after December 15, 2024. We are currently assessing the impact this guidance will have on our financial statements.

 

Other accounting standards that have been issued or proposed by FASB that do not require adoption until a future date are not expected to have a material impact on the consolidated financial statements upon adoption. The Company does not discuss recent pronouncements that are not anticipated to have an impact on or are unrelated to its financial condition, results of operations, cash flows or disclosures.

 

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Inventories

 

Inventories consist of finished goods of milled flour and related packaging material recorded at the lower of cost or net realizable value with the cost measured using the average cost method. Inventories includes all costs that relate to bringing the inventory to its present condition and location under normal operating conditions.

 

Revenue Recognition

 

Product revenue during the fourth quarter of 2023 was limited to sales from hydroxyl generators and will expand to include sales of our UN(THINK) Foods products in 2024. We recognize product revenue when we satisfy performance obligations by transferring control of the promised products or services to customers. Product revenue is recognized at a point in time when control of the promised good or service is transferred to the customer, which is at the point of shipment or delivery of the goods.

 

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.”. 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 or could require net cash settlement, then the contract shall be classified as an asset or a liability.

 

Foreign Currency Transactions

 

The financial statements of the Company and its subsidiaries whose functional currencies are the local currencies are translated into USD for consolidation as follows: assets and liabilities at the exchange rate as of the balance sheet date, shareholders’ equity at the historical rates of exchange, and income and expense amounts at the average exchange rate for the period. Translation adjustments resulting from the translation of the subsidiaries’ accounts are included in “Accumulated other comprehensive income” as equity in the consolidated balance sheets. Transactions denominated in currencies other than the applicable functional currency are converted to the functional currency at the exchange rate on the transaction date. At period end, monetary assets and liabilities are remeasured to the reporting currency using exchange rates in effect at the balance sheet date. Non-monetary assets and liabilities are remeasured at historical exchange rates. Gains and losses resulting from foreign currency transactions are included within non-operating expenses.

 

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.

 

Impairment of Long-Lived Assets

 

The Company reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. In order to determine if assets have been impaired, assets are grouped and tested at the lowest level for which identifiable independent cash flows are available (“asset group”). An impairment loss is recognized when the sum of projected undiscounted cash flows is less than the carrying value of the asset group. The measurement of the impairment loss to be recognized is based on the difference between the fair value and the carrying value of the asset group. Fair value can be determined using a market approach, income approach or cost approach. The reversal of impairment losses is prohibited.

 

Loss per Share

 

The Company presents basic and diluted loss per share data for its common shares. Basic loss per common share is calculated by dividing the profit or loss attributable to common shareholders of the Company by the weighted average number of common shares outstanding during the year. The number of common shares used in the loss per shares calculation includes all outstanding common shares plus all common shares issuable for which there are no conditions to issue other than time. Diluted loss per common share is calculated by adjusting the weighted average number of common shares outstanding to assume conversion of all potentially dilutive share equivalents, such as stock options and warrants and assumes the receipt of proceeds upon exercise of the dilutive securities to determine the number of shares assumed to be purchased at the average market price during the year.

 

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Fair Value Accounting

 

The fair value of the Company’s accounts receivable, accounts payable and other current liabilities approximate their carrying amounts due to the relatively short maturities of these items.

 

As part of the issuance of debentures on June 30, 2022, January 17, 2023, October 18, 2023 and November 30, 2023 as well as the private placement on June 20, 2023, the Company issued warrants having strike price denominated in USD. This creates an obligation to issue shares for a price that is not denominated in the Company’s functional currency and renders the warrants not indexed to the Company’s stock, and therefore, must be classified as a derivative liability and measured at fair value at the end of each reporting period. On the same basis, the Series A Warrants and the representative warrants issued as part of the IPO are also classified as a derivative liability and measured at fair value.

 

The fair value of the Company’s warrants is 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.

 

Reclassifications

 

The Company has reclassified certain share base payment expenses from Wages and salaries to Share based compensation in the 2023 consolidated statements of comprehensive loss to align with the 2024 presentation.

 

3. PREPAID EXPENSES AND OTHER CURRENT ASSETS

 

  

March 31,

2024

   December 31, 2023 
Legal retainer   10,517    8,039 
Prepaid expenses   262,033    223,624 
Inventory advances   118,697    30,654 
Others   4,030    10,555 
Prepaid expenses, other current assets  $395,277   $272,872 

 

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4. INVENTORIES

 

As at March 31, 2024, the Company had $nil (December 31, 2023 – $38,857) in finished goods.

 

5. INTANGIBLE ASSET

 

Intangible asset represents $12,265,856 (December 31, 2023 - $12,733,885) 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 grains, pulses, and root vegetables, into 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 147,600 prefunded warrants valued at $12,106,677 (the “Purchase Price”). Subject to a 9.99% stopper and SEC Rule 144 restrictions, the prefunded warrants will vest in tranches up until March 10, 2024 (all tranches have fully vested). 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 Patent and Trademark Office and the title was transferred to the Company. During the year ended December 31, 2023, the Company issued 141,175 shares in relation to this transaction. As at March 31, 2024 and December 31, 2023, there were 6,425 unconverted prefunded warrants outstanding.

 

Based on the terms above and in conformity with US GAAP, the Company accounted for purchase as an asset acquisition. The asset was available for use on January 3, 2023. The asset has a useful life of 20 years. The Company recorded $164,295 in amortization expense related to the Manna IP for the three months ended March 31, 2024 (March 31, 2023 - $163,750).

 

The estimated annual amortization expense for the next five years are as follows:

 

Period ending:  Amount 
Remaining 2024  $490,634 
2025   654,179 
2026   654,179 
2027   654,179 
2028   654,179 
Subsequent years   9,158,506 
Total  $12,265,856 

 

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6. INVESTMENT

 

On June 18, 2023, the Company signed a memorandum of understanding with Radical Clean Solutions Ltd. (“RCS”) to purchase common shares issued by RCS. The Company paid RCS $225,000 for 14% of the issued and outstanding common shares of the Company. Under the terms of the MOU, the use of proceeds is exclusively for the advance purchase of hydroxyls generating devices for commercial sales into controlled environment agriculture, food manufacturing, warehousing and transportation verticals. The Company will receive one of five board of director seats of RCS and has a right of first refusal to maintain an ownership percentage in RCS of not less than 10% of the total issued and outstanding common shares. On October 1, 2023 the Company and RCS signed a definitive agreement to convert the advance into a 14% ownership investment in RCS.

 

As at March 31, 2024, the carrying value of the investment in RCS was $218,449 (December 31, 2023 - $223,801) adjusted for foreign exchange differences of $6,551. As at March 31, 2024, the Company assessed the investment for the presence of the following impairment indications:

 

A significant deterioration in the earnings performance, credit rating, asset quality, or business prospects of the investee
   
A significant adverse change in the regulatory, economic, or technological environment of the investee
   
A significant adverse change in the general market condition of either the geographic area or the industry in which the investee operates
   
A bona fide offer to purchase, an offer by the investee to sell, or a completed auction process for the same or similar investment for an amount less than the carrying amount of that investment
   
Factors that raise significant concerns about the investee’s ability to continue as a going concern, such as negative cash flows from operations, working capital deficiencies, or noncompliance with statutory capital requirements or debt covenants.

 

None of the above qualitative factors demonstrating potential impairment were present.

 

7. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES

 

   March 31, 2024   December 31, 2023 
Accounts payable  $616,491   $578,128 
Accrued expenses   900,032    868,451 
Others   421,308    495,432 
Accounts payable and accrued liabilities  $1,937,831   $1,942,011 

 

8. DEBENTURES

 

On June 30, 2022, the Company executed the definitive agreements (the “Purchase Agreements”) with arm’s length accredited institutional investors (the “Investors”) for $14,025,000 in debentures with a 10% original issue discount for gross proceeds of $12,750,000 (“First Tranche Debentures”). The First Tranche Debentures were convertible into common shares at $111.00 per share. In addition, the Investors received 82,129 warrants at a strike price of $122.10, 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 Debentures are senior to all other indebtedness or claims in right of payment, other than indebtedness secured by purchase money security interested.

 

The Investors had 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 additional debentures totaling $5,076,923 with a 10% original issue discount for gross proceeds of $4,615,385 (the “Second Tranche Debenture”). The Second Tranche Debentures were convertible into common shares at $62.00 per share and the Investors received an additional 53,226 warrants at a strike price of $62.00, 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 $62.00. The transaction costs incurred in relation to second tranche were $325,962.

 

On June 26, 2023, the Company entered into waiver and amendment agreements (“Debenture Modification Agreements”) with the Investors to modify terms of the Purchase Agreements. The Debenture Modification Agreements provide as follows:

 

  1. The July 1, 2023 interest and principal payments will be settled with the Company’s Common Shares
  2. The Conversion Price has been reduced to the lower of $22.50 or the price of subsequent dilutive issuances under the Company’s ATM program.
  3. 100% of ATM proceeds up to $1 million USD may be kept by Company, while any dollar amount over this threshold will be distributed 33% to the Company and 67% to the Investors.
  4. The minimum tranche value for Additional Closings has been reduced from $5.0 million to $2.5 million.
  5. The Investors have each agreed to raise no objection to one or more private placements of securities by the Company with an aggregate purchase price of up to $1,000,000 at a purchase price of at least $12.50 per common share and two-year warrant (with a per share exercise price of $25.00, and no registration rights).
  6. The Company may not prepay any portion of the principal amount of this Debenture without the prior written consent of the Investor; However the Company must apply the approved or percentage of approved gross proceeds from the sale of its Common Stock from an at-the-market offering to prepay this Debenture (pro-rated among all Debentures) and shall be permitted to prepay the Debentures notwithstanding any contrary provision of this Debenture or the Purchase Agreement.

 

On August 9, 2023, the Company entered into another waiver and amendment agreement (“Agreement”) with the Investors with respect to a certain Senior Convertible Debenture (the “Debentures”) due July 17, 2025 issued by the Company to that Investor. The Agreement provides as follows:

 

  1. The Company wishes to make Monthly Redemptions in shares of the Company’s Common Stock in lieu of cash payments, until further written notice from the Company to the Purchaser.
  2. The Purchaser is willing to accept such shares as payment of the Monthly Redemption Amount provided that the Equity Conditions are met; and will consider on a case-by-case basis accepting payments in shares of Common Stock if the Equity Conditions are not met, at its sole discretion. The Company may inquire of the Purchaser at least five (5) Trading Days prior to a Monthly Redemption Date whether the Purchaser is willing to accept Shares without the Equity Conditions having been met. An email reply from the Purchaser shall be sufficient evidence of such monthly waiver.
  3. The Purchaser will accept the August 1, 2023 Monthly Redemption Amount in shares of Common Stock valued at the August 1 Repayment Price for such date.

 

On October 18, 2023, the Investors purchased additional debentures totaling $2,750,000 with a 10% original issue discount for gross proceeds of $2,500,000 (the “Third Tranche Debenture”). The Third Tranche Debentures were convertible into common shares at $2.62 per share and the Investors received an additional 620,230 warrants at a strike price of $2.62, which expire on April 18, 2027 (the “Third Tranche Warrants”). The issuance of the additional tranche triggered the down round provision, adjusting the exercise prices of the First and Second Tranche Debentures and the First and Second Tranche Warrants to $2.62. The transaction costs incurred in relation to third tranche were $31,915.

 

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On November 30, 2023, the Investors purchased additional debentures totaling $2,750,000 with a 10% original issue discount for gross proceeds of $2,500,000 (the “Fourth Tranche Debenture”). The Fourth Tranche Debentures were convertible into common shares at $0.90 per share and the Investors received an additional 1,986,112 warrants at a strike price of $0.90, which expire on May 30, 2027 (the “Fourth Tranche Warrants”). The issuance of the additional tranche triggered the down round provision, adjusting the exercise prices of the First, Second and Third Tranche Debentures and the First, Second and Third Tranche Warrants to $0.90. The transaction costs incurred in relation to fourth tranche were $30,040.

 

On February 21, 2024, the Investors purchased additional debentures totaling $1,100,000 with a 10% original issue discount for gross proceeds of $1,000,000 (the “Fifth Tranche Debenture”). The Fifth Tranche Debentures were convertible into common shares at $0.214 per share and the Investors received an additional 3,341,122 warrants at a strike price of $0.2354, which expire on August 21, 2027 (the “Fifth Tranche Warrants”). The issuance of the additional tranche triggered the down round provision, adjusting the exercise prices of the First, Second, Third and Fourth Tranche Debentures and the First, Second, Third and Fourth Tranche Warrants to $0.214. The transaction costs incurred in relation to fifth tranche were $50,000.

 

The First, Second, Third, Fourth and Fifth 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, July 1, 2023 for the Second Tranche Debentures, January 1, 2024 for the Third Tranche Debentures, May 1, 2024 for the Fourth Tranche Debentures and August 1, 2024 for the Fifth Tranche Debentures. The Debentures may be extended by nine months at the election of the Company by paying a sum equal to nine months’ interest on the principal amount outstanding at the end of the 18th month, at the rate of 8% per annum.

 

The following table summarizes our outstanding debentures as of the dates indicated:

 

    Maturity   Cash
Interest Rate
    March 31,
2024
    December 31,
2023
 
Principal (First Tranche Debentures)   12/31/2024     5.00% - 8.00 %   $ 731,842     $ 3,029,676  
Principal (Second Tranche Debentures)   07/17/2025     5.00% - 8.00 %     1,082,770       2,940,461  
Principal (Third Tranche Debentures)   04/18/2026     5.00% - 8.00 %     2,276,010       2,750,000  
Principal (Fourth Tranche Debentures)   06/01/2026     5.00% - 8.00 %     2,750,000       2,750,000  
Principal (Fifth Tranche Debentures)   08/20/2026     5.00% - 8.00 %     1,100,000       -  
Debt issuance costs and discounts (Note 8 & 11)                 (5,869,877 )     (7,385,494 )
Total Debentures (current)               $ 2,070,745     $ 4,084,643  

 

During the three months ended March 31, 2024, the Investors converted $1,760,290 (March 31, 2023 - $881,400) of principal and $92,880 (March 31, 2023 - $nil) of interest into shares of the Company resulting in a $272,732 (March 31, 2023 - $419,703) loss on the conversion of convertible debentures. During the three months ended March 31, 2024, the Company incurred $1,364,205 (March 31, 2023 - $1,872,470) in accretion interest and made cash repayments of $668,568 (March 31, 2023 - $1,180,950).

 

During the three months ended March 31, 2024, the Investors converted $2,200,657 of the First and Second Tranche Debentures into 8,758,422 shares of the Company. The conversions were determined to be an extinguishment of the existing debt and issuance of new debt. As a result, the Company recorded a loss on debt extinguishment in the amount of $410,433.

 

9. CONTRACT BALANCES

 

As at March 31, 2024, contract balances consisted of $29,815 of advance payments for product sales not yet delivered, which are recognized as a contract liability (December 31, 2023 - $15,336).

 

10. 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 $29,520 (CAD$40,000) (December 31, 2023 - $30,243(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 $14,760 (CAD$20,000) (December 31, 2022 - 15,122 (CAD$20,000)). The expansion loan is subject to the original terms and conditions of the Program.

 

The loan was interest free for an initial term that ended on January 18, 2024. Any outstanding loan after initial term carries an interest rate of 5% per annum, payable monthly during the extended term i.e. January 19, 2024 to December 31, 2025. The loan is due December 31, 2026.

 

The balance as at March 31, 2024 was $44,280 (CAD $60,000) (December 31, 2023 was $45,365 (CAD $60,000)).

 

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11. DERIVATIVE LIABILITIES

 

Warrant Liabilities

 

As at March 31, 2024, the Warrant Liabilities represent aggregate fair value of publicly traded 61,765 Series A warrants (“IPO Warrants”), 2,721 representative’s warrants (“Rep Warrants”), 82,129 First Tranche Warrants, 53,226 Second Tranche Warrants, 620,230 Third Tranche Warrants, 1,986,112 Fourth Tranche Warrants and 20,000 warrants issued in a private placement (“Private Placement Warrants”).

 

The fair value of the IPO Warrants, Rep Warrants and Private Placement Warrants amounted to $28,296 (December 31, 2023 - $11,308). As at March 31, 2024 the Company utilized the Black-Scholes option-pricing model for the IPO Warrants, Rep Warrants and Private Placement Warrants and used the following assumptions: stock price $0.18 (December 31, 2023 - $0.47), dividend yield – nil (December 31, 2023 – nil), expected volatility 105% to 155% (December 31, 2023 – 105% to 117%), risk free rate of return 3.91% to 4.17% (December 31, 2023 – 3.67% to 3.88%), and expected term of 1.25 to 3 years (December 31, 2023 – expected term of 1.50 to 3 years).

 

As at March 31, 2024 the First Tranche Warrants had a fair value that amounted to $9,000 (December 31, 2023 - $24,000). As at March 31, 2024 the Company utilized the Monte Carlo option-pricing model to value the First Tranche Warrants using the following assumptions: stock price $0.18 (December 31, 2023 - $0.47), dividend yield – nil (December 31, 2023 – nil), expected volatility 100.0% (December 31, 2023 – 100.0%), risk free rate of return 4.70% (December 31, 2023 – 4.23%), and expected term of 1.75 years (December 31, 2023 – expected term of 2 years).

 

As at March 31, 2024 the Second Tranche Warrants had a fair value that amounted to $6,000 (December 31, 2023 - $15,000). As at March 31, 2024 the Company utilized the Monte Carlo option-pricing model to value the Second Tranche Warrants using the following assumptions: stock price $0.18 (December 31, 2023 - $0.47), dividend yield – nil (December 31, 2023 – nil), expected volatility 97.5% (December 31, 2023 – 105.0%), risk free rate of return 4.50% (December 31, 2023 – 4.12%), and expected term of 2.30 years (December 31, 2023 – expected term of 2.55 years).

 

As at March 31, 2024 the Third Tranche Warrants had a fair value that amounted to $76,000 (December 31, 2023 - $192,000). As at March 31, 2024 the Company utilized the Monte Carlo option-pricing model to value the Third Tranche Warrants using the following assumptions: stock price $0.18 (December 31, 2023 - $0.47), dividend yield – nil (December 31, 2023 – nil), expected volatility 95.0% ((December 31, 2023 – 107.5%), risk free rate of return 4.40% ((December 31, 2023 – 3.98%), and expected term of 3.05 years ((December 31, 2023 – expected term of 3.30 years).

 

As at March 31, 2024 the Fourth Tranche Warrants had a fair value that amounted to $272,000 (December 31, 2023 - $724,000). As at March 31, 2024 the Company utilized the Monte Carlo option-pricing model to value the Fourth Tranche Warrants using the following assumptions: stock price $0.18 (December 31, 2023 - $0.47), dividend yield – nil (December 31, 2023 – nil), expected volatility 95.0% (December 31, 2023 – 107.5%), risk free rate of return 4.38% (December 31, 2023 – 3.97%), and expected term of 3.17 years (December 31, 2023 – expected term of 3.42 years).

 

As at March 31, 2024 the Fifth Tranche Warrants had a fair value that amounted to $396,000 (February 21, 2024 - $564,000). As at March 31, 2024 the Company utilized the Monte Carlo option-pricing model to value the Fifth Tranche Warrants using the following assumptions: stock price $0.18 (February 21, 2024 - $0.21), dividend yield – nil (February 21, 2024 – nil), expected volatility 95.0% (February 21, 2024 – 105.0%), risk free rate of return 4.36% (February 21, 2024 – 4.40%), and expected term of 3.39 years (February 21, 2024 – expected term of 3.50 years).

 

Debenture Convertible Feature

 

As at March 31, 2024 the fair value of the First Tranche Debentures’ convertible feature amounted to $137,000 (December 31, 2023 – $164,000). The Company utilized the Monte Carlo option-pricing model for valuing the convertible feature using the following assumptions: stock price $0.18 (December 31, 2023 - $0.47), dividend yield – nil (December 31, 2023 – nil), expected volatility 100.0% (December 31, 2023 – 100.0%), risk free rate of return 5.21% (December 31, 2023 – 5.03%), discount rate 18.25% (December 31, 2023 – 17.50%), and expected term of 0.75 year (December 31, 2023 – 1 year).

 

As at March 31, 2024 the fair value of the Second Tranche Debentures’ convertible feature amounted to $252,000 (December 31, 2023 – $429,000). The Company utilized the Monte Carlo option-pricing model for valuing the convertible feature using the following assumptions: stock price $0.18 (December 31, 2023 – $0.47), dividend yield – nil December 31, 2023 – nil), expected volatility 97.5% (December 31, 2023 – 105.0%), risk free rate of return 4.81% (December 31, 2023 – 4.51%), discount rate 18.00% (December 31, 2023 – 17.50%), and expected term of 1.30 years (December 31, 2023 – 1.55 years).

 

As at March 31, 2024 the fair value of the Third Tranche Debentures’ convertible feature amounted to $618,000 (December 31, 2023 – $491,000). The Company utilized the Monte Carlo option-pricing model for valuing the convertible feature using the following assumptions: stock price $0.18 (December 31, 2023 – $0.47), dividend yield – nil (December 31, 2023 – nil), expected volatility 95.0% (December 31, 2023 – 107.5%), risk free rate of return 4.59% (December 31, 2023 – 4.12%), discount rate 18.00% (December 31, 2023 – 17.25%), and expected term of 2.05 years (December 31, 2023 – 2.30 years).

 

15
 

 

As at March 31, 2024 the fair value of the Fourth Tranche Debentures’ convertible feature amounted to $786,000 (December 31, 2023 – $640,000). The Company utilized the Monte Carlo option-pricing model for valuing the convertible feature using the following assumptions: stock price $0.18 (December 31, 2023 - $0.47), dividend yield – nil (December 31, 2023 – nil), expected volatility 95.0% (December 31, 2023 – 107.5%), risk free rate of return 4.50% (December 31, 2023 – 4.12%), discount rate 17.75% (December 31, 2023 – 17.25%), and expected term of 2.17 years (December 31, 2023 – 2.42 years).

 

As at March 31, 2024 the fair value of the Fifth Tranche Debentures’ convertible feature amounted to $359,000 (February 21, 2024 - $359,000). The Company utilized the Monte Carlo option-pricing model for valuing the convertible feature using the following assumptions: stock price $0.18 (February 21, 2024 – $0.21), dividend yield – nil (February 21, 2024 – nil), expected volatility 95.0% (February 21, 2024 – 105.0%), risk free rate of return 4.50% (February 21, 2024 – 4.54%), discount rate 17.75% (February 21, 2024 – 16.00%), and expected term of 2.39 years (February 21, 2024 – 2.50 years).

 

The IPO Warrants, Rep Warrants, and Private Placement Warrants (the “Equity Warrants”) are classified as Level 1 financial instruments, while the Debenture Warrants and Debenture Convertible Feature are classified as Level 3 financial instruments.

 

Changes in the fair value of the Company’s financial instruments for the nine months ended March 31, 2024 and 2023 were as follows:

  

   Level 1   Level 3   Level 3     
  

IPO and Rep

Warrants

  

Debenture

Warrants

  

Debenture

Convertible

Feature

   Total 
Balance at January 1, 2024  $11,308   $955,000   $1,724,000   $2,690,308 
Additions   -    564,000    359,000    923,000 
Conversions   -    -    (630,106)   (630,106)
Change in fair value   17,273    (736,181)   742,677    23,769 
Effect of exchange rate changes   (285)   (23,819)   (43,571)   (67,675)
Balance at March 31, 2024  $28,296   $759,000   $2,152,000   $2,939,296 

 

   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 

 

Due to the expiry date of the warrants and conversion feature being greater than one year, the liabilities have been classified as non-current.

 

12. SHARE CAPITAL

 

On March 31, 2024, the Company owed $44,214 worth of stock-based compensation to Company officers. The balance issuable was classified as an Obligation to issue shares.

 

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):

  

  

March 31,

2024

  

March 31,

2023

 
Warrants   6,218,226    250,759 
Options   61,712    27,653 
Convertible debentures   39,475,584    227,171 
Total anti-dilutive weighted average shares   45,755,522    505,583 

 

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13. LEASES

 

The components of lease expenses were as follows:

 

  

Three months ended

March 31, 2024

  

Three months ended

March 31, 2023

 
Operating lease cost  $-   $72,643 
Short-term lease cost   44,170    3,437 
Total lease expenses  $44,170   $76,080 

 

As at March 31, 2024, the Company terminated its short-term office lease.

 

14. COMMITMENTS AND CONTINGENCIES

 

Debenture principal repayments

 

The following table summarizes the future principal payments related to our outstanding debt as of March 31, 2024:

 

      
Remaining 2024  $3,497,073 
2025   3,541,549 
2026   902,000 
Long Term Debt  $7,940,622 

 

Contingencies

 

Litigation

 

On August 11, 2023, AgriFORCE’s former CEO, Ingo Wilhelm Mueller filed a Notice of Civil Claim in which he alleges that AgriFORCE wrongfully terminated his employment without notice, in breach of the parties’ underlying employment agreement. Mr. Mueller alleges to have suffered damages including, among other things, a loss of base salary of $473,367 CAD per annum and damages from not receiving common stock of AgriFORCE equivalent in value to $468,313 CAD. AgriFORCE’s position is that Mr. Mueller was terminated for ‘just cause’ because he breached his fiduciary duty to act in AgriFORCE’s best interest by, among other things, submitting a sizeable bid for the acquisition of a company without first obtaining Board approval. In doing so, Mr. Mueller misrepresented AgriFORCE’s financial standing and forged, or instructed others to forge, a document by affixing the electronic signature of AgriFORCE’s CFO.

 

As at December 31, 2023, the parties were in the discovery stage of litigation. AgriFORCE has produced relevant documents to Mr. Mueller, and is awaiting Mr. Mueller’s production of relevant documents. The parties are also in the process of scheduling examinations for discovery. Management is instructing counsel to advance the matter given the relative strength of AgriFORCE’s case.

 

The likelihood of an unfavorable outcome is relatively low given the facts supporting AgriFORCE’s ‘for cause’ termination of Mr. Mueller as well as the significant expense that Mr. Mueller would have to incur to advance this matter to trial.

 

On September 31, 2023, Stronghold filed a Complaint with the Superior Court of California for Breach of Contract; Breach of the Covenant of Good Faith and Fair Dealing; and Common Count: Goods and Services Rendered in relation to the purchase and sale agreement for the Coachella property. Stronghold alleges that AgriFORCE breached the PSA by failing to deposit certain stocks certificates into Escrow, failing to pay amounts owed for its costs incurred in connection with the Sellers Work, and for terminating the PSA despite Stronghold’s performance of the Sellers Work. Stronghold is claiming $451,684 plus interest in damages based on invoices it provided. AgriFORCE will dispute, among other things, the amount and invoices, estimating approximately $230,000 as Stronghold’s true expenses that may be claimed. The Company filed their answer on February 26, 2024. The trial date has not been set for this case.

 

On March 27, 2024, BV Peeters Advocaten-Avocats (“Peeters”) summoned the Company to appear on May 31, 2024 at the First Chamber of the Dutch-Speaking Division of the Business Court in Brussels. Peeters is seeking payment for €467,249 of unpaid bills for legal services plus penalties and interest. The Company believes that Peeters performed actions that were not in the Company’s best interest. The Company does not intend to pay the outstanding legal bills and intends to vigorously defend its position in court.

 

15. SUBSEQUENT EVENTS

 

The Company evaluated subsequent events through May 15, 2024, the date on which these interim financial statements were 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, 2024, 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.

 

From April 1, 2024 through May 15, 2024, the Company issued 3,440,489 common shares upon conversion of convertible debt and conversion of convertible debt in lieu of repayment in cash (principal and interest of $454,312).

 

From April 1, 2024 through May 15, 2024, the Company issued 15,664 common shares to consultants for services rendered.

 

From April 1, 2024 through May 15, 2024, the Company issued 6,425 common shares upon conversion of prefunded warrants.

 

On April 11, 2024, an Investor purchased an additional tranche of $550,000. The convertible debt and warrants were issued with an exercise price of $0.163 and $0.18, respectively. The issuance of the additional tranche triggered the down round provision, adjusting the conversion prices of the First, Second, Third, Fourth and Fifth Tranche Debentures and the exercise prices of First, Second, Third, Fourth and Fifth Tranche Warrants to $0.163.

 

17
 

 

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

 

Overview

 

AgriFORCE™ 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 800 – 525 West 8th Avenue, Vancouver, BC, Canada, V5Z 1C6.

 

Our Business

 

AgriFORCE™ is an “Ag-Tech” company with a primary focus to developing and utilizing our intellectual property assets for improvements dedicated to the agricultural industry. We believe that this goal is best achieved by using our proprietary IP for solutions in the agricultural industry as well as seeking development of new IP to both enhance the technology which we already retain in house as well as development of new technologies which can increase our footprint in the Ag-Tech space with expansion into other areas which have ESG ramifications.

 

Our AgriFORCE™ Brands division is focused on the development and commercialization of plant-based ingredients and products that deliver more nutritious food. We will market and commercialize ingredient supplies, like our Awakened Flour™ and Awakened Grains ™.

 

The AgriFORCE™ Solutions division is dedicated to transforming modern agriculture through our controlled environment agriculture (“CEA”) equipment, including our FORCEGH+™” solution. We are continuing to modify our business plan to accommodate artificial intelligence and blockchain in the development and implementation of FinTech systems to commercial farmers, and advancing on the commercialization of our Hydroxyl clean room systems to greatly reduce the spread of pathogens, mold and disease at processing facilities worldwide.

 

AgriFORCE™ Brands

 

UN(THINK)™ Foods

 

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 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 year ended December 31, 2023, the Company has achieved milestones towards the commercialization of our UN(THINK) Awakened Flour™ flour, the Company’s first line of products to utilize the 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 to establish additional production hubs – at no additional CAPEX - 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 starting to approach US and Canadian Bakeries and Baked Goods Companies who are now testing our new flours for integration into their manufacturing operations and innovation pipeline. Online sales logistics and advertising materials were developed during the period to support the establishment of the direct-to-consumer sales channel which will be started once the Business to Business channel sales will ramp up. Lastly, the Company has developed an extensive number of recipes for the application of Awakened Flour™ product line for both customers and consumers.

 

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). Apart from dietary fiber, whole flour is only marginally better in terms of these macronutrients (5).

 

(4) Based on protein, fiber, and starch content results from a nationally certified independent laboratory, as compared to standard all-purpose flour.

(5) https://www.soupersage.com/compare-nutrition/flour-vs-whole-wheat-flour

 

18
 

 

In contrast, foods high in fiber help to satiate hunger, suppress cravings and raise metabolism(6). They also assist in weight loss, lower cholesterol, and may reduce the risk of cancer, heart disease and diabetes(7).

 

Advantages of the UN(THINK)™ Foods IP

 

Our 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 flour(8).

 

 

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.

 

(6) https://my.clevelandclinic.org/health/articles/14400-improving-your-health-with-fiber

(7) https://www.health.harvard.edu/blog/fiber-full-eating-for-better-health-and-lower-cholesterol-2019062416819

(8) Based on protein, fiber, and starch content results from a nationally certified independent laboratory, as compared to standard all-purpose flour.

 

19
 

 

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 and granulated
  - High protein, high fiber, low carb pet foods and snacks

 

We intend to commercialize these products behind three (2) main sales channels:

 

  - Branded ingredients (B2B)
  - Consumer branded products (B2B and B2C)

 

Successful commercialization of premium specialized products from the UN(THINK)™ foods IP and the capture of a small percentage share of the category is a notable business opportunity for AgriFORCE™.

 

   Breads & Bakery (2)   Whole Wheat Flours (1)  

Pulse

Flours (3)

   Dairy Alternatives  

Cereal

Bars (4)

   Total 
Global market size of target categories  $235B  $72B  $19B  $23B  $23B     
Potential market share   0.1%   0.2%   1%   0.01%   0.01%     
AgriFORCE™ potential net revenues  $200M  $140M  $190M  $20M  $20M  $560M

 

Sources: Future Market Insights Reports, June 2022 (2), October 2022 (1), January 2023 (3) and October 2022 (4)

 

20
 

 

To produce the UN(THINK)™ power wheat flour, we are using our patented process to develop a new germinated whole grain wheat flour, which we have qualified and made available for sale through November 2023 in Canada and the USA, under the UN(THINK)™ Awakened Flour™ brand. This new Awakened Grains™ flour – available in 3 types: hard white wheat and hard red wheat for breads and soft white wheat for bakery and pastries – will provide enhanced nutrition with over five times more fiber, up to two times more protein and 23% less net carbs versus conventional all-purpose flour (source: Eurofins Food Chemistry Madison, Inc, December 2022).

 

GROWTH PLAN

 

AgriFORCE™’s organic growth plan is to actively establish and deploy the commercialization of products in four distinct phases:

 

PHASE 1 (COMPLETED):

 

  Product and process testing and validation. (completed)
  Filing of US and international patents. (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 Flour™ lightly germinated flour range of products in business to business (“B2B”) channel. (completed)
  Develop range of finished products behind the wheat grain flours, qualify patented process for pulse/legume, and rice-based protein flours
  Drive business as ingredients for bakery, snack and plant-based protein products manufacturers.
  Develop relationships with universities, nonprofit organizations and civic organizations focused on health in underserved communities to research impact of patented flour on nutrition.

 

PHASE 3:

 

  Develop range of finished products behind the wheat grain flours, qualify patented process for pulse/legume, and rice-based protein flours.
  Drive business as ingredients for bakery, snack and plant-based protein products manufacturers.
  Develop manufacturing base through partnerships and licensing.

 

PHASE 4:

 

  Expand product range in US/Canada.
  Expand business to other geographies internationally.

 

AgriFORCE Solutions

 

Understanding Our Approach –Bringing Cutting Edge Technology to Enhance and Modernize Agriculture

 

Traditional farming includes three fundamental approaches: outdoor, greenhouse and indoor. We are taking modern technologies such as artificial intelligence (“AI”) and blockchain–based advances to bring what is traditionally a low technology industry into the 21st century. This approach means that we are able to reach into areas not readily available to agricultural businesses in the past, such as advanced Fintech to enhance financing capabilities for these businesses and more readily provide advanced intelligence for farmers. These technologies can also be applied to worldwide sourcing and matching food producers to consumers in an efficient manner.

 

Our intellectual property combines a patented uniquely engineered facility design and automated growing system to solve excessive water loss and high energy consumption, two problems plaguing nearly all controlled environment agriculture systems. FORCEGH+ delivers a patented clean, sealed, self-contained micro-environment that maximizes natural sunlight and offers supplemental LED lighting. It limits human intervention and is designed to provide superior quality control through AI optical technology. It was also created to drastically reduce environmental impact, substantially decrease utility demands, conserving water, while delivering customers daily harvests and higher crop yields.

 

21
 

 

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. 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.

 

The Company intends to continue development and license its technology to existing farmers 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 farmers to effectively grow crops in a sealed controlled environment (“FORCEGH+™”). The Company has designed FORCEGH+™ facilities to produce crops 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

 

The Company will launch a full line up of Hydroxyl Devices and start commercializing the Hydroxyl Devises into the US market of CEA and Food Manufacturing. The Company will identify and establish exclusive distribution agreement for the EMEA region as well Expand Distribution Network into Latin America and Asia. The Company will also advance on the commercialization of our Hydroxyl clean room systems to greatly reduce the spread of pathogens, mold and disease at processing facilities worldwide.

 

The Company is exploring opportunities to utilize its patented FORCEGH+™ structure and its related technologies in joint ventures and licensing. The Company is also studying the utilization of FORCEGH+ technologies in arctic, tropical and desert environments. The Company intends to continue development of and license of its technology to existing farmers 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 farmers to effectively grow crops in a sealed controlled environment (“FORCEGH+™”).

 

The Company also looks to expand its efforts into development of blockchain solutions and the implementation of these solutions into FinTech systems to allow quicker and less costly transactions between commercial farmers.

 

The Company is exploring opportunities to utilize its patented FORCEGH+™ structure and its related technologies in joint ventures and licensing. The Company is also studying the utilization of FORCEGH+ technologies in arctic, tropical and desert environments and artificial intelligence and blockchain in the development and implementation of FinTech systems to commercial farmers, and advancing on the commercialization of our Hydroxyl clean room systems to greatly reduce the spread of pathogens, mold and disease at processing facilities worldwide.

 

The AgriFORCE Clean Solutions

 

The Company’s Solutions division is charged with the commercialization of our FORCEGH+ technology and our RCS clean room systems. The Company has also begun to advance its initiative to integrate blockchain in the development and implementation of FinTech systems for commercial farmers.

 

22
 

 

We have a worldwide license to commercialize the proprietary hydroxyl generating devices of Radical Clean Solutions, Inc. (“RCS”) for the CEA and food manufacturing industries. The RCS technology is a product line consisting of patent-pending “smart hydroxyl generation systems” focused on numerous industry verticals that is proven to eliminate 99.99+% of all major pathogens, virus, mold, volatile organic compounds (VOCs) and allergy triggers(8).

 

On October 1, 2023, the Company signed a definitive agreement to purchase a 14% ownership stake in RCS.

 

The Company generated its first revenue from the sale of RCS devices in late 2023. During 2023, the Company signed an exclusive distribution agreement with a leading distributor of air conditioning and heating solutions in Mexico for the representation and sale of the AgriFORCE/RCS hydroxyl generating devices for greenhouses and food manufacturing facilities for the territory of Mexico. The first products were delivered in October 2023 pursuant to purchase orders for the products.

 

The Company will continue to expand sales into Mexico through its distributor, Commercializadora DESICO. Based on its sale into the poultry industry in Mexico, the Company is expanding its distribution of its Clean System solutions into other Latin American markets and the United States.

 

(8) BCI Labs, Gainesville Florida, February 2022; and various institutional studies.

 

BUSINESS PLAN

 

2024

 

  Continue introduction into the Mexico market with our exclusive distributor
  Identify and set up exclusive distribution agreements for the EMEA region
  Start commercializing the Hydroxyl Devices into the US market of CEA and Food Manufacturing
  Launch full line up of Hydroxyl Devices : in-Duct HVAC unit, Portable Industrial QuadPro Unit, Small Rooms Wall-Mount unit

 

2025

 

  Expand Distribution Network into Latin America and Asia.

 

Merger and Acquisition (“M&A”)

 

The Company plans to evaluate accretive M&A opportunities of an appropriate scale as it progresses with its ongoing business plans surrounding its already owned IP and improvements thereto. Any M&A propositions must be of a size and scale which works to complement the Company’s ongoing business in terms of allocation of resources.

 

The Company intends to focus any M& A activity to targets which are focused in the Ag-Tech space with emphasis on businesses which can also increase our ESG footprint. This refocused M&A strategy will ensure that proper personnel and economic resources are allocated to the Company’s ongoing businesses, while refocusing efforts on synergistic opportunities which work to enhance the Company’s existing assets.

 

As a result of this refocus of the M&A strategy, the following formerly considered acquisition opportunities are no longer being considered by the Company:

 

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 Ag-Tech consultancy firm, for €23.5 million through a combination of cash and stock.
  On May 25, 2023, the parties mutually terminated the share purchase agreement after extensive due diligence, an evaluation of the historical and projected financial information, potential for impairment risk as well as current market conditions.

 

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”).
  The Deroose LOI was subject to completion of standard due diligence and entry into a definitive purchase agreement.
  The Company is no longer pursuing this acquisition opportunity.

 

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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.
  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.
  On October 12, 2023, the Company was served a complaint filed in the Superior Court of California from Stronghold for breach of contract in relation to the PSA. The Company denies any liability, other than what is already recorded in the financial statements and will vigorously defend the claims made against the Company.

 

Berry People LLC Binding Letter of Intent

 

  On January 24, 2023 the Company announced it has entered a binding letter of intent (“BP LOI”) to acquire Berry People LLC, (“Berry People”).
  The Company is no longer pursuing this acquisition opportunity.

 

Recent Developments

 

Management Restructuring

 

On January 25, 2024, Troy McClellan, President of AgriFORCE Solutions, submitted a letter of resignation to the Company. On January 25, 2024, the Company accepted his resignation and deemed it effective immediately pursuant to Section 7.3 of his employment agreement with the Company which permits waiver by the Company of Mr. McClellan’s notice period (through March 31, 2024) and corresponding acceleration of the resignation date.

 

On February 10, 2024, Richard Wong resumed his original role as Chief Financial Officer in order to focus on finance and accounting matters for the Company. Effective as of the same day, Jolie Kahn was appointed Executive Turnaround Consultant to support the Company’s operational growth and expansion efforts. Jolie Kahn shall report to David Welch, Chairman of the Board of Directors of the Company, who shall act as Executive Chairman until such time as a permanent Chief Executive Officer is appointed.

 

On February 19, 2024, Margaret Honey resigned as a Director of (the “Company”) to pursue other interests. The resignation is not the result of any disagreement with the Company.

 

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.

 

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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, 2024 AND 2023

 

Results of Operations

 

The following discussion should be read in conjunction with the condensed unaudited financial statements for the interim periods ended March 31, 2024 and 2023 included in this report.

 

Revenues

 

The Company sells its products directly to customers and indirectly to customers through sales brokers.

 

During the three months ended March 31, 2024 and 2023, the Company had no revenue.

  

Operating Expenses

 

Operating expenses primarily consist of wages and salaries, professional fees, consulting, office and administration, investor and public relations, research and development, and share-based compensation. Operating expenses decreased during the three months ended March 31, 2024 as compared to March 31, 2023 by $1,474,934 or 52% primarily due to the following:

 

Professional fees and consulting decreased by $116,974 and $106,200, respectively due to a significant decrease in M&A spending during the three months ended March 31, 2024 as a result of the Company focusing on organic growth of currently active ventures.
Research and development decreased by $32,538 due to limited research services procured during 2024 as compared to expenditures for UN(THINK) product development during the three months ended March 31, 2023.
Investor and public relations expenses decreased by $242,638 due to more investor and public relations advisory services utilized in 2023 for Company campaigns and communication.
Wages and salaries decreased by $526,930 due to a reduction in staff head count (number of employees reduced from 15 during the three months ended March 31, 2023 to 7 during the three months ended March, 2024).
Office and administrative decreased by $40,559 due to overall cost cutting initiatives for the three months ended March 31, 2024.
Travel and entertainment decreased by $67,961 due to a reduction in travel for foreign business development.
Sales and marketing decreased by $75,350 due to significant reductions in public relations agency work and social media contracted fees from cost cutting initiatives.
Share based compensation decreased $256,151 due to a significant number of option forfeitures from lower staff head count.  
Lease expense decreased $31,910 due to the termination of the Company’s long term office lease in 2023.

 

This was partially offset by the following:

 

Inventory write-off increased by $38,470 for inventory that was disposed of (due to flour passing its best before date) during the three months ended March 31, 2024, $nil during the three months ended March 31, 2023.

 

Other Expenses / (Income)

 

Other expense for the three months ended March 31, 2024 increased due to the following:

 

Change in fair value of derivative liabilities decreased by $3,397,801 due to the Company’s stock price stabilizing during the period between December 31, 2023 and March 31, 2024, resulting in the smaller revaluation adjustment as at March 31, 2024.
Increase in loss on debt extinguishment increased by $410,433 as a result of unscheduled conversions of debentures into the Company’s common shares which triggered an extinguishments of debt due to the change of the fair value of the debt after the conversions. There were no debt extinguishments during the three months ended March 31, 2023.

 

This was partially offset by the following:

 

Accretion interest on debentures decreased by $508,265 due to a significant amount of debentures repaid in cash and shares during 2023, resulting in less interest accreted during March 31, 2024.
Loss on conversion of convertible debt decreased by $146,971 due to shares issued upon conversion were issued at a smaller premium above the exercise price compared to shares issued during March 31, 2023.
Foreign exchange gain increased by $61,251 (March 31, 2023 – foreign exchange loss of $6,620) due to increasing USD to CAD rate throughout the three months ended March 31, 2024.
All other items aggregate to $9,166.

 

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 $3,327,700 for the three months ended March 31, 2024, and a net loss of $1,720,053 for the three months ended March 31, 2023. We have recorded an accumulated deficit of $47,835,004 as of March 31, 2024 and $44,507,304 as of December 31, 2023. Net cash used in operating activities for the three months ended March 31, 2024 and March 31, 2023 was $1,309,334 and $2,647,873 respectively.

 

The Company held $2,863,391 in cash at March 31, 2024 as compared to $3,878,578 at December 31, 2023.

 

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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, 2024 was $1,309,334 compared to $2,647,873 for the three months ended March 31, 2023. The decrease of $1,338,539 was primarily due to the following:

 

Decrease in net loss of $1,607,647 due to operating expenses noted above.
Decrease in cash flow adjustments of $300,195 for share based compensation due to forfeiture of stock options by departed employees.
Decrease of $499,870 in amortization of debt issuance costs for less interest recorded on debentures as the carrying value of the debentures were lower as at March 31, 2024 compared to March 31, 2023.
Decrease of loss on debt conversion of $146,971 due to shares issued upon conversion were issued at a smaller premium above the exercise price compared to shares issued during March 31, 2023.
Increase in prepaid expenses and other current assets used in operating activities of $188,215 due to utilization of consulting retainers during March 31, 2024 with no additional retainers added.

 

This was partially offset by the following:

 

Non-cash change in fair value of derivative liabilities decreased by $3,397,801 due to the Company’s stock price stabilizing during the period between December 31, 2023 and March 31, 2024, resulting in the smaller revaluation adjustment as at March 31, 2024.
Increase in loss on debt extinguishment cash adjustment by $410,433 as a result of unscheduled conversions of debentures into the Company’s common shares which triggered extinguishments of debt due to the change of the fair value of the debt after the conversions. There were no debt extinguishments during the three months ended March 31, 2023.
Decrease in accounts payable and accrued liabilities adjustments of $290,475 due to the Company reducing operational spend as such reduced additional accounts payable and accrued liabilities.
All other items in an aggregate amount of $17,272.

 

Net cash provided by financing activities for the three months ended March 31, 2024, represents net proceeds from debentures of $1,000,000. This was partially offset by repayments on convertible debentures of $668,568, financing costs of debentures of $50,000. Net cash used in financing activities for the three months ended March 31, 2023 represents net proceeds from debentures of $4,615,385 and was partially offset by repayments and interest paid on convertible debentures of $1,180,950 and financing costs of debentures of $325,962.

 

Recent Financings

 

On January 17, 2023, the Debenture Investors purchased additional tranches totaling $5,076,923 and received 53,226 warrants. The convertible debentures and debenture warrants were issued with an exercise price of $62.00 and expire on July 17, 2025. The issuance of the additional tranches triggered the down round provision, adjusting the exercise prices of the First Tranche Debentures and the First Tranche Debenture Warrants to $62.00.

 

On June 20, 2023 the Company issued 20,000 common shares with 20,000 warrants through a private placement for consideration of $250,000.

 

Between June 7, 2023 and August 30, 2023, the Company issued 124,652 common shares for cash under the ATM public offerings agreement for net proceeds of $939,695. The issuance triggered the down round provision, adjusting the exercise prices of the First and Second Tranche Debentures as well as the First and Second Tranche Debenture Warrants to $5.50.

 

On October 18, 2023, a Debenture Investor purchased an additional tranche totaling $2,750,000 in convertible debentures and received 620,230 warrants. The convertible debentures and debenture warrants were issued with an exercise price of $2.62 and expire on April 18, 2027. The issuance of the additional tranche further triggered the down round provision, adjusting the exercise prices of the First and Second Tranche Debentures as well as the First and Second Tranche Debenture Warrants to $2.62.

 

On November 30, 2023, a Debenture Investor purchased an additional tranche totaling $2,750,000 in convertible debentures and received 1,986,112 warrants. The convertible debentures and debenture warrants were issued with an exercise price of $0.90 and expire on May 30, 2027. The issuance of the additional tranche further triggered the down round provision, adjusting the exercise prices of the First, Second and Third Tranche Debentures as well as the First, Second and Third Tranche Debenture Warrants to $0.90.

 

On February 21, 2024, a Convertible Debt Investor purchased an additional tranche of $1,100,000 in convertible debentures and received 3,341,122 warrants. The convertible debentures and debenture warrants were issued with an exercise price of $0.214 and expire on August 21, 2027. The issuance of the additional tranche triggered the down round provision, adjusting the exercise prices of the First, Second, Third, and Fourth tranche of Debentures and the First, Second, Third, Fourth tranche of Debenture Warrants to $0.214.

 

On April 11, 2024, an Investor purchased an additional tranche of $550,000. The convertible debt and warrants were issued with an exercise price of $0.163 and $0.18, respectively. The issuance of the additional tranche triggered the down round provision, adjusting the conversion prices of the First, Second, Third, Fourth and Fifth Tranche Debentures and the exercise prices of the First, Second, Third, Fourth and Fifth Tranche Warrants to $0.163.

 

26
 

 

Off Balance Sheet Arrangements

 

None.

 

Significant Accounting Policies

 

See the footnotes to our unaudited financial statements for the three months ended March 31, 2024 and 2023, included with this quarterly report.

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

 

As a smaller reporting company as defined by Rule 12b-2 of the Exchange Act and in Item 10(f)(1) of Regulation S-K, we are electing scaled disclosure reporting obligations and therefore are not required to provide the information requested by this item.

 

Item 4. Controls and Procedures

 

Disclosure Controls and Procedures.

 

Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Our management is also required to assess and report on the effectiveness of our internal control over financial reporting in accordance with Section 404 of the Sarbanes-Oxley Act of 2002 (“Section 404”). Our internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes of accounting principles generally accepted in the United States. Management assessed the effectiveness of our internal control over financial reporting as of September 30, 2023. In making this assessment, we used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control - Integrated Framework in the 2013 COSO framework. Based on this assessment, management concluded that our disclosure controls and procedures were effective.

 

Changes in Internal Controls.

 

There have been no changes in our internal control over financial reporting during the quarter ended March 31, 2024, that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

 

Limitations on Effectiveness of Controls and Procedures

 

Our disclosure controls and procedures and internal control over financial reporting are designed to provide reasonable assurance of achieving the desired control objectives. Our management recognizes that any control system, no matter how well designed and operated, is based upon certain judgments and assumptions and cannot provide absolute assurance that its objectives will be met. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints, and that management is required to apply judgment in evaluating the benefits of possible controls and procedures relative to their costs. Similarly, an evaluation of controls cannot provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, have been detected.

 

27
 

 

PART II — OTHER INFORMATION

 

Item 1. Legal Proceedings

 

For a discussion of legal proceedings, see Note 14 to the unaudited condensed consolidated financial statements included under Part I, Item 1 of this report.

 

Item 1A. Risk Factors

 

As a smaller reporting company as defined by Rule 12b-2 of the Exchange Act and in Item 10(f)(1) of Regulation S-K, we are electing scaled disclosure reporting obligations and therefore are not required to provide the information requested by this item.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

 

The Company had the following sales of unregistered securities during the three months ended March 31, 2024:

 

16,493,602 common shares were issued upon conversion of convertible debt.

 

126,646 common shares were issued to consultants.

 

112,645 common shares were issued as part of compensation to Company officers.

 

On February 21, 2024, a Convertible Debt Investor purchased an additional tranche of $1,100,000 in convertible debentures and received 3,341,122 warrants. The convertible Debentures and Debenture Warrants were issued with an exercise price of $0.214. The issuance of the additional tranche triggered the down round provision, adjusting the exercise prices of the First, Second, Third, and Fourth tranche of Debentures and the First, Second, Third, Fourth tranche of Debenture Warrants to $0.214.

 

The Company had the following sales of unregistered securities from April 1, 2024 to May 15, 2024:

 

3,440,489 common shares were issued upon conversion of convertible debt.

 

15,644 common shares were issued to consultants.

 

6,425 common shares were issued upon conversion of prefunded warrants.

 

On April 11, 2024, an Investor purchased an additional tranche of $550,000. The convertible debt and warrants were issued with an exercise price of $0.163 and $0.18, respectively. The issuance of the additional tranche triggered the down round provision, adjusting the exercise prices of the First, Second, Third, Fourth and Fifth Tranche Debentures and the First, Second, Third, Fourth and Fifth Tranche Warrants to $0.163.

 

28
 

 

Item 3. Defaults Upon Senior Securities

 

None.

 

Item 4. Mine Safety Disclosures

 

Not applicable.

 

Item 5. Other Information

 

None.

 

Item 6. Exhibits

 

31.1 Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002*
31.2 Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002*
32.1 Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002*
32.2 Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002*
101.ins Inline XBRL Instance Document**
101.sch Inline XBRL Taxonomy Schema Document**
101.cal Inline XBRL Taxonomy Calculation Document**
101.def Inline XBRL Taxonomy Linkbase Document**
101.lab Inline XBRL Taxonomy Label Linkbase Document**
101.pre Inline XBRL Taxonomy Presentation Linkbase Document**
104 Cover Page Interactive Data File (embedded within the Inline XBRL document)

 

* Furnished herewith
** Filed herein

 

29
 

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

  AGRIFORCE GROWING SYSTEMS, LTD.
     
Date: May 15, 2024 By: /s/ Jolie Kahn
  Name: Jolie Kahn
  Title: Executive Consultant (Principal Executive Officer)
     
Date: May 15, 2024 By: /s/ Richard Wong
  Name: Richard Wong
  Title: Chief Financial Officer (Principal Financial and Accounting Officer)

 

30