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Cannapharmarx (CPMD)

Filed: 19 Aug 20, 4:31pm

 

Table of Contents

 

U.S. SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

Form 10-Q

 

Quarterly Report Under

the Securities Exchange Act of 1934

 

For Quarter Ended: June 30, 2020

 

Commission File Number: 000-27055

 

CANNAPHARMARX, INC.

(Exact name of small business issuer as specified in its charter)

 

Delaware 27-4635140
(State of other jurisdiction of incorporation) (IRS Employer ID No.)

 

Suite 3600

888 – 3rd Street SW

Calgary, Alberta, CanadaT2P 5C5

(Address of principal executive offices)

 

949-652-6838

(Issuer’s Telephone Number)

 

Securities registered pursuant to Section 12(b) of the Act: None

 

Title of each classTrading Symbol(s)Name of each exchange on which registered
NoneN/AN/A

 

Securities registered pursuant to section 12(g) of the Act:

Shares of common stock with a par value of $0.001

(Title of class)

 

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 þ  No o

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files). Yes þ No o

 

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

  

Large accelerated fileroAccelerated filero
Non-accelerated filerþSmaller reporting companyþ
Emerging growth companyþ  

 

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 Exchange Act. o Yes þ No

 

The number of shares of the registrant’s only class of common stock issued and outstanding as of August 17, 2020, was 42,448,339 shares.

 

 

 

 

TABLE OF CONTENTS

 

   Page No.
PART I. FINANCIAL INFORMATION
   
Item 1.Financial Statements 3
    
 Unaudited Consolidated Balance Sheets as of June 30, 2020, and December 31, 2019 3
    
 Unaudited Consolidated Statement of Operations for the Three and Six Months Ended June 30, 2020, and 2019 4
    
 Unaudited Consolidated Statement of Cash Flows for the Three Months Ended June 30, 2020, and 2019 5
    
 Unaudited Consolidated Statements of Stockholders Equity (Deficit) for the Three and Six Months ended June 30, 2020, and 2019 6
    
 Notes to Unaudited Consolidated Financial Statements 10
    
Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations/Plan of Operation 29
    
Item 3.Quantitative and Qualitative Disclosures About Market Risk 37
    
Item 4.Controls and Procedures 37
    
 PART II. OTHER INFORMATION  
    
Item 1.Legal Proceedings 38
   
Item 1A.Risk Factors 38
    
Item 2.Unregistered Sales of Equity Securities and Use of Proceeds 38
    
Item 3.Defaults Upon Senior Securities 39
   
Item 4.Mine Safety Disclosures 39
    
Item 5.Other Information 39
    
Item 6.Exhibits 39
    
 Signatures 40

 

 

 

   
 

 

Forward Looking Statements

 

This Report includes statements that are, or may be deemed to be, “forward-looking statements,” as defined in the Private Securities Reform Act of 1995. These forward-looking statements can be identified by the use of forward-looking terminology, including the terms “believes,” “estimates,” “anticipates,” “projects,” “expects,” “intends,” “may,” “will,” “seeks” or “should” or, in each case, their negative or other variations or comparable terminology, or in relation to discussions of strategy, plans, objectives, goals, future events or intentions. These forward-looking statements include matters that are not historical facts. They appear in a number of places throughout this Quarterly Report and include statements regarding Issuer’s current intentions, beliefs or expectations concerning, among other things, the Issuer’s future plans for the Project, results of operations, financial condition, prospects, growth, strategies and the markets in which the Issuer intends to operate.

 

By their nature, forward-looking statements involve risks and uncertainties because they relate to events and depend on circumstances that may or may not occur in the future. Forward-looking statements are not an assurance of future performance. The Issuer’s actual results of operations and financial condition may differ materially from those suggested by the forward-looking statements contained in this document. In addition, even if the Issuer’s future results of operations and financial condition are consistent with the forward-looking statements contained in this document, those results or developments may not be indicative of results or developments in subsequent periods. The information in this Private Placement Memorandum, including, but not limited to, the information under “Risk Factors,” identifies important factors that could cause such differences (including, but not limited to, a change in overall economic conditions in the United States, a change in the Issuer’s financial condition, changes in tax law or the interpretation thereof, interest rate fluctuations and other market conditions, and the effect of new legislation or government directives).

 

Forward-looking statements include, but are not limited to, information concerning possible or assumed future results of the Issuer’s operations set forth under the section entitled “Business of the Issuer”. Such statements, estimates and projections reflect various assumptions by the Issuer concerning anticipated results and are subject to significant business, financing, economic and competitive uncertainties and contingencies, many of which are beyond the control of the Issuer and are based upon assumptions with respect to future business decisions that are subject to change. Accordingly, there can be no assurance that such statements, estimates and projections will be realized or that actual results will not vary considerably from those anticipated, expected or projected. The Issuer, its accountants, its legal advisers and its agents or affiliates do not make any representations as to the accuracy or completeness of such statements, estimates and projections, or that any forecasts will be achieved.

 

The Issuer is not obliged to, and does not intend to, update or revise any forward-looking statements made in this Quarterly Report whether as a result of new information, future events or otherwise. All subsequent written forward-looking statements attributable to the Issuer, or persons acting on behalf of the Issuer, are expressly qualified in their entirety by the cautionary statements contained throughout this Private Placement Memorandum. As a result of these risks, prospective investors of the Convertible Bonds should not place undue reliance on these forward-looking statements. Neither the forward-looking statements nor the underlying assumptions have been verified or audited by any third party.

 

 

 

 

 

 2 

 

 

PART I. FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

CANNAPHARMARX, INC.

UNAUDITED CONSOLIDATED BALANCE SHEETS

 

  June 30,  December 31, 
  2020  2019 
       
ASSETS        
         
Current assets        
Cash $3,789  $1,547 
Deposit     1,308,830 
HST Receivable  1,040   28,361 
Prepaid expenses     592,473 
Total current assets  4,829   1,931,211 
         
Construction in progress  1,463,411   1,540,918 
Land  136,487   143,201 
Office equipment  3,033   3,978 
Investments  6,672,019   4,193,597 
Intangible assets  1,685,738   1,834,176 
Goodwill  6,071,633   6,370,333 
Total Assets $16,037,150  $16,017,414 
         
LIABILITIES & STOCKHOLDERS' DEFICIT        
         
Current liabilities        
Accounts payable and accrued expenses $1,055,326   902,854 
Accounts payable related party  268,189   154,291 
Accrued interest  82,302   27,630 
Accrued legal settlement  190,000   190,000 
Accrued expense - related party  899,307   606,356 
Notes payable current  1,079,352   2,800,559 
Convertible Notes -net of discount  1,591,907   552,603 
Derivative liability  969,102    
Loan payable - related party  226,899   427,805 
Total current liabilities  6,362,385   5,662,098 
Notes payable long-term  6,948,228   5,501,118 
Total Liabilities  13,310,613   11,163,216 
         
Commitments and contingencies      
         
Stockholders' Equity        
Preferred stock, Series A, $0.0001 par value, 60,000 shares authorized, 60,000 shares issued and outstanding as of June 30, 2020, and December 31, 2019, respectively  60,000   60,000 
Preferred Stock Series B, $0.0001 par value, 3,000,000 shares authorized 475,000 and -0- shares issued and outstanding as of June 30, 2020, and December 31, 2019, respectively  475,000   475,000 
Common stock, $0.0001 par value; 300,000,000 shares authorized, 42,448,339 and 36,486,999 issued and outstanding as of June 30, 2020 and December 31, 2019, respectively  4,245   3,649 
Treasury stock, 133,200 and -0- shares as of June 30, 2020, and December 31, 2019, respectively  (13)  (13)
Additional paid-in capital  65,232,248   61,619,415 
Retained earnings (deficit)  (63,128,845)  (57,441,549)
Accumulated other comprehensive income (loss)  83,903   137,696 
Total Stockholders' Equity (Deficit)  2,726,537   4,854,198 
Total Liabilities and Stockholders' (Equity) $16,037,150  $16,017,414 

 

 

 

 3 

 

 

CANNAPHARMARX, INC.

UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS

 

  Three months ended  Six months ended 
  June 30,  June 30,  June 30,  June 30, 
  2020  2019  2020  2019 
             
Revenue $  $  $  $ 
                 
Operating Expenses:                
General & administrative  183,926   31,108   226,254   60,025 
Acquisition expenses  (18,488)  97,523   1,862,638   123,347 
Amortization and depreciation  31,477   31,787   63,141   63,787 
Stock-based compensation  206,579   161,335   413,158   322,669 
Travel and entertainment  1,405   38,024   7,942   65,241 
Rent related parties  17,597   17,394   17,597   25,156 
Professional fees  118,394   147,298   272,123   302,199 
Consulting fees  1,996   5,623   1,996   244,591 
Consulting fees and payroll-related parties  244,598   158,772   492,644   428,771 
Total operating expenses  787,484   688,863   3,357,493   1,635,786 
Income (loss) from operations  (787,484)  (688,863)  (3,357,493)  (1,635,786)
                 
Other income (expense)                
Interest (expense)  (641,377)  (59,216)  (1,360,702)  (180,987)
Change in the fair value of derivative liability  (43,618)     (969,102)    
Other income           25 
Other income (expense) net  (684,995)  (59,216)  (2,329,804)  (180,962)
Income (loss) before provision for income taxes  (1,472,479)  (748,079)  (5,687,297)  (1,816,748)
Provision (credit) for income tax            
Net income (loss) $(1,472,479) $(748,079) $(5,687,297) $(1,816,748)
                 
Basic and diluted earnings(loss) per common share $(0.04) $(0.02) $(0.15) $0.07 
                 
Weighted average number of shares outstanding  40,002,473   32,303,799   38,273,494   27,169,075 
                 
Comprehensive loss:                
Net income (loss) $(1,472,479) $(748,079) $(5,687,297) $(1,816,748)
Foreign currency translation adjustment  13,481   (70,644)  (53,793)  (144,196)
Comprehensive income (loss) $(1,458,998) $(818,723) $(5,741,090) $(1,960,944)

 

The accompanying notes are an integral part of these consolidated financial statements.

 

 

 

 

 4 

 

 

CANNAPHARMARX, INC.

UNAUDITED STATEMENTS OF CONSOLIDATED CASH FLOWS

 

  Six months ended 
  June 30,  June 30, 
  2020  2019 
Cash Flows From Operating Activities: $(5,741,090) $(1,816,748)
Net income (loss)        
Adjustments to reconcile net income to net cash provided by (used for) operating activities        
Stock-based compensation expense  413,158   322,669 
Amortization of intangible assets  62,384   63,787 
Advertising expense paid with common stock  153,000    
Common stock issued in connection with financing  130,834    
Change in the fair value of derivatives  969,102    
Depreciation  758    
Amortization of debt discount  1,009,149   118,827 
Changes in operating assets and liabilities        
(Increase)/decrease in prepaid expenses and deposit  1,788,111   147,705 
HST Receivable  25,991    
Accrued interest  54,671   62,160 
Accounts payable/loan payable related party  121,132   134,535 
Accrued expense related party  292,951   323,771 
Accounts payable and accrued expense  46,492   156,918 
Net cash provided by (used for) operating activities  (673,357)  (486,376)
         
Cash Flows From Investing Activities:        
Changes in intangible assets  62,435    
Capitalized mortgage interest and changes in construction in progress     (37,251)
Net cash provided by (used for) investing activities  62,435   (37,251)
         
Cash Flows From Financing Activities:        
Proceeds from the sale of preferred stock     288,000 
Proceeds from convertible loans  534,000    
Proceeds from loans, net of repayment  (3,490)   
Purchase of treasury shares     (98,955)
Proceeds (repayment of related party loans), net  (83,259)  75,000 
Net cash provided by (used for) financing activities  447,251   264,045 
         
Effect of exchange rates on cash and cash equivalents  165,917   (72,686)
Net Increase (Decrease) In Cash  2,246   (332,268)
Cash At The Beginning Of The Period  1,547   464,118 
Cash At The End Of The Period $3,793  $131,850 
         
Supplemental disclosure of cash flow information:        
Cash paid for interest $  $ 
Cash paid for income taxes $  $ 
         
Supplemental disclosure of non-cash investing and financing activities:        
Common stock issued as a financing expense on convertible notes $130,849  $ 
Common stock issued for advertising expense $153,000    
Common stock issued related to investment in Great Northern Cannabis $2,478,422  $11,264,438 
Common stock issued to convert convertible notes and accrued interest into equity $  $2,202,213 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

 

 

 5 

 

 

UNAUDITED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY

FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2020 AND 2019

 

 Preferred Stock Series A     Preferred Stock Series B     Common Stock    
 Shares  Value  Shares  Value  Shares  Value 
Balances at December 31, 2018 60,000  $60,000     $   18,942,506  $1,894 
                        
Net loss                       
                        
Issuance of Series B Preferred Stock         178,000   178,000         
                        
Conversion of convertible notes and accrued interest to common shares                 5,505,530   551 
                        
Issuance of shares to purchase non-controlling interest in GN                 7,988,963   799 
                        
Stock-based compensation related to warrant issuance                       
                        
Repurchase of shares from investor                       
Balance at March 31, 2019 60,000  $60,000   178,000  $178,000   32,436,999  $3,244 
                        
Net loss                       
                        
Issuance of Series B Preferred Stock         110,000   110,000         
                        
Stock-based compensation related to warrant issuances                       
                        
Change in foreign currency translation                       
Balance at June 30, 2019$60,000  $60,000   288,000  $288,000   32,436,999  $3,244 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

 

 

 6 

 

 

UNAUDITED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (continued)

FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2020 AND 2019

 

 Treasury Stock     Paid in  Retained earnings  

Accumulated

other

comprehensive

  Equity/ 
 Shares  Value  Capital  (Deficit)  income (loss)  Deficit 
Balances at December 31, 2018   $  $36,642,275  $(36,990,469) $  $(286,299)
                        
Net loss             (1,068,669)  (73,552)  (1,142,221)
                        
Issuance of Series B Preferred Stock                     178,000 
                        
Conversion of convertible notes and accrued interest to common shares         2,201,662           2,202,213 
                        
Issuance of shares to purchase non-controlling interest in GN         11,263,639           11,264,438 
                        
Stock-based compensation related to warrant issuance         161,133           161,133 
                        
Repurchase of shares from investor 133,200   (13)  (98,942)          (98,955)
Balance at March 31, 2019 133,200  $(13) $50,169,767  $(38,059,138) $(73,552) $12,278,509 
                  ��     
Net loss             (748,079)      (748,079)
                        
Issuance of Series B Preferred Stock                     110,000 
                        
Stock-based compensation related to warrant issuances         161,335           161,335 
                        
Change in foreign currency translation                 (70,644)  (70,644)
Balance at June 30, 2019 133,200  $(13) $50,331,103  $(38,807,217) $(144,196) $11,731,121 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

 

 

 7 

 

 

UNAUDITED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (continued)

FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2020 AND 2019

 

 Preferred Stock Series A     Preferred Stock Series B     Common Stock    
 Shares  Value  Shares  Value  Shares  Value 
                        
Balance at December 31, 2019 60,000  $60,000   475,000  $475,000   36,486,999  $3,649 
                        
Net loss                       
                        
Change in foreign currency translation                       
                        
Common stock issued in connection with convertible notes                 153,940   15 
                        
Beneficial conversion feature of note discount                       
                        
Stock-based compensation related to warrant issuances                       
Balances at March 31, 2020 60,000  $60,000   475,000  $475,000   36,640,939  $3,664 
                        
Change in foreign currency translation                       
                        
Net loss                       
                        
Shares issued for services                 300,000   30 
                        
Stock based compensation related to warrant issuances                       
                        
Shares received from share exchange with GN                 5,507,400   551 
Balances at June 30, 2020 60,000  $60,000   475,000  $475,000   42,448,339  $4,245 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

 

 

 8 

 

 

UNAUDITED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (continued)

FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2020 AND 2019

 

 Treasury Stock     Paid in  Retained earnings  

Accumulated

other

comprehensive

  Equity/ 
 Shares  Value  Capital  (Deficit)  income (loss)  Deficit 
                        
Balance at December 31, 2019 133,200  $(13) $61,619,415  $(57,441,549) $137,696  $4,854,198 
                        
Net loss             (4,214,818)      (4,214,818)
                        
Change in foreign currency translation                 (67,273)  (67,273)
                        
Common stock issued in connection with convertible notes         130,834           130,849 
                        
Beneficial conversion feature of note discount         438,000           438,000 
                        
Stock-based compensation related to warrant issuances         206,579           206,579 
                        
Balances at March 31, 2020 133,200  $(13) $62,394,828  $(61,656,367) $70,422  $1,347,534 
                        
Change in foreign currency translation                 13,481   13,481 
                        
Net loss             (1,472,479)      (1,472,479)
                        
Shares issued for services         152,970           153,000 
                        
Stock-based compensation related to warrant issuances         206,579           206,579 
                        
Shares received from share exchange with GN         2,477,871           2,478,422 
Balances at June 30, 2020 133,200  $(13) $65,232,248  $(63,128,846) $83,903  $2,726,536 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

 9 

 

 

CANNAPHARMARX, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

For the Three and Six Month Interim Periods Ended June 30, 2020, and June 30, 2019

 

NOTE 1. NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES

 

Nature of Operations

 

CannaPharmaRx, Inc. (the “Company”) is a Delaware corporation. In November 2018 it formed an Ontario corporation, Hanover CPMD Acquisition Corporation, to facilitate the acquisition described below. As of the date of this Report, the Company intends to engage in acquisitions or joint ventures with a company or companies that will allow to become a national or internationally branded cannabis cultivation company, or otherwise engage in the cannabis industry. Management is engaged in seeking out and evaluating businesses for acquisition. However, if an opportunity in another industry arises the Company will review that opportunity as well.

 

History

 

The Company was originally incorporated in the State of Colorado in August 1998 under the name “Network Acquisitions, Inc.” It changed its name to Cavion Technologies, Inc. in February 1999 and subsequently to Concord Ventures, Inc. in October 2006. On December 21, 2000, the Company filed for protection under Chapter 11 of the United States Bankruptcy Code. In connection with the filing, on February 16, 2001, the Company sold its entire business, and all of its assets, for the benefit of its creditors. After the sale, the Company still had liabilities of $8.4 million and was subsequently dismissed by the Court from the Chapter 11 reorganization, effective March 13, 2001, at which time the last of the Company’s then remaining directors resigned. On March 13, 2001, the Company had no business or source of income, no assets, no employees or directors, outstanding liabilities of approximately $8.4 million, and had terminated its duty to file reports under securities law. In February 2008, after filing of a Form 10 registration statement pursuant to the Securities Exchange Act of 1934, as amended, we were re-listed on the OTC Bulletin Board.

 

In April 2010, the Company re-domiciled in Delaware under the name CCVG, Inc. (“CCVG”). Effective December 31, 2010, the Company completed an Agreement and Plan of Merger and Reorganization (the “Reorganization") which provided for the merger of two of the Company’s wholly-owned subsidiaries. As a result of this reorganization, the Company’s name became “Golden Dragon Inc.,” which became the surviving publicly quoted parent holding company.

 

On May 9, 2014, the Company entered into a Share Purchase Agreement (the “Share Purchase Agreement”) with CannapharmaRx, Inc., a Colorado corporation (“Canna Colorado”), and David Cutler, a former President, Chief Executive Officer, Chief Financial Officer and director of the Company. Under the Share Purchase Agreement, Canna Colorado purchased 1,421,120 restricted shares of the Company’s common stock from Mr. Cutler and an additional 9,000,000 common shares directly from the Company.

 

In October 2014, the Company changed its legal name to “CannaPharmaRx, Inc.”

 

In April 2016, the Company ceased operations. As a result, the Company was then considered a “shell” company as defined under the Securities Exchange Act of 1934, as amended, as defined in Rule 405 of the Securities Act and Rule 12b-2 of the Exchange Act.

 

 

 

 10 

 

 

Effective December 31, 2019, the Company and Hanover CPMD Acquisition Corp. (“CPMD Hanover”) a newly formed, wholly-owned subsidiary, entered into a Securities Purchase Agreement with Alternative Medical Solutions, Inc., an Ontario, Canada corporation (“AMS”), its shareholders, wherein the Company acquired all of the issued and outstanding securities of AMS. AMS is a corporation organized under the laws of the Province of Ontario, Canada. It is a late-stage marijuana licensed producer applicant in Canada. It is currently in the Pre-License Inspection and Licensing phase, which is Stage 5 of 6, with a fully approved license. Upon completion of the final construction of the facility, Health Canada will inspect the facility and relevant operating procedures to ensure it meets the standards that have been approved in the application. There can be no assurances that the Company will receive this license.

 

The facility is a 48,750 square foot marijuana grow facility built on a 6.7-acre parcel of land located in Hanover, Ontario Canada. To date, the exterior construction of the building has been completed. However, no interior construction has begun. Upon full completion, the facility will contain up to 20 separate growing rooms which we believe will provide an annual production capacity of 9,500 kilos of marijuana (20,900 lbs.). Completion of the build-out of the facility is expected to take an estimated 20 weeks. Together with the remaining equipment needed to complete the grow the Company estimates that it will require approximately CAD$20.0 million in additional financing which it may seek to raise via equity and debt. There can be no assurances that the Company will successfully raise the financing required to complete the construction of the facility and begin cultivation.

 

As a result of the completion of the acquisition of AMS on December 31, 2019, the Company no longer fits the definition of a “shell company,” as defined in Rule 405 of the Securities Act and Rule 12b-2 of the Exchange Act. It filed the required disclosure on Form 8-K/A with the SEC on February 14, 2019, advising that it was no longer a shell company pursuant to the aforesaid Rule.

 

Effective February 25, 2019, the Company acquired 3,712,500 shares and 2,500,000 Warrants to purchase 2,500,000 shares of Common Stock of GN Ventures, Ltd, Alberta, Canada, f/k/a Great Northern Cannabis, Ltd. (“GN”), in exchange for an aggregate of 7,988,963 shares of its Common Stock, from a former shareholder of GN who is now the Company’s President and CEO. These shares and warrants, when exercised, will represent approximately 5% and 3%, respectively, of the issued and outstanding stock of GN. While no assurances can be provided, the Company believes this is the initial step in its efforts to acquire all or a significant portion of the issued and outstanding stock of GN. In May 2020, the Company exchanged 5,507,400 of its shares for 3,671,597 shares of GN.

 

GN owns a 60,000 square foot cannabis cultivation and grow facility located on 38 acres in Stevensville, Ontario, Canada. Because the Company is a minority shareholder of GN and GN is a privately held company, the Company cannot confirm that the information it currently has on GN’s operations is complete or fully reliable. GN estimates annual total production capacity from the Stevensville facility of up to 12,500 kilograms of cannabis. GN believes the Stevensville facility to be complete, and GN’s subsidiary, 9869247 Canada Limited, received a license to cultivate from the Canadian Ministry of Health on July 5, 2019. As a result, in October 2019, GN commenced cultivation activities and began generating revenues during the first calendar quarter of 2020. The Company expects that it will obtain additional information on the business activities of GN as it has renewed discussions to acquire additional interests and is performing its due diligence procedures.

 

Effective June 11, 2019, the Company entered into a Securities Purchase Agreement with Sunniva, Inc, a British Columbia, Canada corporation (“Sunniva”) wherein the Company agreed to acquire all of the issued and outstanding securities of Sunniva’s wholly-owned subsidiaries Sunniva Medical Inc. (“SMI”) and 1167025 B.C. LTD (“1167025”) for CAD $16.0 million in cash and a note in the principal amount of CAD $4.0 million. These companies are the current owners of the Sunniva Canada Campus, which includes construction assets for a planned 759,000 square-foot greenhouse located on an approximately 114-acre property in Okanagan Falls, British Columbia.

 

On June 8, 2020, the Company received a notice of termination of this Purchase Agreement, as amended, from Sunniva. As a result, for the three-month interim period ended June 30, 2020, the Company incurred a charge of $1,881,126 due to the write-off of its deposit to Sunniva, banking fees and prepaid expenses associated with the failed acquisition of Sunniva. The Company is in discussions with Sunniva, as well as an investment banker who received deposits from the Company, about recovering all or a portion of its deposits, banking fees, and prepaid expenses. There can be no assurances that the Company will be successful in recovering any amounts. See Note 16, Subsequent Events, below. The accompanying financial statements as of June 30, 2020, do not reflect, potential recovery amounts related to Sunniva and other parties, if any.

 

 

 

 11 

 

 

COVID-19

 

On March 11, 2020, the World Health Organization (“WHO”) declared the Covid-19 outbreak to be a global pandemic. In addition to the devastating effects on human life, the pandemic is having a negative ripple effect on the global economy, leading to disruptions and volatility in the global financial markets. Most US states and many countries have issued policies intended to stop or slow the further spread of the disease.

 

Covid-19 and the U.S’s response to the pandemic are significantly affecting the economy. There are no comparable events that provide guidance as to the effect the Covid-19 pandemic may have, and, as a result, the ultimate effect of the pandemic is highly uncertain and subject to change. We do not yet know the full extent of the effects on the economy, the markets we serve, our business, or our operations.

 

Management’s Representation of Interim Financial Statements

 

The accompanying unaudited consolidated financial statements have been prepared by the Company without audit pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) have been condensed or omitted as allowed by such rules and regulations, and management believes that the disclosures are adequate to make the information presented not misleading. These consolidated financial statements include all of the adjustments, which in the opinion of management are necessary to a fair presentation of financial position and results of operations. All such adjustments are of a normal and recurring nature. Interim results are not necessarily indicative of results for a full year. These consolidated financial statements should be read in conjunction with the audited consolidated financial statements at December 31, 2019, and 2018, as presented in the Company’s Form 10-K filed on May 27, 2020 with the SEC.

 

Basis of Presentation

 

The accompanying unaudited consolidated financial statements have been prepared in accordance with the Financial Accounting Standards Board (“FASB”) “FASB Accounting Standard Codification™” (the “Codification”) which is the source of authoritative accounting principles recognized by the FASB to be applied by nongovernmental entities in the preparation of financial statements in conformity with generally accepted accounting principles (“GAAP”) in the United States. Certain amounts in prior periods have been reclassified to conform to the current presentation.

 

All figures are in U.S. dollars unless indicated otherwise.

 

Use of Estimates

 

The preparation of financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported assets and expenses during the reporting period. The most significant estimates relate to investments, purchase price allocation of acquired assets, impairment of long-lived assets, intangibles, and goodwill. The Company bases its estimates on historical experience, known or expected trends and various other assumptions that are believed to be reasonable given the quality of information available as of the date of these financial statements. The results of these assumptions provide the basis for making estimates about the carrying amounts of assets and liabilities that are not readily apparent from other sources. Actual results could differ from these estimates.

 

 

 

 12 

 

 

Cash and Cash Equivalents

 

The Company considers all highly liquid temporary cash investments with an original maturity of three months or less to be cash equivalents. On June 30, 2020, and December 31, 2019, the Company’s cash and cash equivalents totaled $3,789 and $1,547, respectively.

 

Comprehensive Gain or Loss

 

ASC 220 “Comprehensive Income,” establishes standards for the reporting and display of comprehensive income and its components in the financial statements. As of June 30, 2020, and December 31, 2019, the Company determined that it had items that represented components of comprehensive income and, therefore, has included a statement of comprehensive income in the financial statements.

 

Derivative Financial Instruments

 

The Company does not use derivative instruments to hedge exposures to cash flow, market or foreign currency risk. Terms of convertible and other promissory notes are reviewed to determine whether they contain embedded derivative instruments that are required to be accounted for separately from the host contract and recorded on the balance sheet at fair value. The fair value of derivative liabilities is required to be revalued at each reporting date, with corresponding changes in fair value recorded in current period operating results.

 

During the six months ended June 30, 2020, the Company entered into six convertible note instruments amounting to $534,000 that contained embedded derivative features. As a result, the Company performed a Black Scholes analysis and recorded a derivative liability and an expense amounting to $969,102.

 

Beneficial Conversion Features

 

In accordance with FASB ASC 470-20, “Debt with Conversion and Other Options” the Company records a beneficial conversion feature (“BCF”) related to the issuance of convertible debt or preferred stock instruments that have conversion features at fixed rates that are in-the-money when issued. The BCF for the convertible instruments is recognized and measured by allocating a portion of the proceeds equal to the intrinsic value of that feature to additional paid-in capital. The intrinsic value is generally calculated at the commitment date as the difference between the conversion price and the fair value of the common stock or other securities into which the security is convertible, multiplied by the number of shares into which the security is convertible. If certain other securities are issued with the convertible security, the proceeds are allocated among the different components. The portion of the proceeds allocated to the convertible security is divided by the contractual number of the conversion shares to determine the effective conversion price, which is used to measure the BCF. The effective conversion price is used to compute the intrinsic value. The value of the BCF is limited to the basis that is initially allocated to the convertible security.

 

Foreign Currency Translation

 

The functional currency and the reporting currency of the Company’s US operations is United States dollars, (“USD”). The functional currency of the Company’s Canadian operations in Canadian dollars (“CAD”), Management has adopted ASC 830 “Foreign Currency Matters” for transactions that occur in foreign currencies. Monetary assets denominated in foreign currencies are translated using the exchange rate prevailing at the balance sheet date. Average monthly rates are used to translate revenues and expenses.

 

Transactions denominated in currencies other than the functional currency are translated into the functional currency at the exchange rates prevailing at the dates of the transaction. Exchange gains or losses arising from foreign currency transactions are included in the determination of net income for the respective periods.

 

 

 

 13 

 

 

Assets and liabilities of the Company’s operations are translated into the reporting currency, United States dollars, at the exchange rate in effect at the balance sheet dates. Revenue and expenses are translated at average rates in effect during the reporting periods. Equity transactions are recorded at the historical rate when the transaction occurred. The resulting translation adjustment is reflected as accumulated other comprehensive income, a separate component of stockholders' equity in the statement of stockholders' equity. These translation adjustments are reflected in accumulated other comprehensive income, a separate component of the Company's stockholders' equity.

 

Harmonized Sales Tax

 

The Harmonized Sales Tax (“HST”) is a combination of the Canadian Goods and Services Tax (“GST”) and Provincial Sales Tax (“PST”) that is applied to taxable goods and services. By fusing sales tax at the federal level with sales tax at the provincial level, the participating provinces harmonized both taxes into a single federal-provincial sales tax. HST is a consumption tax paid by the consumer at the point of sale (POS). The vendor or seller collects the tax proceeds from consumers by adding the HST rate to the cost of goods and services. They then remit the total collected tax to the government periodically.

 

The HST is in effect in five of the ten Canadian provinces: New Brunswick, Newfoundland and Labrador, Nova Scotia, Ontario, and Prince Edward Island. The HST is collected by the Canada Revenue Agency (CRA), which remits the appropriate amounts to the participating provinces. The HST may differ across these five provinces, as each province will set its own PST rates within the HST. In provinces and territories which have not enacted the HST, the CRA collects only the 5% goods and services tax. The current rate in Ontario is 13%.

 

Capital Assets- Construction in Progress

 

As of June 30, 2020, and December 31, 2019, the Company had $1,463,411 and $1,540,918 in construction in progress, respectively, comprised entirely of the construction in progress relating to the building acquired with the acquisition of AMS. Additionally, the Company had $136,487 and $143,201, respectively, in the land upon which the construction in process was situated.

 

Depreciation expense related to the construction in progress amounted to $-0- and $-0- for the periods ended June 30, 2020, and June 30, 2019, respectively.

 

Stock Purchase Warrants

 

The Company accounts for warrants issued to purchase shares of its common stock as equity in accordance with FASB ASC 480, Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock, Distinguishing Liabilities from Equity.

 

Stock-Based Compensation

 

The Company has adopted ASC Topic 718, (Compensation-Stock Compensation), which establishes a fair value method of accounting for stock-based compensation plans. In accordance with guidance now incorporated in ASC Topic 718, the cost of stock options and warrants issued to employees and non- employees is measured on the grant date based on the fair value. The fair value is determined using the Black-Scholes option-pricing model. The resulting amount is charged to expense on the straight-line basis over the period in which the Company expects to receive the benefit, which is generally the vesting period. The fair value of stock warrants was determined at the date of grant using the Black-Scholes option-pricing model. The Black-Scholes option model requires management to make various estimates and assumptions, including expected term, expected volatility, risk-free rate, and dividend yield. Stock options and warrants outstanding shares of common stock are excluded from the calculations of diluted net loss per share since their effect is anti-dilutive.

 

 

 

 14 

 

 

Goodwill and Intangible Assets

 

Goodwill represents the future economic benefit arising from other assets acquired that could not be individually identified and separately recognized. The goodwill arising from the Company’s acquisitions is attributable to the value of the potential expanded market opportunity with new customers. Intangible assets have either an identifiable or indefinite useful life. Intangible assets with identifiable useful lives are amortized on a straight-line basis over their economic or legal life, whichever is shorter. The Company’s amortizable intangible assets consist of a marijuana license with a useful life of 15 years.

 

Goodwill and indefinite-lived assets are not amortized but are subject to annual impairment testing unless circumstances dictate more frequent assessments. The Company performs an annual impairment assessment for goodwill during the fourth quarter of each year and more frequently whenever events or changes in circumstances indicate that the fair value of the asset may be less than the carrying amount. Goodwill impairment testing is a two-step process performed at the reporting unit level. Step one compares the fair value of the reporting unit to its carrying amount. The fair value of the reporting unit is determined by considering both the income approach and market approaches. The fair values calculated under the income approach and market approaches are weighted based on circumstances surrounding the reporting unit. Under the income approach, the Company determines fair value based on estimated future cash flows of the reporting unit, which are discounted to the present value using discount factors that consider the timing and risk of cash flows. For the discount rate, the Company relies on the capital asset pricing model approach, which includes an assessment of the risk-free interest rate, the rate of return from publicly traded stocks, the Company’s risk relative to the overall market, the Company’s size and industry and other Company-specific risks. Other significant assumptions used in the income approach include the terminal value, growth rates, future capital expenditures and changes in future working capital requirements. The market approach use key multiples from guideline businesses that are comparable and are traded on a public market. If the fair value of the reporting unit is greater than its carrying amount, there is no impairment. If the reporting unit’s carrying amount exceeds its fair value, then the second step must be completed to measure the amount of impairment, if any. Step two calculates the implied fair value of goodwill by deducting the fair value of all tangible and intangible net assets of the reporting unit from the fair value of the reporting unit as calculated in step one. In this step, the fair value of the reporting unit is allocated to all of the reporting unit’s assets and liabilities in a hypothetical purchase price allocation as if the reporting unit had been acquired on that date. If the carrying amount of goodwill exceeds the implied fair value of goodwill, an impairment loss is recognized in an amount equal to the excess.

 

Determining the fair value of a reporting unit is judgmental in nature and requires the use of significant estimates and assumptions, including revenue growth rates, strategic plans, and future market conditions, among others. There can be no assurance that the Company’s estimates and assumptions made for purposes of the goodwill impairment testing will prove to be accurate predictions of the future. Changes in assumptions and estimates could cause the Company to perform an impairment test prior to scheduled annual impairment tests.

 

The Company performed its annual fair value assessment on December 31, 2019, on its subsidiaries with material goodwill and intangible asset amounts on their respective balance sheets and determined that no impairment exists.

 

Long-Lived Assets

 

The Company evaluates the recoverability of its long-lived assets whenever events or changes in circumstances have indicated that an asset may not be recoverable. The long-lived asset is grouped with other assets at the lowest level for which identifiable cash flows are largely independent of the cash flows of other groups of assets and liabilities. If the sum of the projected undiscounted cash flows is less than the carrying value of the assets, the assets are written down to the estimated fair value.

 

The Company evaluated the recoverability of its long-lived assets on June 30, 2020, and on December 31, 2019, respectively on its subsidiaries with material amounts on their respective balance sheets and determined that no impairment exists.

 

 

 

 15 

 

 

Fair Values of Assets and Liabilities

 

The Company has adopted the guidance under ASC Topic 820 for financial instruments measured on fair value on a recurring basis. Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability, in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs.

 

Financial Instruments

 

The estimated fair value for financial instruments was determined at discrete points in time based on relevant market information. These estimates involve uncertainties and could not be determined with exact precision. The fair value of the Company’s financial instruments, which include cash, prepaid expenses, accounts payable and the related party loan, each approximate their carrying value due either to their short length to maturity or interest rates that approximate prevailing market rates.

 

Income Taxes

 

The Company accounts for income taxes under the liability method, which requires recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred tax assets and liabilities are determined based on the difference between the financial statements and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse.

 

Cost Method Investment

 

Our cost method investment consists of an investment in a private company in which we do not have the ability to exercise significant influence over its operating and financial activities. The investment is tested for impairment quarterly.

 

Income (Loss) Per Share

 

Income (loss) per share is presented in accordance with Accounting Standards Update (“ASU”), Earning per Share (Topic 260) which requires the presentation of both basic and diluted earnings per share (“EPS”) on the income statements. Basic EPS would exclude any dilutive effects of options, warrants, and convertible securities but does include the restricted shares of common stock issued. Diluted EPS reflects the potential dilution that would occur if securities or other contracts to issue common stock were exercised or converted to common stock. Basic EPS calculations are determined by dividing net income by the weighted average number of shares of common stock outstanding during the year. Diluted EPS calculations are determined by dividing net income by the weighted average number of common shares and dilutive common share equivalents outstanding.

 

Business Segments

 

The Company’s activities during the three months ended June 30, 2020, and the year ended December 31, 2019, comprised a single segment.

 

Recently Issued Accounting Pronouncements

 

The Company has implemented all new accounting pronouncements that are in effect and that may impact its financial statements and does not believe that there are any other new pronouncements that have been issued that might have a material impact on its financial position or results of operations. The Company adopted ASC 842 on January 1, 2019. However, the adoption of the standard had no impact on the Company’s financial statements since all Company leases are month to month, or short-term rental.

 

 

 

 16 

 

 

NOTE 2. GOING CONCERN AND LIQUIDITY

 

As of June 30, 2020, and December 31, 2019, the Company had $3,789 and $1,547 in cash on hand respectively, and no revenue-producing business or other sources of income. Additionally, as of June 30, 2020, the Company had outstanding liabilities totaling $13,310,613 and $4,829 in short term liquid assets.

 

In the Company’s financial statements for the fiscal years ended December 31, 2019, and 2018, the Reports of the Independent Registered Public Accounting Firm include an explanatory paragraph that describes substantial doubt about the Company’s ability to continue as a going concern. These financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the settlement of liabilities and commitments in the normal course of business. Based on the Company’s current financial projections, it believes it does not have sufficient existing cash resources to fund its current limited operations.

 

It is the Company’s current intention to raise debt and/or equity financing to fund ongoing operating expenses. There is no assurance that these events will be satisfactorily completed or at terms acceptable to the Company. Any issuance of equity securities, if accomplished, could cause substantial dilution to existing stockholders. Any failure by the Company to successfully implement these plans would have a material adverse effect on its business, including the possible inability to continue operations.

 

NOTE 3. DEPOSITS

 

As of June 30, 2020, and December 31, 2019, the Company had deposits of $-0- and $1,308,830 respectively. The $1,308,830 which was non-refundable and was intended to be credited against the purchase price of the Sunniva acquisition (referenced throughout this Report) if it had been successfully consummated. This balance was written off by the Company due to the termination of the Sunniva Purchase Agreement on June 8, 2020.

 

NOTE 4. PREPAID EXPENSES

 

The following table sets forth the components of the Company’s prepaid expenses at June 30, 2020, and December 31, 2019:

  

  

June 30,

2020

  

December 31,

2019

 
       
Prepaid interest acquisition expenses-Sunniva $   592,473 
    Total $  $592,473 

 

The prepaid acquisition expenses for Sunniva were written off during the period ended March 31, 2020 due to the termination of the Sunniva Agreement.

 

 

 

 17 

 

 

NOTE 5. FAIR VALUE OF FINANCIAL INSTRUMENTS

 

The Company has adopted the guidance under ASC Topic 820 for financial instruments measured on a fair value on a recurring basis. Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability, in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs.

 

ASC Topic 820 establishes a fair value hierarchy, giving the highest priority to quoted prices in active markets and the lowest priority to unobservable data and requires disclosures for assets and liabilities measured at fair value based on their level in the hierarchy. The fair value hierarchy is based on three levels of inputs, of which the first two are considered observable and the last unobservable, as follows:

 

·Level 1 applies to assets or liabilities for which there are quoted prices in active markets for identical assets or liabilities.

 

·Level 2 applies to assets or liabilities for which there are inputs other than quoted prices that are observable for the asset or liability such as quoted prices for similar assets or liabilities in active markets; quoted prices for identical assets or liabilities in markets with insufficient volume or infrequent transactions (less active markets); or model-derived valuations in which significant inputs are observable or can be derived principally from, or corroborated by, observable market data.

 

·Level 3 applies to assets or liabilities for which there are unobservable inputs to the valuation methodology that are significant to the measurement of the fair value of the assets or liabilities.

 

The Company’s financial instruments consist principally cash, accounts payable, and accrued liabilities. The carrying values of these financial instruments approximate their fair value due to their short maturities. The carrying amount of the Company’s debt approximates fair value because the interest rates on these instruments approximate the interest rate on debt with similar terms available to the Company.

 

The Company analyzes all financial instruments with features of both liabilities and equity under ASC 480, “Distinguishing Liabilities from Equity” and ASC 815, “Derivatives and Hedging”. Derivative liabilities are adjusted to reflect fair value at each period end, with any increase or decrease in the fair value being recorded in results of operations as adjustments to fair value of derivatives. The effects of interactions between embedded derivatives are calculated and accounted for in arriving at the overall fair value of the financial instruments. Also, the fair value of freestanding derivative instruments such as warrant and option derivatives are valued using the Black-Scholes simulation model.

 

The Company’s derivative liabilities were adjusted to fair market value at the end of each reporting period, using Level 3 inputs.

 

The following table sets forth by level with the fair value hierarchy the Company’s financial assets and liabilities measured at fair value on June 30, 2020:

 

  Level 1  Level 2  Level 3  Total 
Derivative financial instruments $  $  $969,102  $969,102 

 

 

 

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NOTE 6. INVESTMENT

 

On February 25, 2019, the Company acquired 3,712,500 shares and 2,500,000 Warrants to purchase 2,500,000 shares of common stock at a price of CAD$1.00 of GN Ventures, Ltd., Alberta, Canada, f/k/a Great Northern Cannabis, Ltd. (“GN”), in exchange for an aggregate of 7,988,963 shares of the Company’s Common Stock from a former shareholder of GN. On the date of purchase, the Company’s Common Stock was trading at $1.41 which values the purchase at $11,264,438. For balance sheet purposes the Company has treated this purchase using the cost method because the purchase consists of an investment in a private company in which the Company does not have the ability to exercise significant influence over GN’s operating and financial activities.

 

The Company conducted an impairment test on December 31, 2019 and determined that an impairment existed resulting in a write-down of the investment by $7,070,841 to a current value of $4,193,597.

 

On May 8, 2020 the Company exchanged 5,507,400 of its shares for 3,671,597 shares of GN. These shares were value at $.67 each which represents the value of the GN shares as determined by the Company’s year-end impairment analysis and were recorded as an investment of $2,478,422. As of June 30, 2020 the Company’s investment in GN was $6,672,019.

 

Additionally, the Company conducted an impairment test at June 30, 2020, and determined that no further impairment existed.

 

NOTE 7. PROPERTY, PLANT AND EQUIPMENT

 

The following table sets forth the components of the Company’s property and equipment at June 30, 2020, and December 31, 2019:

 

  June 30, 2020  December 31, 2019 
  

Gross Carrying

Amount

  Accumulated Depreciation  Net Book Value  

Gross Carrying

Amount

  Accumulated Depreciation  Net Book Value 
Computers, software, and office equipment $4,549  $(1,516) $3,033  $4,757  $     (779) $3,978 
Land  136,487      136,487   143,201      143,201 
Construction in progress  1,463,411      1,463,411   1,540,918      1,540,918 
Total fixed assets $1,604,447  $(1,516) $1,602,931  $1,688,876  $(779) $1,688,097 

 

For the ended June 30, 2020, and 2019, the Company recorded depreciation expense of $758 and $-0-, respectively.

 

The facility acquired as part of the AMS acquisition is a 48,750 square foot marijuana grow facility built on a 6.7-acre parcel of land located in Hanover, Ontario Canada. To date, the exterior construction of the building has been completed, however, no interior construction has begun.

 

For construction in-progress assets, no depreciation is recorded until the asset is placed in service. When construction is completed, the asset should be reclassified as building, building improvements, or land improvement and should be capitalized and depreciated. Construction in progress includes all costs related to the construction of a medical cannabis facility. Cost also includes soft costs such as loan fees and interest and consulting fees and related expenses. The facility is not available for use and therefore not being amortized.

 

 

 

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NOTE 8. GOODWILL AND INTANGIBLE ASSETS

 

As of June 30, 2020 and December 31, 2019, the Company had $6,071,633 in goodwill and $1,685,738 in intangible assets, compared to $6,370,333 and $1,834,176 respectively. The goodwill and intangible assets arose as a result of the acquisition of AMS. Based on a valuation study performed on the acquisition, the Company determined that the marijuana license in process at AMS had a value of $1,871,000 which will be amortized over a fifteen-year period or approximately $124,733 per year.

 

The Company has recorded amortization expense of $63,141 and $63,787 respectively, for the six months ended June 30, 2020, and June 30, 2019.

 

NOTE 9. ACCOUNT PAYABLE AND ACCRUED LIABILITIES

 

Accounts payables are recognized initially at the transaction price and subsequently measured at the undiscounted amount of cash or other consideration expected to be paid. Accrued expenses are recognized based on the expected amount required to settle the obligation or liability.

 

The following table sets forth the components of the Company’s accrued liabilities on June 30, 2020, and December 31, 2019.

 

  

June 30,

2020

  

December 31,

2019

 
Accounts payable and accrued expenses $1,055,326  $902,854 
Accrued interest (a)  82,302   27,630 
Accrued legal settlement (b)  190,000   190,000 
Total accounts payable and accrued liabilities $1,327,628  $1,120,484 

 

(a)Represents interest accrued on the outstanding convertible notes -see Note 12, Notes Payable

 

(b)The Company had previously been a party to an action filed by Gary M. Cohen, a former officer and director of the Company in 2014. In March 2015, the Company entered into a Settlement Agreement with Mr. Cohen wherein the Company agreed to repurchase 2,250,000 shares of its Common Stock from Mr. Cohen in consideration for $350,000. Mr. Cohen passed away while there was a remaining balance of $190,000 remaining to be paid in accordance with the Settlement Agreement. The Company has taken the position that his death has discharged any obligation the Company might have to make the balance of the payments. The Company has not received any demand for payment or otherwise been involved in any attempt to collect this balance for a period of greater than two years prior to the date of this Report.

 

NOTE 10. RELATED PARTY TRANSACTIONS

 

The following table sets forth the components of the Company’s related party liabilities on June 30, 2020, and December 31, 2019.

 

  

June 30,

2020

  

December 31,

2019

 
Accounts payable and accrued payroll-related party(a) $495,088  $582,096 
Accrued expense - related party (b)  899,307   606,356 
Total accounts payable and accrued liabilities $1,394,395  $1,188,452 

 

 (a)Accounts payable and accrued payroll-related parties as of June 30, 2020, is comprised of the following: Interest-free loans of $226,899 from directors and officers and accrued salaries for officers and employees of $268,189.

 

 (b)Accrued expense related parties of $899,307 is comprised of accrued bonuses and fees due to current and former directors and officers of the Company. As of June 30, 2020, there was $150,000 included with the $748,307 amount due to claims received from two former directors, which was purported to be accrued salaries arising out of services provided in 2015 and 2016. Management is in the process of reviewing these claims.

 

 

 

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From April 1, 2018 through March 2019, the Company’s principal place of business was located at 2 Park Plaza, Suite 1200 – B. Irvine, CA 92614. This space was provided to the Company on a twelve-month term by a company of which Mr. Nicosia, one of the Company’s directors, serves of the President and CEO. The monthly rent at that location was $1,000, however, as of the date of this report, the Company has not made any rent payments and continues to accrue those amounts as accounts payable.

 

Effective on March 1, 2019, the Company changed its principal place of business to Suite 206 1180 Sunset Drive, Kelowna, BC, Canada Z1Y 9W6, which the Company has rented pursuant to an oral sublease from PLC International Investments Inc, a company owned and controlled by Dominic Colvin, the Company’s current CEO, President and a director. This location consists of approximately 500 sq. feet. The Company paid a monthly rent of $1,500 (CAD).

 

Effective March 22, 2019, the Company changed its principal place of business and leases three offices at 3600 888 3 St SW, Calgary, Alberta, Canada, T2P 5C5. The lease may be terminated by either party on 30 days’ notice. Rent is $4,000 CAD per month. This space was provided by a company to which, Mr. Orman, one of the Company’s directors, serves as a Director.

 

See Note 16, Subsequent Events, below, for additional related party transactions.

 

NOTE 11. CONVERTIBLE NOTES AND DERIVATIVE LIABILITIES

 

The following tables set forth the components of the Company’s, convertible debentures as of June 30, 2020, and December 31, 2019:

 

  

June 30,

2020

  

December 31,

2020

 
Principal value of convertible notes $2,084,000  $1,550,000 
Note discount  (492,093)  (997,397)
Total convertible notes, net current $1,591,907  $552,603 

 

On July 8, 2019, the Company commenced a private offering of Units at a price of $50,000 per Unit, each Unit consisting of 50,000 shares of the Company’s Common Stock and one $50,000 unsecured Convertible Note (“a Convertible Note”), which mature one year from the date of issuance and accrue interest at 5% per annum. These Convertible Notes are convertible into shares of the Company’s Common Stock at a conversion price of $1.00 per share. During the year ended December 31, 2019, the Company issued 31 Units in this offering for and received proceeds of $1,550,000 from six accredited investors. Since the Company’s stock price exceeded the conversion feature of the Convertible Notes and was immediately exercisable, the Company recorded a beneficial conversion feature (“BCF”) and expense of $1,550,000 which was charged to interest expense with an offset to paid-in capital.

 

 

 

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In addition, the 5,505,530 shares of Common Stock included in the Units were valued at $5,075,000. The excess above the $1,550,000 face value of the Convertible Notes or, $3,525,000, was charged to interest expense with an offset to paid-in capital. The remaining $1,550,000 was recorded as a Note discount of $1,550,000 to be amortized over the three years from the date of the Note to the maturity date. The Company recorded $552,602 in interest expense related to the amortization of note discount during the year ended December 31, 2019. During the six months ended June 30, 2020 the Company recorded $38,643 in interest expense on these Notes and amortized $772,877 of note discount which was charged to interest expense. As of June 30, 2020, there was $66,274 in accrued interest on these notes, and $224,521 in unamortized note discount related to these notes.

 

During the six months ended June 30, 2020, the Company issued $438,000 in unsecured 8% convertible notes, and $96,000 in unsecured 10% convertible notes to four accredited investors. Under the terms of each convertible note, the investors received the right to convert their to common stock commencing six months after the date of issuance at 75% and 61%, respectively of the lowest closing price for the Company’s common measured 20 business days prior to conversion. Additionally, these notes were issued with an original issue discount of $18,000 which were immediately expensed. One of the noteholders also received 153,940 “returnable” shares in connection with issuance of the convertible notes. These shares are returnable to the Company if the underlying convertible note ($160,000) is redeemed before the passage of 180 days.

 

Based on the Company’s current financial condition, management determined it was unlikely that these notes would be refinanced before the noteholders had the opportunity to convert their note to common shares. As a result the Company determined that each of the notes had embedded derivative features which were likely to be exercised. The Company recorded a note discount of $534,000 on these notes and expensed the stock issuance as a financing cost in the amount of $130,849 related to the issuance of the 153,940 shares describe above. During the six months ended June 30, 2020, the Company recorded $16,028 in interest expense on these six new notes and amortized $180,751 of note discount which was charged to interest expense. As of June 30, 2020, there was $16,028 in accrued interest on these notes, and $353,429 in unamortized note discount related to these notes.

 

The FASB has issued authoritative guidance whereby instruments which do not have fixed settlement provisions are deemed to be derivative instruments. The conversion prices of the Notes described above were not a fixed amount because they were either subject to an adjustment based on the occurrence of future offerings or events or they were variable. Since the number of shares is not explicitly limited, the Company is unable to conclude that enough authorized and unissued shares are available to settle the conversion option. In accordance with the FASB authoritative guidance, the conversion features have been characterized as derivative liabilities to be re-measured at the end of every reporting period with the change in value reported in the statement of operations.

 

As of June 30, 2020, derivative liabilities were valued using a probability-weighted average Black-Scholes-Merton pricing model with the following assumptions:

 

  

June 30,

2020

 
Exercise Price $0.0003–0.035 
Stock Price $0.0006 
Risk-free interest rate  .19%-1.55% 
Expected volatility  133.80%-443.00% 
Expected life (in years)  1.00 
Expected dividend yield  0% 
Fair Value: $969,102 

 

The risk-free interest rate was based on rates established by the Federal Reserve Bank. The Company uses the historical volatility of its common stock to estimate the future volatility for its common stock. The expected life of the conversion feature of the notes was based on the remaining term of the notes. The expected dividend yield was based on the fact that the Company has not customarily paid dividends in the past and does not expect to pay dividends in the future.

 

During the six months ended June 30, 2020, the Company recognized a loss of $969,102 as “Other Expense” on its Statements of Operations, which represented the net change in the value of the derivative liability.

 

 

 

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NOTE 12. NOTES PAYABLE

 

The following tables set forth the components of the Company’s secured notes payable as of June 30, 2020, and December 31, 2019:

  

  

June 30,

2020

  

December 31,

2019

 
Principal value of Promissory Notes $8,376,501  $8,789,794 
Loan discounts  (348,921)  (488,117)
Less: current portion  (1,079,352)  (2,800,559)
Promissory Notes, long term net of discount $6,948,228  $5,501,118 

 

Pursuant to the terms of the Securities Purchase Agreement with AMS the Company issued a non-interest bearing CAD $10,000,000 ($7,330,000 USD) promissory note secured only by the shares acquired in AMS. Principal payments under the Promissory Note are due quarterly commencing upon AMS receiving a license to cultivate and are computed based upon 50% of AMS' cash flow, defined as EBITDA less all capital expenditures, taxes incurred, non-recurring items and other non-cash items for the relevant fiscal quarter, including the servicing of all senior debt payment obligations of the Company. The Promissory Note matures the earlier of two years from the date AMS receives a license to cultivate, or December 31, 2021. Since AMS had not received its cultivation license as of June 30, 2020, the Note Payable will have a maturity date of December 31, 2021.

 

The Company performed a valuation study as part of the AMS acquisition. The valuation study determined that the Promissory Note should be valued at $6,632,917 since it was non-interest bearing. As a result, the Company recorded a note discount of $697,083. The note discount will be amortized to interest expense over the three-year term of the Promissory Note. During the year ended December 31, 2019, the Company recorded $317,000 in interest expense related to the amortization of the note discount. No interest expense was recorded in 2018 since the acquisition occurred on December 31, 2018.

 

On July 3, 2019, the Company entered into a 12% $1,000,000 Loan Agreement with Koze Investments LLC (“Koze”), payable in full on June 28, 2020. The Company is currently in discussions with Koze to extend the maturity date of the Note. While the Company believes it will be successful in extending the maturity date, there are no assurances this will occur. Under the terms of the 12% Note, Koze took a first security interest against the Company’s Hanover, Ontario cannabis facility in progress and required the Company to pay off its existing mortgage of approximately $650,000 CAD. Additionally, the Company agreed to pay a 3% origination fee, prepay six months of interest ($60,000) and to issue to Koze five-year warrants to purchase 1,001,000 shares of the Company’s Common Stock at an exercise price $1.00 per share. After paying the origination fees, the prepayment and paying off the original mortgage, the Company used a portion of the remaining proceeds as payment against the SMI purchase price of CAD $1,000,000. As of the date this Report the Company has continued to accrue interest on the Koze Note and is in discussion to extend its term. Koze has not asserted that a default has occurred.

 

On April 21, 2020, the Company received a loan from the Government of Canada under the Canada Emergency Business Account program (CEBA). This loan was in the amount of $40,000 CAD (USD $29,352). These funds are interest-free until December 31, 2022, at which time the remaining balance will convert to a 3-year term loan at an interest rate of 5% per annum. If the Company repays the loan prior to December 31, 2022, there will be loan forgiveness of 25% or $10,000 CAD.

 

NOTE 13. INCOME TAXES

 

As of June 30, 2020, the Company has approximately $61,000,000 of federal net operating loss carryforwards. The federal net operating loss carryforwards begin to expire in 2030. State net operating loss carryforwards begin to expire in 2034. Due to the change in ownership provisions of the Internal Revenue Code, the availability of the Company’s net operating loss carryforwards could be subject to annual limitations against taxable income in future periods which could substantially limit the eventual utilization of such carryforwards. The Company has not analyzed the historical or potential impact of its equity financings on beneficial ownership and therefore no determination has been made whether the net operating loss carryforward is subject to any Internal Revenue Code Section 382 limitation. To the extent there is a limitation there could be a substantial reduction in the deferred tax asset with an offsetting reduction in the valuation allowance. As of June 30, 2020, the Company has no unrecognized income tax benefits.

 

 

 

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The tax years from 2014 and forward remain open to examination by federal and state authorities due to net operating loss and credit carryforwards. The Company is currently not under examination by the Internal Revenue Service or any other taxing authorities.

 

NOTE 14. COMMITMENTS AND CONTINGENCIES

 

On April 1, 2018, the Company changed its principal place of business to 2 Park Plaza, Suite 1200 – B. Irvine, CA 92614. This space is provided on a twelve-month term by a company to which Mr. Nicosia, one of the Company’s directors, serves as Chief Executive Officer. Monthly rent is $1,000, however, as of the date of this filing, the Company has not made any rent payments and continues to accrue those amounts as accounts payable.

 

In March 2019, the Company temporarily moved its principal place of business to Suite 206 1180 Sunset Drive, Kelowna, BC, Canada Z1Y 9W6, which the Company rented under an oral sublease from PLC International Investments Inc, a company owned and controlled by Dominic Colvin, the Company’s current CEO, President, and a director. This location consists of approximately 500 sq. feet. The Company continues to occupy this location as of the date of this Report and pays a monthly rent of $1,500 (CAD).

 

Effective March 22, 2019, the Company moved into a new principal place of business and entered into a lease agreement to lease three offices at Suite 3600, 888 3 St SW, Calgary, Alberta, Canada, T2P 5C5. The lease may be terminated by either party on 30 days’ notice. Rent is $4,000 CAD per month. This space was provided by a company to which, Mr. Orman, one of the Company’s directors, serves as a Director.

 

NOTE 15. STOCKHOLDERS’ EQUITY

 

Preferred Stock

 

The Company is authorized to issue up to 10,000,000 shares of one or more series of Preferred Stock, par value of $0.0001 per share. The Board of Directors may, without stockholder approval, determine the dividend rates, redemption prices, preferences on liquidation or dissolution, conversion rights, voting rights, and any other preferences.

 

Series A Preferred Stock

 

In April 2018, the Company issued 60,000 shares of its Series A Convertible Preferred Stock for $1.00 per share to certain investors who then became members of management and the board of directors. Each share of Series A Convertible Preferred Stock is convertible into 1,250 shares of Common Stock and vote on an as-converted basis. The rights and designations of these Preferred Shares include the following:

 

·entitles the holder thereof to 1,250 votes on all matters submitted to a vote of the shareholders:

 

·The holders of outstanding Series A Convertible Preferred Stock shall only be entitled to receive dividends upon declaration by the Board of Directors of a dividend payable on the Company’s Common Stock, whereupon the holders of the Series A Convertible Preferred Stock shall receive a dividend on the number of shares of Common Stock into which each share of Series A Convertible Preferred Stock is convertible;

 

·Each Series A Preferred Share is convertible into 1,250 shares of Common Stock;

 

·not redeemable.

 

 

 

 24 

 

 

The beneficial conversion (“BCF”) feature attributed to the purchase of Preferred Stock was deemed to have no value on the date of purchase because there was no public trading market for the Convertible Preferred Stock, and none is expected to develop in the future. Therefore, the BCF related to the Preferred Shares was considered to have no value on the date of issuance.

 

There were 60,000 shares of Series A Preferred Stock issued and outstanding as of June 30, 2020, and December 31, 2019, respectively.

 

Series B Preferred Stock / Common Stock

 

In February 2019, the Company commenced an offering of up to $3 million in principal amount of Units at a price of $1.00 per Unit, each Unit consisting of one share of Series “B” Convertible Preferred Stock, each Convertible Preferred Share convertible into one share of the Company’s Common Stock at the election of the holder and one Common Stock Purchase Warrant exercisable to purchase one share of Common Stock at an exercise price of $2.00 per share, which offering is to be offered only to “accredited investors,” as that term is defined in Rule 501 of Regulation D. this Offering was closed at the end of August 2019. As of June 30, 2020, the Company had accepted $475,000 in subscriptions in this offering.

 

There were 475,000 shares of Series B Convertible Preferred Stock issued and outstanding as of June 30, 2020, and December 31, 2019, respectively.

 

The Company is authorized to issue 300,000,000 shares of Common Stock, par value $0.0001 per share. As of June 30, 2020, and December 31, 2019, 42,448,339 and 36,486,999 shares of Common Stock were issued and outstanding, respectively.

 

In January 2019, the Company closed a private offering of 12% Convertible Debentures where it accepted subscriptions in the aggregate amount of $2,072,000 from 35 accredited investors, as that term is defined in Rule 501 of Regulation D. Each Convertible Debenture is convertible into shares of common stock at the lesser of $0.40 or 50% of the closing market price on the date a business combination valued at greater than $5,000,000 is completed., The Company used the proceeds from this offering for the purchase of AMS, as well as working capital, including costs associated with the preparation of over three years of reports that had not been filed with the SEC. During the three month period ended June 30, 2019, the Company entered into a Qualified Financing with its minority purchase of GN stock and warrants described in Note 4 “Investment”. As a result on June 30, 2019, the convertible notes amounting to $2,072,000 along with $130,212 of accrued interest were converted, pursuant to the automatic conversion terms described above, to equity at a price of $0.40 per share, or a total of 5,505,530 shares.

 

Unit Offering

 

On July 8, 2019 the Company commenced a private offering of Units at a price of $50,000 per Unit, each Unit consisting of 50,000 shares of the Company’s Common Stock and one $50,000 unsecured Convertible Note (“Unit Convertible Note”), which mature in one year from the date of issuance and accrue interest at 5% per annum. These Unit Convertible Notes are convertible into one share of the Company’s Common stock at a conversion price of $1.00 per share. During the three months ended June 30, 2020, the Company issued $1,200,000 in Unit Convertible Notes to two accredited investors. Since the Company’s stock price exceeded the conversion feature of the Unit convertible Notes and was immediately exercisable, the Company recorded a beneficial conversion feature (“BCF”) and expense of $1,200,000 which was charged to interest expense with an offset to paid-in capital.

 

Additionally, 1.2 million shares of Common Stock were issued in connection with the sale of the Units which were valued at $2,598,000. The excess above the $1,200,000 face value of the Unit Convertible Notes or, $1,398,000 was charged to interest expense with an offset to paid-in capital. The remaining $1,200,000 was recorded as a Note discount of $1,200,000 to be amortized over one year at the rate of $100,000 per month. $200,000 in interest expense related to this discount was recorded during the three months ended June 30, 2020.

 

 

 

 25 

 

 

Shares Issued in Connection with the Assignment Agreement with Great Northern Ltd

 

On September 28, 2018, Great Northern Cannabis, Ltd (“GN”), entered a Letter of Intent with P2P Green Power Energy Solutions and certain individuals to acquire all of the issued and outstanding shares of AMS. On October 10, 2018, the Company entered into an Assignment and Assumption Agreement (“the AA Agreement”) with GN. Under the terms of the AA Agreement, the Company essentially purchased the right to acquire AMS from GN for the following consideration:

 

·A refundable payment of CAD $200,000
·An accountable reimbursement of GN expenses and fees related to the AMS acquisition not to exceed CAD $300,000
·In the event that we didn’t enter into a management agreement with GN post-closing, we agreed to issue GN, 2,500,000 shares of our Common Stock trading under symbol “CPMD”

 

All of the above consideration was expressly contingent upon the closing of the AMS acquisition which was consummated by the Company on December 31, 2019. The payments of $200,000 and $300,000 were made to GN. On August 30, 2019, the parties determined that no management agreement had been entered into so the Company issued 2,500,000 shares to GN valued at $5,800,000 as required pursuant to the Agreement. Under the guidelines of ASC 805, Business Combinations, since we disclosed that the AMS transaction was complete, the goodwill re-measurement period ended and therefore we could not adjust goodwill for this transaction. As a result, we recorded an acquisition expense on the Company’s income statement for $5,800,000.

 

Shares Reserved for Issuance

 

As of June 30, 2020, the Company had 122,568,069 Common Shares reserved for issuance. These shares are comprised of 75,000,000 Common Shares issuable upon the conversion of the Series A Preferred Stock; 475,000 Common Shares issuable upon the conversion of Series B Preferred Stock; 750,000 Common Shares upon the exercise of stock options, 1,550,000 shares issuable upon a conversion of the convertible notes, and 2,344,750 Common Shares issuable upon the exercise of warrants. None of these shares were used in the calculation of earnings per share because their inclusion would be anti-dilutive since the Company is operating at a loss. There are no assurances that the conversion rights will be utilized or that the options or the warrants will be exercised.

 

Additionally, at June 30, 2020 there were 1,374,118 shares not included in shares reserved for issuance that would have issuable under the provisions of certain convertible notes. See “Note 11. Convertible Notes and Derivative Liabilities.”

 

Stock Options

 

During the period ended June 30, 2020, and December 31, 2019, the Company did not record any stock-based compensation expense related to stock options. As of June 30, 2020, options were outstanding to purchase 750,000 shares of the Company’s Common Stock at an exercise price of $1.00 per share. These stock options expire on November 1, 2024.

 

 

 

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Stock Purchase Warrants

 

The following table reflects all outstanding and exercisable warrants on June 30, 2020, and December 31, 2019:

 

 Number of Warrants Outstanding (a)  Weighted Average Exercise Price  Average Remaining Contractual Life (Years) 
Warrants outstanding, January 1, 2018    $    
Warrants issued  350,000   0.57   2.75 
Warrants exercised         
Warrant forfeited         
Warrants outstanding, December 31, 2018  350,000  $0.57   1.37 
Warrants issued (a)  1,519,750  $1.01   1.84 
Warrants outstanding December 31, 2019  1,869,750  $0.92   2.05 
             
Warrants outstanding June 30, 2020  1,869,750  $0.92   1.75 

 

Stock purchase warrants are exercisable for a period of two-five years from the date of issuance.

 

(a) The number of warrants reflected in this table does not include 475,000 warrants that were issued at various times during 2019 in connection with the issuance of the Company’s Series B Preferred stock. These warrants are exercisable for a period of three years at a strike price of $2.00 per share. The Company accounts for warrants issued to purchase shares of its common stock or preferred stock as equity in accordance with FASB ASC 480, Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock, Distinguishing Liabilities from Equity. Therefore, no stock-based compensation expense was recorded for the issuance of these 475,000 warrants.

 

The value of the stock purchase warrants for the periods ended June 30, 2020, and December 31, 2019, was determined using the following Black-Scholes methodology:

 

Expected dividend yield (1)0.00%
Risk-free interest rate range (2)1.75 - 2.91%
Volatility range (3)1.23% - 442.92%
Expected life (in years)2.00 - 5.00

_____________

(1)The Company has no history or expectation of paying cash dividends on its Common Stock.
(2)The risk-free interest rate is based on the U.S. Treasury yield for a term consistent with the expected life of the awards in effect at the time of grant.
(3)The volatility of the Company’s Common Stock is based on trading activity for the previous three year period ended at each stock purchase warrant contract date.

 

During the three-month periods ended June 30, 2020 and 2019, the Company recorded $206,579 and $161,335, respectively, in stock-based compensation.

 

 

 

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NOTE 16. SUBSEQUENT EVENTS

 

On July 8, 2020, we filed a lawsuit in the United States District Court for the District of Colorado against Gary Herick, Arrowhead Consulting, LLC, Whitemoon Energy LLC., Jamie Huttrer a/k/a Jamie Huttrer-Herick, and ZeroRMW, LLC (collectively, the “Herick Parties”). The lawsuit alleges, among other things, the Herick Parties engaged in various legal violations including breach of fiduciary duty, common law fraud, conversion, usurpation of corporate opportunities, securities violations pursuant to Section 10b-5 of the Securities Exchange Act of 1934, and civil conspiracy. Mr. Herick is a former officer and director of the Company.

 

On July 8, 2020, August 7, 2020, and August 16, 2020, three notes principal amount due of $200,000, $200,000 and $800,000, respectively reached their maturity dates. These notes remain outstanding and we continue to accrue the required interest on the principal balance. As of the date of this Report, the noteholders not asserted that a default has occurred and, while there can be no assurance, we believe we will be successful in extending the maturity dates of these notes.

 

On July 9, 2020, we made a demand of Gary Herick, Arrowhead Consulting, LLC, Whitemoon Energy LLC., Jamie Huttrer a/k/a Jamie Huttrer-Herick, and ZeroRMW, LLC (collectively, the “Herick Parties”) for a return of with seeking the return of profits made between the period of August 2018, to January 2019. During this period, Gary Herick was the Chief Financial Officer and Director of the Issuer. Gary Herick was also the owner of approximately twenty-six percent (26%) of the Issuer’s common stock. Pursuant to the Securities Exchange Act of 1934, §16(b), 15 U.S.C.S. § 78p(b), an issuer may recover any profits realized by a beneficial owner from the sale of the issuer's equity securities within a six (6) month period. All unlawful profits must be returned to the Issuer on or before Tuesday, September 8, 2020. If Herick does not return such profits by that date, the Company will file a lawsuit to recover such profits.

 

On August 4, 2020, we executed a non-binding Letter of Intent with Triton Funds LP (“Triton”) whereby Triton would agree to purchase $3,000,000 of our Common Stock at a price equal to 80% of the lowest trading price of the prior ten trading days. Triton would purchase shares of our Common Stock in tranches of $250,000. In order to consummate this financing, we will be required to file, and have declared effective, a Registration Statement on Form S-1 with the Securities and Exchange Commission.

 

 

 

 

  

 

 

 

 

 

 

 

 

 

 

 

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

Note Regarding Forward-Looking Statements

 

This Quarterly Report on Form 10-Q includes a number of forward-looking statements that reflect management's current views with respect to future events and financial performance. Forward-looking statements are projections in respect of future events or our future financial performance. In some cases, you can identify forward-looking statements by terminology such as “may,” “should,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “potential” or “continue” or the negative of these terms or other comparable terminology. These statements include statements regarding the intent, belief or current expectations of us and members of our management team, as well as the assumptions on which such statements are based. Prospective investors are cautioned that any such forward-looking statements are not guarantees of future performance and involve risk and uncertainties, and that actual results may differ materially from those contemplated by such forward-looking statements. These statements are only predictions and involve known and unknown risks, uncertainties and other factors, including the risks set forth in the section entitled “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2019 as filed with the U.S. Securities and Exchange Commission (the “SEC”) on May 27, 2020 any of which may cause our company’s or our industry’s actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied in our forward-looking statements. These risks and factors include, by way of example and without limitation:

 

·our ability to successfully commercialize and our products and services on a large enough scale to generate profitable operations;

 

·our ability to maintain and develop relationships with customers and suppliers;

 

·our ability to successfully integrate acquired businesses or new brands;

 

·the impact of competitive products and pricing;

 

·supply constraints or difficulties;

 

·the retention and availability of key personnel;

 

·general economic and business conditions;

 

·substantial doubt about our ability to continue as a going concern;

 

·our need to raise additional funds in the future;

 

·our ability to successfully recruit and retain qualified personnel in order to continue our operations;

 

 

 

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·our ability to successfully implement our business plan;

 

·our ability to successfully acquire, develop or commercialize new products and equipment;

 

·intellectual-property claims brought by third parties; and

 

·the impact of any industry regulation.

 

Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, or performance. Except as required by applicable law, including the securities laws of the United States, we do not intend to update any of the forward-looking statements to conform these statements to actual results.

 

Readers are urged to carefully review and consider the various disclosures made by us in this report and in our other reports filed with the SEC. We undertake no obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events or changes in the future operating results over time except as required by law. We believe that our assumptions are based upon reasonable data derived from and known about our business and operations. No assurances are made that actual results of operations or the results of our future activities will not differ materially from our assumptions.

 

As used in this Quarterly Report on Form 10-Q and unless otherwise indicated, the terms “CannaPharmaRx,” “Company,” “we,” “us,” and “our” refer to CannaPharmaRx, Inc. and our wholly-owned subsidiaries. Unless otherwise specified, all dollar amounts are expressed in United States dollars.

 

The following discussion should be read in conjunction with our financial statements and notes thereto included herein. In connection with, and because we desire to take advantage of, the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995, we caution readers regarding certain forward-looking statements in the following discussion and elsewhere in this report and in any other statement made by, or on our behalf, whether or not in future filings with the Securities and Exchange Commission. Forward looking statements are statements not based on historical information and which relate to future operations, strategies, financial results or other developments. Forward looking statements are necessarily based upon estimates and assumptions that are inherently subject to significant business, economic and competitive uncertainties, and contingencies, many of which are beyond our control and many of which, with respect to future business decisions, are subject to change. These uncertainties and contingencies can affect actual results and could cause actual results to differ materially from those expressed in any forward-looking statements made by, or on our behalf. We disclaim any obligation to update forward looking statements.

 

Overview and History

 

We were originally incorporated in the State of Colorado in August 1998 under the name “Network Acquisitions, Inc.” We changed our name to Cavion Technologies, Inc. in February 1999 and subsequently to Concord Ventures, Inc. in October 2006.

 

On December 21, 2000, we filed for protection under Chapter 11 of the United States Bankruptcy Code. In connection with the filing, on February 16, 2001, we sold our entire business, and all of our assets, for the benefit of our creditors. After the sale, we still had liabilities of $8.4 million and were subsequently dismissed by the Court from the Chapter 11 reorganization, effective March 13, 2001, at which time the last of our remaining directors resigned. On March 13, 2001, we had no business or other source of income, no assets, no employees or directors, outstanding liabilities of approximately $8.4 million and had terminated our duty to file reports under securities law. In February 2008, we were re-listed on the OTC Bulletin Board.

 

 

 

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In April 2010, we re-domiciled in Delaware under the name CCVG, Inc. (“CCVG”). Effective December 31, 2010, CCVG completed an Agreement and Plan of Merger and Reorganization (the “Reorganization") which provided for the merger of two of our wholly-owned subsidiaries. As a result of this reorganization our name was changed to “Golden Dragon Inc.”, which became the surviving publicly quoted parent holding company.

 

On May 9, 2014, we entered into a Share Purchase Agreement (the “Share Purchase Agreement”) with CannaPharmaRx, Inc., a Colorado corporation (“Canna Colorado”), and David Cutler, a former President, Chief Executive Officer, Chief Financial Officer and director of our Company. Under the Share Purchase Agreement, Canna Colorado purchased 1,421,120 shares of our common stock from Mr. Cutler and an additional 9,000,000 restricted common shares directly from us.

 

On May 15, 2014, as amended and effective January 29, 2015, we entered into an Agreement and Plan of Merger (the “Merger”) pursuant to which Canna Colorado became a subsidiary of our Company. In October 2014, we changed our legal name to “CannaPharmaRx, Inc.”

 

Pursuant to the Merger, all of the shares of our common stock previously owned by Canna Colorado were cancelled. As a result of the aforesaid transactions we became an early-stage pharmaceutical company whose purpose was to advance cannabinoid research and discovery using proprietary formulation and drug delivery technology then under development.

  

Our executive offices are located at Suite 3600, 888 3rd Street SW, Calgary, Alberta Canada, T2P 5C5 phone (949) 652-6838. Our website address is www.cannapharmarx.com.

 

We have not generated any revenues during the past five years. Following is our current Plan of Operation.

 

PLAN OF OPERATION

 

We are involved in the cannabis industry in Canada and are reviewing opportunities in other jurisdictions where cannabis has been legalized, including the US. Our principal business activities to date have been to negotiate, acquire and develop various cannabis cultivation projects throughout Canada. As of the date of this Report we do not own or operate any businesses in the US.

 

Our activities to date have centered around four projects, including (i) the Hanover Project; (ii) the Great Northern Project; (iii) the acquisition of Sunniva Medical, Inc.; and (iv) the acquisition of Ramon Road Production Campus LLC.

 

On June 8, 2020, we received a notice of termination of the relevant Purchase Agreement with Sunniva.

 

Following is a description of the projects we are pursuing as of the date of this Report:

 

Hanover

 

Effective November 19, 2018, we entered into a Securities Purchase Agreement with Alternative Medical Solutions, Inc., an Ontario, Canada corporation (“AMS”), its shareholders and Hanover CPMD Acquisition Corp., wherein we acquired all of the issued and outstanding securities of AMS. As part of the material terms of this transaction, we also agreed to acquire all of the outstanding shareholder loans held by the principal shareholder of AMS. The purchase price was CAD$12,700,000, of which CAD$1,012,982 was paid at closing and we assumed debt of approximately CAD$650,000. The principal shareholders of AMS elected to receive 971,765 shares of our Common Stock in lieu of CAD$985,000 in additional cash. We granted the holders of these shares “piggyback” registration rights but we have not yet filed a registration statement to cause us to register these shares with the SEC. The balance of approximately CAD$10,000,000 is to be paid pursuant to the terms of a relevant subordinated non-interest bearing promissory note, secured only by the shares acquired in AMS Principal payments under the Promissory Note are due quarterly and are computed based upon 50% of AMS' cash flow, defined as EBITDA less all capital expenditures, taxes incurred, non-recurring items and other non-cash items for the relevant fiscal quarter, including the servicing of all senior debt payment obligations of the company. The Promissory Note matures the earlier of two years from the date AMS receives a license to cultivate or December 31, 2021. As of the date of this report, we are not producing any cannabis on this property. We are currently reviewing our proposed activities on this project.

 

 

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Relevant thereto, in January 2019 we also entered into a two-year Consulting Agreement with Stephen Barber, a founder and principal shareholder of AMS, to assist us in our ongoing discussions and negotiations with various governmental agencies, including the City of Hanover and Province of Ontario, whereby we agreed to pay (i) a consulting fee of US$225,000, payable on or before April 30, 2019, along with a monthly fee of CAD$1,500 and (ii) an option to purchase up to 500,000 shares of our common stock at an exercise price of USD$1.00 per share, which option shall expire November 19, 2020. Further, we agreed to repurchase 45,000 shares of the stock issued to him as part of the AMS acquisition for CAD$33,750 (USD$0.75 per share) on or before April 30, 2019. As of June 30, 2020, per the terms of these agreements we owed the balance of $$237,409 to Mr. Barber, which is past due as of the date of this Report. However, we are currently reviewing whether Mr. Barber has performed pursuant to the terms of the Consulting Agreement. See “Part II, Item 1, Legal Proceedings” below.

  

The AMS cultivation facility is a 48,750 square foot cannabis grow facility built on a 6.7-acre parcel of land located in Hanover, Ontario Canada. To date, exterior construction of the building has been completed, however, no interior construction has begun. Upon full completion, the facility will contain up to 20 separate growing rooms which we believe will provide annual production capacity of 9,500 kilos of cannabis (20,900 lbs.). Together with the remaining equipment needed to complete the grow facility we estimate that we will require approximately CAD$20 million in additional financing which we will seek to raise via equity and debt. While no definitive decision has been made, as of the date of this Report we are considering converting the building to a cannabis extraction facility or sell the property.

 

Great Northern

 

In early 2019 we retained new members of management who are actively engaged in the Canadian cannabis industry, including former management of GN Ventures, Ltd, Alberta, Canada, f/k/a Great Northern Cannabis, Ltd. (“GN”). Not coincidentally, effective February 25, 2019, we acquired 3,712,500 shares and 2,500,000 Warrants to purchase 2,500,000 shares of Common Stock of GN in exchange for an aggregate of 7,988,963 shares of our Common Stock, from our current CEO, who is a former shareholder of GN. We believe this is the initial step in our efforts to acquire all of the issued and outstanding stock of GN. Based upon various discussions that have taken place we anticipate making additional purchases of stock from other shareholders of GN during 2020 but there are no assurances this will occur.

 

GN owns a 60,000 square foot cannabis cultivation and grow facility located on 38 acres in Stevensville, Ontario, Canada. Because we are minority shareholders of GN and GN is a privately held company, we cannot confirm that the information we currently have on their operations is complete or fully reliable. GN estimates annual total production capacity from the Stevensville facility of up to 12,500 kilograms of cannabis. GN advised that the Stevensville facility is complete, and GN’s subsidiary, 9869247 Canada Limited, received a license to cultivate from the Canadian Ministry of Health on July 5, 2019. As a result, in October 2019 GN commenced cultivation activities, with the initial harvest in the first quarter of 2020. Additionally, it is our current understanding that GN intends to increase cannabis production by building additional cannabis cultivation facilities on the excess land presently owned adjacent to the existing Stevensville facility, provided that additional funding can be obtained on commercially reasonable terms. Neither we nor GN have any firm commitment to provide any of the funds necessary for expansion as of the date of this report. We cannot state any definitive information concerning Great Northern because it is a privately held Canadian company who is keeping its business activities confidential. We expect that we will obtain additional information on the business activities of GN as we renew discussions to acquire additional interests and can perform our due diligence.

 

On May 8, 2020, we agreed to acquire an additional 3,671,597 shares of GN common stock in exchange for an aggregate of 5,507,400 shares of our Common Stock. We presently own 7,384,097 shares of GN common stock which we believe, based on information provided by the management of GN, equals approximately 10% of the total issued and outstanding shares of GN common stock. Additionally, we own Warrants to purchase an additional 2,500,000 shares of GN common stock with each Warrant having an exercise price of CAD$1.00 per share. We intend to continue to acquire the common stock of GN in one or multiple additional transactions.

 

 

 

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Ramon Road Production Campus

 

On June 26, 2020, the Company signed a Purchase Agreement with Bristol Capital Investors, LLC to acquire all of their membership interests in Ramon Road Production Campus LLC. This LLC owns the Cathedral City Cannabis Campus, located in Coachella Valley, California, a state-of-the-art cannabis cultivation and production facility consisting of 325,599 square feet situated on nearly 20 acres, designed with long term automation methodologies, efficiency and a focus on sustainability of cannabis production. The sale of this property is being made on an “as is, where is” basis. The purchase price is $10 million. We have no commitment from any financing source to provide this funding as of the date of this Report. In addition, we would require an additional $20 million of financing to complete construction and place the facility into operational status. As of the date of this filing, we continue to negotiate this transaction with the relevant parties.

 

Sunniva Medical

 

Effective June 11, 2019, we along with a wholly-owned subsidiary of our Company entered into a Securities Purchase Agreement with Sunniva, Inc, a British Columbia, Canada corporation (“Sunniva”) wherein we have agreed to acquire all of the issued and outstanding securities of Sunniva’s wholly-owned subsidiaries Sunniva Medical Inc. (“SMI”) and 1167025 B.C. LTD (“1167025”).SMI and 1167025 are owners of real estate on properties that are subject to late-stage marijuana licensed producer applications in Canada. We entered into various amendments to the Securities Purchase Agreement, however, on June 8, 2020 we received notice from Sunniva, Inc. of its exercise of its rights to terminate that Purchase Agreement dated June 11, 2019, as amended, wherein we had agreed to purchase Sunniva’s wholly-owned subsidiaries Sunniva Medical Inc. and 1167025 B.C. LTD.

  

We recently file an application to list our Common Stock for trading on the OTCQB. We also intend to dual list our Common Stock for trading on the Canadian Securities Exchange (“CSE”) as a condition of consummating a transaction with GN. We anticipate filing our initial listing application with the CSE in the near future and, while no assurances can be provided, we anticipate receiving approval for trading during the fourth quarter of 2020.

 

LIQUIDITY AND CAPITAL RESOURCES

 

As of June 30, 2020, we had $3,789 in cash.

 

In April 2018, we issued 60,000 shares of our Series A Convertible Preferred Stock at a price of $1.00 per share. Each share of Series A Convertible Preferred Stock is convertible into 1,250 shares of common stock and vote on an as-converted basis. The rights and designations of these Preferred Shares include the following:

 

 ·entitles the holder thereof to 1,250 votes on all matters submitted to a vote of the shareholders;
 ·The holders of outstanding Series A Convertible Preferred Stock shall only be entitled to receive dividends upon declaration by the Board of Directors of a dividend payable on our Common Stock whereupon the holders of the Series A Convertible Preferred Stock shall receive a dividend on the number of shares of Common Stock in to which each share of Series A Convertible Preferred Stock is convertible;
 ·Each Series A Preferred Share is convertible into 1,250 shares of Common Stock; and
 ·not redeemable.

 

 

 

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During 2018 we conducted a private offering of 12% Convertible Debentures where we accepted subscriptions in the aggregate amount of $2,072,000 from 35 accredited investors, as that term is defined in Rule 501 of Regulation D. Each Convertible Debenture is convertible into shares of our Common Stock at the lesser of $0.40 or a 50% of the closing market price on the date a business combination valued at greater than $5,000,000 is completed. We relied upon the exemption from registration provided by Rule 506 of Regulation D to issue the Convertible Debentures. We used the proceeds from this offering for the purchase of AMS, as well as working capital, including costs associated with the preparation of over three years of reports that had not been filed with the SEC. During the initial calendar quarter of 2019 we entered into a Qualified Financing with our minority purchase of GN stock and warrants described in Note 6, “Investment” to our Notes to our Financial Statements include herein. This offering closed in January 2019. On March 31, 2019, the convertible notes amounting to $2,072,000 along with $130,212 of accrued interest were converted, pursuant to the automatic conversion terms included in the Convertible Debentures, to shares of our Common Stock at a price of $0.40 per share, or a total of 5,505,530 shares.

 

In the first quarter of 2019 we commenced a private offering of Units to accredited investors only at a price of $1.00 per Unit, each Unit consisting of one share of Series B Convertible Preferred Stock convertible into one share of our Common Stock and one Common Stock Purchase Warrant exercisable to purchase one share of our Common Stock at an exercise price of $2.00. In August 2019 we closed this offering after accepting aggregate subscriptions totaling $475,000. The Units were offered in reliance upon the exemption from registration provided by Rule 506 of Regulation D. We use these funds for working capital purposes.

  

On July 8, 2019, we commenced a private offering of Units at a price of $50,000 per Unit, each Unit consisting of 50,000 shares of our Common Stock and one $50,000 unsecured Convertible Note (a “Convertible Note”), which mature one year from the date of issuance and accrue interest at 5% per annum. These Convertible Notes are convertible into shares of our Common Stock at a conversion price of $1.00 per share. During the year ended December 31, 2019, we issued 31 Units in this Offering for net proceeds of $1,550,000 to six accredited investors. Since our stock price exceeded the conversion feature of the Convertible Notes and was immediately exercisable, we recorded a beneficial conversion feature (“BCF”) and expense of $1,550,000 which was charged to interest expense with an offset to paid-in capital.

 

The 5,505,530 million shares of Common Stock included in the Units were valued at $5,075,000. The excess above the $1,550,000 face value of the Convertible Notes or, $3,525,000, was charged to interest expense with an offset to paid-in capital. The remaining $1,550,000 was recorded as a Note discount of $1,550,000 to be amortized over the three year period from the date of the Note to the maturity date. We recorded $552,602 in interest expense related to the amortization of note discount during the year ended December 31, 2019.

 

We estimate that in order to complete development of the cultivation facilities we presently own located in Hanover, Ontario, we would require approximately CAD $20 million However, our ability to arrange such financing has been significantly impaired by the collapse of the cannabis sector in late 2019 in addition to the arrival of the COVD19 Pandemic in 2020. While no decision whether to proceed or not has been made, we will either elect to sell this property, or if it makes economic sense, develop an extraction facility.

 

As disclosed above, in June 2019 we executed an SPA with Sunniva in consideration for the payment of CAD $20 million. In order to fully develop this property we would need to raise both the purchase price, plus approximately CAD $225 million to complete the development of this property.

 

On July 3, 2019, we entered into a 12% $1,000,000 Loan Agreement with Koze Investments LLC (“Koze”), payable in full on June 28, 2020. Under the terms of the 12% Note, Koze took a first security interest against our Hanover, Ontario cannabis facility in progress and required the us to pay off the existing mortgage of approximately CAD $650,000. Additionally, we agreed to pay a 3% origination fee, prepay six months of interest ($60,000) and to issue to Koze five-year warrants to purchase 1,001,000 shares of our Common Stock at an exercise price $1.00 per share. After paying the origination fees, the prepayment and paying off the original mortgage, we used a portion of the remaining proceeds as payment against the SMI purchase price of CAD $1,000,000. We are currently in discussion with Koze to extend the maturity date of the Note. As of the date of this Report, Koze has not asserted that a default has occurred and we believe we will be successful in extending the maturity date however there can be no assurance.

 

 

 

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In May 2019, a director loaned us the principal amount of $75,000. In October 2019, our Chief Executive Officer extended a loan to us in the principal amount of $250,000. Subsequent partial repayments have reduced the $250,000 loan balance to $140,158 as of June 30, 2020. Both of these loans are non-interest bearing and are due upon demand.

 

On January 8, 2020, we issued two $100,000 Senior OID Convertible Promissory Notes (“OID Notes) to two accredited investors (“Holders”) and received $190,000 in proceeds. Under the provisions of the OID Notes, each Holder was granted the right at their sole discretion to fund up to another $150,000 each under the same terms. The maturity date for each additional tranche of these OID Notes funded shall be twelve (12) months from the date of funding.

 

These Notes were issued with a one-year maturity date, an 8% interest rate. The OID Notes are convertible into our Common Stock at a price equivalent to the lower of $1.25/share at any time after 180 days, or 75% times the lowest closing price of Common Stock for 20 consecutive trading days prior to conversion. In the event of a change of control, the conversion price is 75% of the closing price. We have the right to redeem these Notes at any time prior to maturity at 110% multiplied by the principal plus accrued interest plus outstanding accrued interest plus default interest if any. These OID Notes, which also include anti-dilution features, are senior obligations with priority over future debt, excluding mortgage debt. 

  

On February 27, 2020, we issued another OID Note for $160,000 to a third accredited investor under comparable terms and received proceeds of $152,000. This Note is convertible into shares of our Common Stock at a price equivalent to; the lower of $1.25/share for the first 180 days from issuance, seventy-five percent (75%) of the lowest closing price of our Common Stock during the twenty (20) trading days immediately preceding Conversion Date. At issuance, we delivered a stock certificate representing half the purchase price in a restricted form (the “Returnable Shares”) in the name of the investor (153,940 shares based on the low closing price of $0.812). The Returnable Shares will only be returned to our treasury if the Note is prepaid in full within the initial 180 days after issuance Based on our current liquidity, it appears the underlying note for $160,000 will not be redeemed before the passage of 180 days. As a result, we have treated these shares as issued and outstanding as of June 30, 2020.

 

On March 25, 2020, we issued an OID Note for $78,000 to an accredited investor and received proceeds of $75,000. The Note was issued with a one-year maturity date and a 10% interest rate. The OID Note is convertible into shares of our Common Stock at a price equal to 61% multiplied by the Market Price/share (the lowest closing price of our Common Stock form 20 consecutive trading days prior to conversion) at any time after 180 days. The borrower has the right to prepayment up to 180 days at a premium of between 115% and 135%.

 

On April 21, 2020, we received a loan from the Government of Canada under the Canada Emergency Business Account program (CEBA). This loan was in the amount of $40,000 CAD (USD $29,352 ). These funds are interest-free until December 31, 2022, at which time the remaining balance will convert to a 3-year term loan at an interest rate of 5% per annum. If the Company repays the loan prior to December 31, 2022, there will be loan forgiveness of 25% or $10,000 CAD.

 

On May 11, 2020, we issued another OID note for $53,000 from an accredited investor (March 25, 2020 above) and received $50,000 in proceeds.

 

On June 4, 2020, we issued another OID note for $43,000 from an accredited investor (March 25, 2020 above) and received $40,000 in proceeds.

 

During the three months ended June 30, 2020 we recorded $38,643 in interest expense on these Notes and amortized $772,877 of note discount which was charged to interest expense.

 

On May 22, 2020, we paid a fee of CAD $30,000 to InSpire Capital relating to a Letter of Interest to provide financing for the purchase of the Sunniva property. As the SPA to acquire Sunniva was terminated on June 8, 2020 as discussed above, we did not proceed with this financing.

 

 

 

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On May 25, 2020, we received $26,000 in proceeds in aggregate from non-interest bearing promissory notes from three officers of the Company. On an interest-free basis. These notes are payable on demand, with no fixed payment terms.

 

On June 26, 2020 the Company engaged Teneo Securities to raise capital to finance current acquisition targets with a closing date on any such financing on September 15, 2020. The Company has paid a retainer of $25,000, with an additional $25,000 fee per month going forward to act as the Company’s financial advisor.

 

Currently, we have no committed source for any funds to allow us to complete any of our proposed acquisitions or projects. No representation is made that any funds will be available when needed. In the event funds cannot be raised if and when needed, we may not be able to carry out our business plan. Our inability to obtain funding for our projects will have a negative impact on our anticipated results of operations.

 

Subsequent Events

 

On July 8, 2020, we filed a lawsuit in the United States District Court for the District of Colorado against Gary Herick, Arrowhead Consulting, LLC, Whitemoon Energy LLC., Jamie Huttrer a/k/a Jamie Huttrer-Herick, and ZeroRMW, LLC (collectively, the “Herick Parties”). The lawsuit alleges, among other things, the Herick Parties engaged in various legal violations including breach of fiduciary duty, common law fraud, conversion, usurpation of corporate opportunities, securities violations pursuant to Section 10b-5 of the Securities Exchange Act of 1934, and civil conspiracy. Mr. Herick was a former officer and director of the Company.

 

On August 4, 2020, we executed a non-binding Letter of Intent with Triton Funds LP (“Triton”) whereby Triton would agree to purchase $3,000,000 of our Common Stock at a price equal to 80% of the lowest trading price of the prior ten trading days. Triton would purchase shares of our Common Stock in tranches of $250,000. In order to consummate this financing, we will be required to file, and have declared effective, a Registration Statement on Form S-1 with the Securities and Exchange Commission.

 

On July 8, 2020, August 7, 2020, and August 16, 2020, three notes principal amount due of $200,000, $200,000 and $800,000, respectively reached their maturity dates. These notes remain outstanding and we continue to accrue the required interest on the principal balance. As of the date of this Report, the noteholders not asserted that a default has occurred and, while there can be no assurance, we believe we will be successful in extending the maturity dates of these notes.

  

Inflation

 

Although our operations are influenced by general economic conditions, we do not believe that inflation had a material effect on our results of operations during the three-month period ended June 30, 2020.

 

Critical Accounting Estimates

 

The discussion and analysis of our financial condition and results of operations are based upon our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates based on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. The following represents a summary of our critical accounting policies, defined as those policies that we believe are the most important to the portrayal of our financial condition and results of operations and that require management’s most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effects of matters that are inherently uncertain.

 

 

 

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

 

We are a smaller reporting company and are not required to provide the information under this item pursuant to Regulation S-K.

 

ITEM 4. CONTROLS AND PROCEDURES.

 

Disclosure Controls and Procedures - Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) as of the end of the period covered by this report.

 

These controls are designed to ensure that information required to be disclosed in the reports we file or submit pursuant to the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission, and that such information is accumulated and communicated to our management, including our CEO and CFO, as appropriate, to allow timely decisions regarding required disclosure.

 

Based on this evaluation, our CEO and CFO concluded that our disclosure controls and procedures were effective as of June 30, 2020 at the reasonable assurance level. We believe that our financial statements presented in this Form 10-Q fairly present, in all material respects, our financial position, results of operations, and cash flows for all periods presented herein.

  

Inherent Limitations - Our management, including our Chief Executive Officer and Chief Financial Officer, do not expect that our disclosure controls and procedures will prevent all error and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. The design of any system of controls is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within our company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdown can occur because of simple error or mistake. In particular, many of our current processes rely upon manual reviews and processes to ensure that neither human error nor system weakness has resulted in erroneous reporting of financial data.

 

Changes in Internal Control over Financial Reporting - There were no changes in our internal control over financial reporting during the period ended June 30, 2020, which were identified in conjunction with management’s evaluation required by paragraph (d) of Rules 13a-15 and 15d-15 under the Exchange Act, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

 

 

 

 

 

 

 

 

 

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PART II. OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS

 

As part of our acquisition of AMS we assumed an action filed against AMS by Ataraxia Canada, Inc., alleging breach of contract, specifically, breach of a nonbinding term sheet providing for Ataraxia to acquire controlling interest in AMS and they are seeking $15 million in damages. A Statement of Claim was prepared by Ataraxia Canada, Inc., as plaintiff, and circulated to Alternative Medical Solutions Inc., as defendant, on August 2, 2018 under the Ontario Superior Court of Justice (Court file no. CV-17-580157). The parties have engaged in discussions with respect to a potential settlement of this matter. Counsel has advised that it believes it is premature to speculate on any outcome of this litigation, including the likelihood of a settlement or any potential liability at this time.

  

Our agreement to acquire AMS contained a provision requiring us to diligently defend against the claims brought forth in, and assume full and complete control of, the Ataraxia litigation, provided that we shall not enter into any compromise or settlement in respect of the Ataraxia litigation without the prior written consent of the sellers, which consent is not to be unreasonably withheld, conditioned or delayed. The sellers are obligated to cooperate fully and make available to us all pertinent information and witnesses under their control, make such assignments and take such other steps as in the opinion of our counsel are reasonably necessary to enable us to defend against the claims brought forth in the Ataraxia litigation.

 

We are currently reviewing a situation with our legal counsel in order to ascertain whether we have claims against Steven Barber arising out of his default of the Consulting Agreement we entered into as part of the AMS acquisition more fully described in” Part I, Item 1,” Business, above. In January 2020 we received correspondence from counsel for Mr. Barber demanding payment on amounts purported to be due pursuant to his Consulting Agreement with us. We are currently reviewing whether Mr. Barber has performed pursuant to the terms of the Consulting Agreement.

 

No decision on whether to proceed against Mr. Barber has been reached as of the date of this Report.

 

On July 8, 2020, we filed a lawsuit in the United States District Court for the District of Colorado against Gary Herick, Arrowhead Consulting, LLC, Whitemoon Energy LLC., Jamie Huttrer a/k/a Jamie Huttrer-Herick, and ZeroRMW, LLC (collectively, the “Herick Parties”). The lawsuit alleges, among other things, the Herick Parties engaged in various legal violations including breach of fiduciary duty, common law fraud, conversion, usurpation of corporate opportunities, securities violations pursuant to Section 10b-5 of the Securities Exchange Act of 1934, and civil conspiracy. Mr. Herick was a former officer and director of the Company.

 

We are not a party to any other legal proceeding or aware of any other threatened action as of the date of this Report.

 

ITEM 1A. RISK FACTORS

 

We are a smaller reporting company and are not required to provide the information under this item pursuant to Regulation S-K.

 

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

On May 8, 2020 we issued 5,507,400 shares of our Common Stock to multiple shareholders of GN in exchange for 3,671,597 shares of GN common stock.

 

On May 20, 2020 and June 30, 2020 we issued 200,000 and 100,000 shares, respectively, to an investor relations firm.

 

 

 

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ITEM 3. DEFAULTS UPON SENIOR SECURITIES

 

None

 

ITEM 4. MINE SAFETY DISCLOSURE

 

Not Applicable

 

ITEM 5. OTHER INFORMATION

 

None

  

ITEM 6. EXHIBITS

 

Exhibit No.Description
  
31.1 Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
   
31.2 Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
   
32 Certification of Chief Executive Officer and Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
   
101.INS XBRL Instances Document
101.SCH XBRL Taxonomy Extension Schema Document
101.CAL XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF XBRL Taxonomy Extension Definition Linkbase Document
101.LAB XBRL Taxonomy Extension Label Linkbase Document
101.PRE XBRL Taxonomy Extension Presentation Linkbase Document

 

 

 

 

 

 

 

 

 

 

 

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SIGNATURES

 

Pursuant to the requirements of Section 12 of the Securities and Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized on August 19, 2020.

 

 CannapharmaRx, Inc. 
    
    
Dated:  August 19, 2020By:/s/ Dominic Colvin 
  Dominic Colvin, 
  Principal Executive Officer 
    
    
Dated:  August 19, 2020By:/s/ John Cassels 
  

John Cassels,

Principal Financial Officer and

 
  Principal Accounting Officer 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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