The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS
For the Three and Six Month, Interim
Periods Ended June 30, 2019 and 2018
NOTE 1.
|
NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
|
Nature of Operations
CannaPharmaRx, Inc. (the “Company”)
is a Delaware corporation. As of the date of this Report, the Company intends to become a national or internationally branded cannabis
cultivation company, or otherwise engage in the cannabis industry. The Company owns the following cannabis cultivation operations,
all of which are located in Canada and which were acquired by the Company on the dates indicated;
|
·
|
On November 19, 2018, the Company entered into a Securities Purchase Agreement with Alternative Medical Solutions, Inc., an Ontario, Canada corporation (“AMS”), its shareholders and Hanover CPMD Acquisition Corp. (“CPMD Hanover”) a newly formed subsidiary, wherein on December 31, 2018 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. At the completion of the licensing stage. AMS will receive a license to begin cultivation of marijuana. 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, 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 will seek to raise via equity and debt. There can be no assurances that the Company will successfully raise the financing required
to complete construction of the facility and begin cultivation;
|
·
|
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 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. These shares and warrants, when exercised, will represent 18% and 11%, respectively, of the issued and outstanding stock of GN. This is the initial step in the Company’s efforts to acquire all of the issued and outstanding stock of GN. 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. Once completed, GN estimates annual
total production capacity from the Stevensville facility of up to 12,500 kilograms of cannabis. On July 5, 2019, Great Northern’s
subsidiary, “9869247 Canada Limited”, received a license to cultivate from the Canadian Ministry of Health. GN believes
it will begin cultivation activities and generate its initial harvest during the fourth quarter of 2019. and
|
·
|
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”).
The purchase price is CAD$20,000,000 of which CAD$1,000,000 was payable on or before June 21, 2019, and CAD$19,000,000 payable
at closing. The effectiveness of the Securities Purchase Agreement is subject to various conditions, including the Company’s
ability to raise a sufficient amount of funds to pay for these acquisitions, as well as completion of an audit of the books and
records of SMI and 1167025 satisfactory to the Company. The payment of CAD$1,000,000 was not made on or before June 21, 2019, however,
the agreement remained in effect. Subsequent to June 30, 2019, and as of the date of this Report, the CAD$1,000,000
payment had been paid in full. See Note 15 – Subsequent Events below.
|
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 other
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.”
As
a result of the aforesaid transactions, the Company 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.
In
April 2016, the Company ceased operations. Its then management resigned their respective positions with the Company, with the exception
of Mr. Gary Herick, who remained as the Company’s sole officer and director. As a result, the Company has thereafter been
considered a “shell” company as defined under the Securities Exchange Act of 1934, as amended.
As a result of the completion of the acquisition
of AMS described above and in Note 6, below, the Company believes that it 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 pursuant to the
aforesaid Rule with the SEC in February 2019 and believes that it will no longer be considered a shell company on February 13,
2020.
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, 2018, and 2017, as presented in the Company’s
Form 10-K filed on April 3, 2019, 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.
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. At June 30, 2019, and December
31, 2018, the Company’s cash and cash equivalents totaled $131,850 and $464,118, 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, 2019, and December 31, 2018, 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.
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 is 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.
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 at the end of the year.
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, 2019, and December 31, 2018,
the Company had $1,666,875 and $1,563,260 in construction in progress, respectively, comprised entirely of the construction in
progress relating to the building acquired with the acquisition of AMS.
Depreciation expenses total $-0- and $-0-
for the periods ended June 30, 2019, and December 31, 2018, 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.
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 approaches 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, 2018, 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, 2019, and at December 31, 2018, respectively on its subsidiaries with material amounts on
their respective balance sheets and determined that no impairment exists.
Fair Values of Assets and Liabilities
The Company groups its financial assets
and financial liabilities generally measured at fair value in three levels, based on the markets in which the assets and liabilities
are traded, and the reliability of the assumptions used to determine fair value.
|
|
Level
1:
|
|
Valuation is based on quoted prices in active markets for identical assets or liabilities. Level 1 assets and liabilities generally include debt and equity securities that are traded in an active exchange market. Valuations are obtained from readily available pricing sources for market transactions involving identical assets or liabilities.
|
|
|
Level 2:
|
|
Valuation is based on observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. For example, Level 2 assets and liabilities may include debt securities with quoted prices that are traded less frequently than exchange-traded instruments.
|
|
|
|
|
|
Level 3:
|
|
Valuation is based on unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Level 3 assets and liabilities include financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation. This category generally includes certain private equity investments and long-term derivative contracts.
|
The fair value hierarchy also requires
an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.
The Company may also be required, from
time to time, to measure certain other financial assets at fair value on a nonrecurring basis. These adjustments to fair value
usually result from the application of lower-of-cost-or-market accounting or write-downs of individual assets. There were no such
adjustments in the periods ended June 30, 2019, or December 31, 2018.
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
six-month period ended June 30, 2019, and the year ended December 31, 2018, comprised a single segment.
Recently Issued Accounting Pronouncements
In February 2016, the FASB issued ASU No.
2016-02, “Leases (Topic 842)” (“ASU 2016-02”). ASU 2016-02 requires an entity to recognize assets and liabilities
arising from a lease for both financing and operating leases. ASU 2016-02 will also require new qualitative and quantitative disclosures
to help investors and other financial statement users better understand the amount, timing, and uncertainty of cash flows arising
from leases. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, with early adoption permitted. As an
emerging growth company, the Company has until December 15, 2019, to adopt ASC 842. The Company is currently evaluating the impact
on its consolidated financial statements.
Management has reviewed all other recently
issued, but not yet effective, accounting pronouncements and do not believe the future adoption of any such pronouncements may
be expected to cause a material impact on our financial condition or the results of our operations.
NOTE 2.
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GOING CONCERN AND LIQUIDITY
|
As of June 30, 2019, and December 31, 2018,
the Company had $131,850 and $464,118 in cash on hand respectively, and no revenue-producing business or other sources of income.
Additionally, as of June 30, 2019, the Company had outstanding liabilities totaling $9,282,469 and $131,850 in short term liquid
assets.
In the Company’s financial statements
for the fiscal years ended December 31, 2018, and 2017, the Reports of the Independent Registered Public Accounting Firm include
an explanatory paragraph that describes substantial doubt about our 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 our current financial projections, we believe we do not have sufficient
existing cash resources to fund our 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.
The following table sets forth the components
of the Company’s prepaid expenses at June 30, 2019, and December 31, 2018:
|
|
June 30,
2019
|
|
|
December 31,
2018
|
|
|
|
|
|
|
|
|
Prepaid stock purchase (a)
|
|
$
|
–
|
|
|
$
|
98,955
|
|
Prepaid interest (b)
|
|
|
–
|
|
|
|
35,734
|
|
Total
|
|
$
|
–
|
|
|
$
|
134,689
|
|
|
(a)
|
Represents money held in escrow to purchase 133,200 shares of the Company’s Common stock held by the Sellers of AMS pursuant to the terms of the Securities Purchase Agreement for the acquisition of AMS. These shares were purchased on January 1, 2019
|
|
(b)
|
Represented six months of prepaid interest on a mortgage assumed by the Company under the terms of the acquisition of AMS. This amount has been capitalized as an addition to construction in progress for the six months ended June 30, 2019
|
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. These shares and warrants, when exercised, will represent 18% and
11%, respectively, of the issued and outstanding stock of GN. On the date of the 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.
Additionally, the Company conducted an
impairment test at June 30, 2019, and determined that no impairment existed.
NOTE 5.
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CONSTRUCTION IN PROGRESS
|
As of June 30, 2019 and December 31, 2018,
the Company had $1,666,875 and $1,563,260 respectively, in construction in progress. 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, 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 the Company believes will provide an annual production capacity
of 9,500 kilos of marijuana (20,900 lbs.).
The Company does not have any other property
or equipment.
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.
NOTE 6.
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BUSINESS COMBINATION
|
Description of acquisition
On November 19, 2018, the Company entered
into a Securities Purchase Agreement with AMS, wherein effective December 31, 2018, the Company acquired all of the issued and
outstanding securities of AMS.
Fair Value of Consideration Transferred and Recording
of Assets Acquired
The following table summarizes the acquisition date fair value
of the consideration paid, identifiable assets acquired, and liabilities assumed including an amount for goodwill:
Consideration Paid:
|
|
|
|
Cash and cash equivalents
|
|
$
|
726,747
|
|
Common stock, 981,765 shares of CannapharmaRX common stock
|
|
|
1,612,600
|
|
Promissory note net of $697,083 discount
|
|
|
6,632,917
|
|
Fair value of total consideration
|
|
$
|
8,972,264
|
|
|
|
|
|
|
Recognized amount of identifiable assets acquired, and liabilities assumed:
|
|
|
|
|
Construction in progress
|
|
$
|
1,563,260
|
|
Accrued liabilities
|
|
|
(50,560
|
)
|
Mortgage payable
|
|
|
(476,450
|
)
|
Intangible assets
|
|
|
1,871,000
|
|
Goodwill
|
|
|
6,065,014
|
|
|
|
$
|
8,972,264
|
|
NOTE 7.
|
GOODWILL AND INTANGIBLE ASSETS
|
As of June 30, 2019 and December 31, 2018,
the Company had $6,065,014 in goodwill and $1,885,413 in intangible assets, compared to $6,065,014 and $1,871,000 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 $63,787 and $-0- respectively, for the periods ended June 30, 2019, and December 31, 2018.
NOTE 8.
|
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 at June 30, 2019, and December 31, 2018.
|
|
June 30,
2019
|
|
|
December 31,
2018
|
|
|
|
|
|
|
|
|
Accounts payable and accrued expenses
|
|
$
|
923,121
|
|
|
$
|
766,203
|
|
Accrued interest (a)
|
|
|
–
|
|
|
|
68,052
|
|
Mortgages payable (b)
|
|
|
496,676
|
|
|
|
476,450
|
|
Accrued legal settlement (c)
|
|
|
190,000
|
|
|
|
190,000
|
|
Total accounts payable and accrued liabilities
|
|
$
|
1,609,797
|
|
|
$
|
1,500,705
|
|
|
(a)
|
Represents interest accrued on the outstanding convertible notes -see Note 11
|
|
(b)
|
Pursuant to the acquisition of AMS, the Company assumed the mortgage on the construction in progress. The mortgage is an interest-only instrument at an interest rate of 15% due and payable on December 31, 2019
|
|
(c)
|
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 9.
|
RELATED PARTY TRANSACTIONS
|
The following table sets forth the components
of the Company’s related party liabilities at June 30, 2019, and December 31, 2018.
|
|
June 30,
2019
|
|
|
December 31,
2018
|
|
|
|
|
|
|
|
|
Accounts payable and loan payable related party
|
|
$
|
163,293
|
|
|
$
|
28,758
|
|
Accrued expense - related party
|
|
|
473,771
|
|
|
|
150,000
|
|
Total accounts payable and accrued liabilities
|
|
$
|
637,064
|
|
|
$
|
178,758
|
|
Accrued expense related parties of $473,771 is comprised of
bonuses and fees to current and former directors and officers of the Company. As of December 31, 2018, there was $150,000 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.
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 to the Company 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 report, the Company has not made any rent payments and continues to accrue those
amounts as accounts payable.
Effective on March 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 entered
into a lease agreement to lease three offices at 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
On May 17, 2019, a Director of the Company
provided an interest-free short term loan to the Company which is included in accounts payable and loan payable related party
of $163,293 for the period ended June 30, 2019.
NOTE 10.
|
CONVERTIBLE NOTES
|
As of June 30, 2019, and December 31, 2018,
the balance of convertible notes was $-0- and $2,072,000, respectively.
In July 2018, the Company commenced
an offering of up to $2 million of one-year maturity convertible notes (“Notes”). The maximum amount under the Offering
was subsequently increased to $2,500,000 These Notes carried both a voluntary conversion feature and an automatic conversion feature.
The Notes carried an interest rate of 12% and are convertible into shares of the Company’s Common Stock.
Through the period ended December 31, 2018,
the Company had received $2,072,000 in proceeds from the sale of convertible notes to 35 accredited investors. No proceeds were
received from convertible notes during the three and six month periods ended June 30, 2019.
Automatic conversion feature
If the Company issues equity
securities (“Equity Securities”) in a transaction or series of related transactions resulting in aggregate gross proceeds
to the Company of at least $5,000,000, including conversion of the Notes and any other indebtedness, or issuance of Equity Securities
in connection with any business combination, including a merger or acquisition (a “Qualified Financing”), then the
Notes, and any accrued but unpaid interest thereon, will automatically convert into the equity securities issued pursuant to the
Qualified Financing at a conversion price equal to the lesser of (i) 50% of the per-share price paid by the purchasers of such
equity securities in the Qualified Financing or (ii) $0.40 per share.
Voluntary conversion feature
If these Notes have not been previously
converted pursuant to a Qualified Financing, then, upon Holders election prior to the Maturity Date or effective upon the Maturity
Date, the Holder may elect to convert their Notes into shares of the Company’s Common Stock at a conversion price equal to
the lesser of (i) 50% of the market price for the Company’s Common Stock as of the Maturity Date or (ii) $0.40 per share.
During the three month period ended March
31, 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 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 described above, to equity at a price of $0.40 per
share, or a total of 5,505,530 shares.
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, whichever is later.
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 six months ended June 30, 2019, the Company has recorded
$118,827 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.
The following tables set forth the components
of the Company’s secured note as of June 30, 2019, and December 31, 2018:
|
|
June 30,
2019
|
|
|
December 31,
2018
|
|
Principal value of Promissory Note
|
|
$
|
7,641,171
|
|
|
$
|
7,330,000
|
|
Loan discounts
|
|
|
(605,563
|
)
|
|
|
(697,083
|
)
|
Promissory Note, long term net of discount
|
|
$
|
7,035,608
|
|
|
$
|
6,632,917
|
|
As of June 30, 2019, the Company has approximately
$9,846,000 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, 2019, the Company has no unrecognized income tax benefits.
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 13.
|
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 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 consisted of approximately 500 sq. feet. The Company paid a monthly rent of
$1,500 (CAD).
Effective March 22, 2019, the Company
entered into a lease agreement to lease three offices at 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.
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”). The purchase price is CAD$20,000,000 of which CAD$1,000,000
was payable on or before June 21, 2019, and CAD$19,000,000 payable at closing. The CAD $1,000,000 was not made on June 21, 2019;
however, the Purchase Agreement was still in effect (and not in default) as of June 30, 2019.
NOTE 14.
|
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 at a price of $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;
|
The beneficial conversion (“BCF”)
feature attributed to the purchase of Preferred Stock was deemed to have no value on the date of purchase for the following reasons:
|
Ø
|
There was no public trading market for the Convertible Preferred Stock, and none is expected to develop in the future.
|
|
Ø
|
Any shares of Common Stock underlying the Preferred Stock to be issued upon conversion would not be eligible for any exemption from registration pursuant to Rule 144 for a period of one (1) year from the date which the Company ceases being deemed a shell company.
|
|
Ø
|
Currently, there is a very limited trading market for the Company's Common Stock.
|
|
Ø
|
The Company had no business activity for the prior twenty-four (24) month period;
|
|
Ø
|
The Company has limited assets and substantial liabilities.
|
Therefore, 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, 2019, and December 31, 2018, 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. As of June 30, 2019, the Company had accepted $288,000 in subscriptions in this offering.
There were 288,000 and -0- shares of Series
B Convertible Preferred Stock issued and outstanding as of June 30, 2019, and December 31, 2018, respectively.
The Company is authorized to issue 300,000,000
shares of Common Stock, par value $0.0001 per share. As of June 30, 2019, and December 31, 2018, 32,436,999 and 18,942,506 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 March 31, 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 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 described above, to equity at a price
of $0.40 per share, or a total of 5,505,530 shares.
Shares Reserved for Issuance
As
of June 30, 2019, the Company had 77,176,000 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; 288,000 Common Shares issuable upon the conversion of Series
B Preferred Stock; 750,000 Common Shares upon the exercise of stock options, and 1,138,000 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.
Stock Options
During the period ended June 30, 2019,
and December 31, 2018, the Company did not record any stock-based compensation expense related to stock options. As of June 30,
2019, there were options 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.
Stock Purchase Warrants
The following table reflects all outstanding and exercisable
warrants on June 30, 2019, and December 31, 2018:
|
|
Number of
Warrants
Outstanding
|
|
|
Weighted Average
Exercise Price
|
|
|
Average Remaining
Contractual
Life (Years)
|
|
Warrants outstanding, January 1, 2018
|
|
|
–
|
|
|
$
|
–
|
|
|
|
–
|
|
Warrants issued
|
|
|
350,000
|
|
|
|
0.57
|
|
|
|
2.625
|
|
Warrants exercised
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
Warrant forfeited
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
Warrants outstanding, December 31, 2018
|
|
|
350,000
|
|
|
$
|
0.57
|
|
|
|
2.625
|
|
Warrants issued
|
|
|
788,000
|
|
|
$
|
1.37
|
|
|
|
1.76
|
|
Warrants outstanding June 30, 2019
|
|
|
1,138,000
|
|
|
$
|
1.12
|
|
|
|
1.94
|
|
Stock purchase warrants are exercisable
for a period of two-three years from the date of issuance.
The
value of the stock purchase warrants for the periods ended June 30, 2019, and December 31, 2018, was determined using the following
Black-Scholes methodology:
|
|
|
|
Expected dividend yield (1)
|
|
|
0.00%
|
|
Risk-free interest rate range (2)
|
|
|
1.92-2.91%
|
|
Volatility range (3)
|
|
|
405.60-442.92%
|
|
Expected life (in years)
|
|
|
2.00-3.00
|
|
______________
(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 six month period ended June
30, 2019, the Company recorded $322,669 in stock-based compensation compared to zero during the same six month period ended June
30, 2018.
NOTE 15.
|
SUBSEQUENT EVENTS
|
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. Subsequent to June 30, 2019 the Company accepted $70,000 in additional subscriptions in this offering.
On July 5, 2019, Great Northern’s
subsidiary, “9869247 Canada Limited”, received a License to Cultivate from the Canadian Ministry of Health.
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”). The purchase price is CAD$20,000,000 of which CAD$1,000,000
was payable on or before June 21, 2019, and CAD$19,000,000 payable at closing. The payment of CAD $1,000,000 was not made on or
before June 21, 2019, however, the agreement remained effect. Subsequent to June 30, 2019, the Company, in a series of payments,
paid the CAD $1,000,000 in full.
On July 3, 2019, the Company entered into
a USD $1,000,000 Loan Agreement with Koze Investments, LLC. (“Koze”) due and payable in full on June 27, 2020. 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 CAD$651,000. Additionally, the Company agreed
to pay a 3% origination fee, prepay six months of interest ($60,000) and to issue to Koze a five-year warrant to purchase 834,000
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 described above