CANNAPHARMARX, INC. - Quarter Report: 2019 September (Form 10-Q)
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: September 30, 2019
Commission File Number: 000-27055
CANNAPHARMARX, INC.
(Exact name of small business issuer as specified in its charter)
| Delaware | 27-4635140 | |
| (State or other jurisdiction of incorporation) | (IRS Employer ID No.) |
3600
888-3rd Street SW
Calgary, Alberta, Canada T2P5C5
(Address of principal executive offices)
(949) 652-6838
(Issuer’s Telephone Number)
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
| Common Stock | CPMD | OTC Pink Sheets |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days: Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically, 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 ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a 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 filer | ☐ | Accelerated filer | ☐ |
| Non-accelerated filer | ☒ | Smaller reporting company | ☒ |
| Emerging growth company | ☒ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act. Yes ☐ No ☒
The number of shares of the registrant’s only class of Common Stock issued and outstanding as of November 12, 2019, was 36,486,999 shares.
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| Item 1. | Financial Statements |
CANNAPHARMARX, INC.
UNAUDITED CONSOLIDATED BALANCE SHEETS
| September 30, | December 31, | |||||||
| 2019 | 2018 | |||||||
| ASSETS | ||||||||
| Current assets | ||||||||
| Cash | $ | 192,503 | $ | 464,118 | ||||
| Deposit | 755,100 | – | ||||||
| Prepaid expenses | 527,385 | 134,689 | ||||||
| Total current assets | 1,474,988 | 598,807 | ||||||
| Construction in progress | 1,647,204 | 1,563,260 | ||||||
| Office equipment | 2,766 | – | ||||||
| Investments | 11,264,438 | – | ||||||
| Intangible assets | 1,831,041 | 1,871,000 | ||||||
| Goodwill | 6,247,875 | 6,065,014 | ||||||
| Total Assets | $ | 22,468,312 | $ | 10,098,081 | ||||
| LIABILITIES & STOCKHOLDERS' DEFICIT | ||||||||
| Current liabilities | ||||||||
| Accounts payable and accrued expenses | $ | 813,197 | $ | 766,203 | ||||
| Accounts payable related party | 104,382 | 9,000 | ||||||
| Accrued interest | 10,000 | 68,052 | ||||||
| Mortgages payable | – | 476,450 | ||||||
| Accrued legal settlement | 190,000 | 190,000 | ||||||
| Accrued expense - related party | 444,591 | 150,000 | ||||||
| Notes payable current | 1,000,000 | – | ||||||
| Convertible Notes -net of discount | 200,000 | 2,072,000 | ||||||
| Loan payable - related party | 94,758 | 19,758 | ||||||
| Total current liabilities | 2,856,928 | 3,751,463 | ||||||
| Notes payable long-term | 6,999,416 | 6,632,917 | ||||||
| Total Liabilities | 9,856,344 | 10,384,380 | ||||||
| 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 September 30, 2019, and December 31, 2018, 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 September 30, 2019, and December 31, 2018, respectively | 475,000 | – | ||||||
| Common stock, $0.0001 par value; 300,000,000 shares authorized, 36,136,999 and 18,942,506 issued and outstanding as of September 30, 2019 and December 31, 2018, respectively | 3,614 | 1,894 | ||||||
| Treasury stock, 133,200 and -0- shares as of September 30, 2019, and December 31, 2018, respectively | ||||||||
| Additional paid-in capital | 60,127,968 | 36,642,275 | ||||||
| Retained earnings (deficit) | (48,127,754 | ) | (36,990,469 | ) | ||||
| Accumulated other comprehensive income (loss) | 73,153 | – | ||||||
| Total Stockholders' Equity (Deficit) | 12,611,968 | (286,299 | ) | |||||
| Total Liabilities and Stockholders' (Equity) | $ | 22,468,312 | $ | 10,098,081 | ||||
The accompanying notes are an integral part of these consolidated financial statements.
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CANNAPHARMARX, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
| For the Three Months | For the Nine Months | |||||||||||||||
| Ended September 30 | Ended September 30, | |||||||||||||||
| 2019 | 2018 | 2019 | 2018 | |||||||||||||
| Revenue | $ | – | $ | – | $ | – | $ | – | ||||||||
| Operating Expenses: | ||||||||||||||||
| General & administrative | 34,659 | 3,924 | 94,684 | 4,075 | ||||||||||||
| Acquisition expenses | 5,834,000 | – | 5,957,347 | – | ||||||||||||
| Amortization | 32,222 | – | 96,009 | – | ||||||||||||
| Stock-based compensation | 199,035 | – | 521,704 | – | ||||||||||||
| Travel and entertainment | 18,090 | 17,309 | 83,331 | 25,299 | ||||||||||||
| Rent related parties | 17,528 | 3,000 | 42,684 | 6,000 | ||||||||||||
| Professional fees | 166,508 | 125,261 | 468,707 | 148,011 | ||||||||||||
| Consulting fees | 16,761 | – | 261,352 | 21,609 | ||||||||||||
| Consulting fees-related parties | 38,196 | 31,000 | 466,967 | 46,000 | ||||||||||||
| Total operating expenses | 6,356,998 | 180,494 | 7,992,785 | 250,994 | ||||||||||||
| Income (loss) from operations | (6,356,998 | ) | (180,494 | ) | (7,992,785 | ) | (250,994 | ) | ||||||||
| Other income (expense) | ||||||||||||||||
| Interest (expense) | (2,897,523 | ) | (914,411 | ) | (3,078,510 | ) | (914,411 | ) | ||||||||
| Finance charges | (66,016 | ) | – | (66,016 | ) | – | ||||||||||
| Other income | – | – | 25 | – | ||||||||||||
| Other income (expense) net | (2,963,539 | ) | (914,411 | ) | (3,144,501 | ) | (914,411 | ) | ||||||||
| Income (loss) before provision for income taxes | (9,320,537 | ) | (1,094,905 | ) | (11,137,286 | ) | (1,165,405 | ) | ||||||||
| Provision (credit) for income tax | – | – | – | – | ||||||||||||
| Net income (loss) | $ | (9,320,537 | ) | $ | (1,094,905 | ) | $ | (11,137,286 | ) | $ | (1,165,405 | ) | ||||
| Basic and diluted earnings(loss) per common share | $ | (0.27 | ) | $ | (0.06 | ) | $ | (0.38 | ) | $ | (0.06 | ) | ||||
| Weighted average number of shares outstanding | 33,921,191 | 17,960,741 | 29,444,513 | 17,960,741 | ||||||||||||
| Comprehensive loss: | ||||||||||||||||
| Net income (loss) | $ | (9,320,537 | ) | $ | (11,137,286 | ) | ||||||||||
| Foreign currency translation adjustment | 217,349 | 73,153 | ||||||||||||||
| Comprehensive income (loss) | $ | (9,103,188 | ) | $ | (11,064,133 | ) | ||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
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CANNAPHARMARX, INC.
UNAUDITED STATEMENTS OF CONSOLIDATED CASH FLOWS
| For the Nine Months | ||||||||
| Ended September 30, | ||||||||
| 2019 | 2018 | |||||||
| Cash Flows From Operating Activities: | ||||||||
| Net income (loss) | $ | (11,137,286 | ) | $ | (1,165,405 | ) | ||
| Adjustments to reconcile net income to net cash provided by (used for) operating activities | ||||||||
| Stock-based compensation expense | 521,704 | – | ||||||
| Amortization of intangible assets | 96,009 | – | ||||||
| Amortization of debt discount | 3,068,510 | 905,000 | ||||||
| Acquisition consideration paid in common stock | 5,800,000 | – | ||||||
| Changes in operating assets and liabilities | ||||||||
| (Increase)/decrease in prepaid expenses | (1,147,796 | ) | – | |||||
| Accrued interest | (58,052 | ) | – | |||||
| Mortgages payable | (476,450 | ) | – | |||||
| Accounts payable related party | 95,382 | – | ||||||
| Loan payable related party | 75,000 | – | ||||||
| Accrued expenses related party | 294,591 | – | ||||||
| Increase/(Decrease) in accounts payable and accrued expenses | 46,994 | 54,163 | ||||||
| Net cash provided by (used for) operating activities | (2,821,394 | ) | (206,242 | ) | ||||
| Cash Flows From Investing Activities: | ||||||||
| Purchase of fixed assets | (2,766 | ) | – | |||||
| Capitalized mortgage interest and changes in construction in progress | (36,673 | ) | – | |||||
| Net cash provided by (used for) investing activities | (39,439 | ) | – | |||||
| Cash Flows From Financing Activities: | ||||||||
| Refundable deposit on acquisition | – | (76,699 | ) | |||||
| Proceeds from the sale of convertible notes | 1,200,000 | 905,000 | ||||||
| Proceeds from the sale of notes payable | 1,000,000 | – | ||||||
| Purchase of treasury shares | (98,955 | ) | – | |||||
| Proceeds from related party loans | 75,000 | – | ||||||
| Proceeds from the sale of preferred stock | 475,000 | 60,000 | ||||||
| Net cash provided by (used for) financing activities | 2,651,045 | 888,301 | ||||||
| Effect of exchange rates on cash and cash equivalents | (61,827 | ) | – | |||||
| Net Increase (Decrease) In Cash | (209,788 | ) | 682,059 | |||||
| Cash At The Beginning Of The Period | 464,118 | – | ||||||
| Cash At The End Of The Period | $ | 192,503 | $ | 682,059 | ||||
| Supplemental disclosure of cash flow information: | ||||||||
| Cash paid for interest | $ | 66,016 | $ | – | ||||
| Cash paid for income taxes | ||||||||
| Supplemental disclosure of non-cash investing and financing activities: | ||||||||
| Common stock issued related to investment in Great Northern Cannabis | $ | 11,264,438 | $ | – | ||||
| Common stock issued to convert convertible notes and accrued interest into equity | $ | 2,202,212 | $ | – | ||||
The accompanying notes are an integral part of these consolidated financial statements.
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CANNAPHARMARX, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY (DEFICIT)
| Accumulated | ||||||||||||||||||||||||||||||||||||
| Preferred Stock Series A | Preferred Stock Series B | Common Stock | Treasury Stock | Paid in | Retained earnings | other comprehensive income | Equity/ | |||||||||||||||||||||||||||||
| Shares | Value | Shares | Value | Shares | Value | Shares | Value | Capital | (Deficit) | (loss) | Deficit | |||||||||||||||||||||||||
| Balances on January 1, 2018 | – | $ | – | – | $ | – | 17,960,741 | $ | 1,796 | – | $ | – | $ | 32,930,067 | $ | (33,896,163 | ) | $ | – | $ | (964,300 | ) | ||||||||||||||
| Net loss | – | – | – | – | – | – | – | – | – | – | – | – | ||||||||||||||||||||||||
| Balance March 31, 2018 | – | $ | – | – | $ | – | 17,960,741 | 1,796 | – | $ | – | 32,930,067 | $ | (33,896,163 | ) | – | $ | (964,300 | ) | |||||||||||||||||
| Net loss | – | – | – | – | – | – | – | – | – | (70,500 | ) | – | (70,500 | ) | ||||||||||||||||||||||
| Issuance of Series A Preferred Stock | 60,000 | $ | 60,000 | – | – | – | – | – | – | – | – | – | 60,000 | |||||||||||||||||||||||
| Balances on June 30, 2018 | 60,000 | $ | 60,000 | – | $ | – | 17,960,741 | $ | 1,796 | – | – | 32,930,067 | $ | (33,966,663 | ) | – | $ | (974,800 | ) | |||||||||||||||||
| Net Loss | – | – | – | – | – | – | – | – | – | (1,094,905 | ) | – | (1,094,905 | ) | ||||||||||||||||||||||
| Recognition of beneficial conversion features-convertible debentures | – | – | – | – | – | – | – | – | 905,000 | – | – | 905,000 | ||||||||||||||||||||||||
| Balances at September 30, 2018 | 60,000 | $ | 60,000 | – | $ | – | 17,960,741 | $ | 1,796 | – | – | 33,835,067 | $ | (35,061,568 | ) | – | $ | (1,164,705 | ) | |||||||||||||||||
| Balances at January 1, 2019 | 60,000 | $ | 60,000 | – | – | 18,942,506 | $ | 1,894 | – | – | 36,642,275 | $ | (36,990,469 | ) | $ | – | $ | (286,299 | ) | |||||||||||||||||
| Net loss | – | – | – | – | – | – | – | – | – | (1,068,669 | ) | – | (1,068,669 | ) | ||||||||||||||||||||||
| Change in foreign currency translation | – | – | – | – | – | – | – | – | – | – | (73,552 | ) | (73,552 | ) | ||||||||||||||||||||||
| Issuance of Series B Preferred Stock | – | – | 178,000 | 178,000 | – | – | – | – | – | – | – | 178,000 | ||||||||||||||||||||||||
| Conversion of convertible notes and accrued interest to common shares | – | – | – | – | 5,505,530 | 551 | – | – | 2,201,662 | – | – | 2,202,213 | ||||||||||||||||||||||||
| Issuance of common stock to purchase non-controlling interest in GNS | – | – | – | – | 7,988,963 | 799 | – | – | 11,263,639 | – | – | 11,264,438 | ||||||||||||||||||||||||
| Stock-based compensation related to warrant issuances | – | – | – | – | – | – | – | – | 161,333 | – | – | 161,333 | ||||||||||||||||||||||||
| Repurchase of shares from investor | – | – | – | – | – | – | 133,200 | (13 | ) | (98,942 | ) | – | – | (98,955 | ) | |||||||||||||||||||||
| Balances on March 31, 2019 | 60,000 | $ | 60,000 | 178,000 | $ | 178,000 | 32,436,999 | $ | 3,244 | 133,200 | $ | (13 | ) | 50,169,968 | $ | (38,059,138 | ) | $ | (73,552 | ) | $ | 12,278,509 | ||||||||||||||
| Net loss | – | – | – | – | – | – | – | – | – | (748,079 | ) | – | (748,079 | ) | ||||||||||||||||||||||
| Change in foreign currency translation | – | – | – | – | – | – | – | – | – | – | (70,644 | ) | (70,644 | ) | ||||||||||||||||||||||
| Issuance of Series B Preferred Stock | – | – | 110,000 | 110,000 | – | – | – | – | – | – | – | 110,000 | ||||||||||||||||||||||||
| Stock-based compensation related to warrant issuances | – | – | – | – | – | – | – | – | 161,335 | – | – | 161,335 | ||||||||||||||||||||||||
| Balances on June 30, 2019 | 60,000 | $ | 60,000 | 288,000 | $ | 288,000 | 32,436,999 | $ | 3,244 | 133,200 | $ | (13 | ) | $ | 50,331,303 | $ | (38,807,217 | ) | $ | (144,196 | ) | $ | 11,731,121 | |||||||||||||
| Net loss | – | – | – | – | – | – | – | – | – | (9,320,537 | ) | – | (9,930,537 | ) | ||||||||||||||||||||||
| Change in foreign currency translation | – | – | – | – | – | – | – | – | – | – | 217,349 | 217,349 | ||||||||||||||||||||||||
| Issuance of Series B Preferred Stock | – | – | 187,000 | 187,000 | – | – | – | – | – | – | – | 187,000 | ||||||||||||||||||||||||
| Issuance of common shares in connection with the issuance of convertible debentures | – | – | – | – | 1,200,000 | 120 | – | – | 3,797,880 | – | – | 3,798,000 | ||||||||||||||||||||||||
| Issuance of common shares for acquisition fees | – | – | – | – | 2,500,000 | 250 | – | – | 5,799,750 | – | – | 5,800,000 | ||||||||||||||||||||||||
| Stock-based compensation related to warrant issuances | – | – | – | – | – | – | – | – | 199,035 | – | – | 199,035 | ||||||||||||||||||||||||
| Balances on September 30, 2019 | 60,000 | $ | 60,000 | 475,000 | $ | 475,000 | 36,136,999 | $ | 3,614 | 133,200 | $ | (13 | ) | $ | 60,127,968 | $ | (48,127,754 | ) | $ | 73,153 | $ | 12,611,968 | ||||||||||||||
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CANNAPHARMARX, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
For the Three and Nine Month Interim Periods Ended September 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 or has an interest in 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, a corporation organized under the laws of the Province of Ontario, Canada. |
AMS owns aa 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 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. |
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 and began cannabis cultivation operations in 2019.
| · | 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, with 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. |
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On October 2, 2019, the Company entered into an Extension Agreement with Sunniva wherein Sunniva has agreed to amend the settlement of the purchase price to CAD $16.0 million in cash and CAD $4.0 million by way of our issuance of a promissory note from the previous all-cash settlement of CAD $20.0 million. Sunniva received an incremental non-refundable deposit of $700,000 as part of the amended terms and the closing date was amended to October 31, 2019. As of the date of this Report the Company is engaged in discussions with Sunniva to extend the closing date to November 30, 2019.
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 was considered a “shell” company as defined under the Securities Exchange Act of 1934, as amended until February 2019.
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.
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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. On September 30, 2019, and December 31, 2018, the Company’s cash and cash equivalents totaled $192,503 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 September 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.
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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 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.
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.
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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 September 30, 2019, and December 31, 2018, the Company had $1,647,204 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 September 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.
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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, 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 September 30, 2019, and on December 31, 2018, respectively on its subsidiaries with material amounts on their respective balance sheets and determined that no impairment exists.
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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 September 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.
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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 nine-month period ended September 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. | GOING CONCERN AND LIQUIDITY |
As of September 30, 2019, and December 31, 2018, the Company had $192,503 and $464,118 in cash on hand respectively, and no revenue-producing business or other sources of income. Additionally, as of September 30, 2019, the Company had outstanding liabilities totaling $9,856,344 and $192,503 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.
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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 September 30, 2019, and December 31, 2018, the Company had deposits of $755,100 and $-0-, respectively. The $755,100 deposit is non-refundable and will be credited against the purchase price of the Sunniva acquisition (referenced throughout this Report) if it is successfully consummated.
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NOTE 4. |
PREPAID EXPENSES |
The following table sets forth the components of the Company’s prepaid expenses at September 30, 2019, and December 31, 2018:
September 30, 2019 | December 31, 2018 | |||||||
| Prepaid stock purchase (a) | $ | – | $ | 98,955 | ||||
| Prepaid acquisition expenses (b) | 235,604 | – | ||||||
| Prepaid financing expenses (c) | 262,171 | – | ||||||
| Prepaid interest (d) | 29,610 | 35,734 | ||||||
| Total | $ | 527,385 | $ | 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)(c) Prepaid acquisition and financing expenses related to the Company’s ongoing efforts to acquire Sunniva Medical as described throughout this Report |
| (d) For the period ended September 30, 2019, this amount represented approximately the equivalent of three months of prepaid interest on the Company’s $1,000,000 Note Payable to Koze Investments, LLC (“Koze”). For the period ended December 31, 2018, this amount 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 nine months ended September 30, 2019 |
| NOTE 5. | 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.
Additionally, the Company conducted an impairment test at September 30, 2019, and determined that no impairment existed.
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| NOTE 6. | CONSTRUCTION IN PROGRESS |
As of September 30, 2019 and December 31, 2018, the Company had $1,647,204 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, 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 the Company believes will provide an annual production capacity of 9,500 kilos of marijuana (20,900 lbs.).
The Company had $2,766 and $-0-, in equipment, respectively for the periods ended September 30, 2019, and December 31, 2018.
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 7. | 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 | |||
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| NOTE 8. | GOODWILL AND INTANGIBLE ASSETS |
As of September 30, 2019 and December 31, 2018, the Company had $6,247,875 in goodwill and $1,831,040 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 $96,009 and $-0- respectively, for the periods ended September 30, 2019, and December 31, 2018.
| 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 September 30, 2019, and December 31, 2018.
September 30, 2019 | December 31, 2018 | |||||||
| Accounts payable and accrued expenses | $ | 813,197 | $ | 766,203 | ||||
| Accrued interest (a) | 10,000 | 68,052 | ||||||
| Mortgages payable (b) | – | 476,450 | ||||||
| Accrued legal settlement (c) | 190,000 | 190,000 | ||||||
| Total accounts payable and accrued liabilities | $ | 1,013,197 | $ | 1,500,705 | ||||
| (a) | Represents interest accrued on the outstanding convertible notes -see Note 12, Notes Payable |
| (b) | Pursuant to the acquisition of AMS, the Company assumed the mortgage on the construction in progress. The mortgage was an interest-only instrument at an interest rate of 15% due and payable on December 31, 2019. In July 2019, the Company paid off the mortgage from the proceeds of $1.0 million one year 12% Note with Koze. See Note 12, Notes Payable. As a condition for entering into the Note, Koze required the Company to prepay approximately $60,000, or six months' worth of interest. On September 30, 2019, the Company had prepaid interest of $29,610 on the Koze Note. |
| (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. |
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| NOTE 10. | RELATED PARTY TRANSACTIONS |
The following table sets forth the components of the Company’s related party liabilities on September 30, 2019, and December 31, 2018.
September 30, 2019 | December 31, 2018 | |||||||
| Accounts payable and loan payable related party | $ | 199,140 | $ | 28,758 | ||||
| Accrued expense - related party | 444,591 | 150,000 | ||||||
| Total accounts payable and accrued liabilities | $ | 643,731 | $ | 178,758 | ||||
Accrued expense related parties of $444,591 is comprised of bonuses and fees to current and former directors and officers of the Company. As of September 30, 2019, and 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. The monthly rent at that location 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 in March 2019, the Company changed its principal place of business to Suite 206 1180 Sunset Drive, Kelowna, BC, Canada Z1Y 9W6, which the Company rents 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 pays a monthly rent of $1,500 (CAD).
In addition to the office in Kelowna discussed above, 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 $75,000 loan to the Company which is included in accounts payable and loan payable related party of $199,140 for the period ended September 30, 2019.
| NOTE 11. | CONVERTIBLE NOTES |
The following tables set forth the components of the Company’s, convertible debentures as of September 30, 2019, and December 31, 2018:
| September 30, 2019 | December 31, 2018 | |||||||
| Principal value of convertible notes | $ | 1,200,000 | 2,072,000 | |||||
| Note discount | (1,000,000 | ) | – | |||||
| Total convertible notes, net current | $ | 200,000 | $ | 2,072,000 | ||||
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In July 2018, the Company commenced an offering of up to $2 million of one-year maturity convertible notes (“A Notes”). The maximum amount under the Offering was subsequently increased to $2,500,000 These A 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.
Automatic conversion feature relating only to these A Notes
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 relating only to these A Notes
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 A 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. Upon conversion, no further convertible notes were offered under these terms and Offering was closed.
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 September 30, 2019, 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 that 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 a one year period at the rate of $100,000 per month. $200,000 in interest expense related to this discount was recorded during the three month period ended September 30, 2019.
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| NOTE 12. | NOTES PAYABLE |
The following tables set forth the components of the Company’s secured note as of September 30, 2019, and December 31, 2018:
| September 30, 2019 | December 31, 2018 | |||||||
| Principal value of Promissory Note | $ | 8,537,991 | $ | 7,330,000 | ||||
| Loan discounts | (538,575 | ) | (697,083 | ) | ||||
| Less: current portion | (1,000,000 | ) | – | |||||
| Promissory Note, long term net of discount | $ | 6,999,416 | $ | 6,632,917 | ||||
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 nine months ended September 30, 2019, the Company recorded $180,926 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 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 $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 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.
| NOTE 13. | INCOME TAXES |
As of September 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 September 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.
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| 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 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 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 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.
On October 2, 2019, the Company entered into an Extension Agreement with Sunniva wherein Sunniva has agreed to amend the settlement of the purchase price to CAD $16.0 million in cash and CAD $4.0 million by way of the Company’s issuance of a promissory note from the previous all-cash settlement of CAD $20.0 million. Sunniva received an incremental non-refundable deposit of CAD $700,000 as part of the amended terms, which will be applied to the purchase price at closing and the closing date was amended to October 31, 2019. As of the date of this Report the Company is engaged in discussions with Sunniva to extend the closing date to November 30, 2019.
| 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 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; |
| · | not redeemable. |
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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, 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 September 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. this Offering was closed at the end of August 2019. As of September 30, 2019, the Company had accepted $475,000 in subscriptions in this offering.
There were 475,000 and -0- shares of Series B Convertible Preferred Stock issued and outstanding as of September 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 September 30, 2019, and December 31, 2018, 36,136,999 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.
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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 September 30, 2019, 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 a one year period at the rate of $100,000 per month. $200,000 in interest expense related to this discount was recorded during the three month period ended September 30, 2019.
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 in fact consummated by the Company on December 31, 2018. 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 September 30, 2019, the Company had 79,602,750 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, 1,200,000 shares issuable upon a conversion of the convertible notes and 2,177,750 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.
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Stock Options
During the period ended September 30, 2019, and December 31, 2018, the Company did not record any stock-based compensation expense related to stock options. As of September 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 September 30, 2019, and December 31, 2018:
| 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 | 3.00 | |||||||||
| Warrants exercised | – | – | – | |||||||||
| Warrant forfeited | – | – | – | |||||||||
| Warrants outstanding, December 31, 2018 | 350,000 | $ | 0.57 | 2.88 | ||||||||
| Warrants issued (a) | 1,352,750 | $ | 0.99 | 3.47 | ||||||||
| Warrants outstanding September 30, 2019 | 1,702,750 | $ | 0.92 | 3.19 | ||||||||
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 September 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) | 1.75 - 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. |
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During the nine-month period ended September 30, 2019, the Company recorded $521,704 in stock-based compensation compared to zero during the same nine-month period ended September 30, 2018.
| NOTE 16. | SUBSEQUENT EVENTS |
In October 2019, the Company received subscriptions from four accredited investors for $350,000 in the Company’s Unit Offering described in Note 14, above.
On October 2, 2019, the Company’s Chief Executive Officer extended a loan to the Company in the principal amount of $250,000, on an interest-free basis, due on demand.
On October 2, 2019, the Company entered into an amendment to the agreement with Sunniva wherein Sunniva has agreed to amend the purchase price to CAD $16.0 million in cash and CAD $4.0 million by way of the Company issuing a promissory note from the previous all-cash settlement of CAD $20.0 million. The Company paid Sunniva an incremental non-refundable deposit of $700,000 CAD, to be applied to the purchase price, as part of the amended terms and the closing date was extended to October 31, 2019. As of the date of this Report the Company is in discussions with Sunniva to extend the closing date to November 30, 2019.
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| ITEM 2. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
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.
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 canceled. 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.
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In April 2016, we ceased operations. Our then management resigned their respective positions with our Company, with the exception of Mr. Gary Herick, who remained as our sole officer and director until his resignation in April 2019. As a result, we were classified as a “shell” company as defined by Rule 12b-2 under the Securities Exchange Act of 1934, as amended until February 2019. Relevant thereto, in February 2019, we filed a report on Form 8-K/A advising that we had taken all steps necessary and disclosed all required information with the SEC so as to allow us to no longer be considered a “shell” company.
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 and until November 2018 we had been dormant since April 2016.
Following is our current Plan of Operation.
PLAN OF OPERATION
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. 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 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.
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 USD$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 133,200 of the stock issued to him as part of the AMS acquisition for USD$98,955, or approximately USD$0.74 per share on or before April 30, 2019. We have completed the stock purchase and have paid Mr. Barber his monthly fee of CAD$1,500, however, as of the date of this Report, we have paid Mr. Barber $42,663 against his USD$225,000 consulting fee, leaving a balance due of $182,337.
AMS is a corporation organized under the laws of the Province of Ontario, Canada.. The application process is a phased approach with Health Canada issuing a Confirmation of Readiness letter during the late stages of the application process. This letter confirms that if the applicant builds out the facility, as described, Health Canada will review the documentation and further assess the applicant’s suitability in obtaining the License to Cultivate. At the completion of construction, the applicant submits an evidence package showing that the facility design and construction meets the Good Production Practices and Security Design described in the application. After review, Health Canada issues the License to Cultivate and then follows up with unannounced inspections as the company becomes operational. Following the successful completion of two batches, Health Canada will inspect and issue the License to Sell. The AMS application was in the Confirmation of Readiness stage in the previous regulatory structure. On October 17, 2018, The Cannabis Regulations (SOR/2018-144) came into effect. With the new regulations, the AMS application will need to be transitioned to the Cannabis Tracking and Licensing System (CTLS). After the application is transitioned to the new regulations, Health Canada will review compliance with the new regulations and again issue the Confirmation of Readiness.
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The AMS cultivation facility is expected to be 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 an annual production capacity of 9,500 kilos of cannabis (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 we estimate that we will require approximately CAD$20 million in additional financing which we will seek to raise via equity and debt. While there can be no assurances that we will successfully raise the financing required to complete construction of the facility and begin cultivation, we have had several initial discussions with funding sources and while no assurances can be provided, we believe we will be able to obtain such financing. Failure to obtain such financing will have a significant negative impact on our ability to successfully implement our business plan.
A Cultivation License issued in Canada gives the licensee the right to produce, possess, ship, transport, deliver and destroy dried cannabis and cannabis plants, as well as cannabis oil extracts. The Cultivation License is issued to the licensee for use only at a designated facility. In the case of AMS, the Hanover Facility will be the designated location.
A Sales License may be obtained during the Cultivation License application process, and as a final step of that general process, as described below.
In 2018 AMS received its Confirmation of Readiness for a license under Canadian law. The Confirmation of Readiness is the result of a successful Initial Screening of the application by Health Canada. At the stage of the initial screening, the (i) the proposed business plan; (ii) the Security Clearance Application Form and (iii) record-keeping methods pertaining to security, Good Production Practices, inventory, and destruction methods of AMS were assessed and deemed satisfactory by Health Canada. In parallel to the Initial Screening process, Health Canada conducted the required security clearance process of the proposed personnel. AMS was notified by Health Canada that all members of proposed personnel had obtained the required security clearance. All of these people have been retained by us following the closing of the AMS acquisition.
In the course of the Detailed Review stage, AMS was asked to submit specific information to Health Canada, which was reviewed to:
| ☐ | complete the assessment of the application to ensure that it met the requirements of applicable law and regulations; |
| ☐ | establish that the issuance of the License was not likely to create risks to public health, safety or security, including the risk of cannabis being diverted to an illicit market or use; and |
| ☐ | establish that there were no other grounds for refusing the application. |
As of the date of this report, the Officer of Medical Cannabis in Canada has asked AMS to confirm or provide evidence of the various items (the “Evidence Package”). AMS will be in a position to begin assembling the Evidence Package as the construction of the Hanover Facility progresses, and once it is completed and the Hanover facility becomes operational. To date, exterior construction of the building has been completed, but no interior construction has begun. We expect that we will be in a position to submit the Evidence Package to the Officer of Medical Cannabis shortly following the completion of the Hanover Facility.
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Upon the completion of the Detailed Review stage, Health Canada is expected to issue a Cultivation License. As part of the terms and conditions on the license, a Licensed Producer is required to notify Health Canada once it begins cultivation. Once notified, Health Canada will schedule an initial inspection to verify that the Licensed Producer is meeting the requirements of applicable Canadian law including, but not limited to, the physical security requirements for the site, record-keeping practices, and Good Production Practices and to confirm that the activities being conducted by the Licensed Producer correspond to those indicated on their License.
Once AMS is issued a Cultivation License, in order to be authorized for the activity of sale specifically, AMS will undergo a Pre-Sale Inspection by Health Canada and submit an amendment application to the Office of Medical Cannabis. Health Canada will then schedule an inspection to verify that AMS, as a Licensed Producer, is meeting the requirements of applicable Canadian law including, but not limited to, Good Production Practices, packaging, labeling, shipping, and record-keeping prior to allowing the sale or provision of product.
When the review is completed, an amended license (i.e. the Sales License), including the activity of sale, may be issued to the Licensed Producer. The Licensed Producer may then begin supplying cannabis products to registered clients, other licensed producers and/or other parties named, depending on the activities licensed.
While no assurances can be provided, based on our knowledge of the licensing process under current Canadian law, we expect that we will be in a position to obtain a Cultivation License and Sales License by the end of June 2020, subject to our ability to raise the funds necessary to complete the interior of the property, of which there is no assurance. The Detailed Review stage will be completed once we complete that construction of a site and production facility that is compliant with the requirements listed above. Based on our projected construction timeline we expect that the construction of the Hanover Facility will be completed by the end of 2020, and that at that time we will have satisfied all of the requirements found in the Confirmation of Readiness and will be in a position to submit the Evidence Package to the Officer of Medical Cannabis. This proposed timeline is only an estimate based on our observations and knowledge of the licensing process under applicable Canadian law and could vary significantly.
For a discussion of the Canadian License Renewal Processes, please see the Business section of our Form 10-K annual report filed with the SEC.
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. We have been verbally advised that, once completed, 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 we believe that GN commenced cultivation activities, with the initial harvest expected in the next few months. 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 their business activities confidential. We expect that we will obtain additional information on the business activities of GN once we renew discussions to acquire additional interests and can perform our due diligence.
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Additionally, 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.
The purchase price is CAD$20,000,000 of which CAD$1,000,000 was payable as a non-refundable deposit to be credited against the purchase price at closing 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 but was made and accepted on July 31, 2019.
Subsequent Event
On October 2, 2019, we entered into an Extension Agreement with Sunniva wherein Sunniva has agreed to amend the settlement of the purchase price to CAD $16.0 million in cash and CAD $4.0 million by way of our issuance of a promissory note from the previous all-cash settlement of CAD $20.0 million. Sunniva received an incremental non-refundable deposit of $700,000 as part of the amended terms and the closing date was amended to October 31, 2019.
Because of the aforesaid change in the terms of the purchase price, our proposed lender needed additional time to comply with contractual obligations and they were unable to satisfy these obligations prior to October 31, 2019. This lender also had concerns about the additional $4 million of debt. As of the date of this Report we are engaged in discussions with Sunniva to extend the closing date to November 30, 2019. We continue to work with Sunniva to complete the transaction. See Notes to Financial Statements, Note 15. Subsequent Events.
We have received a commitment from HB Partners 48 Inc., Toronto, Canada, to provide Cannapharmarx Canada, Inc., our wholly owned subsidiary with a loan in the principal amount of $16,100,000, secured by the Sunniva property. We have also agreed to provide a corporate guarantee of this obligation. Interest on this loan will be 11.75%, over a one-year term. We anticipate replacing this loan upon receiving construction financing for the completion of the SMI project..
The SMI project is a 759,000 square foot cannabis grow facility to be built on an approximately 116-acre parcel of land located in Okanagan Falls, British Columbia, Canada. The full facility is designed with two phases. Phase One is comprised of development of 458,000 square feet and Phase Two is the development of the remaining 301,000 square feet. To date, all design, engineering and site improvements required for both Phases have been completed. However, except for the concrete footing walls for Phase One, no physical construction of the grow facility has begun.
Each Phase is designed to have 8 separate growing rooms of approximately 22,000 square feet which we believe will provide annual production capacity of 60,000 kg of cannabis flower (120,000 lbs.). Upon full completion of both Phases, the facility will contain 16 separate growing rooms which we estimate will provide annual production capacity of 120,000 kilograms of cannabis flower (264,000 lbs.).
Completion of the build-out of Phase One of the facility is expected to take an estimated 12 months and require additional capital of approximately CAD$100,000,000. Phase Two, which can be completed in the future requires additional financing of approximately CAD$95,000,000.
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Applicable thereto, in expectation of making the acquisitions described above, on or about May 7, 2019, we executed an agreement with KannaREIT, Inc., wherein KannaREIT has agreed to enter into a relationship with us to arrange a construction financing facility for the continued development of the properties acquired from Sunniva, which facility will be converted to a permanent financing facility upon the completion of the Sunniva site improvements. This agreement is subject to the parties agreeing to and complying with certain conditions precedent to the aforementioned agreement. Specifically, the agreement provides for the parties to set up a special purpose vehicle (the “SPV”). We would assign the interests acquired in the Sunniva acquisition described above, along with any improvements made onto the lands and exiting machinery and equipment as our equity contribution to the SPV, concurrent and in series with the placement of the above-noted construction financing facility. This arrangement calls for an equity contribution by us towards the total project cost and, as such, does not provide us funding to allow us to complete the Sunniva acquisition described above. However, it does provide a capital mechanism to allow us to develop the property if and when the acquisition becomes effective. We would own 100% of the operations, separate from the SPV, of the SMI Project.
We have engaged in discussions with various investment bankers and other investors about raising the additional funds necessary to successfully consummate the Sunniva acquisition but as of the date of this Report we do not have a definitive agreement with any third party to provide this additional financing and there are no assurances that such an agreement will be executed so as to allow us to close the Sunniva acquisition. Failure to raise these funds will have a significant negative impact on our proposed operations described herein.
We intend to dual list our Common Stock for trading on the Canadian Securities Exchange (“CSE”) as a precursor to 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 2019 or first calendar quarter of 2020.
There are numerous things that will need to occur in order to allow us to implement this aspect of our business plan and there are no assurances that any of these developments will occur, or if they do occur, that we will be successful in fully implementing our plan.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 2019, we had $192,503 in cash.
We have no revenue-producing operations or other source of income as of the date of this Report, nor have we had any revenue during the past 3 years. See “Plan of Operation” above herein for an explanation of our current business activities.
In January 2019, we closed 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 50% of the closing market price on the date a business combination or combined issuance of equity securities valued at greater than $5,000,000 is completed., 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. 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 herein to equity at a price of $0.40 per share, or a total of 5,505,530 shares.
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As disclosed elsewhere in this Report, in February 2019, we 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 our Common Stock from a former shareholder of GN. On the date of the purchase, our Common Stock was trading at $1.41 which values the purchase at $11,264,438. 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.
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.
We estimate that in order to consummate the acquisition of GN discussed under Plan of Operation, above, as well as to complete development of the cultivation facilities we presently own located in Hanover, Ontario, we will require up to CAD $20 million in additional financing. In addition, as disclosed above, in June we executed an SPA with Sunniva in consideration for the payment of CAD $20 million. In order to fully develop this property we will need to raise both the purchase price, plus approximately CAD $225 million to complete the development of this property.
Applicable thereto, on May 7, 2019, we executed an agreement with KannaREIT, Inc., wherein KannaREIT has agreed to enter into a relationship with us to arrange a construction financing facility for the continued development of the properties acquired from Sunniva, which facility will be converted to a permanent financing facility upon the completion of the Sunniva site improvements. This agreement is subject to the parties agreeing to and complying with certain conditions precedent to the aforementioned agreement. Specifically, the agreement provides for the parties to set up a special purpose vehicle (the “SPV”). We would assign the interests acquired in the Sunniva acquisition described above, along with any improvements made onto the lands and exiting machinery and equipment as our equity contribution to the SPV, concurrent and in series with the placement of the above noted construction financing facility. This arrangement calls for an equity contribution by us towards the total project cost and, as such, does not provide us funding to allow us to complete the Sunniva acquisition described above. However, it does provide a capital mechanism to allow us to develop the property if and when the acquisition becomes effective.
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 (“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 shares of our Common Stock at a conversion price of $1.00 per share. During the three months ended September 30, 2019, we accepted subscriptions totaling $1,200,000 in this Offering from to two accredited investors. Since our stock price exceeded the conversion feature of the Unit Convertible Notes and was immediately exercisable, we 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, the 1.2 million shares of Common Stock that were issued in connection with the sale of the Units were valued at $2,598,000.
Currently, other than the pending loan commitment from HB Partners 48 Inc., and the commitment from KannaREIT each described above in Plan of Operation, we have no other committed source for any funds to allow us to complete either of our proposed 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 and could fail in business as a result of these uncertainties.
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Subsequent Events
In October 2019, we accepted subscriptions from four additional accredited investors for $350,000 in Units as part of our private offering commenced in July 2019 discussed above.
Additionally, in October 2019, our Chief Executive Officer extended a loan to us on an interest-free basis in the principal amount of $250,000, which is due upon demand.
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 nine-month period ended September 30, 2019.
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.
| 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.
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Based on this evaluation, our CEO and CFO concluded that our disclosure controls and procedures were effective as of September 30, 2019, at a 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 September 30, 2019, 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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| 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 filed by Ataraxia Canada, Inc., as plaintiff, and circulated to Alternative Medical Solutions Inc., as defendant, on August 2, 2017, under the Ontario Superior Court of Justice (Court file no. CV-17-580157). The pleadings have closed and the parties are now expected to schedule examinations for discovery. Counsel has advised that it believes it is premature to speculate on any outcome of this litigation, including the likelihood of success or 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.
In the event we are not successful in defending this action, the AMS Agreement also provides that the Purchase Price (and the amount owing under the Purchaser Notes) we paid for AMS shall be reduced by an amount equal to any judgment or order awarded against (and payable by) and all costs and expenses incurred by us in defending the Ataraxia litigation including, without limitation, all legal and other professional fees and any and all costs and expenses of any appeal of any judgment or order.
We have held substantial settlement discussions with Ataraxia Canada, Inc. regarding this matter and, while there are no assurances, we believe an amicable resolution will be reached.
In addition, we had previously been party to an action filed by Gary M. Cohen, a former officer and director of our Company in 2014. In March 2015, we entered into a Settlement Agreement with Mr. Cohen wherein we agreed to repurchase 2,250,000 shares of our 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. We have taken the position that his death has discharged any obligation we might have to make the balance of the payments. We have not received any demand for payment or otherwise been involved in any attempt to collect this balance as of the date of this report.
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.
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| ITEM 2. | UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS. |
On July 8, 2019, we commenced an offshore 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 (“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 shares of our Common Stock at a conversion price of $1.00 per share. During the three months ended September 30, 2019, we accepted subscriptions totaling $1,200,000 in Units in this offering from two accredited investors. Since our stock price exceeded the conversion feature of the Unit Convertible Notes, which were immediately exercisable, we 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 Units are being offered in reliance upon the exemption from registration provided by Regulation S. We have utilized the proceeds from this Offering for working capital. and for expenses related to the ongoing efforts to acquire SMI.
In the first quarter of 2019 we commenced a private offering of up to $3,000,000 of Units 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. We closed this offering in August 2019 after accepting aggregate subscriptions totaling $475,000. The Units were issued in reliance upon the exemption from registration provided by Rule 506 of Regulation D. $100,000 of these funds were used for the payments made to Sunniva, with the balance used for working capital.
| ITEM 3. | DEFAULTS UPON SENIOR SECURITIES. |
None
| ITEM 4. | MINE SAFETY DISCLOSURE. |
Not Applicable
| ITEM 5. | OTHER INFORMATION. |
None
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| 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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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 November 14, 2019.
| CannaPharmaRx, Inc. | |||
| By: | /s/ Dominic Colvin | ||
| Dominic Colvin, | |||
| Principal Executive Officer | |||
| By: | /s/ John Cassels | ||
|
John Cassels, Principal Financial Officer and |
|||
| Principal Accounting Officer | |||
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