Avax One Technology LTD.: Form 10-Q for the period ended Sep 30, 2023

Prospective investors should read the following discussion and analysis of our financial condition and results of operations together with our financial statements and the related notes and other financial information included elsewhere in this Annual Report. Some of the information contained in this discussion and analysis or set forth elsewhere in this Annual Report, including information with respect to our plans and strategy for our business, includes forward-looking statements that involve risks and uncertainties. See “Cautionary Note Regarding Forward-Looking Statements.” You should review the “Risk Factors” section of this Annual Report for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis.

Company History and Our Business

AgriFORCE Growing Systems Ltd. (“AgriFORCE” or the “Company”) was incorporated as a private company by Articles of Incorporation issued pursuant to the provisions of the Business Corporations Act (British Columbia) on December 22, 2017. The Company’s registered and records office address is at 800 – 525 West 8th Avenue, Vancouver, BC, Canada, V5Z 1C6.

AgriFORCE™ is dedicated to positively transforming farm, food, and family every day, everywhere. We aim to achieve this goal by providing novel agriculturally focused consulting, facility solutions, and products & services through our Solutions division, and by leveraging innovative technologies and processes to deliver healthier more nutritious food to consumers through our Brands division.

The AgriFORCE™ Solutions division is dedicated to transforming modern agricultural development “Building from the Seed to Deliver sustainable, Efficient, and Healthier crops” through our integrated Agtech platform 2.0 combining knowledge and IP with CEA equipment solutions, including our FORCEGH+™” solution, implementing solutions that are best suited to the crops and environment chosen.

Our AgriFORCE™ Brands division is focused on the development and commercialization of plant-based ingredients and products that deliver more nutritious “Food to Table”. We will market and commercialize both branded consumer product offerings and ingredient supplies.

AgriFORCE Solutions

Understanding Our Approach – The AgriFORCE™ Precision Growth Method

Traditional farming includes three fundamental approaches: outdoor, greenhouse and indoor. AgriFORCE™ introduces a unique fourth method, the AgriFORCE™ precision growth method, which is informed by cutting-edge science and leveraging the latest advances in artificial intelligence (AI) and Internet of Things (IoT).

With a carefully optimized approach to facility design, IoT, AI utilization, nutrient delivery, and micro-propagation, we have devised an intricate, scientific and high success-oriented approach designed to produce much greater efficacy yields using fewer resources. This method is intended to outperform traditional growing methods using a specific combination of new and traditional techniques required to attain this efficiency. We call it precision growth. The AgriFORCE™ precision growth method focuses on addressing some of the most important legacy challenges in agriculture: environmental impact, operational efficiency and yield volumes.

The AgriFORCE™ precision growth method presents a tremendous opportunity to positively disrupt all corners of the industry. The market size of just the nutraceutical and plant-based pharmaceutical and vaccine/therapeutics market is over $500 billion. Including the traditional hydroponics high value crops and controlled-environment food markets, the addressable market approaches nearly $1 trillion(1)(2)(3).

The AgriFORCE™ Model – Managing the Difficulties of Agricultural Verticals with Modern Technology and Innovation

Our intellectual property combines a uniquely engineered facility design and automated growing system to provide a clear solution to the biggest problems plaguing most high value crop agricultural verticals. It delivers a clean, self-contained environment that maximizes natural sunlight and offers near ideal supplemental lighting. It also limits human intervention and – crucially – it was designed to provide superior quality control. It was also created to drastically reduce environmental impact, substantially decrease utility demands, as well as lower production costs, while delivering customers daily harvests and higher crop yields.

(1) https://home.kpmg/pl/en/home/insights/2015/04/nutraceuticals-the-future-of-intelligent-food.html

(2) https://link.springer.com/article/10.1057/jcb.2010.37

(3) https://medium.com/artemis/lets-talk-about-market-size-316842f1ab27

Our Position in the Ag-Tech Sector

The Ag-Tech sector is severely underserved by the capital markets, and we see an opportunity to acquire global companies who have provided solutions to the industry and are leading innovation moving forward. The robustness of our engagement with potential targets has confirmed our belief and desire to be part of a larger integrated Ag-Tech solutions provider, where each separate element of the business has its existing legacy business and can leverage across areas of expertise to expand their business footprint.

The AgriFORCE™ Grow House

The Company intends to operate in the plant based pharmaceutical, nutraceutical, and high value crop markets using its unique patented facility design and hydroponics based automated growing system that enable cultivators to effectively grow crops in a controlled environment (“FORCEGH+™”). The Company has designed FORCEGH+™ facilities to produce in virtually any environmental condition and to optimize crop yields to as near their full genetic potential possible while substantially eliminating the need for the use of pesticides, fungicides and/or irradiation.

The Company continues to develop its solution for fruits and vegetables focusing on the integration of its current structure with a new form of vertical grow technology.

BUSINESS PLAN

The Company is exploring opportunities to utilize its patented grow house structures and automated growing systems to expand its internal operations as well as external opportunities for joint ventures and licensing.

AgriFORCE Brands

UN(THINK)™ Foods

The Company purchased Intellectual Property (“IP”) from Manna Nutritional Group, LLC (“Manna”), a privately held firm based in Boise, Idaho on September 10, 2021. The IP encompasses a granted patent to naturally process and convert grain, pulses and root vegetables, resulting in low-starch, low-sugar, high-protein, fiber-rich baking flour as well as produces a natural sweetener juice. The core process is covered under the Patent Nr. 11,540,538 in the U.S. and key international markets. The all-natural process is designed to unlock nutritional properties, flavors, and other qualities in a range of modern, ancient and heritage grains, pulses and root vegetables to create specialized all-natural baking and all-purpose flours, sweeteners, juices, naturally sweet cereals and other valuation products, providing numerous opportunities for dietary nutritional, performance and culinary applications.

During the period ended September 30, 2023, the Company has achieved milestones towards the commercialization of our Awakened Grains™ flour, the Company’s first brand to utilize the IP. Management has defined and tested its quality controls and safety protocols for production, and produced several multi-ton batches of germinated grains, refining and scaling production processes with our partners in Canada. We are also in the process of qualifying partners in the US to establish additional production hubs which will support growth and reduce logistics costs for customers in the region. Additionally, we have established our supply chain logistics with a contracted shipping company and two warehouses in Canada and the US. Our commercial team made progress in defining pricing and is conducting advanced customer R&D trials to understand how to integrate the product into food suppliers’ manufacturing processes. Online sales logistics and advertising materials were developed during the period to support the establishment of the direct-to-consumer sales channel. Lastly, the Company has developed an extensive number of recipes for the application of Awakened Grains™ flour for both customers and consumers.

With our R&D partners, the Company is developing several finished product prototypes including a line of pancake mixes, which are ready for consumer testing.

Wheat and Flour Market

Modern diet is believed to be a contributor to health risks such as heart disease, cancer, diabetes and obesity, due in part to the consumption of highly processed foods that are low in natural fiber, protein and nutrition; and extremely high in simple starch, sugar and calories. These “empty carbs” produce glycemic swings that may cause overeating by triggering cravings for food high in sugar, salt and starch. As an example, conventional baking flour is low in natural fiber (~ 2-3%), low-to-average in protein (~ 9%), and very high in starch (~ 75%)(4). Whole wheat flour is only marginally better.

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

In contrast, foods high in fiber help to satiate hunger, suppress cravings and raise metabolism(5). They also assist in weight loss, lower cholesterol, and may reduce the risk of cancer, heart disease and diabetes.

Advantages of the UN(THINK)™ Foods IP

The Controlled Enzymatic Reaction & Endothermic Saccharification with Managed Natural Germination (“CERES-MNG”) patented process allows for the development and manufacturing of all-natural flours that are significantly higher in fibers, nutrients and proteins and significantly lower in carbohydrates and calories than standard baking flour.

CERES-MNG baking flour produced from soft white wheat has 40 times more fiber, three (3) times more protein and 75% less net carbohydrates than regular all- purpose flour(6).

Source: Independent analysis by Eurofins Food Chemistry Testing Madison, Inc, February 2022

The CERES-MNG patent will help develop new flours and products from modern, ancient and heritage grains, seeds, legumes and tubers/root vegetables.

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

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

Products that AgriFORCE™ intends to develop for commercialization from the CERES-MNG patented process under the UN(THINK)™ foods brand:

• High protein, high fiber, low carb modern, heritage and ancient grain flours (for use in breads, baked goods, doughs, pastry, snacks, and pasta)
• Protein flours and protein additives
• High protein, high fiber, low carb cereals and snacks
• High protein, high fiber, low carb oat based dairy alternatives
• Better tasting, cleaner label, high protein, high fiber, low carb nutrition bars
• High protein, high fiber, low carb nutrition juices
• Sweeteners – liquid and granulated
• High protein, high fiber, low carb pet foods and snacks

We intend to commercialize these products behind three (3) main sales channels:

• Ingredients
• Branded ingredients
• Consumer branded products

Successful commercialization of premium specialized products from the UN(THINK)™ foods IP and the capture of a small percentage share of the category is a notable business opportunity for AgriFORCE™. We estimate potential revenues to be between $500 million and $1 billion by 2030 (excluding any potential revenues from the Maltose-Power Juice applications).

Sources: Grand View Research Reports, San Francisco CA, 2018 Estimates.

Ahead of setting up a pilot plant in Canada to produce the UN(THINK)™ power wheat flour , we are using our patented process to develop a gold-standard sprouted wheat flour, which we have qualified and made available for sale through brokers as of January 2023 in Canada and the USA, under the UN(THINK)™ Awakened Grains™ brand. This new Awakened Grains™ flour – available in 3 types: hard white wheat and hard red wheat for breads and soft white wheat for bakery and pastries – will provide enhanced nutrition with over five times more fiber, up to two times more protein and 77% of net carbs versus conventional all purpose flour (source: Eurofins Food Chemistry Madison, Inc, December 2022).

BUSINESS PLAN

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

PHASE 1 (COMPLETED):

• Product and process testing and validation. (completed)
• Filing of US and international patents. (completed)
• Conceptual engineering and preliminary budgeting on commercial pilot plant. (completed)
• Creation of the UN(THINK)™ foods brand. (completed)
• Qualification and operational and commercial set up of the Awakened Grains™ line of products. (completed)

PHASE 2:

• Launch of the UN(THINK)™ Awakened Grains™ lightly germinated flour range of products in business to business (“B2B”) channel. (complete) Launch of the UN(THINK)™ Awakened Grains™ lightly germinated flour range of products in the direct to consumers (“D2C”) channel.
• Design, build, start-up, and operation of the pilot plant for the fully processed and patented flours.
• Develop range of finished products behind the wheat grain flours, qualify patented process for pulse/legume, and rice-based protein flours.
• Develop relationships with universities to research impact of patented flour on nutrition.

PHASE 3:

• Launch first range of fully patent processed products in US/Canada (UN(THINK)™ power wheat flour).
• Drive business with finished products in D2C, retail, food service.
• Drive business as ingredients for bakery, snack and plant-based protein products manufacturers.
• Develop manufacturing base through partnerships and licensing.
• Conceptual engineering and preliminary budgeting on large-scale processing plant.

PHASE 4:

• Expand product range in US/Canada.
• Expand business to other geographies internationally.
• Design, build, start-up, and operation of large-scale processing plan.

Radical Clean Solutions (“RCS”)

RCS is a US based company that has developed an advanced product line consisting of patent-pending “smart hydroxyl generation systems” focused on numerous industry verticals that is proven to eliminate 99.99+% of all major pathogens, virus, mold, volatile organic compounds (VOCs) and allergy triggers(7). Applications for the system range from home, office, medical and senior care facilities to restaurants, transportation and more. RCS’s goal is to create a safe and healthy world, especially in light of the recent COVID pandemic.

The Company has a worldwide licensing agreement with RCS to commercialize their proprietary hydroxyl generating devices within the controlled environment agriculture (CEA) and food manufacturing industries.

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

The Company expects revenue from the sale of RCS devices in late 2023. During the quarter, the Company has signed an exclusive distribution agreement with a leading distributor of AC and heating solutions in Mexico for the representation and sale of the AgriFORCE/RCS hydroxyl generating devices for greenhouses and food manufacturing facilities for the territory of Mexico. The first purchase orders were received in September 2023.

Merger and Acquisition (“M&A”)

With respect to M&A growth, the Company is pursuing acquisitions in the agriculture technology and food technology space. The Company believes that a buy and build strategy will provide unique opportunities for innovation across each segment of the Ag-Tech market we serve.

Manna Nutritional Group Asset Acquisition

On September 10, 2021, the Company signed a definitive asset purchase agreement to acquire food production and processing IP from Manna.

On May 10, 2022, the Company completed an amendment to its asset purchase agreement with Manna Nutritional Group LLC. The amendment required the issuance of prefunded warrants instead of shares over several tranches and contained covenants to obtain shareholder approval of the acquisition transactions before the prefunded warrants can be exercised into Company common shares.

The transaction was fully approved by the shareholders on December 15, 2022. The Company paid consideration of $1,475,000 in cash and issued 147,600 prefunded warrants valued at $12,106,677 adjusted for foreign exchange differences of $492,300. Subject to a 9.99% stopper and SEC Rule 144 restrictions, the prefunded warrants will vest in tranches up until March 10, 2024. When vested the tranches of prefunded warrants will be converted into an equal number of common shares.

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

On January 3, 2023, Manna satisfied all its contractual obligations when the patent was approved by the US Patents Office and title was transferred to the Company. During the nine months ended September 30, 2023, the Company has issued 102,610 shares upon exercise of vested tranches of Manna’s prefunded warrants in relation to this transaction. On October 1, 2023, the Company issued an additional 13,645 common shares upon exercise of vested tranches of Manna’s prefunded warrants.

Delphy Groep BV Acquisition

On February 10, 2022, the Company signed a definitive share purchase agreement (the “Delphy Agreement”) to acquire Delphy, a Netherlands-based AgTech consultancy firm, for €23.5 million through a combination of cash and stock. Delphy, which optimizes production of plant-based foods and flowers, has multi-national operations in Europe, Asia, and Africa, with approximately 200 employees and consultants. The Delphy Agreement was negotiated at arm’s length and was not a related party transaction.

On May 25, 2023, the parties mutually terminated the share purchase agreement after extensive due diligence, an evaluation of the historical and projected financial information, potential for impairment risk as well as current market conditions.

Deroose Plants NV Binding Letter of Intent

On February 23, 2022, the Company signed a binding letter of intent (the “Deroose LOI”) with Deroose Plants NV (“Deroose”), one of the largest tissue culture propagation companies in the world with a leadership position in horticulture, plantation crops, and fruit and vegetables. Founded in 1980, Deroose has multi-national operations in Europe, North America, and Asia, and over 800 employees.

The Deroose LOI is subject to completion of standard due diligence and entry into a definitive purchase agreement, which is expected to include commercially standard terms and conditions, including, but not limited to, representations and warranties, covenants, events of default and conditions to closing.

Neither party has provided notice to terminate the agreement.

Stronghold Land Acquisition

On August 30, 2022, the Company entered into a Purchase and Sale Agreement (“PSA”) with Stronghold Power Systems, Inc. (“Stronghold”) to purchase approximately 34 acres of land in Coachella California. The purchase price was $4,300,000, payable as follows: (i) $1,500,000 in cash and (ii) $2,800,000 in restricted shares of common stock of the Company. The stock was issued in the form of prefunded warrants in two tranches: (i) $1,700,000 (13,917 prefunded warrants) issued within five days of entry into the PSA, and (ii) $1,100,000 (9,005 prefunded warrants) at closing of the transaction. The first tranche, issued during the first quarter, was voided on March 31, 2023 when closing of the transaction did not occur. The prefunded warrants per share exercise price was $122.15 which was subject to certain adjustments. Issuance of all securities in this transaction were exempt from registration under Section 4(a)(2) of the Securities Act of 1933, as amended. Under the terms of the agreement, Stronghold was to complete certain permitting, zoning, and infrastructure work by March 31, 2023, to close the transaction.

As at March 31, 2023 the prefunded warrants issued were rescinded and the warrants were rendered null and void as the Company presented termination notice to Stronghold.

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

Berry People LLC Binding Letter of Intent

On January 24, the Company announced it has entered a binding letter of intent (“BP LOI”) to acquire Berry People LLC, (“Berry People”), a berry business with an increasingly international footprint and a scalable business model. The acquisition bolsters the AgriFORCE™ Brands division and allows the Company to realize commercial synergies with UN(THINK)™.

Berry People was founded in 2017 by berry industry veterans to create a new platform to meet market demand for a branded, year-round supply of organic and conventional berries. Berry People quickly established a recognized global trade brand and scalable operations, comprised of over 200 retail and foodservice clients and over 100 grower and exporter clients across the US, Canada, Mexico, and Peru. Berry People had net revenues of USD $35.4 (unaudited) million for the year ended December 31, 2022.

The BP LOI states, among other things that:

• the transaction will be subject to completion of due diligence to the Company’s satisfaction and, after satisfactory due diligence, the reaching of agreement on the terms of the purchase pursuant to a definitive purchase agreement, including conditions precedent for closing of the transaction;
• the parties will sign the definitive purchase agreement no later than April 30, 2023(8), unless agreed to by both parties; and
• Berry People will not enter any negotiations with other parties for a period of three months following the execution of the BP LOI.

(8) Berry People and the Company mutually agreed to be amended the long stop date to August 31, 2023

The BP LOI sets forth a proposed purchase price of $28.0 million, consisting of $18.2 million in cash and $9.8 million in AgriFORCE™ restricted shares, which will be paid at closing to acquire 70% of Berry People’s equity interests. Berry People will have the opportunity for future earnouts during the five years after closing based on future revenue and EBITDA targets associated with agreed upon growth targets.

In collaboration with AgriFORCE™, Berry People aims to further develop backward integration into agricultural production via farming joint ventures and deploy licensed and developed IP as part of a scalable franchising model. The berries market was $9.65 billion in 2021 in the U.S. alone, with growth rates of around 10% or more each year since 2019(9)— a trend that is expected to continue.

(9) As per IRI Integrated Fresh, Latest 52 WE 3/20/2022

Recent Developments

On July 18, 2023, the Company announced a restructuring of management. Ingo Mueller departed from his position as CEO and Chair of the Board. Richard Wong was concurrently appointed as interim CEO, and David Welch and John Meekison each assumed the role of Co-Chair of the Board. Ingo Mueller served as a director of the Company until the shareholder meeting dated September 27, 2023 at which time he was not re-elected and ceased to serve as a director. The Company is currently evaluating options regarding the appointment of a fulltime CEO.

Status as an Emerging Growth Company

On April 5, 2012, the Jumpstart Our Business Startups Act of 2012, or the JOBS Act, was enacted. Section 107 of the JOBS Act provides that an “emerging growth company” can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act of 1933, as amended, or the Securities Act, for complying with new or revised accounting standards. In other words, an “emerging growth company” can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We have irrevocably elected to avail ourselves of this extended transition period and, as a result, we will adopt new or revised accounting standards on the relevant dates on which adoption of such standards is required for private companies.

We are in the process of evaluating the benefits of relying on other exemptions and reduced reporting requirements provided by the JOBS Act. Subject to certain conditions set forth in the JOBS Act, as an “emerging growth company,” we intend to rely on certain of these exemptions from, without limitation, (i) providing an auditor’s attestation report on our system of internal controls over financial reporting pursuant to Section 404(b) of the Sarbanes-Oxley Act and (ii) complying with any requirement that may be adopted by the Public Company Accounting Oversight Board (PCAOB) regarding mandatory audit firm rotation or a supplement to the auditor’s report providing additional information about the audit and the financial statements, known as the auditor discussion and analysis. We will remain an “emerging growth company” until the earliest of (a) the last day of our fiscal year following the fifth anniversary of the closing of the initial public offering, (b) the last day of the first fiscal year in which our annual gross revenues exceed $1.07 billion, (c) the last day of our fiscal year in which we are deemed to be a “large accelerated filer” as defined in Rule 12b-2 under the Securities Exchange Act of 1934, or Exchange Act (which would occur if the market value of our equity securities that is held by non-affiliates exceeds $700 million as of the last business day of our most recently completed second fiscal quarter), or (d) the date on which we have issued more than $1 billion in nonconvertible debt during the preceding three-year period.

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2023 AND 2022

Results of Operations

The following discussion should be read in conjunction with the condensed unaudited financial statements for the interim periods ended September 30, 2023 and 2022 respectively, included in this report.

Revenues

The Company has generated no revenue since inception.

Operating Expenses

Operating expenses decreased in the three months ended September 30, 2023 as compared to September 30, 2022 by $1,778,223 or 52%, primarily due to the following:

• Professional fees decreased $899,542 due to a significant decrease in M&A spending during Q3 2023 as a result of the Company focusing on organic growth of currently active ventures.
• Consulting decreased $375,386 due to a significant decrease in M&A spending during Q3 2023 as a result of the Company focusing on organic growth of currently active ventures.
• Office and administrative decreased $164,579 due to overall cost cutting initiatives during Q3 2023.
• Research and development decreased $137,962 due to the a reduction in product research and development.
• Wages and salaries decreased $92,268 due to lower executive compensation as well as a reduction in staff head count in Q3 2023.
• Share based compensation decreased $88,483 due to a significant amount of option forfeitures from lower employee head count.
• Sales and marketing decreased $84,508 due to significant reductions in public relations agency and social media contracted fees from cost cutting initiatives.
• Travel and entertainment decreased $52,091 due to a reduction in travel for foreign business development.
• Investor and public relations decreased $50,180 due to more investor and public relations advisory services utilized in 2022 for communication on M&A targets than in Q3 2023.

This was partially offset by the following:

• Depreciation and amortization increased $165,382 due to the beginning of amortization of the intangible asset which became available for use in January 2023.
• All other items aggregate to $1,394.

Operating expenses decreased in the nine months ended September 30, 2023 as compared to September 30, 2022 by $3,024,149 or 29%, primarily due to the following:

• Professional fees decreased $1,032,592 due to a significant decrease in M&A spending during 2023 as a result of the Company focusing on organic growth of currently active ventures.
• Consulting decreased $998,784 due to a significant decrease in M&A spending during 2023 as a result of the Company focusing on organic growth of currently active ventures.
• Research and development decreased $515,460 due to limited work during 2023 as compared to expenditures paid to RCS in 2022 as well as design and construction fees that were only incurred in 2022.
• Investor and public relations decreased $267,239 due to more investor and public relations advisory services utilized in 2022 for communication.
• Wages and salaries decreased $202,138 due to lower executive compensation as well as a reduction in staff head count in 2023.
• Office and administrative decreased $165,940 due to overall cost cutting initiatives during 2023.
• Share based compensation decreased $140,021 due to a significant amount of option forfeitures from lower employee head count in 2023.
• Travel and entertainment decreased $109,787 due to a reduction in travel expenses for M&A targets.

This was partially offset by the following:

• Depreciation and amortization increased by $496,989 due to the beginning of amortization of the intangible asset which became available for use in January 2023.
• All other items aggregate to $89,177.

Other (Income) / Expenses

Other expenses for the three months ended September 30, 2023 increased primarily due to the change in fair value of derivative liabilities of $1,138,985 caused by significant conversions in Q3 2023 versus Q3 2022, accretion interest on debentures of $376,264 from two tranches of debentures in 2023 versus one tranche in 2022 and an increase in the loss on debt conversion of $202,098 due to debt repayments being made via share issuance in lieu of cash. All other items aggregate to $157,299.

Other expense for the nine months ended September 30, 2023 increased primarily due to the increase accretion interest on debentures of $4,356,542 from two tranches of debentures versus one in 2022, the loss on debt conversions of $635,703 due to several debt repayments being made via share issuance in lieu of cash. This was offset by the change in fair value of derivative liabilities of $4,475,578 from a significant decrease in securities price during the period. All other items aggregate to $127,059.

Liquidity and Capital Resources

The Company’s primary need for liquidity is to fund working capital requirements, capital expenditures, and for general corporate purposes. The Company’s ability to fund operations and make planned capital expenditures and debt service obligations depends on future operating performance and cash flows, which are subject to prevailing economic conditions, financial markets, business and other factors. We have recorded a net loss of $7,740,078 for the nine months ended September 30, 2023, and a net loss of $10,120,501 for the nine months ended September 30, 2022. We have recorded an accumulated deficit of $40,514,172 as of September 30, 2023 and $32,774,094 as of December 31, 2022. Net cash used in operating activities for the nine months ended September 30, 2023 and September 30, 2022 was $5,437,592 and $9,061,726, respectively.

The Company held $586,565 in cash at September 30, 2023 as compared to $2,269,320 at December 31, 2022.

Our future capital requirements will depend on many factors, including:

• the cost and timing of our regulatory activities, especially the process to obtain regulatory approval for our intellectual properties in the U.S. and in foreign countries
• the costs of R&D activities we undertake to further develop our technology
• the costs of constructing our grow houses, including any impact of complications, delays, and other unknown events
• the costs of commercialization activities, including sales, marketing and production
• the level of working capital required to support our growth
• our need for additional personnel, information technology or other operating infrastructure to support our growth and operations as a public company
• completion of planned acquisitions

The accompanying financial statements have been prepared on a going concern basis, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. The financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might result from the outcome of this uncertainty. The Company is at the stage of development of its first facility and other IP. As such it is likely that additional financing will be needed by the Company to fund its operations and to develop and commercialize its technology. These factors raise substantial doubt about the Company’s ability to continue as a going concern.

For the next twelve months from issuance of these financial statements, the Company will seek to obtain additional capital through the sale of debt or equity financings or other arrangements to fund operations; however, there can be no assurance that the Company will be able to raise needed capital under acceptable terms, if at all. The sale of additional equity may dilute existing shareholders and newly issued shares may contain senior rights and preferences compared to currently outstanding common shares. Issued debt securities may contain covenants and limit the Company’s ability to pay dividends or make other distributions to shareholders. If the Company is unable to obtain such additional financing, future operations would need to be scaled back or discontinued. Due to the uncertainty in the Company’s ability to raise capital, management believes that there is substantial doubt in the Company’s ability to continue as a going concern for twelve months from the issuance of these financial statements.

Cash Flows

The net cash used by operating activities for the nine months ended September 30, 2023 was $5,437,592 compared to $9,061,726 for the nine months ended September 30, 2022. The change of $3,624,134 was primarily due to the following:

• A decrease in net loss of $2,380,423 due to operating expenses noted above.
• A favorable change in working capital of $992,009 driven by a delay in payment of trade payables as part of a cash savings initiative and the utilization of a prepaid retainer balance for investor relations services as well as amortization of deferred offering costs for usage of the ATM in 2023.
• All other items aggregate to $251,702.

There was $nil cash used in investing activities for the nine months ended September 30, 2023. The net cash used in investing activities for nine months ended September 30, 2022 was related to the payment against acquisition of IP intangible asset of $500,000 and acquisition of equipment and leasehold improvements amounting to $93,259 and $50,000 paid for construction in progress. This was partially offset by $20,000 of the refundable portion of a deposit for the Coachella, California property in which escrow was closed.

Net cash provided by financing activities for the nine months ended September 30, 2023, represents net proceeds from debentures of $4,615,385 as well as common shares issued for cash of $1,342,915. This was partially offset by repayments on convertible debentures of $1,741,950, financing costs of debentures of $325,962 and share issuance costs of $153,220. Net cash used in financing activities for the nine months ended September 30, 2022 represents net proceeds from debentures of $12,750,000. This was partially offset by financing costs of debentures of $1,634,89 as well as repayments of principal and interest on convertible debentures of $1,122,000 and $173,376, respectively.

Recent Financings

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

On June 20, 2023 the Company entered in to a private placement agreement to issue 20,000 common shares with an additional 20,000 warrants for total consideration of $250,000.

During the nine months ended September 30, 2023, the Company issued 124,652 common shares for cash under the ATM agreement net of issuance costs for a total of $939,695. The issuance further triggered the down round provision, adjusting the exercise prices of the First and Second Tranche Debentures as well as the First and Second Tranche Debenture Warrants to $5.50.

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

Off Balance Sheet Arrangements

None.

Significant Accounting Policies

See the footnotes to our unaudited financial statements for the nine months ended September 30, 2023 and 2022, included with this quarterly report.

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

Disclosure Controls and Procedures.

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

Changes in Internal Controls.

There have been no changes in our internal control over financial reporting during the quarter ended September 30, 2023, that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

Limitations on Effectiveness of Controls and Procedures

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

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