CBDY 10-Q
Target Group Inc. (CBDY)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
For the quarterly period ended | |
or | |
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
For the transition period from ___________ to __________
Commission file number:
(Exact name of registrant as specified in its charter)
(State or Other Jurisdiction of | (I.R.S. Employer |
(Address of principal executive officers) | (Zip Code) |
+
(Registrant’s telephone number, including area code)
(Former name, former address and former fiscal year, if changed since last report)
Securities registered under Section 12(b) of the Act:
None
Securities registered under Section 12(g) of the Act:
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 last 90 days.
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).
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,” “small reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ☐ | 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
Securities registered pursuant to Section 12(b) of the Securities Exchange Act of 1934:
Title of each class |
| Trading symbol |
| Name of each exchange on which registered |
N/A | N/A | N/A |
State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the registrant’s most recently completed second fiscal quarter was $14,824,053 as of June 30, 2021.
State the number of shares outstanding of each of the issuer’s classes of common equity, as of the latest practicable date: As of May 6, 2022, the registrant had
TABLE OF CONTENTS
Condensed Consolidated Interim Financial Statements (Unaudited) | 3 | ||
Management’s Discussion and Analysis of Financial Condition and Results of Operations | 4 | ||
13 | |||
13 | |||
15 | |||
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2
PART I – FINANCIAL INFORMATION
ITEM 1. UNAUDITED CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS.
TARGET GROUP INC.
UNAUDITED CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
INDEX
Condensed Consolidated Balance Sheets as of March 31, 2022 (Unaudited) and December 31, 2021 | F-1 |
F-2 | |
F-4 | |
F-5 | |
Notes to Condensed Consolidated Interim Financial Statements (Unaudited) | F-6 - F-26 |
3
TARGET GROUP INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
| March 31, |
| December 31, | ||||
2022 | 2021 | ||||||
$ | $ | ||||||
(unaudited) |
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ASSETS |
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Current assets |
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Cash |
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Restricted cash | | | |||||
Accounts receivable, no allowance |
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Inventory | Note 3 |
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Prepaid asset |
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Sales tax recoverable, net of allowance | Note 4 |
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Receivable from joint venture | Note 6 | | | ||||
Other receivable | Note 8 | | | ||||
Total current assets |
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Long term assets |
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Fixed assets | Note 5 |
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Investment in joint venture | Note 6 | | | ||||
Goodwill | Note 7 | | | ||||
Operating lease right-of-use assets | Note 9 |
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Total long term assets |
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Total assets |
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LIABILITIES AND STOCKHOLDERS’ DEFICIENCY |
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Current liabilities |
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Bank overdraft | | | |||||
Accounts payable and accrued liabilities |
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Settlement payable | Note 1 | | | ||||
Sales tax payable | Note 4 | | | ||||
Payable to related parties, net | Note 8 | | | ||||
Operating lease liability - Current portion | Note 9 |
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Convertible promissory notes, net | Note 10 | | | ||||
Derivative liability | Note 10 | | | ||||
Total current liabilities | | ||||||
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Long term liabilities |
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Payable to related parties, net - Non-current portion | Note 8 | | | ||||
Operating lease liability - Non-current portion | Note 9 | | | ||||
Warrant liability | Note 11 | | | ||||
Total long term liabilities |
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Total liabilities | | ||||||
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Contingencies and commitments | Note 13 |
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Stockholders’ deficiency |
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Preferred stock, $ | Note 11 |
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Common stock, $ | Note 11 |
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Shares to be issued | Note 11 |
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Additional paid-in capital |
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Accumulated deficit |
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Accumulated comprehensive loss | ( | ( | |||||
Total stockholders’ deficiency | ( | ( | |||||
Total liabilities and stockholders’ deficiency | | ||||||
The accompanying notes are an integral part of these unaudited condensed consolidated interim financial statements.
F-1
TARGET GROUP INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(UNAUDITED)
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| For the |
| For the | |
| three months ended | three months ended | |||
| March 31, 2022 | March 31, 2021 | |||
| $ | $ | |||
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REVENUE | |
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OPERATING EXPENSES |
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Advisory and consultancy fee | |
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Management services fee | |
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Salaries and wages | |
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Legal and professional fees | | | |||
Depreciation expense | | | |||
Operating lease expense | Note 9 | ( | ( | ||
Office and general | |
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Total operating expenses | |
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OTHER EXPENSES (INCOME) |
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Change in fair value of derivative and warrant liability | ( |
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(Gain) loss on settlement |
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Interest and bank charges | |
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Exchange loss | |
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Other income | ( | ( | |||
Allowance for sales tax recoverable | ( |
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Share of (income) loss from joint venture | Note 6 | ( | | ||
Debt issuance cost | Note 8 | | | ||
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Total other expenses | |
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Net loss before income taxes | ( |
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Income taxes |
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Net loss | ( |
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Foreign currency translation adjustment | |
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Comprehensive loss | ( |
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Loss per share - basic and diluted | ( |
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Weighted average shares - basic and diluted | |
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The accompanying notes are an integral part of these unaudited condensed consolidated interim financial statements.
F-2
TARGET GROUP INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIT
(UNAUDITED) FOR THE THREE MONTHS ENDED MARCH 31, 2022 AND 2021
Stock | Additional | Accumulated | ||||||||||||||||||||
Preferred stock | Common stock | Shares to be issued | subscription | paid-in | Accumulated | comprehensive | ||||||||||||||||
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| Amount |
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| Amount |
| Shares |
| Amount |
| receivable |
| capital |
| deficit |
| loss |
| Total |
| # | $ | # | $ | # | $ | $ | $ | $ | $ | $ | |||||||||||
As at December 31, 2021 |
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Shares issued as consideration for consideration of the intellectual property rights [Note 11] |
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Net loss | | | — | | — | — | | — | ( | | ( | |||||||||||
Foreign currency translation | | | — | | — | — | | — | | | | |||||||||||
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As at March 31, 2022 |
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The accompanying notes are an integral part of these unaudited condensed consolidated interim financial statements.
F-3
TARGET GROUP INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIT
(UNAUDITED) FOR THE THREE MONTHS ENDED MARCH 31, 2022 AND 2021
Additional | Accumulated | |||||||||||||||||||||
Preferred stock | Common stock | Shares to be issued | Stock | paid-in | Accumulated | comprehensive | Total | |||||||||||||||
| Shares |
| Amount |
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| subscription |
| capital |
| deficit |
| loss |
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| # | $ | # | $ | # | $ | receivable | $ | $ | $ | $ | |||||||||||
As at December 31, 2020 (Reported) |
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Cancellation of shares [Note 11] | — | — | | | — | — | — | | — | — | | |||||||||||
Shares issued as consideration for consideration of the intellectual property rights [Note 11] |
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Execution of the settlement agreement [Note 11] | — | — | — | — | — | — | — | | — | — | | |||||||||||
Shares issued on conversion of convertible promissory notes [Note 11] |
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Shares and warrants issued pursuant to debt purchase and assignment agreement [Note 11] | — | — | — | — | — | — | — | — | — | — | — | |||||||||||
Correction to the number of shares to be issued for past private placements [Note 11] | — | — | — | — | | | — | — | — | — | | |||||||||||
Net income | — |
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Foreign currency translation |
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As at March 31, 2021 |
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The accompanying notes are an integral part of these unaudited condensed consolidated interim financial statements.
F-4
TARGET GROUP INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
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| For the |
| For the |
| year ended | year ended | ||
| March 31, 2022 | March 31, 2021 | ||
| $ | $ | ||
OPERATING ACTIVITIES |
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Net loss for the period |
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Adjustment for non-cash items |
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Change in fair value of derivative and warrant liability |
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Gain on settlement |
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Shares and warrants issued/to be issued for services |
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Allowance for sales tax recoverable | ( | | ||
Depreciation expense |
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Operating lease expense | | | ||
Investment (income) loss from joint venture | ( | | ||
Debt issuance cost | | | ||
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Changes in operating assets and liabilities: |
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Change in sales tax recoverable |
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Change in other receivable | | | ||
Change in accounts payable and accrued liabilities |
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Change in operating lease liability, net | ( | ( | ||
Net cash provided by operating activities |
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INVESTING ACTIVITIES |
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Amounts invested on fixed assets | ( | ( | ||
Investment in joint venture | ( | ( | ||
Net cash used in investing activities |
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FINANCING ACTIVITIES |
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Utilization of bank overdraft facility |
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Proceeds from loans from related parties | | | ||
Proceeds from private placements |
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Payment for settlement payable | ( | ( | ||
Net cash provided by financing activities |
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Net increase in cash and restricted cash during the period |
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Effect of foreign currency translation |
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Cash and restricted cash, beginning of period |
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Cash and restricted cash, end of period |
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NON-CASH INVESTING AND FINANCING ACTIVITIES |
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Shares issued on conversion of debt |
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Shares issued as consideration for services |
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SUPPLEMENTARY CASH FLOW INFORMATION | ||||
Cash paid for interest |
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Cash paid for taxes |
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The accompanying notes are an integral part of these unaudited condensed consolidated interim financial statements.
F-5
TARGET GROUP INC.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
1. Organization, Nature of Business, Going Concern and Management Plans
Organization and Nature of Business
Target Group Inc. (“Target Group” or “the Company”) was incorporated on July 2, 2013, under the laws of the state of Delaware to engage in any lawful corporate undertaking, including, but not limited to, selected mergers and acquisitions.
Target Group Inc. is a diversified and vertically integrated, progressive company with a focus on both national and international presence. The Company owns and operates Canary Rx Inc, a Canadian licensed producer, regulated under The Cannabis Act. Canary Rx Inc, operates a
The Company’s current business is to produce, manufacture, distribute, and conduct sales of cannabis products. As of the current period end, the company has produced and sold cannabis products of $
On July 3, 2018, the Company filed an amendment in its articles of incorporation to change its name to Target Group Inc. The Company was able to secure an OTC Bulletin Board symbol CBDY from Financial Industry Regulatory Authority (FINRA).
As of the date of this report, the Company (i.e., Target Group Inc. and its subsidiaries) does not have any operations, employees or corporate offices based in United States.
Visava Inc./Canary Rx Inc.
On June 27, 2018, the Company entered into an Agreement and Plan of Share Exchange (“Exchange Agreement”) with Visava Inc., a private Ontario, Canada corporation (“Visava”). Visava owns
The Exchange Agreement provides that, subject to its terms and conditions, the Company issued to the Visava shareholders an aggregate of
CannaKorp Inc.
Effective January 25, 2019, the Company entered into an Agreement and Plan of Share Exchange (“Exchange Agreement”) with CannaKorp Inc., a Delaware corporation (“CannaKorp”). The Company had previously entered into a Letter of Intent with CannaKorp dated November 30, 2018, which was disclosed in the Company’s report on Form 8-K filed December 4, 2018.
The Exchange Agreement provided that, subject to its terms and conditions, the Company issued to the CannaKorp shareholders an aggregate of
F-6
TARGET GROUP INC.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
operations as a subsidiary of the Company. The transaction was closed effective March 1, 2019. During the year ended, December 31, 2021, all of the warrants expired,
cGreen, Inc. Exclusive License Agreement
Effective August 8, 2019, the Company entered into an Exclusive License Agreement (“License Agreement”) with cGreen, Inc., a Delaware corporation (“cGreen”). The License Agreement granted to the Company an exclusive license to manufacture and distribute the patent-pending THC antidote True Focus™ in the United States, Europe and the Caribbean. The term of the license was (10) years and four (4) months from the effective date of August 8, 2019. In consideration of the license, the Company would issue
During the quarter ended June 30, 2020, the Company was in arbitration with cGreen for the breaches of the terms of the License Agreement, however, through an early mediation, both companies reached a settlement agreement to settle the breaches of the contract on July 27, 2020 (“Effective Date”). As per the settlement agreement, the License Agreement has been terminated and the Company did not have to issue the
Joint Venture Agreement
Effective May 14, 2020, Canary entered into a Joint Venture Agreement (“Joint Venture”) with 9258159 Canada Inc., a corporation organized under the laws of the Province of Ontario, Canada (referred to as “Thrive”) and 2755757 Ontario Inc., a corporation organized under the laws of the Province of Ontario, Canada (referred to as “JVCo”). Canary and Thrive each hold 50% of the voting equity interest in JVCo. The term of the Joint Venture is five (5) years from its effective date of May 14, 2020.
CL Investors Debt Purchase and Assignment Agreement
On June 15, 2020, the Company, its first–tier subsidiaries Visava Inc. (“Visava”) CannaKorp Inc. (“CannaKorp”), and the Company’s second-tier subsidiary, Canary Rx Inc. (“Canary”), entered into a Debt Purchase and Assignment Agreement (“Agreement”) with CL Investors Inc. (“CLI”), a corporation organized under the laws of the Province of Ontario, Canada. June 15th was the preliminary date of the agreement and the agreement was not finalized until the later date as indicated below. The CEO (and also a director) of the Company is the Secretary of CLI, a shareholder of CLI and the CEO’s brother is the President and sole director of CLI therefore the loan from CLI is classified under related party transactions.
Pursuant to the Agreement, CLI purchased from the Company for the sum of $
F-7
TARGET GROUP INC.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
As a condition of the closing of the Agreement, the terms of the Canary Debt were amended to provide for interest at
| a) | In the first year of the Term, Canary will pay CLI the greater of $ |
| b) | In the second year of the Term, Canary will pay CLI the greater of $ |
| c) | In the third year of the Term, Canary will pay CLI the greater of $ |
| d) | In the fourth year of the Term, Canary will pay CLI the greater of $ |
| e) | In the fifth year of the Term, Canary will pay CLI the balance owing under this Note, by way of twelve ( |
For this Note, “Net Revenue” will mean all revenue generated from Canary’s Licensed Facility (hereinafter defined) to which it is entitled to the net of applicable taxes and third-party expenses.
The repayment of the Canary Debt, as amended, is guaranteed by Visava and the Company’s wholly-owned subsidiary CannaKorp Inc. and secured by (i) a general security interest in the assets of the Company, Canary, Visava and CannaKorp Inc., respectively; and (ii) a pledge by the Company of all of the issued and outstanding common stock of Canary, Visava and CannaKorp Inc. held by the Company. In addition to the foregoing guarantees, security interest and stock pledge, CLI has been granted an option, in lieu of repayment of the amended Canary Debt, to demand, in its sole and absolute discretion the transfer, assignment and conveyance of
Effective August 14, 2020, the Agreement was amended (“Amendment”) to provide that CLI will purchase from Rubin Schindermann, a director of the Company,
The transactions contemplated by the Agreement and the Amendment closed on August 14, 2020.
F-8
TARGET GROUP INC.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
Going Concern and Management Plans
The Company has earned minimal revenue since inception to date and has sustained operating losses during the three months ended March 31, 2022. The Company had a working capital deficit of $
The unaudited condensed consolidated interim financial statements have been prepared assuming that the Company will continue as a going concern up to at least 12 months from the balance sheet date; however, the above condition raises substantial doubt about the Company’s ability to do so. The unaudited condensed consolidated interim financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classifications of liabilities that may result should the Company be unable to continue as a going concern.
To maintain its current level of operations, the Company will require additional working capital from either cash flow from operations or the sale of its equity. However, the Company currently has no commitments from any third parties for the purchase of its equity. If the Company is unable to acquire additional working capital, it will be required to significantly reduce its current level of operations.
2. Summary of Significant Accounting Policies
Basis of Presentation and Consolidation
The unaudited condensed consolidated interim financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”) for interim financial information and the rules and regulations of the SEC and are expressed in US dollars. Accordingly, the unaudited condensed consolidated interim financial statements do not include all information and footnotes required by US GAAP for complete annual financial statements. The unaudited condensed consolidated interim financial statements reflect all adjustments, consisting of only normal recurring adjustments, considered necessary for a fair presentation. Interim operating results are not necessarily indicative of results that may be expected for the year ending December 31, 2022, or for any other interim period. The unaudited condensed consolidated interim financial statements should be read in conjunction with the audited consolidated financial statements of the Company and the notes thereto as of and for the year ended December 31, 2021.
The unaudited condensed consolidated interim financial statements include the accounts of the Company and its wholly-owned subsidiaries, Visava Inc./Canary RX Inc. and CannaKorp, Inc. Significant intercompany accounts and transactions have been eliminated.
Use of Estimates
The preparation of the unaudited condensed consolidated interim financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the unaudited condensed consolidated interim financial statements and the reported amounts of revenues and expenses during the reporting periods. Estimates may include those pertaining to accruals. Actual results could materially differ from those estimates.
Inventory
Inventory is stated at the lower of cost or net realizable value, cost being determined on a weighted average cost basis, and market whichever being determined as the lower of cost or net realizable value. The Company records write-downs of inventory that is obsolete or in excess of anticipated demand or market value based on consideration of product lifecycle stage, technology trends, product development plans and assumptions about future demand and market conditions. Actual demand may differ from forecasted demand, and such differences may have a material effect on recorded inventory values. Inventory write-downs are charged to the cost of revenue and establish a new cost basis for the inventory. The cost is determined based on the average cost or first-in, first-out methods.
F-9
TARGET GROUP INC.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
Fixed Assets
Fixed assets are reported at cost, less accumulated depreciation. Depreciation is calculated using the straight-line method over the estimated useful lives of assets, commencing when the assets become available for productive use, based on the following estimated useful lives:
Depreciation is calculated using the following terms and methods:
Furniture & office equipment |
| Straight-line |
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Machinery & equipment |
| Straight-line |
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Software | Straight-line | |||
Leasehold improvements |
| Straight-line |
| Lease period |
An item of equipment is derecognized upon disposal or when no future economic benefits are expected from its use. Any gain or loss arising from the derecognition of the asset (calculated as the difference between the net disposal proceeds and the carrying value of the asset) is included in the profit or loss in the period the asset is derecognized. The assets’ residual values, useful lives and methods of depreciation are reviewed at each reporting date, and adjusted prospectively, if appropriate.
Fair Value of Financial Instruments
The Company follows guidance for accounting for fair value measurements of financial assets and financial liabilities and for fair value measurements of nonfinancial items that are recognized or disclosed at fair value in the unaudited condensed consolidated interim financial statements on a recurring basis. Additionally, the Company adopted guidance for fair value measurement related to nonfinancial items that are recognized and disclosed at fair value in the unaudited condensed consolidated interim financial statements on a nonrecurring basis. The guidance establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to measurements involving significant unobservable inputs (Level 3 measurements).
The three levels of the fair value hierarchy are as follows:
| ● | Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date. |
| ● | Level 2 inputs are inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. |
| ● | Level 3 inputs are unobservable inputs for the asset or liability. The carrying amounts of financial assets such as cash approximate their fair values because of the short maturity of these instruments. |
The estimated fair value of cash and accounts payable and accrued liabilities approximate their carrying values due to the short-term maturity of these instruments. The derivative liabilities of the promissory convertible notes and warrant liabilities are valued Level 3, refer to Note 11 for further details.
Revenue recognition
As per guidance under ASC 606, revenue is recognized when performance obligations under the terms of the contracts with our customers are satisfied. Our performance obligation generally consists of the promise to sell our finished products to our customers, wholesalers, distributors or retailers. Control of the finished products is transferred upon shipment to, or receipt at, our customers’ locations, as determined by the specific terms of the contract. Once control is transferred to the customer, we have completed our performance obligation, and revenue is recognized.
The Company did
F-10
TARGET GROUP INC.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
In addition, Canary generated revenue of $
Equity Method Investments
The Company uses the equity method of accounting for investments when the Company has the ability to significantly influence, but not control, the operations or financial activities of the investee. As part of this evaluation, the Company considers the participating and protective rights in the venture as well as its legal form. The Company records the equity method investments at cost and subsequently adjust their carrying amount each period for the Company’s share of the earnings or losses of the investee and other adjustments required by the equity method of accounting. Distributions received from the equity method investments are recorded as reductions in the carrying value of such investments and are classified on the unaudited condensed consolidated interim statements of cash flows pursuant to the cumulative earnings approach. Under this approach, distributions received are considered returns on investment and are classified as cash inflows from operating activities unless the cumulative distributions received, less distributions received in prior periods that were determined to be returns of investment, exceed the cumulative equity in earnings recognized from the investment. When such an excess occurs, the current period distributions up to this excess are considered returns of investment and are classified as cash inflows from investing activities.
The Company monitors equity method investments for impairment and records reductions in their carrying values if the carrying amount of an investment exceeds its fair value. An impairment charge is recorded when such impairment is deemed to be other than temporary. To determine whether an impairment is other than temporary, we consider our ability and intent to hold the investment until the carrying amount is fully recovered. Circumstances that indicate an impairment may have occurred include factors such as decreases in quoted market prices or declines in the operations of the investee. The evaluation of the investment for potential impairment requires us to exercise significant judgment and to make certain assumptions. The use of different judgments and assumptions could result in different conclusions. The Company has recorded no impairment losses related to our equity method investments during the three months ended March 31, 2022, and 2021.
Recently Issued Accounting Standards
The FASB recently issued ASU 2020-06, Debt – Debt with Conversion and Other Options (Subtopic 470- 20) and Derivatives and Hedging – Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity, to reduce complexity in applying GAAP to certain financial instruments with characteristics of liabilities and equity. The guidance in ASU 2020-06 simplifies the accounting for convertible debt instruments and convertible preferred stock by removing the existing guidance in ASC 470-20, Debt: Debt with Conversion and Other Options, which requires entities to account for beneficial conversion features and cash conversion features in equity, separately from the host convertible debt or preferred stock. The guidance in ASC 470-20 applies to convertible instruments for which the embedded conversion features are not required to be bifurcated from the host contract and accounted for as derivatives. In addition, the amendments revise the scope exception from derivative accounting in ASC 815-40 for freestanding financial instruments and embedded features that are both indexed to the issuer’s own stock and classified in stockholders’ equity, by removing certain criteria required for equity classification. These amendments are expected to result in more freestanding financial instruments qualifying for equity classification (and, therefore, not accounted for as derivatives), as well as fewer embedded features requiring separate accounting from the host contract. The amendments in ASU 2020-06 further revise the guidance in ASC 260, Earnings Per Share, to require entities to calculate diluted earnings per share (EPS) for convertible instruments by using the if-converted method. In addition, entities must presume share settlement for purposes of calculating diluted EPS when an instrument may be settled in cash or shares. The amendments in ASU 2020-06 are effective for public entities for fiscal years beginning after December 15, 2021, with early adoption permitted (for “emerging growth company” beginning after December 15, 2023). The Company has adopted this standard effective from January 1, 2021, and the adoption of this standard did not have any significant impact on the unaudited condensed consolidated interim financial statements.
F-11
TARGET GROUP INC.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
3. Inventory
As of March 31, 2022, the inventory of $
In addition, the inventory of $
4. Sales Tax Recoverable and Payable
As of March 31, 2022, the Company had $nil of gross sales tax recoverable compared to $
Recoverable is due to the sales tax paid by the Company on expenses incurred during the year which are recoverable from the government while payable is due to the sales tax received (after deducting sales tax paid on expenses incurred by the Company) during the year which are payable from the government due to sales conducted by the Joint Venture.
The Company has recorded an allowance of $nil (December 31, 2021: $
5. Fixed Assets
The Company’s subsidiary, Canary, initiated construction on its leased
Canary has recorded a depreciation expense of $
Below is a breakdown of the consolidated fixed asset, category wise:
| Furniture & |
| Machinery & |
|
| Leasehold |
| |||
fixture | Equipment | Software | improvements |
| Total | |||||
$ | $ | $ | $ | $ | ||||||
Cost | | |
| |
| | | |||
Accumulated depreciation | ( | ( |
| ( |
| ( | ( | |||
| |
| |
| | |
6. Joint Venture
Effective May 14, 2020, Canary entered into a Joint Venture Agreement (“Joint Venture”) with 9258159 Canada Inc., a corporation organized under the laws of the Province of Ontario, Canada (referred to as “Thrive Cannabis”) and 2755757 Ontario Inc., a corporation organized under the laws of the Province of Ontario, Canada (referred to as “JVCo”). Canary and Thrive Cannabis each hold
Under the Joint Venture, JVCo is permitted to use the rooms, of Canary’s licensed cannabis cultivation facilities located in Simcoe, Ontario, Canada (“Licensed Site Portion”) to operate and manage the Licensed Site Portion for the cultivation and process of cannabis
F-12
TARGET GROUP INC.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
pursuant to Canary’s license issued by Health Canada. During the term of the Joint Venture, JVCo will be responsible for the administration, operation and management of the Licensed Site Portion and all proceeds from the sale of the cannabis and related cannabis products cultivated therein will be payable to the JVCo.
In addition, Canary, Thrive Cannabis, and JVCo entered into a Unanimous Shareholder Agreement dated May 14, 2020, governing the management and administration of the business of JVCo.
As per the Joint Venture, Canary will provide the JVCo with a Hard Cost Loan with the maximum amount of $
The JVCo will reimburse Canary for certain expenses incurred by Canary for the cultivation and processing of cannabis products. Below is the table which summarizes the activity of the period:
Three months ended March 31, | 2022 | 2021 | ||||||
| CAD |
| USD |
| CAD |
| USD | |
Sales |
| |
| |
| |
| |
Cost of goods sold | | | | | ||||
Gross profit | | | | | ||||
Operation expenses | | | | | ||||
Net income (loss) | | | ( | ( | ||||
Eligible recoverable expenses |
| |
| |
| |
| |
Recoverable amount |
| |
| |
| |
| |
Income (loss) on equity |
| |
| |
| ( |
| ( |
Due to reimbursement of an office and general expense during the comparable quarter ended which had been expensed in the books of Canary in the period prior to the comparable period, therefore, lead to a credit (negative) expense on the unaudited condensed consolidated interim statement of operations and comprehensive loss. During the three months ended March 31, 2022, revenue was sold to
The JVCo shall make payments out of the revenues, net of applicable taxes and expenses (“Net Income”), per the following order of priority:
a) | First, the payment of recoverable expenses; |
b) | Second, to the repayment of the Hard Cost Loan until repaid in full; |
c) | Third, to the repayment of the Soft Costs (costs of services and materials provided by Thrive Cannabis) until repaid in full; |
d) | Finally, any remaining Net Income shall be distributed, monthly, as follows: |
(i) | For the first two ( |
(ii) | For the three () years following such period, Canary shall receive |
F-13
TARGET GROUP INC.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
Below is the position of the JVCo as at:
As of | March 31,2022 | December 31, 2021 | ||||||
| CAD |
| USD |
| CAD |
| USD | |
Assets |
| |
| |
| |
| |
Liabilities |
| |
| |
| |
| |
Equity |
| ( |
| ( |
| ( |
| ( |
7. Goodwill
Business Acquisition
ASC Topic 805, “Business Combinations” requires that all business combinations be accounted for using the acquisition method and that certain identifiable intangible assets acquired in a business combination be recognized as assets apart from goodwill. ASC Topic 350, “Intangibles-Goodwill and Other” (“ASC 350”) requires goodwill and other identifiable intangible assets with indefinite useful lives not be amortized, such as trade names, but instead tested at least annually for impairment (which the Company tests each year end, absent any impairment indicators) and be written down if impaired. ASC 350 requires that goodwill be allocated to its respective reporting unit and that identifiable intangible assets with finite lives be amortized over their useful lives.
CannaKorp Inc.
Effective January 25, 2019, the Company entered into an Agreement and Plan of Share Exchange (“Exchange Agreement”) with CannaKorp Inc., a Delaware corporation (“CannaKorp”). Company had previously entered into a Letter of Intent with CannaKorp dated November 30, 2018, which was disclosed in the Company’s report on Form 8-K filed December 4, 2018.
The Exchange Agreement provides that, subject to its terms and conditions, the Company issued to the CannaKorp shareholders an aggregate of
Due to the publicly traded nature of the Company’s shares of the common stock, the equity issuance of the shares was considered to be a more reliable measurement of the fair market value of the transaction compared to having a separate valuation of the net assets. This acquisition was accounted for using the acquisition method of accounting. As of March 1, 2019, the fair value of the net liabilities was $
The purchase consideration of
|
| $ |
Number of Common Stock |
| |
Market price on the date of issuance |
| |
Fair value of Common Stock |
| |
F-14
TARGET GROUP INC.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
|
| $ |
Number of warrants |
| |
Fair value price per warrant |
| |
Fair value of warrant |
| |
|
|
|
Fair value of Common Stock |
| |
Fair value of warrant |
| |
Purchase consideration |
| |
The fair value of these warrants was measured at the date of acquisition using the Black-Scholes option pricing model using the following assumptions:
| ● | Forfeiture rate of |
| ● | Stock price of $ |
| ● | Exercise price between the range of $ |
| ● | Volatility at |
| ● | Risk free interest rate of |
| ● | Expected life of |
| ● | Expected dividend rate of |
During the year ended December 31, 2019, the goodwill was revaluated after the completion of CannaKorp’s audit of the year ended December 31, 2018. This resulted in changing the balance on the acquisition date, March 1, 2019, thereby increasing the goodwill by $
However, during the same year the Company identified circumstances that would call for an evaluation of goodwill impairment and therefore impaired $
Further, during the year ended December 31, 2020, the Company identified circumstances that would call for an evaluation of goodwill impairment and therefore the remaining balance of goodwill related to the CannaKorp to $
During the year ended December 31, 2021, all of the warrants expired, none were exercised.
Visava Inc./Canary Rx Inc.
On June 27, 2018, the Company entered into an Agreement and Plan of Share Exchange (“Exchange Agreement”) with Visava Inc., a private Ontario, Canada corporation (“Visava”). Visava owns
F-15
TARGET GROUP INC.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
Pursuant to the Agreement, the Company acquired
This acquisition was accounted for using the acquisition method of accounting. As of August 2, 2018, the fair value of the net liabilities was $
|
| $ |
Number of Common Stock |
| |
Market price on the date of issuance |
| |
Fair value of Common Stock |
| |
|
| $ |
Number of warrants |
| |
Fair value price per warrant |
| |
Fair value of warrant |
| |
|
|
|
Fair value of Common Stock |
| |
Fair value of warrant |
| |
Purchase consideration |
| |
The fair value of these warrants was measured at the date of acquisition using the Black-Scholes option pricing model using the following assumptions:
| ● | Forfeiture rate of |
| ● | Stock price of $ |
| ● | Exercise price of $ |
| ● | Volatility at |
| ● | Risk free interest rate of |
| ● | Expected life of |
| ● | Expected dividend rate of |
During the period and year ended March 31, 2022 and December 31, 2021, respectively, the Company has identified no circumstances which would call for further evaluation of goodwill impairment related to Canary.
During the year ended, December 31, 2020, all of the warrants expired,
Goodwill
The Company tests for impairment of goodwill at the reporting unit level. In assessing whether goodwill is impaired, the Company utilizes the two-step process as prescribed by ASC 350. The first step of this test compares the fair value of the reporting unit, determined based upon discounted estimated future cash flows, to the carrying amount, including goodwill. If the fair value exceeds the carrying amount, no further work is required and no impairment loss is recognized. If the carrying amount of the reporting unit exceeds the fair value, the goodwill of the reporting unit is potentially impaired and step two of the goodwill impairment test would need to be performed to measure the amount of an impairment loss, if any. In the second step, the impairment is computed by comparing the implied fair value of the reporting unit’s goodwill with the carrying amount of the goodwill. If the carrying amount of the reporting unit’s goodwill is greater than the implied fair value of its goodwill, an impairment loss in the amount of the excess is recognized and charged to the statement of operations.
F-16
TARGET GROUP INC.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
8. Related Party Transactions and Balances
During the three months ended March 31, 2022, the Company expensed $
The breakdown of the related party balance as of March 31, 2022 of $
Debt purchase by CL Investors Inc.
On June 15, 2020, the Company and its subsidiaries, entered into a Debt Purchase and Assignment Agreement (“Agreement”) with CL Investors Inc. (“CLI). June 15th was the preliminary date of the agreement and the agreement was not finalized until the later date as indicated below.
The CEO (and also a director) of the Company is the Secretary of CLI, a shareholder of CLI and the brother of the CEO is the President and sole director of CLI therefore the below loan from CLI is classified under related party transactions.
CLI purchased from the Company for the sum of $
The Canary debt owed to CLI from Canary bears an interest rate of
Interest expense charged for the three months ended in the amount of $
The repayment schedule of the minimum principal payments is shown below:
2022 | $ | | |
2023 | | ||
2024 | | ||
2025 | | ||
Total | | ||
Current portion | ( | ||
Non-current portion | $ | |
Effective August 14, 2020, the Agreement was amended (“Amendment”) to provide that CLI will purchase from Rubin Schindermann, a director of the Company,
F-17
TARGET GROUP INC.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
impact of both transactions resulted in a debt issuance cost of $
Shareholder loan
One of the Company’s shareholders provided a loan to the Company. The loan is secured by all assets owned by the Company and its subsidiaries including leasehold improvements and matures on June 1, 2023 and therefore is presented as non-current. The loan was provided in two tranches and the latest amendment increased the maximum loan amount of tranche two by $
Tranche 1 | Tranche 2 | Total | ||||||||||
| CAD |
| USD |
| CAD |
| USD |
| CAD |
| USD | |
Maximum loan |
| |
| |
| |
| |
| |
| |
Outstanding loan |
| |
| |
| |
| |
| |
| |
Interest rate |
|
|
|
| ||||||||
Interest expense charged for the three months ended March 31, 2022 in the amount of $
Outstanding management service fee
The balance owing to key officers of the Company is $
Balances outstanding related to subsidiaries
During the year ended December 31, 2019, the Company settled with the loan holders provided to the Company’s subsidiary, CannaKorp. The total amount subject to settlement was $
Balances outstanding related to directors
During the three months ended March 31, 2022, the Company has purchased $
The Company subleases its principal executive office premise from Norlandam Marketing Inc., a company owned by one of the directors. During the quarter ended March 31, 2021, the premises were subleased to a third party that makes rent payments directly to Norlandam Marketing Inc. The balance outstanding as of March 31, 2022 is $
9. Operating Lease Right-Of-Use Assets and Lease Liability
The Company adopted ASC 842 as of January 1, 2019, using a modified retrospective approach and applying the standard’s transition provisions at January 1, 2020, the effective date. The Company made an accounting policy election to exclude from balance sheet reporting those leases with initial terms of 12 months or less. The Company determines if an arrangement is a lease at inception. This determination generally depends on whether the arrangement conveys to the Company the right to control the use of an explicitly or
F-18
TARGET GROUP INC.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
implicitly identified fixed asset for a period of time in exchange for consideration. Control of an underlying asset is conveyed to the Company if the Company obtains the rights to direct the use of and to obtain substantially all of the economic benefits from using the underlying asset. The Company has lease agreements which include lease and non-lease components, which the Company has elected to account for as a single lease component for all classes of underlying assets. Lease expense for variable lease components is recognized when the obligation is probable.
Right-of-use assets and liabilities are recognized at the commencement date based on the present value of lease payments over the lease term. ASC 842 requires a lessee to discount its unpaid lease payments using the interest rate implicit in the lease or if that rate cannot be readily determined, its incremental borrowing rate. As an implicit interest rate is not readily determinable in the Company’s leases, the incremental borrowing rate is used based on the information available at the adoption date in determining the present value of lease payments. The lease term for all of the Company’s leases includes the non-cancellable period of the lease plus any additional periods covered by either a Company option to extend (or not to terminate) the lease that the Company is reasonably certain to exercise, or an option to extend (or not to terminate) the lease controlled by the lessor. Options for lease renewals have been excluded from the lease term (and lease liability) for the majority of the Company’s leases as the reasonably certain threshold is not met.
The Company does not own any real property and it currently leases
During the quarter ended March 31, 2021, the Company subleased its executive premises to a third party that makes rent payments directly to the landlord. However, if the sub-lessee cancels its sub-lease agreement with the landlord during the Company’s lease term with the landlord (ending on August 30, 2023), the Company will be responsible for making rent payments for the period from the date of cancellation by the sub-lessee to August 30, 2023.
The Company’s subsidiary, Canary, is a party to a
These leases will expire between 2023 and 2030. The weighted average discount rate used for these leases was
2022 | $ | | |
2023 | | ||
2024 | | ||
2025 | | ||
Thereafter | | ||
Total lease payments | | ||
Less imputed interest | ( | ||
Present value of lease liabilities | | ||
Current portion | ( | ||
Non-current portion | $ | |
F-19
TARGET GROUP INC.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
Below is the reconciliation of the net operating lease presented on the unaudited condensed consolidated interim statement of operations:
| For the |
| For the | |
three months ended | three months ended | |||
March 31, 2022 | March 31, 2021 | |||
$ | $ | |||
Gross operating lease expense | | |||
Gross rent and utilities expenses | | |||
Recoverable expenses from JVCo related to rent and utilities | ( | ( | ||
( | ( |
As explained in Note 6, the JVCo reimburses a certain percentage of gross expenses incurred by Canary which includes rent and utilities. Due to this unique circumstance and since operating lease expense are related to rent expenses, the Company has decided to group the operating lease expenses, all lease-related expenses and the recoverable amount from JVCo to show a net operating lease expense.
10. Convertible Promissory Notes
Interest amounting to $
Principal amount outstanding as of March 31, 2022 and December 31, 2021 was $
All notes maturing prior to the date of this report are outstanding.
Derivative liability
During the three months ended March 31, 2022, there were
|
| Derivative |
|
|
|
| Derivative | |||
liability as at | Conversions / Redemption | Change due | liability as at | |||||||
December 31, | during the | to | Fair value | March 31, | ||||||
2021 | period | Issuances | adjustment | 2022 | ||||||
$ | $ | $ | $ | $ | ||||||
Note D |
| |
| |
| |
| |
| |
Note F |
| |
|
| |
| |
| | |
Note G |
| |
|
| |
| |
| | |
Note K |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
Key assumptions used for the valuation of convertible notes
Derivative element of the convertible notes was fair valued using a multinomial lattice model. Following assumptions were used to fair value these notes as of March 31, 2022:
| ● | Projected annual volatility of |
| ● | Risk free interest rate of |
| ● | Stock price of $ |
| ● | Liquidity term of |
| ● | Dividend yield of |
| ● | Exercise price of $ |
F-20
TARGET GROUP INC.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
11. Stockholders’ Equity
Capitalization
Preferred Stock
| ● | Par value: $ |
| ● | Authorized: |
| ● | Issued: |
Common Stock
| ● | Par value: $ |
| ● | Authorized: |
| ● | Issued: |
As of March 31, 2022, convertible notes, warrants and preferred stock outstanding could be converted into
Preferred Stock
Shares of preferred stock may be issued from time to time in one or more series as may be determined by the board of directors. The board of directors may fix the designation, powers, preferences and rights of the shares of each such series and the qualifications, limitations or restrictions thereof without any further vote or action by the stockholders of the Company, except that no holder of preferred stock shall have pre-emptive rights. Any shares of preferred stock so issued would typically have priority over the common stock concerning dividend or liquidation rights. The board of directors does not at present intend to seek stockholder approval prior to any issuance of currently authorized stock unless otherwise required by law.
Series A Preferred Stock (“Series A Stock”)
Dividends shall be declared and set aside for any shares of Series A Stock in the same manner and amount as for the Common Stock. Series A Stock, as a class, shall have voting rights equal to a multiple of 2X the number of shares of Common Stock issued and outstanding that are entitled to vote on any matter requiring shareholder approval. The Series A Stockholder shall not vote as a separate class but shall vote together with the common stock on all matters, including any amendment to increase or decrease the authorized capital stock. Upon the voluntary or involuntary dissolution, liquidation or winding up of the corporation, the assets of the Company available for distribution to its shareholders shall be distributed to the holders of common stock and the holders of the Series A Stock ratably without any preference to the holders of the Series A Stock. Shares of Series A Stock can be converted at any time into fully paid and nonassessable shares of Common Stock at the rate of one hundred (
Common Stock
Holders of shares of common stock are entitled to one vote for each share on all matters to be voted on by the stockholders. Holders of common stock do not have cumulative voting rights.
Subject to preferences that may be applicable to any outstanding shares of preferred stock, the holders of common stock are entitled to share ratably in dividends, if any, as may be declared from time to time by the board of directors in its discretion from funds legally available therefore.
Holders of common stock have no pre-emptive rights to purchase the Company’s common stock. There are no conversion or redemption rights or sinking fund provisions with respect to the common stock. The Company may issue additional shares of common stock which could dilute its current shareholder’s share value.
F-21
TARGET GROUP INC.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
2022
During the quarter ended March 31, 2022, the Company issued
2021
During the quarter ended March 31, 2021, the Company issued
During the quarter ended March 31, 2021, the Company sold
During the quarter ended June 30, 2021, the Company issued
Moreover, the Company had found an error in issuing in the incorrect number of shares for a private placement and therefore had recorded a subscription receivable in the amount of $
During the quarter ended September 30, 2021, the Company issued
F-22
TARGET GROUP INC.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
Shares to be issued include the following:
| Shares |
| Amount |
| Description | ||
| |||||||
Services | | $ | | ||||
Private placements |
| | $ | |
| Consideration for private placements with the fair value based on cash proceeds received. Proper allocation between common stock and additional paid-in capital of the amount received will be completed in the period when the shares are issued. | |
Settlement of loans of CannaKorp |
| | $ | |
| Refer to Note 14 for details. | |
Agreement with Serious Seeds |
| | |
| As consideration for intellectual property rights granted by Smit. The fair value is based on the market price of the Company’s stock on the date of issue as per the agreement. | ||
| | $ | | ||||
Warrants
Due to the change in the functional currency of the Company from United States Dollar to Canadian Dollar (which took place during year ended December 31, 2019), any outstanding warrants with an exercise price in United States Dollar no longer meet the scope exception of ASC 815 and therefore, should not be considered indexed to its own stock and as a result, these warrants have been revalued on each period end. The fair value of the warrants was measured on reporting dates using the Black-Scholes option pricing model using the following assumptions:
2022
| As at | |
March 31, | ||
2022 | ||
Forfeiture rate |
| |
Stock price | $ | |
Exercise price | $ | |
Volatility | | |
Risk free interest rate | ||
Expected life (years) | ||
Expected dividend rate |
2021
As at | As at | As at | As at | |||||
December 31, | September 30, | June 30, | March 31, | |||||
| 2021 |
| 2021 |
| 2021 |
| 2021 | |
Forfeiture rate |
| |||||||
Stock price | $ | $ | $ | $ | ||||
Exercise price | $ | $ | $ | $ | ||||
Volatility | ||||||||
Risk free interest rate | ||||||||
Expected life (years) | ||||||||
Expected dividend rate |
F-23
TARGET GROUP INC.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
The fair value of the warrants, which were issued during the below quarters, were measured on issuance dates using the Black-Scholes option pricing model using the below assumptions.
2022
During quarter | ||
ended | ||
March 31, 2022 | ||
Forfeiture rate | ||
Stock price | $ | |
Exercise price | $ | |
Volatility | ||
Risk free interest rate | ||
Expected life (years) | ||
Expected dividend rate | ||
Fair value of warrants | $ |
2021
During quarter | During quarter | During quarter | During quarter | |||||
ended | ended | ended | ended | |||||
| December 31, 2021 |
| September 30, 2021 |
| June 30, 2021 |
| March 31, 2021 | |
Forfeiture rate |
| |||||||
Stock price | $ | $ | $ | $ | ||||
Exercise price | $ | $ | $ | $ | ||||
Volatility | ||||||||
Risk free interest rate | ||||||||
Expected life (years) | ||||||||
Expected dividend rate | ||||||||
Fair value of warrants | $ | $ | $ | $ |
Breakdown of warrants outstanding as of March 31, 2022 and December 31, 2021 are detailed below:
Remaining | Remaining | |||||||
|
| contractual life | contractual life | |||||
| Warrants |
| Warrants |
| term as at |
| term as at | |
| outstanding as at |
| outstanding as at |
| March 31, |
| December 31, | |
| March 31, |
| December 31, |
| 2022 |
| 2021 | |
| 2022 |
| 2021 |
| (years) |
| (years) | |
Private placements |
| |
| |
|
| ||
Serious Seeds |
| |
| |
|
| ||
CLI | | | ||||||
Total |
| |
| |
|
|
|
|
During the three months ended March 31, 2022,
Movement of the warrant liability is detailed below:
| $ | |
Warrant liability as at December 31, 2021 | | |
Warrant liability for new issuance | | |
Change in fair value | ( | |
Warrant liability as at March 31, 2022 | |
F-24
TARGET GROUP INC.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
12. Earnings (Loss) Per Share
FASB ASC 260, Earnings Per Share provides for calculations of “basic” and “diluted” earnings per share. Basic earnings per share include no dilution and is computed by dividing net income (loss) available to common stockholders by the weighted average common shares outstanding for the period. Diluted earnings per share reflect the potential dilution of securities that could share in the earnings of an entity similar to fully diluted earnings per share. Diluted EPS excludes all dilutive potential shares if their effect is anti-dilutive.
13. Contingencies and commitments
Contingencies
During the year ended December 31, 2019, a terminated employee of Canary has filed a lawsuit against the Company amounting to approximately $
A complaint for damages of $
A claim for damages of $
During the year ended December 31, 2020, a claim for damages of $
As explained in Note 1, on July 27, 2020 (“Effective Date”), the Company entered into a settlement agreement with cGreen, Inc., a Delaware corporation (“cGreen”). As consideration, the Company paid $
Covid-19 Pandemic
On March 11, 2020, the World Health Organization declared the ongoing COVID-19 outbreak as a global health emergency. This resulted in governments worldwide enacting emergency measures to combat the spread of the virus, including the closure of certain non-essential businesses.
During the period and year ended March 31, 2022 and December 31, 2021, respectively, the pandemic did not have a material impact on the Company’s operations. As of March 31, 2022 and December 31, 2021, the Company did not observe any material impairment of its assets or a significant change in the fair value of assets due to the COVID-19 pandemic. The Company has taken steps to minimize the potential impact of the pandemic including safety measures with respect to personal protective equipment, the reduction in travel and the implementation of a virtual office including regular video conference meetings and participation in virtual customer meetings and other virtual events.
F-25
TARGET GROUP INC.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
Due to the rapid developments and uncertainty surrounding COVID-19, it is not possible to predict the impact that COVID-19 will have on the Company’s business, balance sheet and operating results in the future. In addition, it is possible that estimates in the Company’s financial statements will change in the near term as a result of COVID-19 and the effect of any such changes could be material, which could result in, among other things, impairment of long-lived assets including goodwill. The Company is closely monitoring the impact of the pandemic on all aspects of its business.
Commitments
As per the Distribution, Collaboration and Licensing Agreement (“Agreement”) entered with Serious Seeds B.V. (“Serious Seeds”), effective December 6, 2018, the Company will issue to Serious Seeds B.V. each month
In consideration of the Company’s appointment as Serious’ exclusive distributor in Canada, the Company will pay Serious certain royalties as follows:
1st year: |
| |
2nd year: | ||
3rd year: | ||
4th year: | ||
5th and following years: |
15. Subsequent Events
The Company’s management has evaluated subsequent events up to May 6, 2022, the date the unaudited condensed consolidated interim financial statements were issued, pursuant to the requirements of ASC 855 and has determined the below material subsequent events to report
On May 3, 2022, pursuant to the Joint Venture agreement, dated May 14, 2020, one of the Company’s subsidiaries has finalized an arrangement with the Joint Venture partner for the repayment of recoverable expenses up to $
F-26
ITEM 2: MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The information and financial data discussed below is derived from the unaudited condensed consolidated interim financial statements of the Target Group Inc. (“we,” “us” or the “Company”) for the three months ended March 31, 2022 and were prepared and presented in accordance with generally accepted accounting principles in the United States.
Forward Looking Statements
Some of the statements contained in this Quarterly Report on Form 10-Q that are not historical facts are “forward-looking statements” which can be identified by the use of terminology such as “estimates,” “projects,” “plans,” “believes,” “expects,” “anticipates,” “intends,” or the negative or other variations, or by discussions of strategy that involve risks and uncertainties. We urge you to be cautious of the forward-looking statements, that such statements, which are contained in this Quarterly Report, reflect our current beliefs with respect to future events and involve known and unknown risks, uncertainties and other factors affecting our operations, market growth, services, products and licenses. No assurances can be given regarding the achievement of future results, as actual results may differ materially as a result of the risks we face, and actual events may differ from the assumptions underlying the statements that have been made regarding anticipated events. Factors that may cause actual results, our performance or achievements to differ materially from those contemplated by such forward-looking statements include without limitation:
| ● | Our ability to raise capital when needed and on acceptable terms and conditions; |
| ● | Our ability to attract and retain management; |
| ● | Our ability to enter into long-term supply agreements for the mineralized material; |
| ● | General economic conditions; and |
| ● | Other factors are discussed in Risk Factors. |
All forward-looking statements made in connection with this Quarterly Report are attributable to us or persons acting on our behalf are expressly qualified in their entirety by these cautionary statements. Given the uncertainties that surround such statements, you are cautioned not to place undue reliance on such forward-looking statements.
Overview
Target Group Inc. (“Target Group” or “the Company”) was incorporated in the State of Delaware on July 2, 2013, under our original name of River Run Acquisition Corporation. Effective May 13, 2014, the Company changed its name to Chess Supersite Corporation. On July 3, 2018, we filed an amendment in our Certificate of Incorporation to change our name to Target Group Inc.
Effective October 18, 2018, our common stock became eligible for quotation on the OTCQB platform operated by OTC Markets Group Inc, under the symbol “CBDY”.
During the second quarter of 2020, the global spread of Coronavirus (COVID-19) continued to have a significant impact on the Canadian and global economy and customer purchasing behaviour, while equity markets remained volatile. However, these factors have not impacted the Company’s operations, financial results for the quarter.
Business and Plan of Operations
Cannabis Business-Canada
We are now engaged in the cultivation, processing and distribution of curated cannabis products for the adult-use medical and recreational cannabis market in Canada and, where legalized by state legislation, in the United States. We believe that there is a shift in the public’s perception of cannabis from a state of prohibition to a state of legalization. In October 2018, Canada became the first major industrialized nation to legalize adult-use cannabis at the national federal level. Cannabis is still heavily regulated. However, the medical use of cannabis is now permitted in up to 29 countries and many more countries have reformed, or are considering reforming, their cannabis uses laws to include the recreational use of cannabis.
In the 2016 publication by Deloitte, Insights and Opportunities Recreational Marijuana, the project size of the Canadian adult-use market ranged from CDN$4.9 billion to CDN$8.7 billion annually. In the 2018 publication by Deloitte, A Society in Transition, an Industry
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Ready to Boom, the projected size of the Canadian adult-use market in 2019 ranged from CDN$1.8 billion to CDN$4.3 billion. The Canadian medical cannabis industry experienced substantial growth since 2014. Health Canada projects the Canadian cannabis market will reach CDN$1.3 billion in annual value by 2024.
We intend to position ourselves with a core emphasis on wholesale & co-packaging services to accommodate all consumer-packaged goods required for the sophisticated cannabis market in Canada and internationally. This will integrate cannabinoid research, analytical testing, product development and manufacturing.
Our product manufacturing will include, but will not be limited to the following:
| ● | Cannabis flower pods for vaporizer use |
| ● | Cannabis extract pods for vaporizer use |
| ● | Cannabis pre-rolls |
| ● | K-Cup infused coffee and tea pods |
| ● | Infused cannabis beverages |
| ● | Infused cannabis edibles |
| ● | Infused topical products and CBD wellness products. |
As of the date of this report, the Company (i.e., Target Group Inc. and its subsidiaries) does not have any operations, employees or corporate offices based in United States.
Acquisitions
To take advantage of the opportunity resulting from the legalization of adult-use cannabis in Canada, we completed several strategic acquisitions and entered into several significant agreements as follows:
Visava Inc./Canary Rx Inc.
On June 27, 2018, the Company entered into an Agreement and Plan of Share Exchange (“Exchange Agreement”) with Visava Inc., a private Ontario, Canada corporation (“Visava”). Visava owns 100% of Canary Rx Inc, (“Canary”), a Canadian corporation that operates a 44,000 square foot facility located in Ontario’s Garden Norfolk County for the production of cannabis. Canary is a Canadian Licensed Producer under Health Canada’s Cannabis Act (“Bill C-45”). Canary expects to grow up to 4 million grams of cannabis annually out of its Simcoe facility once it is at full capacity. The Company is now growing premium cannabis in indoor grow rooms and each 2,200 square feet room gets up to 5.4 turns annually.
Pursuant to the Exchange Agreement, the Company issued to the Visava shareholders an aggregate of 25,500,000 shares of the Company’s Common Stock in exchange for all of the issued and outstanding common stock held by the Visava shareholders. In addition to its Common Stock, the Company issued to the Visava shareholders, pro rata Common Stock Purchase Warrants to purchase an aggregate of 25,000,000 shares of the Company’s Common Stock at a price per share of $0.10 for a period of two years following the issuance date of the Warrants. The transactions contemplated by the Exchange Agreement closed effective August 2, 2018. Visava continues its business operations as a first-tier wholly-owned subsidiary of the Company with Canary operating as our second-tier subsidiary. During the year ended, December 31, 2020, all of the warrants expired, none were exercised.
CannaKorp Inc.
Pursuant to the terms of an Agreement and Plan of Share Exchange dated January 25, 2019 (“Exchange Agreement”), on March 1, 2019, we completed the acquisition of Massachusetts –based CannaKorp Inc., a Delaware corporation (“CannaKorp”). CannaKorp has developed a single-use pre-measured pod and vaporizer system for consumers interested in vaporizing natural herbs, including cannabis. The patent-pending system is known as The Wisp™ and Wisp Pods™. The Wisp™ vaporizer system extracts the medically beneficial compounds more efficiently while simultaneously offering a much safer and more enjoyable experience than other alternatives.
Under the terms of the Exchange Agreement, we issued 30,407,712 shares of our common stock to the exchanging CannaKorp shareholders in exchange for 99.8% of the outstanding common stock held by the CannaKorp shareholders. CannaKorp continues to operate as our subsidiary. During the year ended, December 31, 2021, all of the warrants expired, none were exercised.
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Agreements
Serious Seeds B.V.
Effective December 6, 2018, the Company and Canary entered into a Distribution, Collaboration and Licensing Agreement (“Agreement”) with Serious Seeds B.V. (“Serious Seeds”), incorporated in the Netherlands, and Simon Smit (“Smit”), President of Serious Seeds. Under the Agreement, Canary was appointed the exclusive distributor in Canada and all other legal markets globally of Serious’ proprietary cannabis seed strains and Serious’ cannabis cuttings, dried flowers, extracts and seeds. In addition, under the Agreement Canary Rx and Serious will develop certain “Collaborative Products” defined as cannabis seed strains created collaboratively using Serious’ intellectual property. During the term of the Agreement, Canary will own all of the intellectual property related to the Collaborative Products.
Under the Agreement, Smit has granted Canary an exclusive license in Canada and all legal markets globally to Serious’ intellectual property including the right to use the service mark of Serious Seeds and all of the names of Serious’ proprietary cannabis seed strains including but not limited to Chronic, AK-47, White Russian, Bubble Gum, Kali Mist, Warlock, Double Dutch, Biddy, Early, Motavation and Strawberry-AKeil.
The initial term of the Agreement will be five (5) years and will be automatically renewed for consecutive five (5) terms subject to rights of termination upon one hundred and eighty (180) days prior notice. In consideration of the intellectual property rights granted by Smit to Canary, the Company will issue to Smit 250,000 shares of the Company’s common stock on the effective date of the Agreement. In addition, on the thirteenth (13) month following the effective date of the Agreement of the initial term, the Company will issue to Smit 5,208 shares of common stock and warrants to purchase 200,000 shares of Target common stock at an exercise price of $0.15 per share. Thereafter, from the fourteenth (14) month following the effective date of the Agreement and continuing through the sixtieth (60) month of the initial term, the Company will issue Smit 5,208 shares of common stock and warrants to purchase 16,667 shares of Target common stock, each month, at varying exercise prices ranging from $0.20 to $0.35 per share. All of the above warrants must be exercised on or before the two (2) year anniversary date of each of the warrant issuance dates.
In consideration of Canary Rx’s appointment as Serious’ exclusive distributor in Canada, Canary Rx will pay Serious Seeds certain royalties as follows:
1st year: |
| 2.00% of gross sales |
2nd year: | 2.25% of gross sales | |
3rd year: | 2.50% of gross sales | |
4th year: | 2.75% of gross sales | |
5th and following years: | 3.00% of gross sales |
On October 8, 2019, Canary was granted licenses to cultivate, process and sell cannabis pursuant to the Cannabis Act (Bill C-45). These Standard Licenses enable Canary to produce approximately 3,600kg of dried cannabis flower per year. Canary has curated a bank of 3,500 seeds, comprised of more than 125 strains, including the entire Serious Seeds collection. The Company has the capacity to grow 8 different strains at a time, within the facility’s 8 indoor separate flower rooms.
Cannavolve Inc. Sales Agency Agreement
Effective December 13, 2018, the Company appointed Cannavolve Inc., an Ontario, Canada corporation based in Toronto (“Cannavolve”), under the terms of a Licensed Producer/Licensed Processor Sales Agency Agreement (“Agency Agreement”), as the Company’s exclusive agent in Canada to market and sell the CannaKorp Wisp™ vaporizer, the Serious Seeds™ products and Canary branded cannabis in the recreational cannabis markets (collectively the “Products”). Cannavolve is an independent recreational cannabis sales and marketing Company established to represent licensed producers and licensed processors in Canada of cannabis and cannabis accessories. Cannavolve operates in Canada with offices in Halifax, Montreal, Calgary and Vancouver.
Under the Agency Agreement, Cannavolve will be paid a commission of 6% of net sales based on the wholesale prices of the Products. The initial term of the Agency Agreement is two (2) years from December 13, 2018 subject to a renewal term of two (2) additional years. In addition to customary termination provisions based upon the material default of either the Company or Cannavolve, we can terminate the Agency Agreement without cause upon ninety (90) days prior written notice. The agreement was renewed on December 13, 2020 for an additional two (2) years.
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cGreen, Inc. Exclusive License Agreement
Effective August 8, 2019, the Company entered into an Exclusive License Agreement (“License Agreement”) with cGreen, Inc., a Delaware corporation (“cGreen”). The License Agreement grants to the Company an exclusive license to manufacture and distribute the patent-pending THC antidote True Focus™ in the United States, Europe and the Caribbean. The term of the license is ten (10) years and four (4) months from the effective date of August 8, 2019. In consideration of the license, the Company will issue 10,000,000 shares of its common stock as follows: (i) 3.500,000 within ten (10) days of the effective date; (ii) 3,500,000 shares on January 10, 2020; and (iii) 3,000,000 shares not later than June 10, 2020. In addition, the Company will pay cGreen royalties of 7% of the net sales of the licensed products and 7% of all sublicensing revenues collected by the Company. The Company will pay cGreen an advance royalty of $300,000 within ten (10) days of the effective date; $300,000 on January 10, 2020; and $400,000 on or before June 10, 2020 and $500,000 on or before November 10, 2020. All advance royalty payments will be credited against the royalties owed by the Company through December 31, 2020.
During the quarter ended December 31, 2019, the intangible asset was written off based on management’s review and evaluation of its recoverability.
Additionally, during the quarter ended June 30, 2020, the Company was in arbitration with cGreen for the breaches of the terms of the License Agreement, however, through an early mediation, both companies reached a settlement agreement to settle the breaches of the contract on July 27, 2020 (“Effective Date”). As per the settlement agreement, the License Agreement has been terminated and the Company does not have to issue the 10 million shares nor pay the outstanding royalty payable in the amount of $1,191,860. As consideration, the Company paid $130,000 within 30 days of the Effective Date and paid $100,000 in monthly installments of $10,000 commenced in April 2021 to cGreen resulting in a gain on settlement of $1,704,860. As at March 31, 2022, there was no outstanding balance (December 31, 2021: $10,000).
Joint Venture Agreement
Effective May 14, 2020, Canary entered into a Joint Venture Agreement (“Joint Venture”) with 9258159 Canada Inc., a corporation organized under the laws of the Province of Ontario, Canada (referred to as “Thrive Cannabis”) and 2755757 Ontario Inc., a corporation organized under the laws of the Province of Ontario, Canada (referred to as “JVCo”). Canary and Thrive Cannabis each hold 50% of the voting equity interest in JVC. The term of the Joint Venture is five (5) years from its effective date of May 14, 2020.
Under the Joint Venture, JVCo is permitted to use all eight (8) rooms, of Canary’s licensed cannabis cultivation facilities located in Simcoe, Ontario, Canada (“Licensed Site Portion”) to operate and manage the Licensed Site Portion for the cultivation and process of cannabis pursuant to Canary’s license issued by Health Canada. During the term of the Joint Venture, JVCo will be responsible for the administration, operation and management of the Licensed Site Portion and all proceeds from the sale of the cannabis and related cannabis products cultivated therein will be payable to the JVCo.
In addition, Canary, Thrive Cannabis, and JVCo entered into a Unanimous Shareholder Agreement dated May 14, 2020 governing the management and administration of the business of JVCo.
As per the Joint Venture, Canary will provide the JVCo with a Hard Cost Loan with the maximum amount of $960,360 (CAD 1,200,000). This loan bears an interest rate of 7% per annum, matures in 12 months from the effective date, and is secured against the personal property of the JVCo and Thrive will guarantee one-half (1/2) of the outstanding balance of the loan. As of March 31, 2022, the loan advanced amounts to $268,101 (CAD 335,000) and interest income charged for the three months ended in the amount of $4,567 (CAD 5,782) is included in other income on the unaudited condensed consolidated interim statement of operations and comprehensive loss and interest receivable in the amount of $31,622 (CAD 39,513) is included in receivable from joint venture on the unaudited condensed consolidated interim balance sheet.
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The JVCo will reimburse Canary for certain expenses incurred by Canary for the cultivation and processing of cannabis products. Below is the table which summarizes the activity of the period:
Three months ended March 31, | 2022 | 2021 | ||||||
| CAD |
| USD |
| CAD |
| USD | |
Sales |
| 1,369,887 |
| 1,081,937 |
| 248,500 |
| 197,607 |
Cost of goods sold |
| 713,168 |
| 563,260 |
| 141,509 |
| 112,528 |
Gross profit |
| 656,719 | 518,677 |
| 106,991 | 85,079 | ||
Operation expenses | 539,918 | 426,427 | 135,601 | 107,679 | ||||
Net income (loss) | 116,801 | 92,250 | (28,610) | (22,600) | ||||
Eligible recoverable expenses | 1,086,622 | 869,624 | 675,991 | 540,995 | ||||
Recoverable amount | 1,086,622 | 869,624 | 677,125 | 541,903 | ||||
Income (loss) on equity | 58,401 | 46,125 | (14,305) | (11,300) | ||||
Due to reimbursement of an office and general expense during the comparable quarter ended which had been expensed in the books of Canary in the prior period, therefore, leading to a credit (negative) expense on the unaudited condensed consolidated interim statement of operations and comprehensive loss. During the three months ended March 31, 2022, revenue was sold to six customers (2021: three).
The JVCo shall make payments out of the revenues, net of applicable taxes and expenses (“Net Income”), per the following order of priority:
| a) | First, the payment of recoverable expenses; |
| b) | Second, to the repayment of the Hard Cost Loan until repaid in full; |
| c) | Third, to the repayment of the Soft Costs (costs of services and materials provided by Thrive Cannabis) until repaid in full; |
| d) | Finally, any remaining Net Income shall be distributed monthly, as follows: |
| (i) | For the first two (2) years following the execution of this Agreement, Canary shall receive 60% and Thrive Cannabis shall receive 40%; and |
| (ii) | For the three (3) years following such period, Canary shall receive 57.5% and Thrive shall receive 42.5%. |
Below is the position of the JVCo as at:
As of | March 31, 2022 | December 31, 2021 | ||||||
| CAD |
| USD |
| CAD |
| USD | |
Assets |
| 6,110,503 |
| 4,890,236 |
| 4,830,446 |
| 3,865,806 |
Liabilities |
| 7,183,791 |
| 5,749,188 |
| 6,020,535 |
| 4,818,234 |
Equity |
| (1,073,288) |
| (858,952) |
| (1,190,089) |
| (952,428) |
CL Investors Debt Purchase and Assignment Agreement
On June 15, 2020, the Company, its first-tier subsidiaries Visava Inc. (“Visava”) CannaKorp Inc. (“CannaKorp”), and the Company’s second-tier subsidiary, Canary Rx Inc. (“Canary”), entered into a Debt Purchase and Assignment Agreement (“Agreement”) with CL Investors Inc. (“CLI”), a corporation organized under the laws of the Province of Ontario, Canada. June 15th was the preliminary date of the agreement and the agreement was not finalized until the later date as indicated below.
The CEO (and also a director) of the Company is the Secretary of CLI, a shareholder of CLI and the CEO’s brother is the President and sole director of CLI therefore the loan from CLI is classified under related party transactions.
CLI purchased from the Company for the sum of $2,320,870 (CAD 2,900,000) a debt obligation owing from Canary, the Company’s second-tier subsidiary, to the Company in the principal balance of $8,483,180 (CAD 10,600,000 (“Canary Debt”)). Upon receipt of the monetary consideration, the Company loaned the full sum to Canary under terms of an unsecured, non-interest-bearing promissory note, subject to a covenant by the Company not to take any collection action so long as the Canary Debt remains unpaid to CLI. As of March 31, 2022, $4,002 (CAD 5,000) is still outstanding from CLI.
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As a condition of the closing of the Agreement, the terms of the Canary Debt were amended to provide for interest at 5% per annum with a maturity date of 60 months from the date of the Agreement (“Term”). The Canary Debt will be repaid according to the following schedule:
| a) | In the first year of the Term, Canary will pay CLI the greater of $904,339 (CAD 1,130,000) and fifty percent (50%) of the Net Revenue (hereinafter defined), provided that where the latter amount exceeds the former amount, Canary will, by the end of such first year, pay CLI no less than the former amount and Canary will, within thirty (30) days following the end of such first year, pay CLI the balance of such amount owing for such first year; |
| b) | In the second year of the Term, Canary will pay CLI the greater of $1,680,630 (CAD 2,100,000) and fifty percent (50%) of the Net Revenue, by way of twelve (12) consecutive monthly installments payable on the 14th day of each month commencing on August 14, 2021, provided that where the latter amount exceeds the former amount, Canary will, within thirty (30) days following the end of such second year, pay CLI the balance of such amount owing for such second year; |
| c) | In the third year of the Term, Canary will pay CLI the greater of $2,576,966 (CAD 3,220,000) and fifty percent (50%) of the Net Revenue, by way of twelve (12) consecutive monthly installments payable on the 14th day of each month commencing on August 14, 2022, provided that where the latter amount exceeds the former amount, Canary will, by the end of such third year, pay CLI no less than the former amount and Canary will, within thirty (30) days following the end of such third year, pay CLI the balance of such payments owing for such third year; |
| d) | In the fourth year of the Term, Canary will pay CLI the greater of $2,464,924 (CAD 3,080,000) and fifty percent (50%) of the Net Revenue, by way of twelve (12) consecutive monthly installments payable on the 14th day of each month commencing on August 14, 2023, provided that where the latter amount exceeds the former amount, Canary will, within thirty (30) days following the end of such fourth year, pay CLI the balance of such amount owing for such fourth year; and |
| e) | In the fifth year of the Term, Canary will pay CLI the balance owing under this Note, by way of twelve (12) consecutive monthly installments payable on the 14th day of each month commencing on August 14, 2024 for an amount calculated by dividing twelve (12) into the sum of all amounts owing under this Note at the beginning of the fifth year of the Term on account of Principal and Interest, provided that where further amounts are owing under this Note at the end of such fifth year, Canary will pay CLI all such further amounts within five (5) days following the end of such fifth year. |
For this Note, “Net Revenue” will mean any revenue generated from Canary’s Licensed Facility (hereinafter defined) to which it is entitled to the net of applicable taxes and third-party expenses.
The repayment of the Canary Debt, as amended, is guaranteed by Visava and the Company’s wholly-owned subsidiary CannaKorp Inc. and secured by (i) a general security interest in the assets of the Company, Canary, Visava and CannaKorp Inc., respectively; and (ii) a pledge by the Company of all of the issued and outstanding common stock of Canary, Visava and CannaKorp Inc. held by the Company. In addition to the foregoing guarantees, security interest and stock pledge, CLI has been granted an option, in lieu of repayment of the amended Canary Debt, to demand, in its sole and absolute discretion the transfer, assignment and conveyance of 75% of the issued and outstanding capital stock of Visava and Canary.
Furthermore, the President and sole director of CLI has been granted an option to acquire the remaining 25% of the issued and outstanding capital stock of Visava and Canary.
Effective August 14, 2020, the Agreement was amended (“Amendment”) to provide that CLI will purchase from Rubin Schindermann, a director of the Company, 500,000 shares of the Company’s Series A Preferred Stock in consideration of the payment by CLI to Rubin Schindermann of $80,030 (CAD 100,000) and the issuance to Schindermann of 10,000,000 shares of the Company’s common stock. In consideration of the foregoing, Mr., Schindermann resigned as a director of the Company and from all administrative and executive positions with the Company’s subsidiaries Visava Inc., Canary Rx Inc. and CannaKorp Inc., respectively. In addition, the Company issued Common Stock Purchase Warrant for 10,000,000 shares of Target common stock to CLI as consideration for the Agreement. Refer to Note 11 for additional details on warrants. The combined impact of both transactions resulted in a debt issuance cost of $251,518. This debt issuance cost will be amortized over the term of the debt on a straight-line basis.
The transactions contemplated by the Agreement and the Amendment closed on August 14, 2020.
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Forward Looking Relating to Future Operations of the Company.
Currently, the company and its senior management are is exploring several new, additional opportunities at its Simcoe, Ontario cultivation facility to expand the Company’s product offerings in other cannabis-related Consumer Packaged Goods (CPG) Product categories.
Employees
As of March 31, 2022, we had 61 employees which include Anthony Zarcone, Chief Executive Officer.
We have contracted several independent contractors and consultants to provide a range of information technology and marketing services who do not receive cash compensation but receive shares of our common stock as compensation. This mitigates any need for full or part-time employees for these services.
Intellectual Property Protection
Our subsidiary CannaKorp Inc. holds the following patents:
International Patent Application No. PCT/US20115/013778
Title: METHODS AND APPARATUS FOR PRODUCING HERBAL VAPO
Filing Date: January 30, 2015
Ref. No.: B1411.70000WO00
U.S. Provisional Application No.: 61/934.255
Title: CONTAINER POD AND DELIVERY SYSTEM
Filing Date: January 31, 2014
Ref. No.: B1411.70000US00
In addition, CannaKorp has proprietary rights to certain trade names, trademarks and service marks which include WISP POD™; cPOD™; CANNACUP™; and WISP™. CannaKorp also has certain proprietary formulas and processes involving herbal formulas and flavors, proprietary herbal production processes and an herbal base developed to suspend active ingredients for optimal vaporization.
At present, CannaKorp has failed to meet its annuities payments as well as maintenance fees on the 2 referenced patents. Although there has been a lapse and these patents remain unmaintained, there remains the possibility of CannaKorp reinstating these patents if done so in a reasonable amount of time. At this time, management is determining the value maintaining these patents will provide the company. Once management has completed their assessment, the company will proceed accordingly. advance in that determined direction moving forward. Additionally, CannaKorp is actively seeking a JV Partner joint venture partner and/ or a licensor to assist in both marketing and launching the Wisp Vaporizer and Wisp Pods in both the US and Canadian Legal Cannabis/ HEMP markets.
Results of Operations
We have not generated significant revenue to date and consequently, our operations are subject to all of the risks inherent in the establishment of a new business enterprise. Our analysis on the performance of the Company is as follows:
Balance sheet – As of March 31, 2022 and December 31, 2021
Cash and Restricted Cash
On March 31, 2022, we had cash of $194,707 (excluding restricted cash of 9,204) compared to $113,079 (excluding restricted cash of 9,072) as of December 31, 2021. The increase is due to increased cash being provided by operating activities and additional loan provided by a related party offset by investment in the joint venture which reflects payments of salaries, rent, and other operating expenses of our subsidiary, Canary.
The change in restricted cash is due to foreign exchange conversion of balances in Canadian Dollar into United States Dollar.
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Prepaid asset
On March 31, 2022, we had prepaid expenses of $45,217 compared to $44,567 as of December 31, 2021. The balance represents the security deposit for the leased land for the facility to produce medical marijuana.
Sales tax recoverable and payable
On March 31, 2022, we had $nil of gross sales tax recoverable compared to $22,146 as of December 31, 2021 while the Company had $42,152 of gross sales tax payable as of March 31, 2022.
Recoverable is due to the sales tax paid by the Company on expenses incurred during the year which are recoverable from the government while payable is due to the sales tax received (after deducting sales tax paid on expenses incurred by the Company) during the year which are payable from the government due to sales conducted by the Joint Venture.
We recorded no allowance (December 31, 2021: $509) stemming from the potentially uncollectible balances within the outstanding sales tax recoverable amount.
Goodwill
Goodwill represents the excess of the cost of an acquisition over the fair value of the Company’s share of the net identifiable assets of our subsidiaries at the date of acquisition.
Fixed assets
The Company initiated construction on its 44,000 square foot cannabis cultivation facility in September of 2017. Since then, extensive demolition and structural upgrades have been carried out at the site. On May 1, 2019, the Company completed the construction of its 44,000 square foot cannabis cultivation facility and on May 14, 2019, the Company submitted a Site Evidence Package to Health Canada as part of the steps to obtain the license to cultivate cannabis at the Company’s facility. On October 8, 2019, the Company was granted licenses to cultivate, process and sell cannabis pursuant to the Cannabis Act (Bill C-45). On June 4, 2021, Canary received its Sales License amendment from Health Canada.
Accounts payable and accrued liabilities
Accounts payable amounting to $3,326,760 as of March 31, 2022, primarily represents consulting and construction services related to capital work in progress and fixed asset additions amounting to $157,361, interest on promissory notes and loans amounting to $1,240,509, outstanding, accrued professional fees amounting to $972,197 and a customer advance payment of $568,411 for sales to be conducted by the Joint venture.
Accounts payable amounting to $2,885,909 as of December 31, 2021, primarily represents customer advance for sales amounting to $394,400, consulting and construction services related to fixed asset additions amounting to $163,101, interest on promissory notes and loans amounting to $952,376, outstanding and accrued professional fees amounting to $973,017.
Payable to related parties
As of March 31, 2022, we had $10,957,107 payable to related parties as compared to $10,658,800 as of December 31, 2021. The balance primarily represents loans provided by the Company’s shareholder and a related party, CLI, management services fee outstanding to the managers of the company, and outstanding amount of $65,000 to be paid to a former shareholder of CannaKorp as part of the settlement agreement.
For additional details, refer to Note 8 in the unaudited condensed consolidated interim financial statements.
Convertible promissory notes payable
Interest amounting to $8 was accrued for the three months ended March 31, 2022 (March 31, 2021: $82).
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The principal amount outstanding as of March 31, 2022 and December 31, 2021 was $480. At both reporting dates, the entire balance was current.
Statement of Operations – For the three months ended March 31, 2022 and 2021:
Revenue
The Company did not generate revenue during the current or the comparable quarter ended in 2022. However, Canary generated revenues of $1,096,321 (though its investment in JVCo) during the quarter ended March 31, 2022 (quarter ended March 31, 2021: $197,607) and is represented as a share of income from joint venture on the unaudited condensed consolidated interim statement of operations. The revenue represents the sale of cannabis product and the entire revenue was sold to six customers (2021: three).
Expenses
Our expenses are classified primarily into advisory and consultancy fees, management fees, salaries and wages, legal and professional fees, and depreciation expense. The increase in operating expenses during the current quarter ended compared to comparable prior quarter ended is due to negative office expenses in comparable period. Other than that, the expense level has remained similar on an overall level due to the management’s continuous efforts to control and reduce expenses.
Expenses primarily represented consulting fees of $11,239 (2021: $1,906), management fees of $27,885 (2021: $77,943), legal and professional charges of $66,944 (2021: $46,424) comprising legal, review, accounting and Edgar agent fee, depreciation expense amounting to $227,624 (2021: $241,795).
Changes in other income and expenses were due to: (1) the revaluation of the warrant and convertible debt liabilities on each quarter-end which reduced significantly in magnitude since a significant number of warrants expired during the current period ended; (2) increase in the principal balance of higher interest rate bearing loans led to increased interest expense; and (3) started to earning net income from the joint venture, as a result, the share of loss has turned into share of income.
Other income and expenses comprised, change in fair value of derivative and warranty liability amounting to positive $17,646 (2021: negative $2,091,334), loss on settlement amounting to $nil (2021: 15,219) interest and bank charges amounting to $288,688 (2021: $220,997), and share of income from joint venture of $46,125 (2021: loss of $11,300).
Liquidity and Capital Resources
As of March 31, 2022, we had a working capital deficit of $4,480,740 (December 31, 2021: $3,459,035). We are actively seeking various financing opportunities to meet the deficit capital requirements.
We have relied on equity financing and personal funds for our operations. The proceeds may not be sufficient to effectively develop our business to the fullest extent to allow us to maximize our revenue potential, in which case, we will need additional capital.
We will need capital to allow us to invest in development. The Company anticipates that its future operations will generate positive cash flows starting in 2022 provided that it is successful in obtaining additional financing in the foreseeable future.
Statement of Cash Flow – For the three months ended March 31, 2022 and 2021:
Operating activities
Operating activities provided cash of $148,043 compared to $79,451 for the corresponding period of the prior year. This improvement is due to the management’s efficient use of cash and Canary starting to generate sales through the JVCo compared to the prior period.
Investing activities
Investing activities used cash of $138,324 compared to $785,585 for the corresponding period of the prior year. The current period cash utilization represents improvements to Canary’s facility to increase its efficiency and increase cannabis production, and investment
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made in the JVCo by way of paying operating expenses such as salaries, rent, utilities, etc., which will be reimbursed by the JVCo in the future. The reduction is due to the JVCo starting to generate sales leading to reduced funding towards JVCo.
Financing activities
Financing activities provided cash of $68,980 compared to $925,177 for the corresponding period of the prior year. During the current period, cash was provided by a loan advance from a related party while in the prior period, cash was primarily provided by proceeds from private placements.
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to stockholders.
Critical Accounting Policies
All critical accounting policies are described in the Company’s Form 10-K for the year ended December 31, 2021.
Subsequent Events
The Company’s management has evaluated subsequent events up to May 6, 2022, the date the unaudited condensed consolidated interim financial statements were issued, pursuant to the requirements of ASC 855 and has determined the below material subsequent events to report.
On May 3, 2022, pursuant to the Joint Venture agreement, dated May 14, 2020, one of the Company’s subsidiaries has finalized an arrangement with the Joint Venture partner for the repayment of recoverable expenses up to $1.6 million (CAD 2 million). As of the filing of this report, the Company has not received the payment
Description of Property
We do not own any properties at this time and do not have presently any agreements to acquire any properties.
Our principal executive office is located at 20 Hempstead Drive, Hamilton, Ontario, Canada.
Our subsidiary, Canary, leases a 44,000 square foot facility located in Norfolk County, Ontario to produce medical and recreational cannabis.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Smaller reporting companies are not required to provide the information required by this item.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of disclosure controls and procedures
Pursuant to Rule 13a-15(b) under the Securities Exchange Act of 1934 (“Exchange Act”), we have carried out an evaluation, with the participation of our management, including the Company’s principal executive officer and principal financial officer of the effectiveness of the Company’s disclosure controls and procedures (as defined under Rule 13a-15(e) under the Exchange Act) as of the end of the period covered by this report. Based upon that evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were effective as of March 31, 2022 to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act (i) is recorded, processed, summarized and reported, within the periods specified in the SEC’s rules and forms and (ii) is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate to allow timely decisions regarding required disclosure.
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It should be noted that any system of controls, however well designed and operated, can provide only reasonable, and not absolute, assurance that the objectives of the system are met. In addition, the design of any control system is based in part upon certain assumptions about the likelihood of future events. Because of these and other inherent limitations of control systems, there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.
Changes in internal controls
No change in our system of internal control over financial reporting occurred during the three months ended March 31, 2022 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
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PART II – OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
During the year ended December 31, 2019, a terminated employee of Canary has filed a lawsuit against the Company amounting to approximately $1,680,630 (CAD 2,100,000) in Ontario, Canada. Currently, the Company is defending its position and believes that the ultimate decision will be in favor of the Company.
A complaint for damages of $150,000 was lodged against CannaKorp by the former Chief Financial Officer of CannaKorp for outstanding professional fees. No claim has been registered. The management is of the view that no material losses will arise in respect of the legal claim at the date of this report.
A claim for damages of $1,490,803 (CAD 1,862,805) was lodged against Company and its directors by the former Chief Financial Officer of the Company for wrongful dismissal. The management is of the view that no material losses will arise in respect of the legal claim at the date of this report.
During the year ended December 31, 2020, a claim for damages of $104,662 (CAD 130,778) was lodged against Canary by a vendor for breach of contract. The management is of the view that no material losses will arise in respect of the legal claim at the date of this report.
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ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
ITEM 5. OTHER INFORMATION
None.
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ITEM 6. EXHIBITS
Exhibits:
Incorporated by Reference | ||||||||
Exhibit |
| Description |
| Form |
| Exhibit |
| Filing |
2.1 | 8-K | 2.1 | 12/11/14 | |||||
2.1.1 | Agreement and Plan of Share Exchange dated June 27, 2018 with Visava Inc. | 8-K | 2.1 | 07/03/18 | ||||
2.1.2 | 8-K | 2.1 | 01/29/19 | |||||
3(i)(a) | 10-12G | 3.1 | 09/30/13 | |||||
3(i)(a) | 10-K | 3(i)(a) | 09/18/22 | |||||
3(i)(a) | 8-K | 3(i) | 10/20/16 | |||||
3(i)(a) | 8-K | 3(i) | 04/12/17 | |||||
3(i)(a) | 8-K | 3(i) | 07/03/17 | |||||
3(i)(a) | 8-K | 3(i) | 11/01/17 | |||||
3(i)(a) | 8-K | 3(i) | 09/25/18 | |||||
3.2 | 10-12G | 3.2 | 09/30/13 | |||||
4.1 | 10-K | 4.1 | 04/14/20 | |||||
10.1 | Form of Securities Purchase Agreement-Blackbridge Capital Growth Fund, LLC | 10-K | 10.1 | 03/31/17 | ||||
10.2 | 10-K | 10.2 | 03/31/17 | |||||
10.3 | 10-K | 10.3 | 03/31/17 | |||||
10.4 | 10-K | 10.4 | 03/31/17 | |||||
10.5 | Form of Securities Purchase Agreement-Crown Bridge Partners, LLC | 10-K | 10.5 | 03/31/17 | ||||
10.6 | 10-K | 10.6 | 03/31/17 | |||||
10.10 | 10-K | 10.10 | 03/28/18 | |||||
10.11 | 10-K | 10.11 | 03/28/18 | |||||
10.12 | 10-K | 10.12 | 03/28/18 | |||||
10.13 | 10-K | 10.13 | 03/28/18 | |||||
10.14 | Securities Purchase Agreement-Power Up Lending Group Ltd. dated December 24, 2018 | 10-K | 10.14 | 04/01/19 | ||||
10.15 | Convertible Promissory Note-Power-Up Lending Group Ltd. dated December 24, 2018 | 10-K | 10.15 | 04/01/19 | ||||
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10.16 | 10-K | 10.16 | 04/01/19 | |||||
10.17 | 10-K | 10.17 | 04/01/19 | |||||
10.18 | Exclusive License Agreement dated August 8, 2019 with cGreen Inc. | 8-K | 2.1 | 08/13/19 | ||||
10.19 | 8-K | 10.1 | 09/19/19 | |||||
10.20 | 10-K | 10.20 | 04/14/20 | |||||
10.21 | First Amending Agreement dated March 11, 2020 with Jerry Zarcone | 10-Q | 10.21 | 06/05/20 | ||||
10.22 | Second Amending Agreement dated April 30, 2020 with Jerry Zarcone | 10-Q | 10.22 | 08/10/20 | ||||
10.23 | Third Amending Agreement dated May 15, 2020 with Jerry Zarcone | 10-Q | 10.23 | 08/10/20 | ||||
10.24 | 10-Q | 10.24 | 08/10/20 | |||||
10.25 | Joint Venture Agreement between Canary Rx Inc. and 9258159 Canada, Inc. dated May 14, 2020 | 10-Q | 10.25 | 08/10/20 | ||||
10.26 | 8-K | 10.1(i) | 08/18/20 | |||||
10.27 | Amendment dated August 14, 2020 to Debt Purchase and Assignment Agreement | 8-K | 10.1(ii) | 08/18/20 | ||||
10.28 | Amendment dated May 12, 2021 to Debt Purchase and Assignment Agreement | 10-Q | 10.28 | 05/7/21 | ||||
31.1* | ||||||||
31.2* | ||||||||
32.1* |
101.INS |
| XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL 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 | |
Exhibit 104 | Cover Page Interactive Data File - The cover page interactive data file does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document |
* | Filed herewith. |
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SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
TARGET GROUP INC. | ||
Dated: May 6, 2022 | By: | /s/ Anthony Zarcone |
Chief Executive Officer, and Director | ||
Dated: May 6, 2022 | By: | /s/ Barry Alan Katzman |
Director | ||
Dated: May 6, 2022 | By: | /s/ Saul Niddam |
Director | ||
Dated: May 6, 2022 | By: | /s/ Frank Monte |
Director | ||
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