AgriFORCE Growing Systems .(AGRI) - 2021 Q3 - Quarterly Report

Cover Page Filing Information This is a Quarterly Report on Form 10-Q for AgriFORCE Growing Systems Ltd. for the period ended September 30, 2021, with the company classified as a non-accelerated filer and not a shell company - The registrant is AgriFORCE Growing Systems Ltd., filing a Quarterly Report on Form 10-Q for the period ended September 30, 2021[2][113] - The company is classified as a non-accelerated filer and is not a shell company[3][4][114][115] Common Stock Outstanding | Date | Shares Outstanding | | :--------------- | :----------------- | | November 15, 2021 | 15,057,859 | Table of Contents Cautionary Note Regarding Forward-Looking Information Forward-Looking Statements Disclosure This section outlines the company's disclosure regarding forward-looking statements, emphasizing that such statements involve risks and uncertainties that could cause actual results to differ materially from expectations - The report contains forward-looking statements concerning future events, including financial performance assumptions, liquidity, capital needs, accounting policy impacts, future operations, and industry outlook[6][117] - These statements inherently involve risks and uncertainties, some beyond the company's control, and actual results may differ materially[7][118] - The company does not assume an obligation to update any forward-looking statement and advises readers to evaluate them carefully in light of identified risk factors[8][119] PART I — FINANCIAL INFORMATION Item 1. Financial Statements This section presents the unaudited condensed consolidated interim financial statements for AgriFORCE Growing Systems Ltd., including the balance sheets, statements of comprehensive loss, statements of changes in shareholders' equity, and statements of cash flows, along with their accompanying notes Condensed Consolidated Interim Balance Sheets The balance sheet shows a significant increase in total assets and shareholders' equity from December 31, 2020, to September 30, 2021, primarily driven by a substantial increase in cash and cash equivalents and common shares issued Condensed Consolidated Interim Balance Sheets (Unaudited) | Metric | September 30, 2021 ($) | December 31, 2020 ($) | | :--------------------------- | :----------------- | :---------------- | | Cash and cash equivalents | $9,834,516 | $653,410 | | Total current assets | $10,345,933 | $875,421 | | Intangible asset | $1,469,933 | $- | | Construction in progress | $2,069,630 | $2,071,093 | | Total assets | $13,923,995 | $3,365,889 | | Total current liabilities | $1,830,469 | $1,930,988 | | Warrants liability | $1,842,895 | $- | | Total liabilities | $3,720,456 | $1,962,405 | | Total shareholders' equity | $10,203,539 | $1,403,484 | - Cash and cash equivalents increased significantly from $653,410 at December 31, 2020, to $9,834,516 at September 30, 2021[11][122] - Total assets increased by over 300% from $3,365,889 to $13,923,995, primarily due to the increase in cash and the recognition of an intangible asset[11][122] Condensed Consolidated Interim Statements of Comprehensive Loss The company reported increased net losses for both the three and nine months ended September 30, 2021, compared to the same periods in 2020, driven by higher operating expenses and other expenses, including accretion of interest and warrant-related costs Condensed Consolidated Interim Statements of Comprehensive Loss (Unaudited) | Metric | Three Months Ended Sep 30, 2021 ($) | Three Months Ended Sep 30, 2020 ($) | Nine Months Ended Sep 30, 2021 ($) | Nine Months Ended Sep 30, 2020 ($) | | :------------------------------------------ | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Operating loss | $(2,380,780) | $(980,956) | $(3,986,274) | $(2,585,051) | | Foreign exchange (gain) loss | $(170,140) | $(7,629) | $(170,664) | $2,011 | | Accretion of interest on senior secured debentures | $57,019 | $- | $484,379 | $- | | Change in fair value of warrants | $(818,960) | $- | $(818,960) | $- | | Issuance cost related to warrants | $375,123 | $- | $375,123 | $- | | Loss on extension of debt term | $(204) | $- | $59,055 | $- | | Net loss | $(1,823,618) | $(973,327) | $(3,915,207) | $(2,587,062) | | Net loss attributable to common shareholders | $(2,027,292) | $(973,327) | $(4,651,139) | $(3,046,298) | | Basic and diluted net loss attributed to common share | $(0.14) | $(0.12) | $(0.46) | $(0.39) | | Weighted average number of common shares outstanding | 14,378,354 | 7,936,767 | 10,144,800 | 7,821,064 | - Net loss for the three months ended September 30, 2021, increased by 87.3% to $1,823,618 from $973,327 in the prior year period[15][126] - Net loss for the nine months ended September 30, 2021, increased by 51.3% to $3,915,207 from $2,587,062 in the prior year period[15][126] Condensed Consolidated Interim Statements of Changes in Shareholders' Equity Shareholders' equity significantly increased from $1,403,484 at January 1, 2021, to $10,203,539 at September 30, 2021, primarily due to shares issued for cash from the IPO and conversion of preferred stock, despite the net loss Key Changes in Shareholders' Equity (Nine Months Ended September 30, 2021) | Item | Common Shares Amount ($) | Additional Paid-in Capital ($) | Accumulated Deficit ($) | Total Shareholders' Equity ($) | | :---------------------------------------- | :------------------- | :------------------------- | :------------------ | :------------------------- | | Balance, January 1, 2021 | $5,696,050 | $1,297,566 | $(12,521,944) | $1,403,484 | | Shares issued for cash | $13,262,712 | $- | $- | $13,262,712 | | Conversion of Series A preferred stock | $6,717,873 | $- | $- | $- | | Share issue costs | $(2,099,842) | $- | $- | $(2,099,842) | | Share based compensation | $- | $571,398 | $- | $571,398 | | Net loss | $- | $- | $(3,915,207) | $(3,915,207) | | Balance, September 30, 2021 | $25,462,183 | $1,913,608 | $(17,173,083) | $10,203,539 | - Total shareholders' equity increased significantly from $1,403,484 at January 1, 2021, to $10,203,539 at September 30, 2021[19][130] - The increase was primarily driven by $13,262,712 from shares issued for cash and the conversion of Series A preferred stock, partially offset by a net loss of $3,915,207 and share issue costs[19][130] Condensed Consolidated Interim Statements of Cash Flows The company experienced a significant increase in cash from financing activities in the nine months ended September 30, 2021, primarily due to proceeds from its Initial Public Offering (IPO), which offset substantial cash used in operating and investing activities Condensed Consolidated Interim Statements of Cash Flows (Unaudited) | Cash Flow Activity | Nine Months Ended Sep 30, 2021 ($) | Nine Months Ended Sep 30, 2020 ($) | | :---------------------------------- | :----------------------------- | :----------------------------- | | Net cash used in operating activities | $(3,017,468) | $(1,633,774) | | Net cash used in investing activities | $(987,057) | $(851) | | Net cash provided by financing activities | $13,396,348 | $(11,213) | | Change in cash | $9,181,106 | $(1,705,371) | | Cash, beginning of period | $653,410 | $2,158,891 | | Cash, end of period | $9,834,516 | $453,520 | - Net cash used in operating activities increased by 84.7% to $3,017,468 for the nine months ended September 30, 2021, compared to $1,633,774 in the prior year[22][133] - Net cash provided by financing activities was $13,396,348 for the nine months ended September 30, 2021, primarily from IPO proceeds, a significant increase from net cash used of $11,213 in the prior year[22][133] Notes to Condensed Financial Statements The notes provide detailed explanations of the company's operations, accounting policies, financial instrument valuations, and specific balance sheet and income statement items, including significant changes in assets, liabilities, and equity, as well as commitments and contingencies Note 1. Nature of Operations and Basis of Preparation AgriFORCE Growing Systems Ltd. is an agriculture-focused technology company specializing in proprietary facility design and automated hydroponics for high-value crops, with management believing it has sufficient liquidity for the next 12 months following its July 2021 IPO - AgriFORCE Growing Systems Ltd. is an innovative agriculture-focused technology company providing solutions for high-value crops through proprietary facility design and automation IP, targeting plant-based pharmaceutical, nutraceutical, and other high-value crop markets[24][135] - The company's 'AgriFORCE grow house' system is designed for controlled environment cultivation, optimizing yields and minimizing pesticide/irradiation use[24][135] - As of September 30, 2021, the company had $9,834,516 in cash and cash equivalents and an accumulated deficit of $17,173,083 Management believes the net proceeds from the July 2021 IPO will provide sufficient cash for at least the next 12 months[28][29][139][140] Note 2. Significant Accounting Policies This note details the company's significant accounting policies, including the adoption of ASU 2019-12 for income taxes, and the ongoing assessment of ASU 2020-06 and ASU 2021-04 related to debt with conversion options and equity-classified written call options - The company adopted ASU 2019-12, 'Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes,' effective January 1, 2021, with no material impact on interim financial statements[30][141] - The company is assessing the impact of ASU 2020-06 on debt with conversion options and ASU 2021-04 on issuer's accounting for certain modifications or exchanges of freestanding equity-classified written call options, both effective for fiscal years beginning after December 15, 2021[31][33][142][144] - Warrants are classified as derivative liabilities and measured at fair value, with changes reported in comprehensive income/loss As of September 30, 2021, IPO and representative's warrants ($1,771,481) are Level 1, while Bridge warrants ($71,414) are Level 3[36][39][147][150] Note 3. Prepaid Expenses and Other Current Assets Prepaid expenses and other current assets increased significantly from December 31, 2020, to September 30, 2021, primarily due to new prepaid insurance and office lease deposits, with the company also renegotiating debt financing for a land purchase in Coachella, California Prepaid Expenses and Other Current Assets | Item | September 30, 2021 ($) | December 31, 2020 ($) | | :---------------------------- | :----------------- | :---------------- | | Deposits | $170,000 | $170,000 | | Legal retainer | $70,295 | $43,038 | | Prepaid insurance | $139,473 | $- | | Others – office lease deposit | $100,102 | $- | | Total | $479,870 | $213,038 | - Prepaid expenses and other current assets increased by 125% from $213,038 at December 31, 2020, to $479,870 at September 30, 2021[41][152] - The company is renegotiating debt financing for a $4.4 million land purchase in Coachella, California, for which a $170,000 deposit has been paid[41][152] Note 4. Intangible Asset The company acquired Intellectual Property (IP) from Manna Nutritional Group, LLC on September 10, 2021, for an aggregate purchase price of up to $14,475,000, consisting of cash and common stock, with the IP recognized as an in-process research and development asset of indefinite life - AgriFORCE acquired IP from Manna Nutritional Group, LLC on September 10, 2021, for up to $14,475,000, comprising common stock and cash payments[42][153] - The IP includes patent-pending technologies for processing grains, pulses, and root vegetables into low-starch, low-sugar, high-protein, fiber-rich baking flour products[42][153] - The purchase is accounted for as an asset acquisition, with the IP recognized as an in-process R&D asset of indefinite life As of September 30, 2021, $225,000 in payments and $750,000 in probable contingent consideration have been recorded[46][157] Note 5. Accounts Payable and Accrued Liabilities Total accounts payable and accrued liabilities decreased from December 31, 2020, to September 30, 2021, primarily due to the settlement of construction payables and IPO costs, partially offset by new accrued expenses related to the IP asset acquisition Accounts Payable and Accrued Liabilities | Item | September 30, 2021 ($) | December 31, 2020 ($) | | :--------------------------------- | :----------------- | :---------------- | | Accounts payable | $197,187 | $991,565 | | Accrued expenses | $813,861 | $905,629 | | Others | $69,421 | $33,794 | | Total | $1,080,469 | $1,930,988 | - Total accounts payable and accrued liabilities decreased by 44% from $1,930,988 at December 31, 2020, to $1,080,469 at September 30, 2021[47][158] - Accrued expenses at September 30, 2021, include $500,000 for the settlement of secured debt related to the IP asset, compared to $nil at December 31, 2020[47][158] Note 6. Senior Secured Debentures The company issued $750,000 in senior secured debentures (Bridge Loan) in March 2021, which were repaid in July 2021, with warrants issued as part of this loan classified as derivative liabilities - On March 24, 2021, the company issued $750,000 principal amount ($600,000 subscription) of senior secured debentures (Bridge Loan), which were fully repaid on July 13, 2021[48][159] - As part of the Bridge Loan, 93,938 warrants were issued with a strike price of $3.99 per share and a three-year term[49][160] - The fair value of these Bridge Warrants, estimated at $71,414 as of September 30, 2021, is categorized as Level 3 input and changes in fair value ($199,255) are recognized in comprehensive income/loss[50][161] Note 7. Long Term Loan The company has a long-term loan under the Canada Emergency Business Account Program, which is interest-free until December 31, 2022, with a 25% forgiveness incentive for early repayment, and an additional loan received in April 2021 under the same program - The company has a long-term loan from Alterna Bank under the Canada Emergency Business Account Program, with a principal amount of $31,417 (CAD**$40,000**) as of December 31, 2020[52][163] - The loan is interest-free until December 31, 2022, and offers 25% loan forgiveness (up to CAD**$10,000**) if repaid by then After this, it carries a 5% annual interest rate[53][164] - An additional $15,932 (CAD**$20,000**) loan was received in April 2021 under the same program[53][164] Note 8. Warrant Liability As of September 30, 2021, the company's warrant liability totals $1,842,895, comprising Series A Warrants, representative's warrants, and Bridge warrants, with a change in fair value of $818,960 recorded in the statement of comprehensive loss - As of September 30, 2021, the total warrant liability is $1,842,895, representing the aggregate fair value of 3,088,198 Series A Warrants, 135,999 representative's warrants, and 93,938 Bridge warrants[11][54][122][165] - The representative's warrant is exercisable one year from the IPO effective date at $6 per share and expires three years after the effective date, subject to a 180-day lock-up[55][166] - A change in the fair value of the warrant liability of $818,960 was recorded in the statement of comprehensive loss for the nine months ended September 30, 2021[56][167] Note 9. Share Capital During the nine months ended September 30, 2021, the company issued a significant number of common shares for cash through its IPO, converted preferred shares, and granted stock options and shares for consulting services, bonus compensation, and director fees, with total unrecognized share-based compensation cost of $901,575 - On July 12, 2021, the company completed its IPO, selling 3,127,998 units at $5.00 per unit, generating gross proceeds of $15,639,990 and net proceeds of $14,388,791[172] - Concurrent with the IPO, 2,258,826 Series A Preferred Shares were converted into common shares[172] - The company granted a total of 509,788 stock options to directors, officers, employees, and consultants during the period, with an estimated fair value of $1.6 million, and had $901,575 of unrecognized compensation cost as of September 30, 2021[58][59][60][169][170][171] Note 10. Commitments and Contingencies The company has future lease commitments totaling $2,366,802 through subsequent years and is involved in a lawsuit regarding alleged misrepresentations of intellectual property, where management believes potential monetary damages are not material Minimum Future Lease Payments | Year | Amount ($) | | :------------------ | :---------- | | Remainder of 2021 | $68,137 | | 2022 | $273,962 | | 2023 | $279,610 | | 2024 | $289,495 | | 2025 | $306,442 | | 2026 | $306,442 | | Subsequent years | $842,714 | | Total | $2,366,802 | - The company is a defendant in a lawsuit filed in May 2019 by HydroHaus Horticulture, Inc. and others, alleging wrongful rescission of agreements and breach of contract related to proprietary technology[65][176] - AgriFORCE has filed a counterclaim alleging fraudulent misrepresentations by the plaintiffs regarding the existence and ownership of intellectual property, which the company deemed invalid[66][177] Note 11. Subsequent Events Management has evaluated subsequent events up to the financial statement issuance date and found no material events requiring disclosure, other than the ongoing negotiation of debt financing for land purchase as mentioned in Note 3 - No material subsequent events were identified by management, except for the ongoing negotiation of debt financing for the land purchase mentioned in Note 3[71][182] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on the company's financial condition and results of operations, detailing its business, strategic plans, financial performance for the periods ended September 30, 2021 and 2020, liquidity, and recent financing activities Company History and Our Business AgriFORCE Growing Systems Ltd., incorporated in 2017, is an agriculture technology company focused on high-value crops, utilizing proprietary facility design and hydroponics-based automated growing systems to optimize yields and eliminate pesticides in controlled environments - AgriFORCE Growing Systems Ltd. was incorporated on December 22, 2017, and changed its name from Canivate Growing Systems Ltd. to AgriForce Growing Systems Ltd. on November 22, 2019[74][185] - The company is an agriculture-focused technology company delivering solutions for high-value crops through proprietary facility design and automation IP[75][186] - Its 'AgriFORCE grow house' system uses hydroponics-based automated growing to optimize crop yields in controlled environments, aiming to eliminate pesticides and irradiation[75][186] Our Business Plan The company's business plan combines organic growth and M&A, with a four-phase organic growth strategy from 2017 to 2025, including completing land acquisition and financing in 2021, developing R&D facilities, and expanding grow house installations - The business plan focuses on organic growth and mergers & acquisitions, with an initial focus on constructing AgriFORCE grow houses in California[76][79][187][190] - Phase 2 (2021) includes completing land financing and purchase in Coachella, CA, building site infrastructure, fitting out a genetics lab for revenue generation, and initiating R&D facility design for food and plant-based pharma[77][188] - Phase 3 (2022-2024) involves delivering second and third facilities, completing R&D facility construction, and developing vertical grow solutions Phase 4 (2025) aims for additional facility installations, international expansion, and the first commercial vertical grow facility[78][189] COVID-19 Management has assessed the impact of the COVID-19 pandemic and concluded that it has not affected the company's business operations or its ability to raise necessary capital - Management concluded that the COVID-19 pandemic has not impacted the company's business operations or its ability to raise capital[80][191] Status as an Emerging Growth Company The company has elected to be an 'emerging growth company' under the JOBS Act, allowing it to delay the adoption of new accounting standards and rely on certain exemptions from reporting requirements - The company has irrevocably elected to avail itself of the extended transition period for complying with new or revised accounting standards as an 'emerging growth company' under the JOBS Act[81][192] - As an emerging growth company, it intends to rely on exemptions from providing an auditor's attestation report on internal controls over financial reporting and complying with PCAOB requirements for mandatory audit firm rotation[82][193] Results of Operations The company has generated no revenue since inception and reported increased net losses for both the three and nine months ended September 30, 2021, primarily due to significant increases in operating expenses and other expenses related to debt and warrants - The company has generated no revenue since inception[85][196] - Operating expenses increased by $1,399,824 (143%) for the three months ended September 30, 2021, and by $1,401,223 (54%) for the nine months ended September 30, 2021, driven by increased staff, operations, and public company costs[85][86][196][197] - Net loss increased to $1,823,618 for the three months and $3,915,207 for the nine months ended September 30, 2021, compared to $973,327 and $2,587,062 respectively in the prior year, due to higher operating and other expenses[88][199] Liquidity and Capital Resources The company's liquidity needs are for working capital, capital expenditures, and general corporate purposes, with management believing current cash and IPO proceeds will cover liquidity requirements for the next 12 months, though future capital needs are substantial - The company's primary liquidity needs are for working capital, capital expenditures, and general corporate purposes[89][200] - As of September 30, 2021, the company had an accumulated deficit of $17,173,083 and used $3,017,468 in operating activities for the nine months ended September 30, 2021[89][200] - Management believes that available cash and net IPO proceeds will be sufficient to meet liquidity requirements for at least the next 12 months, but future capital requirements are significant and may necessitate additional capital raises[90][91][201][202] Cash Flows For the nine months ended September 30, 2021, the company used significant cash in operating and investing activities, largely offset by substantial cash provided by financing activities, primarily from its IPO - Net cash used in operating activities for the nine months ended September 30, 2021, was $3,017,468, primarily due to net loss and operating costs, adjusted by non-cash expenses like share-based compensation[92][203] - Net cash used in investing activities for the nine months ended September 30, 2021, was $987,057, mainly for equipment, intangibles, and construction in progress[22][93][133][204] - Net cash provided by financing activities for the nine months ended September 30, 2021, was $13,396,348, largely from IPO proceeds ($13,360,616 net) and senior secured debentures, partially offset by repayment of debentures[22][93][133][204] Recent Financings In March 2021, the company secured and later repaid senior secured debentures, and in July 2021, it completed its IPO, raising significant gross and net proceeds - On March 24, 2021, the company entered into a securities purchase agreement for $750,000 in senior secured debentures ($600,000 subscription amount), which were repaid in full on July 13, 2021[94][205] - On July 12, 2021, the company completed its IPO, selling 3,127,998 units at $5.00 each, resulting in gross proceeds of $15,639,990 and net proceeds of $14,388,791[94][205] Off Balance Sheet Arrangements The company reported no off-balance sheet arrangements - The company has no off-balance sheet arrangements[95][206] Significant Accounting Policies This section refers to the detailed discussion of significant accounting policies provided in the footnotes to the unaudited financial statements - Significant accounting policies are detailed in the footnotes to the unaudited financial statements for the nine months ended September 30, 2021 and 2020[95][206] Item 3. Quantitative and Qualitative Disclosures About Market Risk As a smaller reporting company, AgriFORCE Growing Systems Ltd. is not required to provide quantitative and qualitative disclosures about market risk - As a smaller reporting company, AgriFORCE Growing Systems Ltd. is exempt from providing quantitative and qualitative disclosures about market risk[96][207] Item 4. Controls and Procedures Management concluded that the company's disclosure controls and procedures were effective as of September 30, 2021, with no material changes in internal controls during the quarter, while acknowledging that no control system can provide absolute assurance - Management assessed the effectiveness of disclosure controls and procedures as of September 30, 2021, and concluded they were effective[97][208] - There were no material changes in internal control over financial reporting during the quarter ended September 30, 2021[98][209] - Management acknowledges that control systems provide reasonable, not absolute, assurance and are subject to judgments and resource constraints[99][210] PART II — OTHER INFORMATION Item 1. Legal Proceedings This section refers to Note 10 of the financial statements for a discussion of the company's legal proceedings - Details regarding legal proceedings are provided in Note 10 to the unaudited condensed consolidated financial statements[101][212] Item 1A. Risk Factors As a smaller reporting company, AgriFORCE Growing Systems Ltd. is not required to provide risk factor disclosures - As a smaller reporting company, AgriFORCE Growing Systems Ltd. is exempt from providing risk factor disclosures[102][213] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds During the period, the company engaged in several unregistered sales and issuances of equity securities, including senior secured debentures, common shares for consulting services, stock dividends to preferred shareholders, shares for cashless option exercises, bonus compensation, and settlement of director fees - On March 24, 2021, the company issued $750,000 in senior secured debentures to accredited investors in an unregistered sale[103][214] - The company issued 30,000 restricted common shares for consulting services during the three months ended March 31, 2021[103][214] - Various issuances of restricted common shares occurred, including 86,739 and 48,791 shares as stock dividends to Series A Preferred shareholders, 7,237 shares to consultants, 820,029 shares from cashless option exercises, 98,356 shares as bonus compensation to officers, and 19,992 shares to directors for accrued fees[104][105][106][107][215][216][217][218] Item 3. Defaults Upon Senior Securities The company reported no defaults upon senior securities - There were no defaults upon senior securities[108][219] Item 4. Mine Safety Disclosures This item is not applicable to the company - Mine Safety Disclosures are not applicable to the company[108][219] Item 5. Other Information The company reported no other information for this item - No other information was reported for this item[108][219] Item 6. Exhibits This section lists the exhibits filed with the Form 10-Q, including certifications under the Sarbanes-Oxley Act and Inline XBRL documents - Exhibits include certifications pursuant to Sections 302 and 906 of the Sarbanes-Oxley Act of 2002, and various Inline XBRL documents[108][219] SIGNATURES Signatures The report is duly signed on behalf of AgriFORCE Growing Systems, LTD. by its Chief Executive Officer and Director, Ingo Mueller, and its Chief Financial Officer, Richard Wong, on November 15, 2021 - The report was signed by Ingo Mueller, Chief Executive Officer and Director, and Richard Wong, Chief Financial Officer, on November 15, 2021[111][222]