AgriFORCE Growing Systems .(AGRI) - 2022 Q1 - Quarterly Report

FORM 10-Q Filing Information This quarterly report for AgriFORCE Growing Systems Ltd. covers the period ended March 31, 2022, with the company classified as a smaller reporting entity - The registrant is a non-accelerated filer, a smaller reporting company, and an emerging growth company[3][119] - As of May 16, 2022, the registrant had 15,349,184 shares of common stock outstanding[3][119] Cautionary Note Regarding Forward-Looking Information Forward-Looking Statements Disclaimer This section cautions that forward-looking statements involve risks and uncertainties, and the company undertakes no obligation to update them - The report contains forward-looking statements concerning future events, including financial performance, liquidity, capital needs, and industry outlook[5][121] - These statements are subject to various risks and uncertainties, and actual results may differ materially[6][122] - The company does not assume an obligation to update any forward-looking statement and advises readers to evaluate them in light of identified risk factors[7][123] PART I — FINANCIAL INFORMATION Item 1. Financial Statements This section presents the unaudited condensed consolidated interim financial statements for AgriFORCE Growing Systems Ltd Condensed Balance Sheets The balance sheet shows a decrease in total assets and shareholders' equity alongside an increase in total liabilities as of March 31, 2022 Condensed Balance Sheet Highlights (USD) | Metric | March 31, 2022 (Unaudited) | December 31, 2021 | |:---|:---|:---| | Cash and cash equivalents | $4,378,121 | $7,775,290 | | Total current assets | $4,884,338 | $8,116,656 | | Total assets | $10,365,239 | $11,765,386 | | Total current liabilities | $1,760,648 | $2,286,039 | | Warrants liability | $1,902,598 | $1,418,964 | | Total liabilities | $5,315,149 | $3,765,283 | | Total shareholders' equity | $5,050,090 | $8,000,103 | - Total assets decreased by $1,400,147 (11.9%) from $11,765,386 at December 31, 2021, to $10,365,239 at March 31, 2022[9][125] - Total liabilities increased by $1,549,866 (41.1%) from $3,765,283 at December 31, 2021, to $5,315,149 at March 31, 2022[9][125] Unaudited Condensed Statements of Comprehensive Loss The company reported a significantly increased net loss for Q1 2022 compared to Q1 2021, driven by higher operating expenses and warrant value changes Condensed Statements of Comprehensive Loss Highlights (USD) | Metric | Three Months Ended March 31, 2022 | Three Months Ended March 31, 2021 | |:---|:---|:---| | Operating loss | $(2,759,736) | $(890,739) | | Change in fair value of warrants | $457,042 | $- | | Net loss | $(3,281,286) | $(884,606) | | Comprehensive loss attributable to shareholders | $(3,293,187) | $(871,572) | | Basic and diluted net loss per common share | $(0.22) | $(0.10) | - Net loss increased by $2,396,680 (271%) from $(884,606) in Q1 2021 to $(3,281,286) in Q1 2022[12][128] - Operating expenses saw significant increases across categories, including wages and salaries (up $618,976), research and development (up $366,544), and investor relations (up $268,652)[12][128][206] Unaudited Condensed Statements of Changes in Shareholders' Equity Shareholders' equity decreased significantly in Q1 2022, primarily due to the net loss incurred during the period Shareholders' Equity Changes (USD) | Metric | March 31, 2022 | January 1, 2022 | |:---|:---|:---| | Total Shareholders' Equity (End of Period) | $5,050,090 | $8,000,103 | | Net loss | $(3,281,286) | - | | Shares issued for consulting services | $88,071 | - | | Shares issued for compensation | $97,121 | - | | Share based compensation | $157,982 | - | - Total shareholders' equity decreased by $2,949,013 from $8,000,103 at January 1, 2022, to $5,050,090 at March 31, 2022[14][130] Unaudited Condensed Statements of Cash Flows The company experienced a substantial increase in cash used in operating and investing activities, leading to a notable decrease in cash reserves Condensed Statements of Cash Flows Highlights (USD) | Metric | Three Months Ended March 31, 2022 | Three Months Ended March 31, 2021 | |:---|:---|:---| | Net cash used in operating activities | $(2,870,654) | $(371,978) | | Net cash used in investing activities | $(500,000) | $(2,157) | | Net cash provided by financing activities | $- | $469,064 | | Change in cash | $(3,397,169) | $82,382 | | Cash, end of period | $4,378,121 | $735,792 | - Net cash used in operating activities increased by $2,498,676 (671.6%) from $(371,978) in Q1 2021 to $(2,870,654) in Q1 2022[17][133] - Net cash used in investing activities increased significantly due to a $500,000 payment against the acquisition of an intangible asset in Q1 2022[17][133][214] Notes to Unaudited Condensed Financial Statements These notes provide detailed disclosures for the financial statements, covering accounting policies, asset breakdowns, and subsequent events 1. NATURE OF OPERATIONS AND BASIS OF PREPARATION This section outlines the company's business, its proprietary growing system, and highlights a going concern doubt due to operating losses - AgriFORCE Growing Systems Ltd is an agriculture-focused technology company providing solutions for high-value crops via its proprietary 'AgriFORCE grow house'[20][136] - The company has incurred substantial operating losses since inception, leading to doubt about its ability to continue as a going concern[23][24][139] - Additional financing through debt or equity sales will be needed to fund operations and commercialize technology[24][140] 2. SIGNIFICANT ACCOUNTING POLICIES This note details significant accounting policies, including the adoption of new standards for leases and the fair value measurement of warrant liabilities - The company adopted ASU 2016-02 (Topic 842, Leases) effective January 1, 2022, recognizing $1.8 million in operating lease liabilities and ROU assets[28][29][144] - Warrants are classified as derivative liabilities and measured at fair value due to strike prices denominated in USD, which is not the company's functional currency[35][151] - As of March 31, 2022, the warrant liability of $1,902,598 is categorized as Level 1 inputs in the fair value hierarchy[38][154] 3. PREPAID EXPENSES AND OTHER CURRENT ASSETS This note provides a breakdown of prepaid expenses and other current assets, showing an increase driven by higher prepaid expenses Prepaid Expenses and Other Current Assets (USD) | Category | 2022 | 2021 | |:---|:---|:---| | Deposits | $32,000 | $32,000 | | Legal retainer | $87,199 | $33,692 | | Prepaid expenses | $335,086 | $214,445 | | Others | $29,324 | $28,903 | | Total | $483,609| $309,040| - Prepaid expenses and other current assets increased by $174,569 from $309,040 at December 31, 2021, to $483,609 at March 31, 2022[39][155] - The company wrote off a $150,000 non-refundable deposit for a land purchase agreement in Coachella, CA, but is currently renegotiating the terms[39][155] 4. INTANGIBLE ASSET This note details the acquisition of Intellectual Property from Manna Nutritional Group for up to $14.475 million - The company acquired $1,498,752 of Intellectual Property (IP) from Manna Nutritional Group, LLC on September 10, 2021[40][156] - The IP includes patent-pending technologies for naturally processing grains, pulses, and root vegetables into low-starch, high-protein flour products[40][156] - The aggregate purchase price for the IP is up to $14,475,000, involving cash payments and prefunded warrants[40][156][158] 5. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES Accounts payable and accrued liabilities decreased significantly due to a reduction in accrued expenses and accounts payable Accounts Payable and Accrued Liabilities (USD) | Category | 2022 | 2021 | |:---|:---|:---| | Accounts payable | $275,439 | $414,117 | | Accrued expenses | $396,944 | $981,027 | | Others | $175,963 | $137,168 | | Total | $848,346| $1,532,312| - Accounts payable and accrued liabilities decreased by $683,966 (44.6%) from $1,532,312 at December 31, 2021, to $848,346 at March 31, 2022[46][162] 6. SENIOR SECURED DEBENTURES This note describes senior secured debentures issued in March 2021, which were repaid in full by July 2021 - On March 24, 2021, the Company issued $750,000 in principal amount ($600,000 subscription) of senior secured debentures (Bridge Loan)[47][163] - The Bridge Loan was repaid in full on July 13, 2021, after an extension of the due date[47][163] - Warrants to purchase 93,938 common shares were issued as part of the loan and were exercised on October 27, 2021, extinguishing the warrant liability[48][49][164] 7. LONG TERM LOAN The company has an interest-free long-term loan under the Canada Emergency Business Account Program with a forgiveness incentive - The company has a loan of $31,417 (CAD$40,000) from Alterna Bank under the Canada Emergency Business Account Program, which is interest-free until December 31, 2022[51][167] - Repayment by December 31, 2022, qualifies for 25% loan forgiveness (up to CAD$10,000)[52][168] - An additional $16,598 (CAD$20,000) expansion loan was received in April 2021 under the same program[52][168] 8. WARRANT LIABILITY The company's warrant liability represents the fair value of publicly traded warrants, with a significant fair value change recorded as an expense in Q1 2022 - As of March 31, 2022, the warrant liability totals $1,902,598, representing the fair value of 3,088,198 Series A Warrants and 135,999 representative's warrants[53][169] - A fair value change of $457,042 on the warrant liability was recorded as an expense in the statement of comprehensive loss for Q1 2022[55][171] - Representative's warrants are exercisable one year from the IPO effective date, expire three years after, and have an exercise price of $6 per share[54][170] 9. SHARE CAPITAL This note details the issuance of common shares during Q1 2022 for compensation and consulting services - In Q1 2022, the company issued common shares for compensation to officers (3,217 shares on Jan 1; 5,160 shares on Jan 31; 20,940 shares on Mar 31) and to consultants (38,380 shares total)[56][172] 10. LEASES The company adopted Topic 842 for lease accounting, recognizing right-of-use assets and lease liabilities for operating leases - The company adopted Topic 842 effective January 1, 2022, recognizing operating lease liabilities and corresponding ROU assets[29][145][173] Lease Expenses (USD) - Three Months Ended March 31, 2022 | Category | Amount | |:---|:---| | Operating lease cost| $76,354 | | Short-term lease cost| $4,583 | | Total lease expenses| $80,937| - The company has one operating lease for an office in Canada with an 8-year remaining term and a 7.0% discount rate[174][176] 11. COMMITMENTS AND CONTINGENCIES This note details the company's lease commitments and ongoing litigation, with management believing potential damages are not material Minimum Future Lease Payments (USD) | Year | Amount | |:---|:---| | Remaining 2022 | $232,105 | | 2023 | $293,847 | | 2024 | $303,926 | | 2025 | $321,204 | | 2026 | $321,204 | | Subsequent years | $883,311 | | Total | $2,355,597| - The company is involved in a lawsuit filed in May 2019 by HydroHaus Horticulture, Inc alleging breach of manufacturing and licensing agreements[181] - The company has filed a counterclaim alleging fraudulent misrepresentations, and management believes potential monetary damages from the lawsuit are not material[183][184] 12. SUBSEQUENT EVENTS Subsequent events include the issuance of common shares to consultants and officers in April 2022 - On April 1, 2022, the company issued 25,000 common shares to a consultant[186][229] - On April 4, 2022, the company issued 77,172 common shares to consultants[186][229] - On April 11, 2022, the company's officers received 35,952 common shares as bonus compensation[186][229] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on financial condition and results for Q1 2022, highlighting significant losses and the need for future capital Company History and Our Business AgriFORCE is an agriculture-focused technology company providing proprietary facility design and automated growing systems for high-value crops - AgriFORCE Growing Systems Ltd was incorporated on December 22, 2017, and changed its name to the current one on November 22, 2019[73][189] - The company focuses on plant-based pharmaceutical, nutraceutical, and other high-value crop markets using its 'AgriFORCE grow house' system[74][190] - The AgriFORCE grow house is designed to produce crops in any environmental condition, optimize yields, and substantially eliminate the need for pesticides[74][190] Status as an Emerging Growth Company The company has elected to use the extended transition period for new accounting standards as an 'emerging growth company' under the JOBS Act - The company has irrevocably elected to use the extended transition period for complying with new or revised accounting standards under the JOBS Act[75][191] - The company intends to rely on exemptions from auditor's attestation report on internal controls and PCAOB requirements for mandatory audit firm rotation[77][193] Our Business Plan The company's business plan involves organic growth through its Solutions and Brands divisions, alongside an aggressive M&A strategy - The business plan includes organic growth in 'AgriFORCE Solutions' and 'AgriFORCE Brands', alongside a Merger and Acquisition (M&A) strategy[78][194][201] - AgriFORCE Solutions' Phase 2 (2022-2023) focuses on financing a land purchase in Coachella, CA, and building site infrastructure and R&D labs[80][196] - AgriFORCE Brands' Phase 2 (2021-2022) involves designing and operating a pilot plant to develop finished products like flours and cereals[84][200] - The M&A strategy involves pursuing acquisitions in key pillars of its platform to innovate across the Ag-Tech market[85][201] COVID-19 Impact The company acknowledges the unpredictable impacts of COVID-19, including potential operational reductions due to governmental restrictions - The COVID-19 pandemic has had unpredictable impacts, leading to quarantines and restrictions globally[86][202] - The company has not been declared an essential business and may be required to reduce or cease operations due to governmental actions[87][203] - The company is still assessing the effect of COVID-19 on its business and cannot assure that it will not materially and adversely affect operations[87][203] Results of Operations For Q1 2022, the company reported no revenue and a significantly increased net loss, driven by a substantial rise in operating and other expenses - The company generated no revenue for the three months ended March 31, 2022, or since inception[89][205] - Operating expenses increased by $1,868,997 (210%) in Q1 2022 compared to Q1 2021, due to higher wages, R&D, and investor relations costs[90][206] - Net loss for Q1 2022 was $3,281,286, a significant increase from $884,606 in Q1 2021, largely due to the change in fair value of warrant liability[91][207][208] Liquidity and Capital Resources The company's liquidity is constrained by substantial operating losses and a decrease in cash, leading to a going concern doubt - The company's cash balance decreased from $7,775,290 at December 31, 2021, to $4,378,121 at March 31, 2022[94][210] - An accumulated deficit of $23,182,278 as of March 31, 2022, raises substantial doubt about the company's ability to continue as a going concern[93][209][210] - Future capital requirements for R&D, construction, and operations will require additional financing[94][210] Cash Flows Cash flows for Q1 2022 show a significant increase in cash used in operating and investing activities, with no financing activities - Net cash used in operating activities for Q1 2022 was $2,870,654, primarily due to a net loss of $3,281,286 adjusted for non-cash expenses[97][213] - Net cash used in investing activities for Q1 2022 was $500,000, related to the payment for an intangible asset acquisition[98][214] - There were no cash flows provided by financing activities in Q1 2022, contrasting with $469,064 provided in Q1 2021[98][214] Recent Financings The company completed an IPO in July 2021, raising $15.6 million in gross proceeds - On July 12, 2021, the company completed its IPO, generating gross proceeds of $15,639,990 and net proceeds of $14,388,791[99][215] - Senior secured debentures, issued on March 24, 2021, for $600,000, were repaid in full on July 13, 2021[99][215] Off Balance Sheet Arrangements The company reported no off-balance sheet arrangements - The company has no off-balance sheet arrangements[100][216] Significant Accounting Policies This section refers to the detailed footnotes for significant accounting policies - Significant accounting policies are detailed in the footnotes to the unaudited financial statements[100][216] Item 3. Quantitative and Qualitative Disclosures About Market Risk As a smaller reporting company, AgriFORCE is not required to provide disclosures about market risk - As a smaller reporting company, AgriFORCE Growing Systems Ltd is exempt from providing quantitative and qualitative disclosures about market risk[100][216] Item 4. Controls and Procedures Management concluded that the company's disclosure controls and procedures were effective as of March 31, 2022 Disclosure Controls and Procedures Management assessed the effectiveness of disclosure controls and procedures as of March 31, 2022, concluding they were effective - Management concluded that the company's disclosure controls and procedures were effective as of March 31, 2022[101][217] - The assessment was based on the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in its 2013 framework[101][217] Changes in Internal Controls There were no material changes in the company's internal control over financial reporting during the quarter ended March 31, 2022 - No material changes in internal control over financial reporting occurred during the quarter ended March 31, 2022[102][218] Limitations on Effectiveness of Controls and Procedures Management acknowledges that all control systems have inherent limitations and cannot provide absolute assurance of achieving objectives - Control systems, by nature, are based on judgments and assumptions and cannot provide absolute assurance that objectives will be met[103][219] - The design of controls must consider resource constraints and the need for management judgment in evaluating benefits versus costs[103][219] PART II — OTHER INFORMATION Item 1. Legal Proceedings This section refers to Note 11 of the financial statements for a discussion of an ongoing lawsuit - Information on legal proceedings is provided in Note 11 to the unaudited condensed consolidated financial statements[105][221] Item 1A. Risk Factors As a smaller reporting company, AgriFORCE is not required to provide risk factor disclosures in this quarterly report - As a smaller reporting company, AgriFORCE Growing Systems Ltd is exempt from providing risk factor disclosures in this item[106][222] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds This section details various unregistered sales and issuances of equity securities for services, dividends, and compensation - The company issued senior secured debentures on March 24, 2021, to accredited investors under Section 4(a)(2) of the Securities Act[107][223] - Various issuances of restricted common shares occurred in 2021 and Q1 2022 for consulting services, stock dividends, stock option exercises, and bonus compensation[107][223][224][225][226][228][229] - Common stock purchase warrants were issued in July 2021 and subsequently exercised in October 2021[110][226][228] Item 3. Defaults Upon Senior Securities The company reported no defaults upon senior securities - There were no defaults upon senior securities[114][230] Item 4. Mine Safety Disclosures This item is not applicable to the company - Mine Safety Disclosures are not applicable to the company[114][230] Item 5. Other Information The company reported no other information for this item - There is no other information to report for this item[114][230] Item 6. Exhibits This section lists the exhibits filed with the quarterly report, including certifications and Inline XBRL documents - Exhibits include certifications pursuant to Sections 302 and 906 of the Sarbanes-Oxley Act of 2002, and Inline XBRL documents[114][230] SIGNATURES Report Signatures The quarterly report was duly signed by the CEO and CFO on May 16, 2022 - The report was signed by Ingo Mueller, Chief Executive Officer, and Richard Wong, Chief Financial Officer, on May 16, 2022[116][232]