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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934:
   
  For the quarterly period ended June 30, 2017
   
[  ] 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: 333-199612

 

Algae Dynamics Corp.

(Exact name of registrant as specified in its charter)

 

Canada   N/A
(State or other jurisdiction of
incorporation or organization)
  (I.R.S. Employer
Identification No.)

 

4120 Ridgeway Drive, Unit 37, Mississauga, ON L5L 5S9 Canada
(Address of principal executive offices) (Zip Code)

 

(289) – 997- 6740
(Registrant’s Telephone Number, including area code)

 

Indicate by check mark whether the issuer (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. [  ] Yes [ X ] No

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files). [  ] Yes [X] No

 

Indicate by check mark whether the registrant is a large accelerated file, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer [  ]   Accelerated filer [  ]
Non-accelerated filer [  ] (Do not check if a smaller reporting company) Smaller reporting company [X]

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). [  ]Yes [X] No

 

As of January 2, 2018 there were 13,337,521 shares of the issuer’s non-par value common shares issued and outstanding.

 

 

 

 

 

 

TABLE OF CONTENTS

 

    Page
     
  PART I FINANCIAL INFORMATION  
     
Item 1. Financial Statements 3
     
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 30
     
Item 3. Quantitative and Qualitative Disclosures about Market Risk 50
     
Item 4. Controls and Procedures 50
     
  PART II OTHER INFORMATION  
     
Item 1. Legal Proceedings 52
     
Item 1A. Risk Factors 52
     
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 52
     
Item 3. Defaults Upon Senior Securities 53
     
Item 4. Mine Safety Disclosures 53
     
Item 5. Other Information 53
     
Item 6. Exhibits 53

 

 2 

 

 

PART 1 - FINANCIAL INFORMATION

 

Item 1. Financial Statements.

 

ALGAE DYNAMICS CORP.

Condensed Interim Balance Sheets

(Stated in Canadian Dollars)

(Unaudited)

 

    As at June 30,     As at March 31,  
    2017     2017  
             
ASSETS                
                 
Current Assets                
Cash   $ 1,553     $ 87  
Prepaid expenses     74,745       32,878  
Amounts receivable, net     13,335       11,963  
Total Current Assets     89,633       44,928  
                 
Equipment and leasehold improvements, net (Note 3)     43,901       47,828  
                 
Total Assets   $ 133,534     $ 92,756  
                 
LIABILITIES                
                 
Current Liabilities                
Accounts payable and accrued liabilities   $ 416,035     $ 286,792  
Advances from shareholders and related parties (Note 4)     29,122       22,347  
Promissory note (Note 6a)     48,899       16,456  
Term loan (Note 5)     50,796       48,894  
Convertible notes (Note 6b and 6c)     67,953       26,076  
Derivative liability (Note 7)     217,762       260,677  
Warrant liability (Note 8b)     115,555       236,200  
Total Current Liabilities     946,122       897,442  
                 
Going Concern (Note 1)                
Commitments and Contingencies (Note 10)                
                 
STOCKHOLDERS’ (DEFICIENCY)                
                 
Common stock (Note 8a), no par value, unlimited amount authorized, 13,337,521 issued and outstanding as of June 30, 2017, (March 31, 2017 - 13,337,521)    

4,313,931

      4,313,931  
Additional paid in capital (Notes 8b and 8c)    

1,018,406

      1,016,324  
Equity to be issued (Note 8a)     86,372       -  
Accumulated deficit     (6,231,297 )     (6,134,941 )
Total Stockholders’ (Deficiency)     (812,588 )     (804,686 )
                 
Total Liabilities and Stockholders’ (Deficiency)   $ 133,534     $ 92,756  

 

These condensed interim financial statements are approved by the Directors:

 

signed “Cameron McDonald”   signed “Blair Mullin”
Director   Director

 

The accompanying notes are an integral part of these condensed interim financial statements

 

 3 

 

 

ALGAE DYNAMICS CORP.

Condensed Interim Statements of Operations

(Stated in Canadian Dollars)

(Unaudited)

 

 

   For the   For the 
   Three Month   Three Month 
   Period Ended   Period Ended 
   June 30,   June 30, 
   2017   2016 
         
OPERATING EXPENSES          
Accretion expenses (Notes 5 and 6)  $

73,042

   $5,897 
Application and membership fees   3,406    3,247 
Amortization expense (Note 3)   3,927    4,356 
Bad debt recovery (Note 11)   (3,270)   - 
Business development   422    2,486 
Fair value change in derivative liability (Note 7)   (61,047)   - 
Foreign exchange gain   (5,056)   - 
Interest   2,039    1,045 

Management fee (recovery)

   (8,125)   - 
Occupancy costs   8,315    7,982 
Office and general   2,936    1,607 

Professional fees (recovery) (Notes 8a, 8b, 8c and 12e)

   (16,504)   154,755 
Research and development   85,000    1,075 
Stock based compensation (Note 8c)   18,192    151,105 
Telephone and internet services   3,791    2,857 
Travel   5,398    5,025 
Total Operating Expenses   

112,466

    341,437 
           
Net loss before income taxes   

112,466

    341,437 
Deferred income tax recovery   -    - 
Net Loss for the Period  $

112,466

   $341,437 
           
Net loss per common share - basic and diluted  $0.01   $0.04 
           
Weighted average common shares outstanding - basic and diluted   13,337,521    9,728,634 

 

The accompanying notes are an integral part of these condensed interim financial statements

 

 4 

 

 

ALGAE DYNAMICS CORP.

Condensed Interim Statements of Stockholders’ Equity (Deficiency)

(Stated in Canadian Dollars)

(Unaudited)

 

    Common     Common     Additional                    
    Shares     Shares     Paid in     Equity to     Accumulated     Stockholders’  
    Number     Amount     Capital     be Issued     Deficit     (Deficiency)  
                                     
March 31, 2017     13,337,521     $ 4,313,931     $ 1,016,324     $ -     $ (6,134,941 )   $ (804,686 )
                                                 
Warrants expired (Note 8b)     -       -       (16,110 )     -       16,110       -  
Stock based compensation (Notes 8c)     -       -       18,192       -             18,192  
Shares issued to consultants as compensation for services (Note 8a)     -       -       -       86,372               86,372  
Net loss for the period     -       -       -               (112,466 )     (112,466 )
June 30, 2017    

13,337,521

    $

4,313,931

    $

1,018,406

    $ 86,372     $ (6,231,297 )   $ (812,588 )

 

The accompanying notes are an integral part of these condensed interim financial statements

 

 5 

 

 

ALGAE DYNAMICS CORP.

Condensed Interim Statements of Cash Flows

(Stated in Canadian Dollars)

(Unaudited)

 

   For the   For the 
   Three Month   Three Month 
   Period Ended   Period Ended 
   June 30,   June 30, 
   2017   2016 
         
Cash flows from operating activities          
           
Net loss for the period  $(112,466)  $(341,437)
Adjustments to reconcile net loss to net cash used in operating activities:          
Amortization   3,927    4,356 
Stock based compensation (Note 8c)   18,192    151,105 
Change in warrant liability (Note 8b)   (179,358)   21,783 
Shares issued and to be issued for services (Note 8a)   86,372    48,651 
Accretion expense   

73,042

    5,897 
Foreign exchange gain   (5,056)   - 
Professional fees   (13,898)   - 
           
Change in operating assets and liabilities          
Prepaid expenses   (41,867)   3,651 
Amounts receivable   (1,372)   254 
Accounts payable and accrued liabilities   129,243    15,294 
Net cash flows used in operating activities   (43,241)   (90,446)
           
Cash flows from financing activities          
Advances from shareholders   6,775    50,855 
Term loan proceeds   -    40,000 
Convertible notes   37,932    - 
Warrant exercise proceeds   -    2,318 
Net cash flows from financing activities   44,707    93,173 
           
Net change in cash   1,466    2,727 
Cash position - beginning of period   87    173 
           
Cash position - end of period  $1,553   $2,900 
           
Supplemental Information:          
           
Income taxes paid  $-   $- 
Interest paid   -    - 
    -    - 

 

The accompanying notes are an integral part of these condensed interim financial statements

 

 6 

 

 

Algae Dynamics Corp.

Notes to the Condensed Interim Financial Statements

(Stated in Canadian Dollars)

(Unaudited)

June 30, 2017 and 2016

 

1.) Nature of the Business and Going Concern

 

Algae Dynamics Corp. (the “Company”) was incorporated under the Canada Business Corporations Act on October 7, 2008 as Converted Carbon of Canada Corp. On November 19, 2010, the Company amended its Articles of Incorporation to change its name to Converted Carbon Technologies Corp. and a further amendment was approved by the shareholders on August 28, 2014 to change the name to Algae Dynamics Corp.

 

The Company is conducting research through sponsored research agreements with two universities to support development of health products utilizing cannabis, hemp and algae oil. The Company’s planned principal operations are the sale of oil extracted from cannabis oils plus the sale of uniquely formulated health products utilizing cannabis oils, algae oils and hemp oils.

 

In May 2016, the Company signed a Letter of Engagement with Midtown Partners & Co, LLC to raise additional equity capital to support the implementation of its business plan; an addendum to this agreement was signed on January 17, 2017 and the agreement was extended for one year in August 2017. See Note 10.

 

On May 8, 2017, the Company signed an additional consulting agreement with Carter, Terry & Company in connection with the proposed capital raise in a combination of equity and/or debt of the Company for a term of two years. See Note 10.

 

In August 2017, the Company signed a Letter of Intent (LOI) with an authorized licensed producer of cannabis for medical purposes. See Note 13

 

The Company’s activities are subject to significant risks and uncertainties, including failing to obtain patents and failing to secure additional funding to operationalize the Company’s current technology before another company develops similar technology.

 

These unaudited condensed interim financial statements have been prepared on the basis of a going concern, which contemplates the realization of assets and the settlement of liabilities in the normal course of business. The Company is in the development stage and has not yet realized profitable operations and has relied on non-operational sources to fund operations. The Company has suffered recurring losses and additional future losses are anticipated as the Company has not yet been able to generate revenue. In addition, as of June 30, 2017, the Company has a working capital deficiency of $856,489 (March 31, 2017 - $852,514) and an accumulated deficit of $6,231,297 (March 31, 2017 - $6,134,941). The Company’s ability to continue as a going concern is dependent on successfully executing its business plan, which includes the raising of additional funds. The Company will continue to seek additional forms of debt or equity financing, but it cannot provide assurances that it will be successful in doing so. These circumstances raise substantial doubt as to the ability of the Company to meet its obligations as they come due and accordingly, the appropriateness of the use of accounting principles applicable to a going concern. The accompanying financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern. Such adjustments could be material.

 

 7 

 

 

Algae Dynamics Corp.

Notes to the Condensed Interim Financial Statements

(Stated in Canadian Dollars)

(Unaudited)

June 30, 2017 and 2016

 

2.) Presentation of Financial Statements

 

Basis of Presentation

 

These unaudited condensed interim financial statements should be read in conjunction with the financial statements for the Company’s most recently completed fiscal year ended March 31, 2017. These unaudited condensed interim financial statements do not include all disclosures required in annual financial statements, but rather are prepared in accordance with recommendations for interim financial statements in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”). These unaudited condensed interim financial statements have been prepared using the same accounting policies, and methods as those used by the Company in the annual financial statements for the year ended March 31, 2017, except when disclosed below.

 

The unaudited condensed interim financial statements contain all adjustments (consisting of only normal recurring adjustments) which are necessary to present fairly the financial position of the Company as at June 30, 2017, and the results of its operations for the three month periods ended June 30, 2017 and 2016 and its cash flows for the three month periods ended June 30, 2017 and 2016. Note disclosures have been presented for material updates to the information previously reported in the annual financial statements.

 

Estimates

 

The preparation of these unaudited condensed interim financial statements has required management to make estimates and assumptions that affect the amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of the revenues and expenses during the reporting period.

 

On an ongoing basis, the Company evaluates its estimates, including those related to provision for doubtful accounts, accrued liabilities and contingencies, and the valuation of income taxes, stock based compensation, warrants, convertible debt and intangible assets. The Company bases its estimates on historical experiences and on various other assumptions believed to be reasonable under the circumstances. Actual results could differ from those estimates. As adjustments become necessary, they are reported in earnings in the period in which they become known.

 

New Accounting Pronouncements

 

ASU No. 2015-17, Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes, was issued to simplify the classification of deferred taxes on the balance sheet. The new guidance would require that deferred taxes be classified as non-current assets and liabilities based on the tax paying jurisdiction. Application of the standard, which can be applied prospectively or retrospectively, is required for fiscal years beginning on or after December 15, 2016 and for interim periods within that year. The adoption of the amended guidance does not have a material impact on the Company’s consolidated financial statements.

 

ASU No. 2016-09, Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. The ASU includes multiple provisions intended to simplify various aspects of the accounting for share-based payments. The areas of simplification in the update involve several aspects of accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows, however, some of the areas for simplification apply only to non-public entities. This guidance is effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods. The guidance does not have a material impact on the Company’s financial statements.

 

 8 

 

 

Algae Dynamics Corp.

Notes to the Condensed Interim Financial Statements

(Stated in Canadian Dollars)

(Unaudited)

June 30, 2017 and 2016

 

3.) Equipment and Leasehold Improvements

 

   June 30, 2017   March 31, 2017 
       Accumulated       Accumulated 
   Cost   Depreciation   Cost   Depreciation 
Computer equipment  $3,558   $2,607   $3,558   $2,530 
Production equipment   67,367    37,249    67,367    35,663 
Leasehold improvements   42,290    

29,458

    42,290    27,194 
Total  $113,215   $69,314   $113,215   $65,387 
Net carrying amount       $43,901        $47,828 

 

During the three month period ended June 30, 2017, the Company recorded total depreciation of $3,927 (2016 - $4,356) which was recorded to depreciation expense on the condensed interim statements of operations.

 

4.) Advances from Shareholders

 

As at June 30, 2017, the Company had received cumulative net working capital advances in the amount of $29,122 (March 31, 2017 - $22,347) from two shareholders who are also officers and directors of the Company. The advances from shareholders are unsecured, non-interest bearing and payable upon demand.

 

5.) Term Loan

 

On May 4, 2016, the Company agreed to a term loan of $40,000 for bridge financing with a relative of one of the officers of the Company. The loan matured on November 30, 2017 and the terms specified a 30% premium to be paid at that time. The 30% premium is recognized as an expense over the term of the loan and is amortized on the statements of operations. During the period ended June 30, 2017 the Company recorded accretion expense of $1,902 (2016 - $5,897). The loan was initially scheduled to mature on August 28, 2016 but an extension of three months, followed by a second extension of three months and followed by a further extension to February 28, 2018 was agreed to with the same terms.

 

6.)

Convertible Notes

   
(a) Promissory Note

 

On February 14, 2017, the Company issued a promissory note to Salamon Partners LLC (“Salamon”), an arm’s length organization, for a principal amount of USD$50,000 ($65,350) at 12% per annum. The net proceeds were USD$47,500 which consisted of the principal amount, net of transaction cost of US$2,500. The principal amount became due on August 15, 2017. The outstanding amount may be prepaid at any time at the option of the Company. In the event of a prepayment the penalty rate shall be assessed as follows:

 

 9 

 

 

Algae Dynamics Corp.

Notes to the Condensed Interim Financial Statements

(Stated in Canadian Dollars)

(Unaudited)

June 30, 2017 and 2016

 

6.)

Convertible Notes (continued)

   
(a) Promissory Note (continued)

 

i.) if the prepayment occurs within 60 days of the loan issuance, the prepayment penalty will equal twenty-five (25%) of the principal amount prepaid

 

ii.) If the prepayment occurs within 60 to 90 days of the loan issuance, the prepayment penalty will equal thirty percent (30%) of the principal amount prepaid

 

iii.) If the prepayment occurs within 90 to 120 days of the loan, the prepayment penalty will equal thirty-five (35%) of the principal amount.

 

The holder of the note may, after a period of 180 days, at its sole option, convert the outstanding principal balance and accrued interest of 12% per annum, into the Company’s common shares at a market closing bid discount of 50% if converting at less than 5 days of the average trading volume, 60% if converting at more than 5 days of the average trading volume and 65% if converting at more than 10 days of the average trading volume at maturity.

 

Due to the variable conversion price associated with this promissory note and the fact that the conversion price is denominated in US dollars whereas the functional currency is the Canadian dollar, the Company has determined that the conversion feature is a derivative liability. The value of the embedded conversion feature at the date of issuance was estimated to be $135,510 (2016 - $Nil), which was recorded as a derivative liability as of the date of issuance. The debt discount is being amortized over the term of the promissory note.

 

 10 

 

 

Algae Dynamics Corp.

Notes to the Condensed Interim Financial Statements

(Stated in Canadian Dollars)

(Unaudited)

June 30, 2017 and 2016

 

6.) Convertible Notes (continued)
   
(a) Promissory Note (continued)

 

The discount to the carrying value of the promissory note is being amortized as a non-cash interest expense over the term of the promissory note using the effective interest rate method, at a rate of 213%. During the period ended June 30, 2017, the Company accreted $33,623 (2016 - $Nil) in non-cash accretion expense in connection with the promissory note, which is included in accretion expense on the statements of operations.

 

Subsequent to the end of the quarter, the promissory note was fully paid at maturity, August 15, 2017. See Note 13.

 

(b) Securities Purchase Agreement and Convertible Note

 

On November 18, 2016, the Company entered into a securities purchase agreement (the “Purchase Agreement”) with GHS Investments, LLC (“GHS”). The Purchase Agreement provides that, upon the terms and subject to the conditions set forth therein, GHS shall purchase from the Company a senior convertible note with a principal amount of USD$56,500 ($76,382) for a purchase price of USD$50,000 ($67,595).

 

The convertible note matures upon the earlier of successfully raising of at least USD$200,000 or August 18, 2017 and accrues interest at the rate of 10% per annum. The convertible note is convertible following ninety (90) days of the execution of the note, in whole or in part, at GHS’ option into common shares of the Company’s capital stock at a variable conversion price equal to a 38% discount from the lowest trading price in the twenty (20) trading days prior to the day that GHS requests conversion. At no time will GHS be entitled to convert any portion of the convertible note to the extent that after such conversion, GHS (together with its affiliates) would beneficially own more than 4.99% of the outstanding common shares, although GHS can modify this limit to 9.99% of the outstanding common shares.

 

The convertible note includes customary event of default provisions, and provides for a default interest rate of 20%. The Company had the right at any time prior to May 18, 2017 to redeem all, but not less than all, of the total outstanding amount then remaining under the convertible note in cash at a price ranging from 125% to 135% of the total amount of the convertible note then outstanding.

 

Due to the variable conversion price associated with this convertible note, the Company has determined that the conversion feature is considered a derivative liability. The embedded conversion feature at the date of issuance was estimated to be $117,807 (2016 - $Nil), which was recorded as a derivative liability as of the date of issuance. The debt discount is being amortized over the term of the convertible note.

 

 11 

 

 

Algae Dynamics Corp.

Notes to the Condensed Interim Financial Statements

(Stated in Canadian Dollars)

(Unaudited)

June 30, 2017 and 2016

 

6.) Convertible Notes (continued)
   
(b) Securities Purchase Agreement and Convertible Note (continued)

 

The discount to the carrying value of the convertible note is being amortized as a non-cash interest expense over the term of the convertible note using the effective interest rate method, at a rate of 144%. During the period ended June 30, 2017, the Company accreted $35,776 (2016 - $Nil) in non-cash accretion expense in connection with the convertible note, which is included in accretion expense on the statements of operations.

 

Subsequent to June 30, 2017 the note was fully paid. See Note 13.

 

(c) Convertible Note

 

On June 21, 2017, the Company commenced a financing of up to USD$500,000 of one-year 12% convertible notes. The notes are convertible at the option of the holder into common shares of the Company at a price of USD$0.25 per share, and are subject to mandatory conversion if the volume-weighted trading price of the common shares is greater than USD$1.00 per share for twenty consecutive trading days so long as the underlying shares may be resold in compliance with the registration requirements of the Securities Act of 1933, as amended. In addition, the Company shall issue pro rata to the purchasers of the first USD$100,000 of notes an aggregate of 200,000 common shares as a commitment fee. To June 30, 2017, the Company issued USD$50,000 ($66,451) of these notes. The Company also granted 200,000 common share purchase warrants to the holders of the USD$50,000 notes. Each warrant is exercisable into one common share at USD$0.50 ($0.65) for a period of five years.

 

 12 

 

 

Algae Dynamics Corp.

Notes to the Condensed Interim Financial Statements

(Stated in Canadian Dollars)

(Unaudited)

June 30, 2017 and 2016

 

6.) Convertible Notes (continued)

 

(c) Convertible Note (continued)

 

Due to the fact that the conversion price and the warrant exercise price are denominated in US dollars whereas the functional currency is the Canadian dollar, the Company has determined that the conversion feature and the warrant are derivative liabilities. The value of the embedded conversion feature at the date of issuance was estimated to be $19,166, which was recorded as a derivative liability as of the date of issuance. The value of the warrant at the date of the issuance was estimated at $27,152, which was recorded as a warrant liability as of the date of issuance. The debt discount is being amortized over the term of the note.

 

The Company used the Black-Scholes option pricing model with the following assumptions to estimate the fair value of the derivative liability at the date of issuance:

 

    June 21, 2017
Stock price  

USD$0.11

Risk free rate  

0.91%

Expected volatility  

251%

Conversion/Exercise price  

USD$0.25

Expected dividend rate   0%
Expected term (in years)  

1.0

 

The Company’s computation of expected volatility is based on the quoted market close price of the Company’s shares over the period equal to the expected life of the convertible note. The Company’s computation of expected life is calculated using the contractual life.

 

The discount to the carrying value of the convertible note is being amortized as a non-cash interest expense over the term of the convertible note using the effective interest rate method, at a rate of 103%. During the period ended June 30, 2017, the Company accreted $1,741 in non-cash accretion expense in connection with the convertible note, which is included in accretion expense on the statements of operations.

 

 13 

 

 

Algae Dynamics Corp.

Notes to the Condensed Interim Financial Statements

(Stated in Canadian Dollars)

(Unaudited)

June 30, 2017 and 2016

 

7.) Derivative Liability

 

The convertible notes discussed in Note 6 have variable conversion prices which results in the conversion feature being recorded as derivative liabilities.

 

The fair value of the derivative liabilities are recorded and shown separately under current liabilities. Changes in the fair value of the derivative liabilities are recorded in the statement of operations.

 

The Company used the Black-Scholes option pricing model with the following weighted average assumptions to estimate the fair value of the derivative liability at June 30, 2017:

 

    June 30, 2017
Stock price   USD$0.10
Risk free rate   1.09%
Expected volatility  

186%

Conversion price  

USD$0.06

Expected dividend rate   0%
Expected life (in years)  

0.20

 

The Company’s computation of expected volatility used to estimate the fair value of the derivative liability as at June 30, 2017 is based on the quoted market close price of the Company’s shares over the period equal to the expected term of the conversion feature.

 

The following table represents the Company’s derivative liabilities activity for the period ended June 30, 2017:

 

   Three months     
   ended   Year ended 
   June 30, 2017   March 31, 2017 
         
Derivative liabilities balance, beginning of period  $260,677   $- 
Issuance of derivative liabilities during the period   19,166    253,318 
Change in derivative liabilities during the period   (62,081)   7,359 
Derivative liabilities balance, end of period  $217,762   $260,677 

 

 14 

 

 

Algae Dynamics Corp.

Notes to the Condensed Interim Financial Statements

(Stated in Canadian Dollars)

(Unaudited)

June 30, 2017 and 2016

 

8.) Capital Stock

 

(a) Common Shares

 

Authorized

 

The Company is authorized to issue an unlimited number of common shares with no par value.

 

Issued and Outstanding

  

Equity to be issued

 

On April 9, 2017 the Company signed a 12 month consulting agreement. The terms of the agreement include the provision of 100,000 restricted common shares on signing valued at USD$20,390 ($27,186). See Note10.

 

On May 8, 2017, the Company signed a consulting agreement with Carter, Terry & Company. The terms of the agreement include a non-refundable equity retainer on signing of 150,000 restricted common shares valued at USD$33,000 ($45,197). See Note 10. 

 

Under the terms of convertible notes issued on June 21, 2017 the Company agreed to issue 100,000 restricted common shares as a commitment fee. See Note 6 (c). This commitment was valued at $13,989 based on the estimated fair market value of the shares as of the date of commitment.

 

 15 

 

 

Algae Dynamics Corp.

Notes to the Condensed Interim Financial Statements

(Stated in Canadian Dollars)

(Unaudited)

June 30, 2017 and 2016

 

8.)  Capital Stock (continued)

 

(a) Common Shares (continued)

 

Equity to be issued (continued)

 

Equity Purchase Agreement (“EPA”)

 

On September 10, 2015, the Company entered into the EPA. The holder of the EPA was committed to purchase up to USD$750,000 worth of the Company’s common shares (the “Put Shares”) over the 12-month term of the EPA. The Company paid to the holder of the EPA a commitment fee for entering into the EPA equal to 50,000 restricted common shares of the Company, valued at $67,195, based on the stock price in the most recent private placement as the Company’s shares had not yet begun to trade on a public market.

 

On June 23, 2016, the Company agreed in conjunction with RY Capital Group, LLC and GHS Investments, LLC to assign the EPA to GHS Investments, LLC.

 

The Company has notified the holder of the EPA that the facility will not be utilized.

 

 16 

 

 

Algae Dynamics Corp.

Notes to the Condensed Interim Financial Statements

(Stated in Canadian Dollars)

(Unaudited)

June 30, 2017 and 2016

 

8.)  Capital Stock (continued)
   

(b) Warrants

 

As at June 30, 2017, the following warrants were outstanding:

 

                          Fair Value at  
          Number of     Weighted         June 30, 2017  
Expiration Date   Number of
Warrants
    Warrants
Exercisable
    Average
Exercise Price
        of Vested Warrants – Liability  
December 31, 2017     275,000       50,000     USD$    0.04              
                    $ (0.05 )       $ 5,050  
January 17, 2022     900,000       900,000     USD$    0.65              
                    $ (0.87 )       $ 82,800  
June 21, 2017     200,000       200,000     USD$   0.50              
                    $ (0.65 )       $ 27,705  
      1,375,000       1,150,000     $ 0.67         $ 115,555  

 

 17 

 

 

Algae Dynamics Corp.

Notes to the Condensed Interim Financial Statements

(Stated in Canadian Dollars)

(Unaudited)

June 30, 2017 and 2016

 

8.) Capital Stock (continued)

 

(b) Warrants (continued)

 

During the period ended June 30, 2017, the Company issued 200,000 warrants of the Company valued at $27,152 (USD$20,400), pursuant to the financing described in Note 6 (c). Each warrant entitles the holder to purchase one common share at an issue price of USD$0.50 ($0.65) for a period of 5 years after the date of issuance. The fair value of the warrants at the date of grant of $27,152 was estimated using the Black-Scholes option pricing model, based on the following weighted average assumptions: stock price of USD$0.11; expected dividend yield of 0%; risk free interest rate of 1.13%; expected volatility of 221%; and expected term of 5 years. The Company’s computation of expected volatility used to estimate the fair value of the warrants as at June 30, 2017 is based on the market close price of comparable public entities over the period equal to the expected remaining life of the warrants.

 

ASC 815 “Derivatives and Hedging” indicates that warrants with exercise prices denominated in a currency other than an entity’s functional currency should not be classified as equity. As a result, warrants with a USD exercise price have been treated as derivatives and recorded as liabilities carried at their fair value, with period-to-period changes in the fair value recorded as a gain or loss in the statements of operations.

 

The continuity of warrants for the period ended June 30, 2017 as follows:

 

    Number     Weighted Average  
    of Warrants     Exercise Price  
Balance, March 31, 2017     1,197,500     $ 0.68  
Issued     200,000     $ 0.65  
Expired, unexercised     (22,500 )   $ 1.12  
Balance, June 30, 2017     1,375,000     $ 0.67  

 

As at June 30, 2017, the fair value of the 1,375,000 (March 31, 2017 – 1,175,000) warrants exercisable in US dollars was $139,180 (March 31, 2017 - $298,700) which was estimated using the Black-Scholes option pricing model based on the following weighted average assumptions:

 

   June 30, 2017   March 31, 2017 
Expected dividend yield   0%   0%
Expected volatility   175%   229%
Risk free interest rate   1.33%   1.03%
Expected term   3.97 years    3.85 years 

 

 18 

 

 

Algae Dynamics Corp.

Notes to the Condensed Interim Financial Statements

(Stated in Canadian Dollars)

(Unaudited)

June 30, 2017 and 2016

 

8.) Capital Stock (continued)

 

(b) Warrants (continued)

 

Of this amount, $115,555 (March 31, 2017 - $236,200) was reflected as a liability as at June 30, 2017, representing the percentage of the fair value of the warrants that is equal to the percentage of the requisite service that has been rendered at June 30, 2017.

 

The warrant liability is classified as Level 3 within the fair value hierarchy (See Note 12). The Company’s computation of expected volatility during the three months ended June 30, 2017 and 2016 is based on the market close price of comparable public entities over the period equal to the expected life of the warrants. The Company’s computation of expected life is calculated using the contractual life.

 

(c) Stock-based compensation

 

The Company’s stock-based compensation program (the “Plan”) includes stock options in which some options vest based on continuous service. For those equity awards that vest based on continuous service, compensation expense is recorded over the service period from the date of grant.

 

The total number of options outstanding as at June 30, 2017 was 695,000 (2016 – 930,000). No options were granted during the three months ended June 30, 2017. The maximum number of options that may be issued under the plan is floating at an amount equivalent to 15% of the issued and outstanding common shares, or 2,000,628 as at June 30, 2017 (March 31, 2017 – 2,000,628).

 

The activities in options outstanding are as noted below:

   Number of   Weighted Average 
   Options   Exercise Price 
Balance, March 31, 2017   695,000   $0.99 
Granted   -   $- 
Balance, June 30, 2017   695,000   $0.99 

 

 19 

 

 

Algae Dynamics Corp.

Notes to the Condensed Interim Financial Statements

(Stated in Canadian Dollars)

(Unaudited)

June 30, 2017 and 2016

 

8.) Capita Stock (continued)

 

(c) Stock-based compensation (continued)

 

The following table presents information relating to stock options outstanding and exercisable at June 30, 2017.

 

    Options Outstanding   Options Exercisable 
        Weighted           Weighted 
        Average       Weighted   Average 
        Remaining       Average   Remaining 
    Number of   Contractual   Number of   Exercise   Contractual 
Exercise Price   Options   Life (Years)   Options   Price   Life (Years) 
$1.73    185,000    2.46    185,000   $1.73    2.46 
$2.43    85,000    3.52    85,000   $2.43    3.52 
$0.38    425,000    4.33    

155,833

   $0.38    4.33 
$0.99    695,000    

3.44

    

425,833

   $

1.38

    

3.35

 

 

9.) Income Taxes

 

The Company has no taxable income under Canadian Federal and provincial tax laws for the three month periods ended June 30, 2017 and 2016. The Company has non-capital loss carryforwards at June 30, 2017 totally approximately $3,702,500, which may be offset against future taxable income. If not used, the loss carryforwards will expire between 2019 and 2037.

 

10.) Commitments and Contingencies

 

The Company entered into a five year operating lease for office and production facilities. The lease commenced on December 1, 2013 and expires on November 30, 2018. The base monthly rental is $1,390 plus the Company’s estimated portion of property taxes and operating expenses which are currently $847 per month. The future commitments pursuant to this lease arrangement, including property taxes and operating expenses for the fiscal periods ending March 31 are:

 

2018 (remaining)   $ 20,133  
2019   $ 17,896  

 

For the three month period ended June 30, 2017, occupancy costs related to this lease were $6,711 (2016 – $6,525).

 

 20 

 

 

Algae Dynamics Corp.

Notes to the Condensed Interim Financial Statements

(Stated in Canadian Dollars)

(Unaudited)

June 30, 2017 and 2016

 

10.) Commitments and Contingencies (continued)

 

On March 11, 2014, and as amended on July 18, September 3, 2014, September 5, 2014, December 31, 2015 and again on December 20, 2016, the Company entered into a consulting agreement with Connectus, Inc. (“Connectus”) to assist and advise the Company in matters concerning corporate finance and the Company’s current and proposed financing activities for the period commencing April 1, 2014 and ending December 31, 2014. Pursuant to this agreement, the Company agreed to issue to Connectus, 625,000 warrants of the Company. Each warrant is exercisable at USD$0.04 ($0.054) per share for a period of three years. Of the warrants granted, 300,000 vested on September 3, 2014 with the unvested portion vesting pro-rata for each USD$250,000 ($335,675) raised in an offering, fully vesting upon USD$1,500,000 ($2,014,050) being raised. During the year ended March 31, 2015, the President of Connectus became a director of the Company. On December 31, 2015, the Company extended the contract to December 31, 2016. In consideration of the contract extension, the Company issued 93,000 common shares to Connectus as compensation, which has been recorded as professional fees on the statements of operations during the year ended March 31, 2016. On December 27, 2016, the Company extended the contract and expiry date of the warrants to December 31, 2017. On January 23, 2017 the Company approved the vesting of 100,000 warrants. Connectus assigned the warrants to Apollo Marketing, LLC.

 

On April 23, 2014, the Company entered into employment agreements with three officers of the Company effective July 1, 2014. The initial contracts contain minimum aggregate commitments of approximately $427,000 per year for three years and additional contingent payments of up to approximately $600,000 in aggregate upon the occurrence of a change of control. The employment agreements were amended whereby any salary from the commencement of the employment agreements has been waived until such a time when the Company is able to raise additional financing. Salaries will be earned and paid at the discretion of the Board.

 

On May 19, 2016, the Company signed a consulting agreement with an agent in connection with proposed placements of up to USD$10,000,000 ($13,427,000) in a combination of equity and or debt of the Company for a term of one year. Consideration payable under the consulting agreement include a non-refundable equity retainer of 100,000 common shares of the Company , a placement fee equal to 8% of the gross purchase price paid for equity of the Company, an administrative fee of 4% of the gross purchase price paid for equity, a placement fee of 4% of the gross purchase price paid for non-convertible debt and warrants to purchase common shares of the Company equal to 8% of the number of shares of common stock issuable by the Company upon exercise or conversion of any and all securities issued at each closing. On January 10, 2017, the Company entered into an addendum to the agreement signed on May 19, 2016 which provided for a grant of 900,000 warrants at an exercise price of USD$0.65 ($0.86) for a period of five years with a cashless exercise option. On August 15, 2017 the Company extended the contract for an additional year.

 

 21 

 

 

Algae Dynamics Corp.

Notes to the Condensed Interim Financial Statements

(Stated in Canadian Dollars)

(Unaudited)

June 30, 2017 and 2016

 

10.) Commitments and Contingencies (continued)

 

On February 23, 2017, the Company entered into a three year sponsored research contract with the University of Waterloo commencing on April 1, 2017. Under the terms of the agreement the Company will contribute $130,000 upon start date of the project, $130,000 on completion of Year 1 and $130,000 on completion of Year 2, plus the Company will make an in-kind contribution valued at $70,000 in each of the 3 years. Any patents initiated by the Company from the sponsored research will be assigned to the Company and in return the Company will pay the researcher $10,000 per patent filed, $40,000 per patent issued by the U.S. patent office, $50,000 per product after the first commercial sale and $50,000 per product once the gross sales exceed $1,000,000. As of June 30, 2017, the Company has not made any payments pursuant to this agreement. The payment schedule has been amended to match the cash flow from the capital raise being undertaken by the Company.

 

On March 13, 2017, the Company entered into a four year sponsored research contract with the University of Western Ontario commencing on April 1, 2017. Under the terms of the agreement the Company will contribute $210,000 upon execution of the agreement, $210,000 on completion of Year 1, $210,000 on completion of Year 2 and $210,000 on completion of Year 3, plus the Company will make an in-kind contribution valued at $62,500 in each of the 4 years. Any patents initiated by the Company from the sponsored research will be assigned to the Company and in return the Company will pay the researcher $10,000 per patent filed, $40,000 per patent issued by the U.S. patent office, $50,000 per product after the first commercial sale and $50,000 per product once the gross sales exceed $1,000,000. As of June 30, 2017, the Company has not made any payments pursuant to this agreement. A payment of $50,000 was made on July 28, 2017. The payment schedule has been amended to match the cash flow from the capital raise being undertaken by the Company.

 

On March 27, 2017, the Company entered into a one year agreement with Questrade, Inc. an Investment Dealer to provide guidance on the trading of the Company’s securities and guidance with respect to the promotion of the Company. The Company shall pay Questrade a monthly fee in an amount equal to USD$5,500 for consulting services rendered each month of the term. See Note 13.

 

On April 9, 2017, the Company signed a 12 month consulting agreement effective April 15, 2017 with an arm’s length organization, The Eversull Group Inc, to provide financial public relations, investor, shareholder, press relations and capital search consulting services. Terms of the agreement include the provision of 100,000 restricted shares annually, a minimum monthly retainer of USD$ 2,000 plus a 3% introduction fee for all sources of funding introduced by The Eversull Group, Inc. and accepted by the Company.

 

On May 8, 2017, the Company signed a consulting agreement with Carter, Terry & Company in connection with the proposed raising of capital in a combination of equity and/or debt of the Company for a term of two years. Terms of the agreement include the issuance of 150,000 restricted common shares on signing (see Note 8(a)) plus future consideration payable under the consulting agreement including a placement fee equal to 10% of the gross proceeds raised less than USD$1,000,000 and 8% for gross funds raised in excess of USD$1,000,000, plus the equivalent amount of restricted shares equal to 4% of the capital raised divided by the closing price of the stock on the date of close for a period of two years.

 

See also Note 13 with respect to the Questrade, Inc. claim.

 

 22 

 

 

Algae Dynamics Corp.

Notes to the Condensed Interim Financial Statements

(Stated in Canadian Dollars)

(Unaudited)

June 30, 2017 and 2016

 

11.) Related Party Transactions

 

Amounts receivable from an officer in the amount of $3,270 was recovered during the three month period ended June 30, 2017, from an amount of $17,656 previously offset by an allowance for doubtful accounts, leaving a remaining balance in the doubtful account of $14,386.

 

12.) Financial Instruments

 

(a) Liquidity risk

 

Liquidity risk is the risk that the Company will not have sufficient cash resources to meet its financial obligations as they come due. The Company’s liquidity and operating results may be adversely affected if its access to the capital market is hindered, whether as a result of a downturn in stock market conditions generally or matters specific to the Company. The Company generates cash flow primarily from its financing activities and advances from shareholders. As at June 30, 2017, the Company had cash of $1,553 (March 31, 2017 - $87) to settle current liabilities of $946,122 (March 31, 2017 - $897,442). All of the Company’s financial liabilities other than the warrant liability of $115,555 (March 31, 2017 - $236,200), the term loan of $50,796 (March 31, 2017 - $48,894), the convertible notes of $67,952 (March 31, 2017 - $26,076) a promissory note of $48,899 (March 31, 2017 - $16,456), and derivative liability of $217,763 (March 31, 2017 - $260,677) have contractual maturities of less than 30 days and are subject to normal trade terms. The Company regularly evaluates its cash position to ensure preservation and security of capital as well as liquidity.

 

In the normal course of business, management considers various alternatives to ensure that the Company can meet some of its operating cash flow requirements through financing activities, such as private placements of common stock, preferred stock offerings and offerings of debt and convertible debt instruments as well as through merger or acquisition opportunities. Management may also consider strategic alternatives, including strategic investments and divestitures. As future operations may be financed out of funds generated from financing activities, the ability to do so is dependent on, among other factors, the overall state of capital markets and investor appetite for investments in the cannabis industry and the Company’s securities in particular. Should the Company elect to satisfy its cash commitments through the issuance of securities, by way of either private placement or public offering or otherwise, there can be no assurance that the efforts to obtain such additional funding will be successful, or achieved on terms favorable to the Company or its existing shareholders. If adequate funds are not available on favorable terms, the Company may have to reduce substantially or eliminate expenditures or obtain funds through other sources such as divestiture or monetization of certain assets or sublicensing (where permitted) of certain rights to certain of the Company’s technologies or products.

 

 23 

 

 

Algae Dynamics Corp.

Notes to the Condensed Interim Financial Statements

(Stated in Canadian Dollars)

(Unaudited)

June 30, 2017 and 2016

 

12.) Financial Instruments (continued)

 

(b) Concentration of credit risk

 

Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash deposits. Cash deposits with a major Canadian chartered bank are insured by the Canadian Deposit Insurance Corporation up to $100,000. As at June 30, 2017, the Company held $1,553 (March 31, 2017 - $87) with a major Canadian chartered bank.

 

(c) Foreign exchange risk

 

The Company principally operates within Canada. The Company’s functional currency is the Canadian dollar and major purchases are transacted in Canadian dollars. Certain of the Company’s debt obligations are denominated in U.S. dollars. Management does not hedge its foreign exchange risk.

 

(d) Interest rate risk

 

As at June 30, 2017, the Company does not have any non-fixed interest-bearing debt. Management believes that the interest rate risk concentration with respect to financial instruments included in assets and liabilities has been reduced to the extent presently practicable.

 

(e) Derivative liability – warrant liability

 

In connection with consulting agreements, the Company granted warrants to purchase up to 1,175,000 common shares of the Company as disclosed in Note 8(b). The warrants have an exercise price of USD$0.04 ($0.052) for Connectus warrants, USD$0.65 ($0.85) for Midtown warrants and USD$0.50 ($0.65) for the investment place in June 2017. The Connectus warrants are exercisable at any time prior to December 31, 2017, the Midtown warrants are exercisable at any time prior to January 16, 2022 and the warrants for the investment undertaken in June are exerciseable prior to June 21, 2022. The warrants are accounted for as derivative liabilities because the exercise price is denominated in a currency other than the Company’s functional currency.

 

      Fair Value at       Fair Value Measurement Using
      June 30, 2017       Level 1       Level 2       Level 3  
Derivative liability – Warrants   $

115,555

    $ -     $ -     $ 115,555  

 

 24 

 

 

Algae Dynamics Corp.

Notes to the Condensed Interim Financial Statements

(Stated in Canadian Dollars)

(Unaudited)

June 30, 2017 and 2016

 

12.) Financial Instruments (continued)

 

(e) Derivative liability – warrant liability (continued)

 

The table below sets forth a summary of changes in the fair value of the Company’s Level 3 financial liabilities (warrant derivative liability) for the periods ended June 30, 2017 and March 31, 2017:

 

    Three months        
    ended     Year ended  
    June 30, 2017     March 31, 2017  
Balance at beginning of year   $ 236,200     $ 27,479  
Derivative instruments granted or vested     27,152       633,000  
Derivative instruments exercised     -       (55,321 )
Change in fair market value, recognized in operations as professional fees     (147,797 )     (368,958 )
Balance at end of period   $ 115,555     $ 236,200  

 

See Note 8 (b)

 

 25 

 

 

Algae Dynamics Corp.

Notes to the Condensed Interim Financial Statements

(Stated in Canadian Dollars)

(Unaudited)

June 30, 2017 and 2016

 

12.) Financial Instruments (continued)

 

(f) Derivative liability – conversion options

 

In connection with the Salamon promissory note and the convertible notes (Notes 6(a), (b) and (c)), the Company has determined that the conversion features are considered derivative liabilities due to the variable conversion prices associated with the notes and the fact that the conversion price is denominated in US dollars whereas the functional currency of the Company is the Canadian dollar. See Note 7.

 

      Fair Value at       Fair Value Measurement Using  
      June 30, 2017       Level 1       Level 2       Level 3  
Derivative liability – conversion options   $

217,762

    $ -     $ -     $

217,762

 

 

The table below sets forth a summary of changes in the fair value of the Company’s Level 3 financial liabilities (convertible note derivative liability) for the periods ended June 30, 2017 and March 31, 2017:

 

    Three months ended     Year ended
    June 30, 2017     March 31, 2017
Balance at beginning of period   $ 260,677       $ Nil  
Derivative instruments issued     19,166         253,318  
Change in fair market value, recognized in operations as fair value change in derivative liability     (62,081 )       7,359  
Balance at end of period   $ 217,762       $ 260,677  

 

 26 

 

 

Algae Dynamics Corp.

Notes to the Condensed Interim Financial Statements

(Stated in Canadian Dollars)

(Unaudited)

June 30, 2017 and 2016

 

13.) Subsequent Events

 

On April 19, 2017, the Company announced plans to form a joint venture corporation with Avanti Rx Analytics Inc. (ARA). The Company would own 96% of the joint venture and ARA would own 4%. As a result of signing the letter of Intent with Bonify on August 10, 2017 (details provided below) the Company will not be proceeding with the joint venture.

 

During the quarter ended June 30, 2017, the Company commenced a financing of up to USD$500,000, see Note 6 (c). The convertible notes include a provision that if the Company raises additional funds under more favourable terms during the life of the convertible note, then the more favourable terms will apply. The Company did raise $358,000 under more favourable terms, see details below, convertible notes.

 

 27 

 

 

Algae Dynamics Corp.

Notes to the Condensed Interim Financial Statements

(Stated in Canadian Dollars)

(Unaudited)

June 30, 2017 and 2016

 

13.) Subsequent Events (continued)

 

On August 8, 2017, the Company signed a non-binding Letter of Intent (LOI) with 6779264 Manitoba Ltd dba Bonify (“Bonify”). Bonify is a licensed producer, pursuant to the Access to Cannabis for Medical Purposes Regulations in Canada. In the LOI the Company and Bonify have outlined the following:

 

i)

The purchase and installation of cannabis oil extraction equipment with an estimated cost of $1,450,000 to be jointly agreed upon by the Company and Bonify with the equipment being located in Bonify’s facility. At the end of the agreement, full right and title to the equipment would be assigned to Bonify;

   
ii) The processing of cannabis material supplied by Bonify and other licensed producers in the oil extraction facility;
   
iii) The supply of cannabis oil and algae omega-3 oils to The University of Waterloo and University of Western Ontario to support the sponsored research agreements that the Company has in place with the two universities (See Note 10);
   
iv)

The sharing of direct expenses, and, after adjustment for the market value of cannabis material supplied by Bonify and third parties, sharing of revenues from the sale of cannabis oil and algae-cannabis oil products; and

   
v) The negotiation of a definitive agreement no later than September 30, 2017. The definitive agreement is still being negotiated.

 

Convertible Notes

 

Subsequent to June 30, 2017, the Company raised a total of USD$408,000 ($520,160) through the issue of convertible notes. The convertible notes, totalling USD$358,000 have a maturity of 60 days, an interest rate of 10%, a conversion price of USD$0.07 per share if the price on or around 15 days before maturity is less than US$0.10 or USD$0.10 per share if the closing price per share is USD$0.10 or above at the conversion dates. For the initial convertible note issued on July 25, 2017, of USD$50,000, the Company committed to issue 100,000 common shares as a commitment fee, the maturity is twelve months from the issue date, the interest rate is 12%, plus the Company granted 200,000 common share purchase warrants. . Each warrant is exercisable into one common share at USD$0.50 ($0.65) for a period of five years. See Note 6(c).

 

Part of the proceeds from the convertible notes has been used to repay the convertible notes payable to Salamon Partners LLC and GHS Investments. See Notes 6(a) and (b).

 

See Note 10 for the $50,000 payment made to the University of Western Ontario. 

 

 28 

 

 

Algae Dynamics Corp.

Notes to the Condensed Interim Financial Statements

(Stated in Canadian Dollars)

(Unaudited)

June 30, 2017 and 2016

 

13.) Subsequent Events (continued)

 

On August 15, 2017, the Company engaged a Canadian firm, Kernaghan and Partners Ltd. (the Agent) a fully regulated full service brokerage firm to conduct a capital raise in the Canadian market. In consideration of the services to be rendered the Agents shall receive on the closing date of the offering;

 

i) a work fee of $25,000;
   
ii) cash commission (the Agency Fee”) of 6% of the gross proceeds from the sale of common shares pursuant to the offering, except for sales to persons on the “President’s List”, in respect of which the commission shall be reduced to 2% of the gross proceeds received from such persons;
   
iii) broker warrants entitling the Agent to purchase, equal to the issue price, the number of common shares that is equal to 6% of the number of common shares sold pursuant to the offering, except for sales to persons on the “President’s List”, in respect of which the broker warrants shall entitle the Agent to purchase the number of common shares that is equal to 2% of the number of common shares sold to such persons. The broker warrants shall have a term of 2 years and an exercise price equal to the offering price of the common shares.

 

On October 24, 2017, the Company was named in Small Claims Court entitled Questrade, Inc. versus Algae Dynamics Corp. (the “Claim”).  The Claim seeks payment of $25,000 for payments allegedly owed under a Consulting Agreement with the Company in which Questrade was to provide certain financial advisory services.  The Company has filed a general denial of liability on the basis that services were not provided or alternately disputing the amount claimed. A hearing date of February 6, 2018 has been set.

 

Grant award

 

The Company, as the industry partner, is a participant in a Project Grant of up to $400,000 from the Mitacs Accelerate program, that will be delivered directly by Western University through eligible internships. The financial contribution by the Company which is $180,000 for this grant is part of the funding included in the research agreement the Company signed with the university and announced on March 13, 2017. To-date the Company has paid the initial of six installments to Mitacs, with the remaining installments being invoiced throughout the duration of the project. The balance of the $400,000 award ($220,000) will be provided by Mitacs. The project started on December 1, 2017 and is scheduled to operate for two (2) years. The extent of the announced award from Mitacs of $400,000 to be paid directly to the university is dependent on the funding provided by the Company and on the number of interns actually employed in the project.

 

On November 8, 2017, the Board approved the grant of 850,000 stock options for common shares to directors and officers of the Company (800,000) and external counsel (50,000). In addition, the Board approved the award of an aggregate of 1,050,000 common shares to three management personnel for services rendered, plus the Board cancelled an aggregate of 600,000 common shares awarded in a prior period to the three management personnel.

 

 29 

 

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 

Caution Regarding Forward-Looking Information

 

This following information specifies certain forward-looking statements of management of Algae Dynamics Corp. (the “Company”). Forward-looking statements are statements that estimate the happening of future events and are not based on historical fact. Forward-looking statements may be identified by the use of forward-looking terminology, such as “may,” “shall,” “could,” “expect,” “estimate,” “anticipate,” “predict,” “probable,” “possible,” “should,” “continue,” or similar terms, variations of those terms or the negative of those terms. The forward-looking statements specified in the following information have been compiled by our management on the basis of assumptions made by management and considered by management to be reasonable. Our future operating results, however, are impossible to predict and no representation, guaranty, or warranty is to be inferred from those forward-looking statements.

 

The assumptions used for purposes of the forward-looking statements specified in the following information represent estimates of future events and are subject to uncertainty as to possible changes in economic, legislative, industry, and other circumstances. As a result, the identification and interpretation of data and other information and their use in developing and selecting assumptions from and among reasonable alternatives require the exercise of judgment. To the extent that the assumed events do not occur, the outcome may vary substantially from anticipated or projected results, and, accordingly, no opinion is expressed on the achievability of those forward-looking statements. We cannot guaranty that any of the assumptions relating to the forward-looking statements specified in the following information are accurate, and, except as required by law, we assume no obligation to update any such forward-looking statements.

 

This Form 10-Q should be read in conjunction with the audited financial statements of the Company included in its Annual Report on Form 10-K for the year ended March 31, 2017, including the notes thereto and the risk factors identified therein. Quarterly results are not necessarily indicative of full-year results.

 

Company Overview

 

Algae Dynamics Corp (ADYNF) is focused on the development of proprietary research and products utilizing cannabis oil and algae oil. The original core of our product development strategy is the extraction of Omega-3 fatty acids from certain strains of algae with high concentrations of DHA to create various nutraceutical products. As a result of the many demonstrated health benefits of other botanical oils, most notably cannabis oil, we have developed a strategy aimed at developing products that combined the health benefits of algae and cannabis oils. Capitalizing on the burgeoning demand for cannabis oil and other smoke-free alternatives to marijuana consumption will help support ongoing initiatives to create and market research-driven product formulations.

 

Collaborating with prominent Canadian universities is a core part of our plan to bolster cannabis extraction expertise, develop premium products and add to our portfolio of intellectual property. Through our agreements with the University of Waterloo and the University of Western Ontario, the Company is focusing primarily on the use of extracts from cannabis oil and algae oil in the context of cancer as well as the development of new pharmacotherapies for mental health.

 

Near-term goals include expanding research and development work with existing and new Canadian universities, securing supply/service agreements with licensed producers, and submitting an application to Health Canada to become a licensed producer of medical marijuana and ultimately have a license to sell products derived from cannabinoids. The Company also owns a proprietary technology for the cultivation of low cost, highly pure algae biomass, which will be developed as a vertical integration strategy in the future to support the need to source algae oil for research-driven product formulations. The management team leading these initiatives has relevant experience ranging from public company management and process experience to successful fund raising and commercialization.

 

The Company has also formed a strong team of scientific and strategic advisors that complement ongoing R&D relationships and initiatives. With this strong foundation, we are positioned to execute on our plan to build a revenue-generating, sustainable opportunity in a rapidly expanding market.

 

Sponsored Research Programs

 

In order to support our new mission, we engaged two prominent Canadian universities to provide research and product development in the use of extracts from cannabis oil and algae oil in the context of cancer, and the development of novel pharmacotherapies for mental health, as follows:

 

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  Dr. Jonathan Blay, PhD, FRSB, FIBMS, Csci, CBiol (Professor of Pharmacy, University of Waterloo, Professor of Pathology, Dalhousie University), the University of Waterloo – to perform research and product development on cannabis oil and its constituents in the context of the development and treatment of the colorectum, pancreas, breast and prostate cancers.
     
Dr. Steven Laviolette, BSc, PhD (Addiction Research Group, Dept. of Anatomy & Cell Biology, Dept. of Psychiatry, Canadian Institute for Military and Veterans Health Research), University of Western Ontario - to perform research and product development on cannabis oil and its constituents in the context of depression, post-traumatic stress disorder, anxiety and schizophrenia.

 

Each research program is a sponsored research program in which the Company pays an agreed amount to each university and in return receives the benefits of the research and the right to acquire the associated intellectual property, based on an agreed fixed payment with no ongoing royalties. The sponsored programs run for three years at the University of Waterloo, at a cost of $600,000 over the three-year life, and for four years at University of Western Ontario, at a cost of $1,000,000 over the life of the program.

 

Collaboration and Supply Agreement

 

We have entered into a letter of intent with 6779264 Manitoba Ltd dba Bonify (“Bonify”) that will provide the Company with several important benefits. We and Bonify have agreed to work together in good faith to finalize definitive documents in a timely manner. Bonify currently holds a Cultivation License pursuant to the Access to Cannabis for Medical Purposes Regulations (“ACMPR”) in Canada with the capability to grow multiple strains of cannabis in its state of the art 320,000 square foot facility. In the letter of intent, we and Bonify agree as follows:

 

The purchase and installation of cannabis oil extraction equipment with an estimated cost of $1,450,000 to be jointly agreed upon by the Company and Bonify with the equipment being located in Bonify’s facility. At the end of the agreement, full right and title to the equipment would be assigned to Bonify;
   
The processing of cannabis material supplied by Bonify and other licensed producers in the oil extraction facility;
   
The supply of cannabis oil and algae omega-3 oils to The University of Waterloo and University of Western Ontario to support the sponsored research agreements that the Company has in place with the two universities (See Note 10);
   
The sharing of direct expenses, and, after adjustment for the market value of cannabis material supplied by Bonify and third parties, sharing of revenues from the sale of cannabis oil and algae-cannabis oil products; and
   
The negotiation of a definitive agreement no later than September 30, 2017. The definitive agreement is still be negotiated.

 

We believe that this relationship is the fastest and surest path to revenues and profits for the Company as the Company will be installing and operating the equipment at the Bonify facility. The term of the agreement is for 3 years from commencement of operations and may be extended by mutual agreement. Should the agreement not be extended we agree to transfer title to the equipment to Bonify. Bonify is currently in the process of obtaining its Sales License to sell cannabis-related products such as cannabis oil. The key benefits of the agreement to the Company are 1) the ability to supply cannabis oil to The University of Waterloo and University of Western Ontario for research purposes, and 2) the potential for a pathway to revenues much faster than if we simply applied for our own licenses. Our current target for commencement of operations is the fourth quarter after completion of necessary financing.

 

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Achievement of revenue for the Company under the licensing regime of Health Canada

 

Stage 1- Collaboration with an authorized Licensed Producer

 

While we believe that our agreement with Bonify, when fully operational, provides us with a pathway to revenues in the near-term, we also intend to apply for our own licenses – both a Cultivation License and a Sales License.

 

The Cultivation License allows the holder to:

 

  possess, produce, provide, ship, deliver, transport and destroy dried cannabis or cannabis oil;
     
  possess, produce, and destroy cannabis in its natural form, other than marijuana or cannabis oil, for the purpose of producing cannabis oil; and
     
  possess and destroy cannabis, other than marijuana or cannabis oil, for the purpose of conducting in vitro testing that is necessary to determine the cannabinoid content of marijuana or cannabis oil.

 

The Sales License allows the holder to sell dried marijuana and cannabis oil to:

 

  a client of the Company or an individual who is responsible for the client;
     
  a hospital employee, if the purpose is in connection with their employment;
     
  another Licensed Producer;
     
  a Licensed Dealer;
     
  the Minister of Health; and
     
  a person to whom an exemption relating to the substance has been granted under section 56 of the Controlled Drugs and Substances Act (CDSA).

 

The Cultivation Licence will also allow the Licensed holder to apply for an import permit to import dried marijuana cannabis as described by the ACMPR. The Cultivation Licence will also allow the Licensed holder to apply for an export permit to export dried marijuana or cannabis other than marijuana or cannabis oil, for the purpose of conducting in vitro testing that is necessary to determine the cannabinoid content of marijuana or cannabis oil. Last, the Cultivation Licence will allow the Licensed holder to ship dried marijuana or cannabis oil to a health care practitioner in the case referred to in subparagraph 130(1)(f)(iii) of the ACMPR.

 

The ACMPR also provide for licenses and import permits relating to fresh marijuana. The Licences, if received, will not include this permission until applied for separately and approved by Health Canada.

 

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The ACMPR provides that cannabis in its natural form, other than marijuana or cannabis oil, for the purpose of producing cannabis oil, may be provided, shipped, delivered or transported if it was obtained or produced for that purpose.

 

We do not require similar special licensing with respect to the extraction of Omega-3 oils from algae biomass and related sales.

 

Capital Requirement

 

In order to execute on our strategy as described above, we estimate an initial capital requirement of US$2.5 million to support activities over the following twelve months, including the following:

 

  Payment to the universities to support the sponsored research programs;
     
  Application to Health Canada for licensing under the ACPMR;
     
  Purchase and installation of oil extraction equipment at Bonify’s facility; and
     
  Working capital to support ongoing operations.

 

We have engaged Kernaghan and Partners, a registered full service brokerage firm in Toronto, and Midtown Partners & Co LLC, a registered broker/dealer in New York, to assist with raising the required capital.

 

Stage 2- Achievement of Licensed Producer status.

 

As part of the longer term strategy the Company will be submitting an application to become an Authorized Licensed Producer of Cannabis for Medical Purposes.

 

The ACMPR Licensing Process

 

The market for cannabis (including Medical Marijuana) in Canada is regulated by the Controlled Drugs and Substances Act (CDSA), the ACMPR, the Narcotic Control Regulations, and other applicable law. Health Canada is the primary regulator of the industry as a whole. The ACMPR aims to treat cannabis like any other narcotic used for medical purposes by creating conditions for a new commercial industry that is responsible for its production and distribution.

 

The table below provides a general overview of the licensing process as described by Health Canada:

 

  Summary
   
Step 1 Preliminary Screening: When Health Canada receives an application, preliminary screening is conducted to ensure that the application is complete. Any incomplete applications will be returned to the applicant, and complete applications are assigned an application numbers. The assignment of an application number indicates that the application has completed the preliminary screening stage.
   
Step 2

Enhanced Screening: After being assigned an application number, a more thorough review of the application is conducted to ensure that there is sufficient information to assess whether the requirement of the regulations are met. Specific elements given initial consideration include: the location of the proposed site; risks to public health, safety and security; the proposed security measures; and the credentials of the proposed quality assurance person to meet the good production requirements outlined in Subdivision D of the ACMPR. Health Canada will verify that the applicant has provided notice of the application to the senior official with the local government in the jurisdiction of the proposed site.

 

The applicant is responsible for ensuring that they are in compliance with all applicable provincial, territorial, and municipal legislation, regulations, and bylaws, including zoning restrictions, fire and electrical safety requirements, and waste management requirements.

 

At this step, Health Canada may request additional information that is relevant to the application.

 

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Step 3 Security Clearance: Once the screening of an application is complete, the security clearance forms for key personnel will be sent for processing. At this point, the Minister for Health will conduct criminal record checks and will review the relevant background of key personnel to assess whether the applicant poses a risk to the integrity of the control of the production and distribution of cannabis under the CDSA. The amount of time required to conduct mandatory security checks varies with each application.
   

Step 4

 

Review: Once all security clearances are obtained, an application will be thoroughly reviewed to validate the information provided. Given the extensive review process, applicants are generally required to communicate with Health Canada multiple times to clarify elements of their application. Health Canada may also request additional information.

 

A detailed review and assessment of physical security plans will be conducted at this stage. Applicants must meet a minimum of a level 7 (as defined in the Directive on Physical Security Requirements for Controlled Substances - Licensed Dealers Security Requirements for the Storage Of Controlled Substances) to be considered for a licence. It is a requirement that physical security comply with the Directive.

 

  Once Health Canada is satisfied that an application is ready for a pre-licence inspection, they will contact the applicant and identify information that needs to be confirmed before a pre- licence inspection can be scheduled. This includes, but may not be limited to, confirming how the applicant has indicated in their application that they would comply with Part 1, Division 1, Subdivision C (Security Measures) of the ACMPR.
   

Step 5

 

Pre-Licence Inspection: When Health Canada is satisfied of the prior steps and when the applicant has confirmed that the site has been fully built and security measures are in place, a Pre-Licence Inspection will be scheduled. The inspection may cover, but is not limited to: Security Measures, Good Production Practices, Packaging, Labelling and Shipping, Registration, and Record Keeping. The purpose of the inspection is to verify that the information submitted to Health Canada is accurate and to assess compliance with the applicable sections of the ACMPR prior to licence approval. Any identified deficiencies will be communicated to the applicant and must be addressed prior to a licence being issued.
   
Step 6

Licensing: Next, the results of the Pre-Licence Inspection are reviewed along with all of the information submitted by the applicant and any other additional relevant information. If it is determined that the issuance of the licence is not likely to create risks to public health, safety or security, including the risk of cannabis being diverted to an illicit market or use, and there are no other grounds for refusing the application, a licence will be issued.

 

Health Canada has introduced a graduated licensing process. Upon approval, applicants will first be issued a production licence. This will enable Health Canada inspectors to confirm that the first batch of marijuana produced meets the production standards and requirements outlined in the ACMPR.

 

The Licensed Producer’s first crop of marijuana will be inspected to establish whether the marijuana meets the Licensed Producer’s specified quality control standards and the Good Production Practices set out in Subdivision D of the ACMPR. Only once Health Canada is satisfied the Licensed Producer meets the requirements of the ACMPR will a licence be amended to allow sale to the public.

 

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Statutory Reporting Requirements

 

With respect to the management and administration of the Company, the ACMPR will require that:

 

  (a) In order to confirm any information submitted in support of an application for a licence or an amendment or renewal of a licence, an inspector may, at a time during normal business hours and with the reasonable assistance of the Company, inspect the site in respect of which the application was made.
     
  (b) If the Company experiences a theft of cannabis or an unusual waste or disappearance of cannabis that cannot be explained on the basis of normally accepted business activities, the Company must report the occurrence to a member of a police force within 24 hours after becoming aware of it and provide a written report to the Minister within 10 days after becoming aware of the occurrence.
     
  (c) The Company apply for and obtain the Minister’s approval before making a change involving the replacement or the addition of (i) the senior person in charge, (ii) the responsible person in charge and, if applicable, the alternate responsible person in charge, (iii) an officer or director, or (iv) an individual authorized to place an order for cannabis on behalf of the licensed producer.
     
  (d) The Minister be notified not later than five days after the event, if a person ceases to be an officer or director of the Company.
     
  (e) The Minister be notified not later than the next business day if the responsible person in charge of the Company ceases to carry out their duties and there is no person designated as an alternate responsible person in charge.
     
  (f) The Company notify the Minister, within five days after such change, of any change to the method used for keeping records or the telephone number, the facsimile number, or the email address for the Company’s site or each building within the site where the activities are conducted under the Cultivation Licence or the Sales Licence.

 

With respect to future clients of the Company and proposed products sold by the Company if granted the Licences, the ACMPR requires that:

 

  (a) In respect of fresh or dried marijuana or cannabis oil sold by the Company, the Minister be provided with a case report for each serious adverse reaction to the substance within 15 days after the day on which the Licensed Producer becomes aware of the reaction.
     
  (b) The Company annually prepare and maintain a summary report that contains a concise and critical analysis of all adverse reactions to fresh or dried marijuana or cannabis oil sold by the Company that have occurred during the previous 12 months (the serious adverse reaction reports and annual summary reports must be retained for a period of 25 years after the day on which they were made).
     
  (c) The Company report any new dried marijuana equivalency factor determined under section 79 of the ACMPR, and the method used to determine it, at least 10 days before the Company sells fresh cannabis, dried marijuana or cannabis oil, in respect of which the label referred to in section 84 or 88 of the ACMPR indicates the new factor, to a client.
     
  (d) The Company, if provided with the given name, surname, date of birth and gender of an individual by a member of a Canadian police force who requests information in the course of an investigation under the CDSA or the ACMPR, verify in a reasonable manner that the person requesting the information is a member of a Canadian police force. If the person is verified as a member of a Canadian police force, the Company must provide as soon as feasible, within 72 hours after receiving the request, the following information to that Canadian police force:

 

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  an indication of whether or not the individual is one of the Company’s clients or an individual who is responsible for one of the Company’s clients,
     
  in the case of a Company client, whether the client is registered with the Minister under Part 2 of the ACMPR and, if so, whether the client’s registration with the producer is for the purpose of obtaining an interim supply of fresh or dried marijuana or cannabis oil, marijuana plants or seeds, or both, and
     
  the daily quantity of dried marijuana that is specified in the medical document supporting the client’s registration or that is specified in that individual’s registration with the Minister made under Part 2 of the ACMPR.

 

  (e) The Company provide the Minister with any information that the Minister may require in respect of the records, documents and information referred to in Division 2 of the ACMPR, in the form and at the times that the Minister specifies.

 

Reporting Requirements from the Licences

 

In addition to the above general reporting requirements of the ACMPR, the Licences, if received, will require that the Company report the following additional information to the Office of Controlled Substances of Health Canada on a monthly basis, unless otherwise stated:

 

  (a) The total amount of dried marijuana (kg) tested, approved and ready for sale, produced by the Company during the reporting period.
     
  (b) The total amount of dried marijuana (kg) transferred to the Company from other Licensed Producers during the reporting period.
     
  (c) The total amount of dried marijuana (kg) sold by the Company during the reporting period to (i) registered clients, (ii) other Licensed Producers, (iii) Licensed Dealers, and (iv) other clients.
     
  (d) The total number of marijuana plants sold during the reporting period.
     
  (e) The number of clients of the Company at the end of the reporting period, including only those clients whose registrations were valid on the last day of the reporting period, and the total number new clients of the Company registered during the reporting period.
     
  (f) The number of clients who attempted to register with the Company during the reporting period, but could not be registered, regardless of the reason.
     
  (g) The number of clients who placed orders or tried to place orders with the Company that could not be filled during the reporting period, regardless of the reason.
     
  (h) The total amount of the following that the Company has in stock on the final day of the reporting period (i) number of harvested plants in the drying process, (ii) cannabis (kg) that has been dried but not tested, (iii) cannabis (kg) that has been dried and tested but not approved for sale, (iv) cannabis (kg) that has been dried, tested, approved and ready for sale, (v) cannabis (kg) held as samples, (vi) number of marijuana plants identified as ready to be destroyed, (vii) dried marijuana (kg) identified as ready to be destroyed, and (ix) number of live marijuana plants.

 

  (i) The total amount of dried marijuana (kg) that the Company imported and exported during the reporting period.

 

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  (j) The total amount of dried marijuana (g) lost and/or stolen during the reporting period.
     
  (k) The total amount of dried marijuana (g) destroyed during the reporting period, specifying the reason(s) and amount(s) of each (e.g., contaminated, past expiration date, recalled).
     
  (l) The total amount of waste marijuana (e.g., plants, leaves, twigs) destroyed during the reporting period (g).
     
  (m) The total number of shipments from the Company to the following in each province or territory during the reporting period (i) registered clients, (ii) other Licensed Producers, (iii) Licensed Dealers, and (iv) other clients.
     
  (n) The average and median daily amounts of dried marijuana (g) supported by healthcare practitioners to be used by the Company’s registered clients during the reporting period for all clients whose registrations were valid on the last day of the reporting period.
     
  (o) The average and median amounts of dried marijuana (g) shipped to the Company’s registered clients during the reporting period.
     
  (p) The 10 highest and ten lowest amounts of dried marijuana shipped to registered clients during the reporting period.
     
  (q) The total number of shipments of dried marijuana to registered clients categorized into 10-gram ranges increasing in size from 0 to 10 g to 141 to 150 g.
     
  (r) A list of all healthcare practitioners who provided a medical document for a registered client in the reporting period, the location of the healthcare practitioner and the number of medical documents the healthcare practitioner signed during the reporting period.
     
  (s) The amount of dried marijuana (kg) that the Company expects to produce during each month of the upcoming three months.
     
  (t) The amount of dried marijuana (kg) that the Company expects to have in inventory during each month of the upcoming three months.

 

Legal and Business Context

 

The Company’s business of the development of unique health products and pharmaceuticals that utilize hemp and cannabis oils is rigorously regulated.

 

Legal access to medicinal cannabis or medical marijuana has been a gradual and regulated process in Canada, which started as early as 1999 with the granting of exemptions under the Controlled Drugs and Substances Act (Canada). Following successful court actions in which patients reliant on medical marihuana won legal recognition of their rights to access marihuana as a medicine, the Federal Government implemented the Marihuana Medical Access Regulations (MMAR) in 2001. The MMAR created an initial regime for individuals with a prescription from their health care practitioner in the required form, to possess and use medical marihuana which they grew themselves, or which they purchased from designated producers or a Health Canada supplier.

 

In general, this regime of supply was restrictive, and faced continuing court challenges from users, eventually leading to the implementation of the Marihuana for Medical Purposes Regulations (MMPR) in June 2013, providing for an expansion of supply based on a regulated private industry of licensed producers of medical marihuana.

 

Over time, court challenges were also mounted to the restrictions in the MMPR, which initially restricted the products made available by Licensed Producers to only dried marihuana. In 2015, the Supreme Court of Canada held that the restriction making only dried medicinal marihuana available to patients was unconstitutional. In response, the Federal Government broadened the scope of available licenses for Licensed Producers to include the production and sale of cannabis oils as well as fresh marihuana leaves and buds.

 

The current ACMPR provides a more advanced and rigorous regulatory regime for the production, distribution and sale of medical marihuana in Canada, and regulates and contemplates the sale of medical marihuana by Licensed Producers to jurisdictions outside of Canada where the use and sale of medical marihuana and derivatives thereof are legally sanctioned.

 

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Liberalizing Regulatory Environment and Competitive Conditions

 

The ACMPR, like prior regulations, requires patients seeking medical marihuana to obtain medical approval from their health care practitioner and to provide a medical document to a Licensed Producer. However, the ACMPR provisions have simplified the requirements of the MMPR, offering easier access to medical marihuana in Canada.

 

According to Health Canada, more than 167,000 patients had enrolled with Licensed Producers under the ACMPR regime by March 31, 2017. Health Canada also indicates that, as of March 31, 2017, the average amount of dried marihuana for medical purposes authorized per client was 2.4 grams per day. For further information, see the Health Canada website at:

 

http://www.hc-sc.gc.ca/dhpmps/marihuana/info/market-marche-eng.php.

 

Further information has recently been released by Canada’s Parliamentary Budget Officer (the “PBO”) in its November 1, 2016 report, which estimates that, in 2018, an estimated 4.6 million individuals aged 15 and over will use cannabis at least once, representing 655 metric tons of cannabis. This number could rise to 5.2 million individuals by 2021, representing 734 metric tons of cannabis. The PBO stated that the pre-tax price of legal cannabis is projected to be between $6.67 and $8.33 per gram, with a mid-point estimate of $7.50. For further information, see “Legalized Cannabis: Fiscal Considerations”, authored by the Office of the PBO and dated November 1, 2016.

 

Recent Canadian developments on the process for the legalization of cannabis.

 

Task Force Report

 

The Task Force on Cannabis Legalization and Regulation (the “Task Force”) appointed by the Federal Government recently released its report entitled “A Framework for the Legalization and Regulation of Cannabis”, dated November 30, 2016 (the “Report”). The Task Force makes a number of recommendations in the Report that are relevant to the market for recreational marihuana and, in particular, recommends that the legislation and regulations ultimately put in place by the Federal Government, among other things, do the following:

 

  set a national minimum age of purchase of 18;
     
  apply comprehensive restrictions to the advertising and promotion of cannabis and related merchandise;
     
  allow limited promotion in areas accessible by adults, similar to those restrictions under the Tobacco Act (Canada);
     
  require plain packaging for cannabis products that only display the producer company name, strain name, price, amounts of THC and cannabidiol (CBD), and warnings and other labelling requirements;
     
  impose strict sanctions on false or misleading promotion as well as promotion that encourages excessive consumption, where promotion is allowed;

 

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  impose requirements to protect children;
     
  impose a price and tax scheme based on potency to discourage purchase of high-potency products;
     
  prohibit mixed products, for example cannabis-infused alcoholic beverages or cannabis products with tobacco, nicotine or caffeine; and
     
  allow for personal cultivation for non-medicinal purposes of up to four plants per residence subject to additional local and safety requirements.

 

Of particular importance, the Task Force recommended that the Federal Government:

 

  continue to regulate the production of cannabis and its derivatives, drawing on the current medicinal marihuana production regime;
     
  use licensing and production controls to encourage a competitive market; and
     
  implement a tracking system to prevent diversion and to allow for product recalls.

 

A full copy of the Report can be found at: http://healthycanadians.gc.ca/task-force-marijuana-groupeetude/framework-cadre/index-eng.php.

 

Legislation introduced to Parliament by the Government of Canada in April 2017

 

The Government of Canada has introduced Bill-45 (Cannabis Act) which is an Act respecting cannabis and to amend the Controlled Drugs and Substances Act, the Criminal Code and other Acts.

 

The proposed Cannabis Act would create a strict legal framework for controlling the production, distribution, sale and possession of cannabis across Canada.

 

The Act seeks to:

 

  restrict youth access to cannabis
     
  protect young people from promotion or enticements to use cannabis
     
  deter and reduce criminal activity by imposing serious criminal penalties for those breaking the law, especially those who import, export or provide cannabis to youth
     
  protect public health through strict product safety and quality requirements

 

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  reduce the burden on the criminal justice system
     
  provide for the legal production of cannabis to reduce illegal activities
     
  allow adults to possess and access regulated, quality controlled legal cannabis
     
  enhance public awareness of the health risks associated with cannabis

 

The current program for accessing cannabis for medical purposes would continue under the new Act. Cannabis will remain illegal as the bill moves through the legislative process. If it is approved by Parliament, the bill could become law with a target date of no later than July 2018.

 

Current Status of the legislation

 

In a statement by Prime Minister Justin Trudeau reported by the Toronto Star on Monday June 19, 2017, the Prime Minister stated - The federal government is staying firm on its plan to legalize marijuana by next summer, even if it has to “backstop” provinces that aren’t ready to distribute cannabis or tax it. Worries about the readiness for legalization were aired Monday when a meeting of federal and provincial finance ministers ended with no clear agreement on a coordinated strategy to tax cannabis or even on the principles to guide how it should be taxed. Indeed, behind the scenes several provinces appealed to Ottawa to delay legalization to provide more time to prepare the myriad law enforcement and health moves required by the change. But Ottawa won’t budge on its deadline to legalize marijuana by July 2018, a fact Prime Minister Justin Trudeau made clear Monday. “We gave everyone lots of time,” Trudeau said on Parliament Hill. “We’ve been working for a long time with all the provinces, with municipalities. It is time to move on.” Federal Finance Minister Bill Morneau says the approaching deadline to legalization should spur the work necessary to make it a reality. “We know that to get things done, we need to set a timeline. That’s exactly what we’ve done,” Morneau told reporters after the meeting.

 

Markets

 

We believe that our focus on development of product formulations that utilize both cannabis oil and algae is a niche strategy that will give us a unique market position. While we believe that this strategy is a natural extension of existing, rapidly growing markets, there is limited data available to measure the market opportunity. With that in mind, what follows is a discussion about the cannabis oil market and the algae oil market.

 

While we are aware of developments in the United States regarding the liberalization in certain states regarding recreational and medicinal marijuana, continuing legal uncertainty has led management to focus exclusively on the Canadian market.

 

Market for Cannabis Oil

 

The Canadian oil extraction marketplace is forecast to grow from C$1 million in 2015 to C$1.7 billion in 2020, assuming full legalization in 2018. In terms of conversion from dried marijuana to extracts/oil, due diligence has been conducted on the Colorado market, finding that 45% of dried marijuana users would eventually convert to marijuana extracts/oil. The Company assumes the market would gradually reach an approximate 45% conversion rate by 2018. Source: Mackie Research Capital Corporation, April 8, 2016 – MRCC Estimates

 

CIBC World Markets issued a report in January 2016 that provided some early estimates of the size of the Canadian recreational marihuana market (to be legalized by July 1, 2018). Using the legalized markets in the States of Colorado and Washington as a comparison, it estimated the Canadian recreational marihuana market is in the broad range of $5 billion to $10 billion per year. This compares with estimated annual Canadian liquor sales of between $5 billion and 8.7 billion according to Deloittes. Canaccord Genuity estimates that the number of marihuana users in the first year following the legalization of marihuana will be approximately 4,000,000. Even as an early estimate, this indicates a recreational market size in the order of 4 to 8 times the size of the medical marihuana market in Canada. (please, see the link for complete report)

 

http://research.cibcwm.com//economic_public/download/eijan16.pdf.

 

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Market for Algae Oil

 

The market data for algae oil presented below is brief since our plan is to utilize algae oil in our products largely to the extent that it complements our products that contain cannabis oil. Whereas until recently, our intention was to commercialize our BioSilo® algae cultivation system for the purpose of selling bulk algae oil, as well as algae biomass, to global markets, our current intention is to utilize the BioSilo system to the extent required to support our internal needs for cannabis/algae oil blends. Any algae oil that is surplus to our mission would be made available to other markets.

 

EPA (eicosapentaenoic acid) and DHA (docosahexaenoic acid) are long-chain omega-3 fatty acids. Studies have shown that EPA and DHA are important for proper fetal development, including neuronal, retinal, and immune function. EPA and DHA may affect many aspects of cardiovascular function including inflammation, peripheral artery disease, major coronary events, and anticoagulation. EPA and DHA have been linked to promising results in prevention, weight management, and cognitive function in those with very mild Alzheimer’s disease. Source: Advances in Nutrition -An International Review Journal January 2012.

 

(DHA) Algae oil prices currently trade in the range of $60 to $90 per kilogram today depending on DHA concentration and country of origin, however, algae oil typically sells for $70 to $75 per kilogram. (source: F & S May 24th. 2016).

 

The opportunity in the global algae market stood at US$608.0 million in 2015 and is projected to be worth US$1.1 billion by 2024, growing at an annual rate of 7.39% therein. By volume, the market is poised to expand at a 5.32% CAGR between 2016 and 2024. Source: Transparency Market Research (TMR) Sept 20, 2016

 

Algae Used Extensively for DHA Production in Healthcare and F&B Sectors

 

Based on application, DHA production takes the lead in the global algae market and is expected to retain its lead throughout the forecast period. Algal biomass is most extensively used in the production of DHA, which is used in the healthcare, pharmaceutical, and food and beverages sectors. Within this segment, the pharmaceutical application sub-segment held a larger share of just under 28% in 2016, which is expected to decline over the coming years to make room for the protein sales sub-segment.

 

Sales and Distribution

 

We intend to develop marketing channels including but not limited to website promotion, medical doctors, product distributors, as appropriate and in compliance with the regulatory requirements.

 

Initially, we intend to sell our product formulations mainly through Bonify, our collaboration and raw material supply partner. When we have received our Sales License from Health Canada, we expect to broaden our sales and distribution channels to include patients, medical doctors, and product distributors.

 

The Company intends to build brand awareness by working with brand/marketing management professionals, specializing in the medical health market, to have packaged products available for sale to customers.

 

Marketing Strategies and Competition

 

Advertising and marketing of medical marihuana in Canada is regulated by the Food and Drugs Act (Canada) and the Narcotic Control Regulations issued under the Controlled Drugs and Substances Act (Canada). Licensed Producers are strictly prohibited from advertising marihuana products or promoting their use.

 

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Our marketing activities will be focused on the promotion of the Company and increasing its visibility within the marketplace. Those efforts will include working with numerous client education centers (patient aggregators), which will review the available research data provided by the universities on medical cannabis oils and products available to clients. We believe this scientific data will help clients make educated decisions.

 

We believe we will have significant advantages in the market that will include multiple strain selection and consistently-produced cannabis oil products backed by scientific research that supports the improved effectiveness of each treatment.

 

We are actively preparing to respond to increased market demand that is expected to occur following the coming into force of proposed legislation to legalize and regulate recreational marihuana. We intend to participate fully in the legalized recreational marihuana marketplace, subject to compliance with applicable regulatory requirements.

 

According to Health Canada, there are currently 54 Licensed Producers in total and of these, just over 30 hold Sales Licenses. For further information, see the Health Canada website at: http://www.hc-sc.gc.ca/dhp-mps/marihuana/info/list-eng.php

 

Cannabinoids and Omega-3

 

Cannabis by itself has long been used for medical purposes and in recent decades has gained significant traction in becoming a common and preferred treatment for specific ailments. Cannabis is one of the fastest growing industries in North America. The Company’s new strategic initiative will seek product development and formulation opportunities that combine the benefits of algae and cannabis oils.

 

The Company’s core product development strategy has been the production of high volume specific algae species and extraction of Essential Fatty Acids (EFAs) which is the foundation of the endocannabinoid system (ECS). The ECS is a group of endogenous cannabinoid receptors located in the mammalian brain and throughout the central and peripheral nervous systems, consisting of neuromodulatory lipids and their receptors. The extracted algae Omega 3 oil with high concentrations of DHA is used as a health supplement product. In light of the potential synergies, the Company has developed its strategy which is aimed at developing new products and formulations that combine the health benefits of algae and cannabis oils.

 

Health Benefits of Algae Omega-3 and Cannabis

 

The following are some of the health benefits of algae and cannabis that the Company intends to research further to potentially combine into synergistic products:

 

Algae Omega-3   Cannabis
Detoxes heavy metals and toxins   Reduces stress and anxiety
Supports immune system   Reduces glaucoma and prevents macular degeneration
Fights cancer   Prevents certain cancers
Detoxifies radiation and chemotherapy   Relives pain
Lowers cholesterol and blood glucose levels   Increases appetite
Improves cardiovascular function   Stimulates antioxidant processes
Improves cognitive functioning   Fights multiple sclerosis and schizophrenia
Fights Alzheimer’s disease   Fights neurodegenerative disorders
Reduces antiplatelet effects   Reduces migraines and headaches
Reduces major coronary events   Fights epilepsy
Acts as an anti-inflammatory agent   Fights obesity and metabolic syndrome
Improves memory   Fights anorexia and osteoporosis

 

Research and Product Development Relationships and Scientific Advisors

 

Dr. Jonathan Blay, PhD, FRSB, FIBMS, Csci, CBiol (Professor of Pharmacy, University of Waterloo, Professor of Pathology, Dalhousie University), the University of Waterloo - performs research and product development on cannabis oil and its constituents in the context of the development and treatment of the colorectum, pancreas, breast and prostate cancers.

 

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Research/Expertise:

 

  Tumour microenvironment of solid cancers (colorectal carcinoma);
     
  Mechanisms of metastasis and its regulation by proteins at the cell surface; and
     
  Development of drugs (both synthetic and natural product-derived) that interfere with cancer metastasis.

 

Dr. Blay’s research group applies a range of techniques in molecular and cellular biology to understand how cell behavior and the action of existing anticancer drugs are affected by the unique physiology of the cancer. This research involves investigations of chemokine pathways, and tumor-initiating cells; as well as the capacity of both synthetic and natural product-derived agents to interfere with the steps that favor metastasis. Researchers in the group identify novel pathways that may be the targets for future anticancer drugs, both derived from natural products and synthesized with the aid of colleagues through molecular design. The goal is to perform fundamental cancer-related research on botanical oils and their constituents which will carry out studies relating to the cellular safety and known cancer-related potential of components within the oils.

 

His full profile may be seen on the University of Waterloo, website at

 

https://uwaterloo.ca/:https://uwaterloo.ca/pharmacy/people-profiles/jonathan-blay

 

Dr. Steven Laviolette, BSc, PhD (Addiction Research Group, Dept. of Anatomy & Cell Biology, Dept. of Psychiatry, Canadian Institute for Military and Veterans Health Research), University of Western Ontario - performs research and product development on cannabis oil and its constituents in the context of depression, post-traumatic stress disorder, anxiety and schizophrenia.

 

Research/Expertise:

 

Dr. Laviolette’s research interests explore the interface between neurobiology, psychology and emotion by using an integrative combination of in vivo neuronal electrophysiology and behavioral neuropharmacology. At the general level, Dr. Laviolette is interested in exploring the neurobiological mechanisms that control how the brain processes emotionally salient information and how disturbances in these basic neural processes may lead to disorders such as addiction and schizophrenia

Dr. Laviolette’s investigations into the neurobiology of addiction have focused on nicotine and opiates, both of which represent highly addictive substances and act on pathways in the brain that control reward, motivation and learning. Dr. Laviolette’s research group has characterized and identified specific regions in the mammalian brain that control the ‘switch’ from the non-addicted state, to the addicted state following exposure to drugs of abuse. Their ongoing research seeks to precisely define and identify the neurobiological mechanisms that control the addiction process at the behavioral, molecular and single neuron levels of analysis.

In addition, Dr. Laviolette’s research group is interested in exploring the neuronal mechanisms of emotional associative learning both in single neurons and in specific brain circuits. They have focused on the roles of the endocannabinoid system and specific dopamine receptor populations in the processing of emotionally salient information. Their ongoing research seeks to examine how disturbances in these brain receptor substrates may underlie the distorted sensory processing and emotional associative learning observed in individuals with schizophrenia.

 

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His full profile may be seen on the University of Western Ontario, website:

 

www.uwo.ca:http://www.schulich.uwo.ca/anatomy/people/bios/faculty/laviolette_steve.html

 

Dr. Kirsten Muller (PhD) – Lead Phycologist

 

Over 10 years’ experience researching and cultivating algae. Currently Associate Professor at the University of Waterloo and Associate Director of the Canadian Phycology Culture Centre (CPCC), which is housed within her laboratory at the University of Waterloo (500 species). She has authored over 25 papers in leading phycology journals and has received many national and international research awards. Dr. Muller won The Luigi Provasoli Award in recognition of authoring the outstanding paper published in the Journal of Phycology (Phycological Society of America) during 2011.

 

Dr. Brendan McConkey (PhD) – Oil Analysis

 

Over 7 years’ research experience as Associate Professor at the University of Waterloo. His areas of expertise include proteomics, biochemistry, toxicology, and computational biology. Research emphasis has been on interdisciplinary approaches that combine biology, chemical engineering, and computational research.

 

BioSilo®

 

Algae Dynamics has engineered a proprietary algae production technology, the Algae Dynamics BioSilo®, which maximizes growth and purity, while minimizing its footprint through a modular design. It allows us to cultivate a wide variety of algae species tailored to the nutrient and purity requirements of our prospective customers. BioSilo® is a novel method of cultivating algae that combines the positive features of open pond systems with those of enclosed photobioreactor algae production systems. The system produces a continuous supply of ultra-pure algae biomass in high volumes. The design’s small footprint and scalability results in very low maintenance cost. The BioSilo ® is capable of producing a variety of species, including Chlorella and algae suited for Omega-3 rich Algae oil.

 

Intellectual Property

 

Our intellectual property currently pertains to the legacy business plan of commercialization of our BioSilo algae cultivation system. The development of BioSilo is commercially relevant in the context of our missions of developing unique products that contain cannabis and algae oils.

 

The following is our approach to intellectual property protection historically. Firstly, a United States Patent (US 8,800,202 B2) Bioreactor was issued August 12, 2014, a second US patent (US 14/334,909) has been filed and a Patent Application (CA 2,735,635) on the same claims as the U.S. patent has been filed for Canada.

 

The patent abstract is: “Biomass production apparatus is disclosed and comprises a stack of trays, each tray, in use, being in receipt of a respective layer of liquid, the layers being spaced apart from one another such that each layer has associated therewith a respective headspace. Light sources are provided for each layer and are disposed in the headspace associated with said each layer, to illuminate, at least in part, said each layer”.

 

Secondly, significant know-how and proprietary in-house knowledge were acquired during development at the University of Waterloo, with the result that the engineering component of intellectual property related to the BioSilo® is a significant part of the “secret sauce”. As well, the Company has identified proprietary algae species isolated by phycology (the study of algae) scientists at the University of Waterloo, Drs. K. Muller and B. McConkey. Algae Dynamics has exclusive access to these species. These species which are not genetically modified have been selected for their high nutrient values.

 

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Critical Accounting Policy and Estimates

 

Our Management’s Discussion and Analysis of Financial Condition and Results of Operations section discusses our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. On an on-going basis, management evaluates its estimates and judgments, including those related to revenue recognition, accrued expenses, financing operations, and contingencies and litigation. Management bases its estimates and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. The most significant accounting estimates inherent in the preparation of our financial statements include estimates as to the appropriate carrying value of certain assets and liabilities which are not readily apparent from other sources. In addition, these accounting policies are described at relevant sections in this discussion and analysis and in the notes to the financial statements included in this Quarterly Report on Form 10-Q for the period ended June 30, 2017.

 

All results are presented in Canadian dollars ($) unless otherwise stated.

 

The following discussion and analysis should be read in connection with the Company’s financial statements and related notes thereto, as included in this quarterly report on Form 10-Q.

 

The following is management’s discussion and analysis of certain significant factors that have affected our financial position and operating results during the periods included in the accompanying financial statements, as well as information relating to the plans of our current management.

 

Results of Operations and Going Concern

 

We are an early stage company with a limited operating history, and we have not begun s to commercialize our products. As a result, we will need to generate significant revenues to achieve and maintain profitability. If our revenues grow slower than anticipated, or if operating expenses exceed expectations, then we may not be able to achieve profitability in the near future or at all, which may depress our stock price. These circumstances raise substantial doubt as to the ability of the company to meet its obligations as they come due and accordingly, the appropriateness, ultimately, of the use of accounting principles applicable to a going concern. The accompanying financial statements do not include any adjustment that might be necessary if the Company is unable to continue as a going concern.

 

We continue to rely on advances, sale of equity, short term bridge loans to fund operating shortfalls and do not foresee a change in this situation in the immediate future. There can be no assurances that we will continue to be able to access advances and sell equity, without which we will not be able to continue operations. As a result of the bridge financing that is currently being completed and advances from members of management and their families, the Company has adequate capital resources to fund its operations through to the end of January 2018. The Company is currently undertaking a raise via private placement or direct offering to the public of equity in our Company in order to fund operations going forward.

 

The Company is projecting that $2 to $3 Million is required to implement the first phase of the business plan. The initial funding is expected to be comprised of a combination of debt and equity.

 

The financing will provide working capital for the Company to execute its long term plan as well as the purchase and installation of the oil extraction equipment at the Bonify facility in order to facilitate the generation of revenue.

 

If the funding from the private placement or direct offering is not available in a timely manner then management will continue foregoing salaries and operations will be scaled back to operate within the funds available. In the normal course of business, management considers various alternatives to ensure that the Company can meet some of its operating cash flow requirements through financing activities, such as private placements of common shares, preferred share offerings and offerings of debt and convertible debt instruments as well as through merger or acquisition opportunities. Management may also consider strategic alternatives, including strategic investments and divestitures. As future operations may be financed out of funds generated from financing activities, the ability to do so is dependent on, among other factors, the overall state of capital markets and investor appetite for investments in the cannabis industry and the Company’s securities in particular. Should the Company elect to satisfy its cash commitments through the issuance of securities, by way of either private placement or public offering or otherwise, there can be no assurance that the efforts to obtain such additional funding will be successful, or achieved on terms favorable to the Company or its existing shareholders. If adequate funds are not available on favorable terms, the Company may have to reduce substantially or eliminate expenditures or obtain funds through other sources such as divestiture or monetization of certain assets or sublicensing (where permitted) of certain rights to certain of the Company’s technologies or products.

 

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For the three months ended June 30, 2017 and 2016

 

Results of Operations and Going Concern

 

We are an early stage company with a limited operating history, and we have not begun to commercialize our products. We have incurred operating losses since our inception in October 2008, and we expect to continue to incur operating losses for the foreseeable future. At June 30, 2017, we had an accumulated deficit of $6,231,297. For the quarters ended June 30, 2017 and 2016, we had a net loss attributable to common stockholders of $112,466, and $341,437, respectively. The more significant expenditures decreased include professional fees which decreased by $171,259 and stock based compensation which decreased by $132,913 during the 3 month period ended June 30, 2017 compared to June 30, 2016. As a result of the Company being in a loss position, we will need to generate significant revenues to achieve and maintain profitability. If our revenues grow slower than anticipated, or if operating expenses exceed expectations, then we may not be able to achieve profitability in the near future or at all. These conditions create an uncertainty as to our ability to continue as a going concern.

 

Results of Operations

 

Revenues

 

We had no revenues for the three months ended June 30, 2017 and 2016 respectively.

 

Operating Expenses

 

The operating expenses decreased in the three month period ended June 30, 2017 $112,466 compared to the same period of 2016 $341,437. This substantial decrease was a result of decreases in professional fees and stock based compensation and the scaling back of operations pending the receipt of financing to continue the business plan. Upon receipt of financing we expect our operating expenses to increase substantially as operating activities are appropriately funded.

 

Other Expenses

 

Nil

 

Net Loss

 

The Company recognized a net loss of $112,466 for the three month period ended June 30, 2017 as compared to a net loss of $341,437 for the same period of 2016. A number of initiatives have been accomplished during the three month period:

 

 

On April 15, 2017 the Company engaged The Eversull Group to provide assistance with the communication to shareholders.

     
 

On April 19, 2017 the Company signed a joint venture agreement with ARA – Avanti Rx Analytics Inc. (ARA) to provide cannabis extraction services. With the signing of the letter of Intent with Bonify the Company will not be proceeding with the ARA joint venture initiative.

     
 

On May 8, 2017 the Company signed a Memorandum of Understanding (MOU) with Bonify for Strategic Collaboration, Material Supply and Product Marketing. Subsequent to the end of the quarter on August 8, 2017 , the MOU was turned into a Letter of Intent to complete a definitive agreement by September 30, 2017; however, the negotiations are still in process.

 

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On May 8, 2017 the Company engaged Carter, Terry and Company an Atlanta based firm to act as a Financial Advisor and Placement Agent to raise capital. Subsequent to the end of the quarter the Company strategically decided to initiate the process to raise capital in the Canadian market as well the intent is to submit an application to be listed on the Canadian Securities Exchange. In order to facilitate this process the Company engaged a registered Toronto based broker dealer to assist with this this process. On August 15, 2017 the Company signed an engagement letter with Toronto based Kernaghan and Partners Ltd. a registered full service broker dealer to assist with the capital raise in the Canadian market

     
  On June 19, 2017, the Company signed a three month contract with Network News Wire to increase brand awareness, to be more transparent and to educate our shareholders about the benefits of cannabis and algae oils for health.
     
 

During the quarter the Company initiated a capital raise for bridge financing to meet the Company’s immediate cash flow requirements until the longer term capital raise being undertaken by Kernaghan and Partners Ltd. takes place. During the quarter USD$50,000 was raised under a bridge financing program and subsequent to the end of the quarter a further USD$408,000 (C$520,160) has been raised.

     
  Subsequent to the end of the quarter a portion of the bridge financing was utilized to pay the initial $50,000 to Western University under the terms of the sponsorship agreement.

 

Liquidity and Capital Resources

 

Net cash used by operating activities was $43,241 and $90,446 for the three month periods ended June 30, 2017 and 2016, respectively. The Company had a working capital deficiency of $856,489 as of June 30, 2017 compared to $852,514 as of March 31, 2017. While the Company continues to incur substantial operating losses, a substantial portion of the operating losses reflect expenses which have been satisfied through the issuance of shares.

 

Furthermore, given the cash shortages the Company has delayed paying trade creditors and professionals pending receipt of expected funds from financing activities.

 

We do not at present have any material commitments for capital expenditures. However, should we execute our business plan as anticipated, we would incur substantial capital expenditures and require financing in addition to the amount required to fund our present operation. When the agreement is completed with Bonify (as discussed under Item 2 – Management’s Discussion and Analysis of Financial Conditions and Results of Operations subsection Collaboaion and Supply Agreement) there will be a potential commitment up to $1,450,000 for capital purchases. In addition, the Company has a commitment to pay under the terms of the Sponsored Research Programs ($340,000 annually), as referenced under Item 2 – Management Discussion and Analysis of Financial Conditions and Results of Operations. The universities have agreed to match the payments under the sponsored research agreements to the cash flow from the cash flow from the capital raise currently being undertaken by the Company.

 

Convertible Note Issued to Teewinot Life Sciences Corporation

 

 

Effective as of October 27, 2017, the Registrant entered into a definitive Note Purchase Agreement with Teewinot Life Sciences Corporation (“Teewinot”) pursuant to which Teewinot invested USD$250,000 in the Registrant in the form of a 10% Senior Convertible Note (the “Note”). The Note converts into common shares automatically on the 45th day after issuance at USD$0.10 per share; provided that if the closing price of the common shares on December 11, 2017 is less than USD$0.10 the then conversion price is adjusted to USD$0.07 per share. The Notes are part of an offering of USD$500,000 of similar notes. The Registrant had previously issued USD$208,000 of similar notes to other investors.

     
  subsequent to the end of the quarter, the bridge financing raised was used to pay the Promissory Note outstanding to Salamon Partners LLC,maturity USD$50,000 at 12% due August 15, 2017. In addition, the Convertible Note due to GHS Investments, LLC was paid.

 

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Additional financing

 

We continue to rely on advances and sale of equity to fund operating shortfalls and do not foresee a change in this situation in the immediate future. There can be no assurances that we will continue to be able to access advances and sell equity, without which we will not be able to continue operations. As a result of bridge financing which has been completed to date (USD$50,000, C$66,550 during the quarter and USD$408,000 (C$520,160) subsequent to the quarter ending) and advances from members of management and their families, the Company has adequate capital resources to fund its operations through to the end of February 2018. The Company has commenced the process to raise via private placement or direct offering to the public of equity in our Company as early as feasible in order to fund operations going forward.

 

The execution of the business plan has been slowed until the appropriate commitments have been made for funding. In order to move forward the Company entered into an agency agreement with Midtown Partners LLC, a registered broker/dealer based in New York and with Kernaghan and Partners Ltd., a Toronto based registered full service broker with the objective being to raise up to $3 million. The Company is projecting that $2 to $3 million is required to implement the first phase of the business plan. The initial funding is expected to be comprised of a combination of debt and equity.

 

The financing will provide working capital for the Company to execute its long term plan as well as the funds to implement the purchase and installation of the oil extraction equipment at the Bonify facility in order to facilitate the generation of revenue.

 

If the funding from the private placement or direct offering is not available in a timely manner, then management will continue foregoing salaries and operations will be scaled back to operate within the funds available. In the normal course of business, management considers various alternatives to ensure that the Company can meet some of its operating cash flow requirements through financing activities, such as private placements of common shares, preferred share offerings and offerings of debt and convertible debt instruments as well as through merger or acquisition opportunities. Management may also consider strategic alternatives, including strategic investments and divestitures. As future operations may be financed out of funds generated from financing activities, the ability to do so is dependent on, among other factors, the overall state of capital markets and investor appetite for investments in the cannabis industry and the Company’s securities in particular. Should the Company elect to satisfy its cash commitments through the issuance of securities, by way of either private placement or public offering or otherwise, there can be no assurance that the efforts to obtain such additional funding will be successful, or achieved on terms favorable to the Company or its existing shareholders. If adequate funds are not available on favorable terms, the Company may have to reduce substantially or eliminate expenditures or obtain funds through other sources such as divestiture or monetization of certain assets or sublicensing (where permitted) of certain rights to certain of the Company’s technologies or products.

 

Off-Balance Sheet Arrangements

 

We have no off-balance sheet arrangements.

 

Critical Accounting Policies and Recent Accounting Pronouncements

 

Critical Accounting Policies

 

The financial statements and accompanying notes have been prepared in accordance with United States generally accepted accounting principles (“US GAAP”) applied on a consistent basis. The preparation of financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting periods.

 

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We have identified the policies below as critical to our business operations and the understanding of our financial statements. A complete discussion of our accounting policies is included in Note 3 of the annual audited financial statements for the year ended March 31, 2017.

 

Use of estimates

 

The preparation of financial statements in accordance with United States generally accepted accounting principles 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 financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could materially differ from these estimates.

 

Going Concern

 

These financial statements have been prepared on the basis of a going concern, which contemplates the realization of assets and the settlement of liabilities in the normal course of business. The Company is in the development stage and has not yet realized profitable operations and has relied on non-operational sources to fund operations. The Company has suffered recurring losses and additional future losses are anticipated as the Company has not yet been able to generate revenue. In addition, as of June 30, 2017, the Company has a working capital deficiency of $856,489 (March 31, 2017 - $852,514) and an accumulated deficit of $6,231,297 (March 31, 2017 - $6,134,941). The Company’s ability to continue as a going concern is dependent on successfully executing its business plan, which includes the raising of additional funds. The Company will continue to seek additional forms of debt or equity financing, but it cannot provide assurances that it will be successful in doing so. These circumstances raise substantial doubt as to the ability of the Company to meet its obligations as they come due and accordingly, the appropriateness of the use of accounting principles applicable to a going concern. The accompanying financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern. Such adjustments could be material.

 

Recent Accounting Pronouncements

 

ASU No. 2015-17, Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes, was issued to simplify the classification of deferred taxes on the balance sheet. The new guidance would require that deferred taxes be classified as non-current assets and liabilities based on the tax paying jurisdiction. Application of the standard, which can be applied prospectively or retrospectively, is required for fiscal years beginning on or after December 15, 2016 and for interim periods within that year. The adoption of the amended guidance does not have a material impact on the Company’s consolidated financial statements.

 

ASU No. 2016-01, Financial Instruments-Overall (Subtopic 825-10) - Recognition and Measurement of Financial Assets and Financial Liabilities, which addresses certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. Most notably, this new guidance requires equity investments (except those accounted for under the equity method of accounting or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income. This new guidance is effective for annual reporting periods beginning after December 15, 2017. The guidance is not expected to have a material impact on the Company’s financial statements.

 

ASU No. 2016-02, Leases (Topic 842), On February 25, 2016, the FASB issued a new standard which requires lessees to recognize almost all leases on their balance sheet as a right-of-use asset and a lease liability. The new guidance will require the asset and liability to be initially measured at the present value of the lease payments in the statement of financial position. The new guidance will also require the company to recognize interest expense on the lease liability separately from the amortization of the right-use-asset for finance leases and recognize a single lease cost allocated on a straight-line basis over the lease term for operating leases, in the statement of comprehensive income. The new standard is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years with early application permitted. The Company is currently evaluating this guidance to determine the impact it may have on the Company’s financial statements.

 

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ASU No. 2016-09, Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. The ASU includes multiple provisions intended to simplify various aspects of the accounting for share-based payments. The areas of simplification in the update involve several aspects of accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows, however, some of the areas for simplification apply only to non-public entities. This guidance is effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods. The guidance does not have a material impact on the Company’s financial statements.

 

ASU No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments. The ASU provides clarity to preparers on the treatment of eight specific items within an entity’s statement of cash flows. The guidance becomes effective for all public entities in fiscal years beginning after December 15, 2017, including interim periods therein. Early adoption of the guidance, including within an interim period, is permitted. We are currently assessing the impact of this modification on the Company’s financial statements.

 

ASU No. 2017-09, Compensation-Stock Compensation (Topic 718): Scope of Modification Accounting. The ASU amends the scope of modification accounting for share-based arrangements and provides guidance on the types of changes to the terms or conditions of share-based payment awards to which an entity would be required to apply modification accounting under ASC 718. The guidance becomes effective for annual reporting periods, including interim periods within those annual reporting periods, beginning after December 15, 2017. We are currently assessing the impact of this modification on the Company’s financial statements.

 

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

 

None.

 

Item 3 Quantitative and Qualitative Disclosure about Market Risk

 

As a smaller reporting company, the Company is not required to provide this disclosure.

 

Item 4. Controls and Procedures.

 

Evaluation of disclosure controls and procedures.

 

We conducted an evaluation, with the participation of our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, or the Exchange Act, as of June 30, 2017, to ensure that information required to be disclosed by us in the reports filed or submitted by us under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities Exchange Commission’s rules and forms, including to ensure that information required to be disclosed by us in the reports filed or submitted by us under the Exchange Act is accumulated and communicated to our management, including our principal executive and principal financial officer, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that as of June 30, 2017, our disclosure controls and procedures were not effective at the reasonable assurance level due to the material weaknesses identified and described below.

 

Our principal executive officers do not expect that our disclosure controls or internal controls will prevent all error and all fraud. Although our disclosure controls and procedures were designed to provide reasonable assurance of achieving their objectives and our principal executive officers have determined that our disclosure controls and procedures are effective at doing so, a control system, no matter how well conceived and operated, can provide only reasonable, not absolute assurance that the objectives of the system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented if there exists in an individual a desire to do so. There can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.

 

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Remediation Plan to Address the Material Weaknesses in Internal Control over Financial Reporting.

 

A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis.

 

Management identified the following three material weaknesses that have caused management to conclude that, as of June 30, 2017, our disclosure controls and procedures, and our internal control over financial reporting, were not effective at the reasonable assurance level:

 

  1. We have developed documentation of our internal control policies and procedures. Written documentation of key internal controls over financial reporting is a requirement of Section 404 of the Sarbanes-Oxley Act as of the period ending June 30, 2017. We plan to progressively implement the written policies and procedures commencing in the immediate future. However, until all of the internal controls and procedures are fully implemented there will continue to be some weaknesses in the system.
     
  2. We do not have sufficient segregation of duties within accounting functions, which is a basic internal control. Due to our size and nature, segregation of all conflicting duties may not always be possible and may not be economically feasible. However, to the extent possible, the initiation of transactions, the custody of assets and the recording of transactions should be performed by separate individuals. Based on the current magnitude of our operations at the present time, it is impractical to employ sufficient staff to fully address the separation of duties issue. As the business plan is implemented and additional staff is required, we will be able to and intend to address this identified weakness.
     
  3. Effective controls over the control environment have not been fully implemented. Specifically, management has not developed and effectively communicated to employees its accounting policies and procedures. This has resulted in inconsistent practices. Further, our Board of Directors has only one independent member. Since these entity level programs have a pervasive effect across the organization, management has determined that these circumstances constitute a material weakness. As the expansion plans are implemented, we intend to communicate our accounting policies and procedures to our employees.
     
  4

We did not maintain sufficient personnel with an appropriate level of technical accounting knowledge, experience and training in the application of GAAP commensurate with our complexity and our financial accounting and reporting requirements. This control deficiency is pervasive in nature. Further, there is a reasonable possibility that material misstatements of the financial statements including disclosures will not be prevented or detected on a timely basis as a result.

 

As a result of the material weaknesses identified above, our internal control over financial reporting was not effective as of June 30, 2017.

 

The Company has initiated a program to address the above weaknesses, specifically the Company has implemented a Code of Business Ethics and Conduct policy, an Equal Opportunity policy, a Freedom from Harassment policy, a Substance Abuse policy, a Whistleblower policy and a Fraud policy. While segregation of duties is very difficult in a small company the Company has an internal policy that all major expenditures are collectively approved by the CEO, President and CFO. In addition, the Company has constituted an Audit Committee, consisting of two non-management directors with the Independent Director as the Chair.

 

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To address the material weaknesses identified, management performed additional analyses and other procedures to ensure that the financial statements included herein fairly present, in all material respects, our financial position, results of operations and cash flows for the periods presented. Accordingly, we believe that the financial statements included in this report fairly present, in all material respects, our financial condition, results of operations and cash flows for the periods presented.

 

As part of the implementation strategy for the expansion of the Company we additionally plan to engage a third-party firm to assist us with the development of any additional systems required. We intend to remedy our material weakness with regard to insufficient segregation of duties by hiring additional employees as funding becomes available to implement the business plan in order to segregate duties in a manner that establishes effective internal controls. All such required remedies are dependent on having the financial resources available to complete them.

 

Changes in internal controls.

 

No change in our system of internal control over financial reporting occurred during the period covered by this report, the period ended June 30, 2017, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

PART II — OTHER INFORMATION

 

Item 1. Legal Proceedings.

 

On October 24, 2017 the Company was named in Brampton Small Claims Court entitled Questrade, Inc. v. Algae Dynamics Corp. (the “Claim”).  The Claim seeks payment of Cdn$25,000 for payments allegedly owed under a Consulting Agreement with the Company in which Questrade was to provide certain financial advisory services.  The Company has filed a general denial of liability on the basis that services were not provided or alternately disputing the amount claimed. A hearing date of February 6, 2018 has been set.

 

Item 1A. Risk Factors.

 

See the risk factor identified in the Company’s Form 10-K filed for March 31, 2017 which are incorporated by reference.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

 

Recent Sales of Unregistered Securities

 

Issued and Outstanding

 

Nil

 

Shares to be issued

 

On April 9, 2017 the Company signed a 12 month consulting agreement effective April 15, 2017 with an arm’s length organization, The Eversull Group Inc,. to provide financial public relations, investor, shareholder, press relations and capital search consulting services. Terms of the agreement include the provision of 100,000 restricted shares annually, a minimum monthly retainer of USD$ 2,000 plus a 3% introduction fee for all sources of funding introduced by The Eversull Group Inc. and accepted by the Company.

 

On May 8, 2017, the Company signed a consulting agreement with Carter, Terry & Company in connection with the proposed raising of capital in a combination of equity and/or debt of the Company for a term of two years. Consideration payable under the consulting agreement includes a non-refundable equity retainer of 150,000 restricted shares of the Company, a placement fee equal to 10% of the gross proceeds raised less than USD$1,000,000 and 8% for gross funds raised in excess of USD$1,000,000, plus the equivalent amount of restricted shares equal to 4% of the capital raised divided by the closing price of the stock on the date of close for a period of two years.

 

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During the quarter Company commenced a private placement of up to USD$500,000 of one-year 12% convertible notes (the “Notes”). The Notes are convertible at the option of the holder into common shares of the Company at a price of USD$0.25 per share, and are subject to mandatory conversion if the volume-weighted trading price of the common shares is greater than USD$1.00 per share for twenty consecutive trading days so long as the underlying shares may be resold in compliance with the registration requirements of the Securities Act of 1933, as amended. In addition to the issuance of the Notes, the Company shall issue to the holders 100,000 five-year common share purchase warrants with an exercise price of USD$0.50 for each USD$25,000 principal amount of Notes purchased. Furthermore, the Company shall issue pro rata to the purchasers of the first USD$100,000 of Notes in the Offering an aggregate of 200,000 common shares as a commitment fee. To the end of the quarter the Company issued USD$50,000 of these Notes and subsequent to the end of the quarter a further USD$408,000 (C$520,160) has been raised. As a consequence, at June 30, 2017 the Company had an obligation to issue 100,000 commitment shares.

 

Each of these issuances was exempt from registration under the Securities Act of 1933, as amended by virtue of Section 4(2) thereunder. No commissions were paid in connection with such issuances.

 

Item 3. Defaults Upon Senior Securities.

 

There was a default on the GHS Investment as the covenant under the agreement for the Company to remain current in its reporting. The Convertible Note including the penalty has now been paid in full.

 

Item 4. Mine Safety Disclosures.

 

Not applicable.

 

Item 5. Other Information.

 

Securities Purchase Agreement and Convertible Note

 

As noted in the Subsequent events note from the Financial Statements for the period ended June 30, 2017, effective as of October 27, 2017, the Registrant entered into a definitive Note Purchase Agreement with Teewinot Life Sciences Corporation (“Teewinot”) pursuant to which Teewinot invested US$250,000 in the Registrant in the form of a 12% Senior Convertible Note (the “Note”). The Note converts into common shares automatically on the 45th day after issuance at US$0.10 per share; provided that if the closing price of the common shares on December 11, 2017 is less than US$0.10 the then conversion price is adjusted to US$0.07 per share. The Notes are part of an offering of US$500,000 of similar notes. The Registrant had previously issued US$208,000 of similar notes to other investors, and anticipates closing the offering shortly.

 

Grant of Shares under the Stock Incentive Plan

 

Effective as of November 8, 2017, the Registrant issued 350,000 common shares of the Corporation to each of Richard Rusiniak, Paul Ramsay, and Ross Eastley in light of their services during 2017 during which they have received no other compensation. In addition to these share issuances, the Registrant granted options to purchase 240,000 options to Messrs. Rusiniak and Ramsay, 200,000 options to Mr. Eastley, 120,000 options to the outside directors and 50,000 to a consultant, such options to be priced at the close of business on November 10, 2017. These shares and the shares underlying the options were registered under the Securities Act by virtue of the Registrant’s Registration Statement on Form S-8.

 

On November 8, 2017 the Board cancelled an aggregate of 600,000 common shares awarded in a prior period to three management personnel.

 

Item 6. Exhibits.

 

31.a Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
   
31.b Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
   
32.a Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
   
32.b Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

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SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

  Algae Dynamics Corp.
  a Canadian Corporation
     

Date: January 10, 2018

By: /s/ Ross Eastley
    Ross Eastley
    Chief Financial Officer
    (Chief Financial and Principal Accounting Officer)

 

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