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EX-32.2 - Algae Dynamics Corp.ex32-2.htm
EX-32.1 - Algae Dynamics Corp.ex32-1.htm
EX-31.2 - Algae Dynamics Corp.ex31-2.htm
EX-31.1 - Algae Dynamics Corp.ex31-1.htm
EX-12.3 - Algae Dynamics Corp.ex12-3.htm
EX-12.2 - Algae Dynamics Corp.ex12-2.htm
EX-10.4 - Algae Dynamics Corp.ex10-4.htm

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-K

 

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the fiscal year ended March 31, 2018

 

OR

 

[  ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from ___________ to _____________

 

Commission file number: 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.)

 

37 – 4120 Ridgeway Drive    
Mississauga, Ontario Canada   L5L 5S9
(Address of principal executive offices)   (Postal Code)

 

Registrant’s telephone number, including area code: (289) 997 6740

 

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act: None

Securities registered pursuant to Section 15 of the Act:

Common Shares, no par value

(Title of Class)

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes [  ] No [X]

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes [  ] No [X]

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [  ] No [X ]

 

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 during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes [  ] No [X]

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. Yes [  ] No [X]

 

Indicate by check mark whether the registrant is a large accelerated filer, 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 [  ] Smaller reporting company [X]
(Do not check if a smaller reporting company) [  ]  

 

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

 

Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date.

 

  Common Shares no par value -   Outstanding at January 16, 2019 – 20,136,377  

 

DOCUMENTS INCORPORATED BY REFERENCE: None.

 

 

 

   

 

 

ALGAE DYNAMICS CORP.

 

TABLE OF CONTENTS

 

      Page
Part I    
       
  Item 1 Business 5
       
  Item 1A Risk Factors 19
       
  Item 1B Unresolved Staff Comments 32
       
  Item 2 Properties  
       
  Item 3 Legal Proceedings 32
       
  Item 4 Mine Safety Disclosures 32
       
Part II    
     
  Item 5 Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities 32
       
  Item 6 Selected Financial Data 37
       
  Item 7 Management’s Discussion and Analysis of Financial Condition and Results of Operation 37
       
  Item 7A Quantitative and Qualitative Disclosures about Market Risk 40
       
  Item 8 Financial Statements and Supplementary Data 41
       
  Item 9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure7 84
       
  Item 9A Controls and Procedures 84
       
  Item 9B Other Information 86
       
Part III    
     
  Item 10 Directors and Executive Officers and Corporate Governance 86
       
  Item 11 Executive Compensation 89
       
  Item 12 Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 96
       
  Item 13 Certain Relationships and Related Transactions, and Director Independence 97
       
  Item 14 Principal Accounting Fees and Services 98
       
Part IV    
     
  Item 15 Exhibits, Financial Statement Schedules 99
       
Signatures   100

 

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PART I

 

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

 

Some discussion in this Annual Report on Form 10-K contains forward-looking statements that have been made pursuant to the provisions of the Private Securities Litigation Reform Act of 1995. These statements involve risks and uncertainties and relate to future events or future financial performance. A number of important factors could cause our actual results to differ materially from those expressed in any forward-looking statements made by us in this Form 10-K. Forward-looking statements are often identified by words such as “believe,” “expect,” “estimate,” “anticipate,” “intend,” “project,” “plans,” “seek” and similar expressions or words which, by their nature, refer to future events. In some cases, you can also identify forward-looking statements by terminology such as “may,” “will,” “should,” “plans,” “predicts,” “potential” or “continue” or the negative of these terms or other comparable terminology.

 

In this Annual Report on Form 10-K, examples of such forward-looking information include, but are not limited to, disclosure relating to the following:

 

the Company’s research and development plans, business model, strategic objectives and growth strategy;
cannabis regulation in Canada;
the Company’s intellectual property;
the Company’s future growth plans;
the Company’s estimate of the size of the potential markets for its products;
the Company’s current and future capital requirements and the need for additional financing;
anticipated trends and challenges in the Company’s business and the markets in which it intends to operate;
the continuation of the Company as a going concern;

 

The forward-looking information in this Annual Report on Form 10-K is based on a number of assumptions which management of Algae Dynamics believes to be reasonable but that may prove to be incorrect. Algae Dynamics cannot assure investors that actual results will be consistent with the forward-looking information contained in this Annual Report on Form 10-K. With respect to the forward-looking information contained in this Annual Report on Form 10-K, Algae Dynamics has made certain assumptions, including, but not limited to the following:

 

general economic conditions in economic and financial markets;
the general state of the cannabis industry and its future developments;
the expected growth of the cannabis industry;
the Company’s ability to successfully execute on its business strategy and develop and expand its business pursuant to its objectives;
the Company’s ability to develop its business;
the Company’s ability to enter into anticipated contracts; and
the Company’s ability to obtain further financing, as needed and on terms that are acceptable.

 

Forward-looking information involves known and unknown risks, uncertainties and other factors that may cause actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking information. Algae Dynamics believes that the expectations reflected by forward- looking information in this Annual Report on Form 10-K are reasonable but no assurance can be given that these expectations will prove to be correct. Accordingly, such forward-looking information should not be unduly relied upon. Algae Dynamics’s actual results, performance or achievements could differ materially from those expressed in, or implied by, the forward- looking information, and, accordingly, no assurance can be given that any of the events anticipated by the forward- looking information included herein will transpire or occur, or if any of them do so, what benefits will be derived as a result. Some of these risks factors, include, but are not limited to the following:

 

the Company’s failure to properly execute on its plans and initiatives;
the Company’s inability to achieve the anticipated benefits of its products;
the Company’s inability to obtain additional financing;
the inability to attract or retain skilled and qualified personnel;
regulatory changes in the cannabis sector;
and other factors, many of which are beyond Algae Dynamics’s control.

 

3

 

 

These forward-looking statements are only predictions and involve known and unknown risks, uncertainties and other factors, including the risks in the section entitled “Risk Factors” below that may cause our or our industry’s actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by these forward-looking statements. In addition, you are directed to factors discussed in the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section as well as those discussed elsewhere in this Form 10-K.

 

Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity or achievements. Except as required by applicable law, including the securities laws of the United States, we do not intend to update any of the forward-looking statements to conform these statements to actual results. However, readers should carefully review the risk factors set forth below or in other reports or documents the Company files from time to time with the Securities and Exchange Commission (the “SEC”), particularly the Company’s Quarterly Reports on Form 10-Q and any Current Reports on Form 8-K. All written and oral forward-looking statements made subsequent to the date of this report and attributable to us or persons acting on our behalf are expressly qualified in their entirety by this section.

 

Use of Certain Defined Terms

 

Except where the context otherwise requires and for the purposes of this report only:

 

the “Registrant,” “Company,” “we,” “us,” and “our” refer to the business of Algae Dynamics Corp., a Canadian corporation, and its subsidiary;
   
“Exchange Act” refers the United States Securities Exchange Act of 1934, as amended;
   
“SEC” refers to the United States Securities and Exchange Commission;
   
“Securities Act” refers to the United States Securities Act of 1933, as amended;
   
“U.S. dollars,” and “USD$” refer to the legal currency of the United States; and
   
“$” refer to the legal currency of Canada as the financial statements are stated in Canadian Dollars.

 

This Annual Report on Form 10-K includes industry and market data and forecasts obtained from independent publications, market research and analyst reports, surveys and other publicly available sources. Although the Company believes these sources to be generally reliable, market and industry data is subject to interpretation and cannot be verified with complete certainty due to limits on the availability and reliability of raw data, the voluntary nature of the data gathering process and other limitations and uncertainties inherent in any statistical survey. Accordingly, the accuracy and completeness of this data is not guaranteed. The Company has not independently verified any of the data from third party sources referred to in this Annual Report on Form 10-K nor ascertained the underlying assumptions relied upon by such sources.

 

4

 

 

ITEM 1. BUSINESS.

 

Business Overview

 

Algae Dynamics Corp (ADYNF) is focused on the development of proprietary research and products utilizing cannabis oil combined with other botanical and nutraceutical products. The original core of our product development strategy was the extraction of Omega-3 fatty acids from certain strains of algae with high concentrations of DHA (docosahexaenoic acid) 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 cannabis oils and nutraceutical products, including algae oil. Capitalizing on the burgeoning demand for cannabis oil and other smoke-free alternatives to marijuana consumption, including for medicinal purposes, will help support our ongoing initiatives to create and market research-driven product formulations.

 

In December 2016, we announced a new initiative into the Canadian cannabis industry. We followed that announcement with a press release in March 6, 2018 announcing our intention to build shareholder value through the pursuit of several key initiatives. Over this period, we have continued to assess how to leverage the research and development which was originally focused on the commercialization of our proprietary BioSilo® algae cultivation system and we have decided to suspend our focus on the development of this proprietary technology. In the interim, we will source algae oil for our research-driven product formulations. By doing so, we have eliminated the immediate capital requirements for extraction and formulation equipment. We are now focused on entering into profit sharing business ventures with potential partners who have the appropriate Health Canada licenses to produce and sell medical cannabis formulated products, utilizing our patented formulations which combine cannabis oil and other nutraceutical products developed through our $1.69Million commitment to support university research and previously announced C$400,000 research grant from MITACS, a not-for-profit, Canadian national research organization together with our sponsored research programs with Canadian universities (our Sponsored Research Programs).

 

Strategic Focus

 

During Health Canada’s consultations relating to the cannabis industry and related legislation, they heard many compelling personal stories of how cannabis is making a difference to Canadians living with serious health challenges such as cancer, HIV/AIDS, multiple sclerosis, arthritis and fibromyalgia. They also heard about the role that cannabis can play in pain management and palliative care, and the relief that cannabis, particularly strains with high levels of CBD and low levels of THC, offers to children with severe forms of epilepsy and how cannabis has enabled patients to limit or eliminate their use of powerful narcotic drugs such as opioids.

 

5

 

 

Algae Dynamics intends to undergo a significant rebranding exercise to ensure that it is able to communicate its emphasis on the application of cannabis. Beginning with a proposed name change to CanaQuest Medical Corp., our mission is to:

 

(i) Identify with the help of our research partners appropriate formulations;
(ii) Acquire the lowest cost dry cannabis from domestic and international suppliers who have adequate logistics and warehousing capabilities to satisfy our requirements; and
(iii) Continue discussions we have already commenced with contract manufacturers who have experience in conducting human trials and commercializing research and development as well as managing supply and risk management including through good manufacturing practices (GMP).

 

We expect our formulations involving both THC and botanical oil extracts will treat mental health ailments and the advent of our formulations is expected to significantly distinguish our approach from “Licensed Producers” (or licensees authorized to cultivate, process and sell cannabis products) who may not have strong relationships with the University research community which we believe we have cultivated over time through our business objectives. We believe our formulations may have significant potential applications in the treatment of anxiety, addiction, depression, schizophrenia, and post-traumatic stress disorder “PTSD” and will form a strong foundation to continue to seek other applications through our Sponsored Research Programs. Accordingly, we believe we have developed a strategy to maximize opportunities in an evolving industry that has international scope and opportunity, with Canadian talent through its universities providing a mechanism to make a significant difference in the lives of medical cannabis users.

 

Intellectual Property Protection

 

The Company is undertaking development & commercialization of cannabinoid therapeutic products from strains of cannabis to treat a variety of clinical indications. Through its relationship with Universities, the Company is collaborating to formulate proprietary solutions which significantly impact the effectiveness of cannabis compounds. In addition, we are looking to:

 

Combine the benefits of cannabis and other botanicals;
Enhance a highly effective suite of medicinal patented products; and
Utilize formulations which increase absorption capacity.

 

Competitive Advantage

 

We believe we have developed a competitive advantage relative to Licensed Producers who may have vertically integrated operations to produce medical applications for cannabis. In particular, we have shown progress in several key areas including:

 

Clinical Trials:

 

Clinical trial data using animal subjects performed by Dr. Laviolette, Western University, has shown positive results.
Our focus is targeted to areas that can provide positive, measurable feedback including anxiety, addiction, depression, schizophrenia and PTSD.
Our products are intended to balance THC with other botanical compounds to minimize the euphoric and related side effects.
We expect further product formulations and uses as our Sponsored Research Programs continue.

 

Relationships:

 

Focused studies by our research partners includes twelve years of cannabis compounding (THC, CBD).
Talented management and sustainability is evident through continuous development and talent retention including seven PhDs and three interns through our Sponsored Research Programs.
Our innovative approach to government funding, including the MITACS $400,000 research grant has built a reputable and collaborative approach between the private and public sector.
Our scientific rather than simply “claims-based” approach provides reviewable clinical data that is attracting attention from leading pharmaceutical firms and producers.
Our primary researcher at Western University, Ontario, Dr. Steve Laviolette, believes that the clinical implications and commercial potential for his formulations are highly significant and has concluded that “since cannabis is commonly prescribed for a host of ailments, including pain, nausea, glaucoma, multiple sclerosis, osteoarthritis, our formulation will again be hugely significant for the non-mental health patient sectors as well”.

 

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University Affiliations:

 

Our strong and developing relationship with Western University positions us to execute on our business strategy and develop viable, useful products.

 

In particular, we believe researchers at Western University are:

 

Ahead of their field with over twelve years of cannabis compound (THC, CBD) research;
Have a strong understanding of the application of THC and CBD compounds to address pain, anxiety, addiction, depression, schizophrenia and post-traumatic stress disorder “PTSD”;
Equipped to realize the benefits of novel proprietary formalizations they developed, and which are eligible for patents which the Company will secure through our research agreements;
In a position to leverage their platform established for ongoing novel formulations and produce relevant clinical trial data with significant results.

 

In addition, the researchers at the University of Waterloo are exploring other areas that have shown positive results for the use of cannabis including:

 

Colorectum, pancreas, breast and prostate cancer;
Ongoing R & D – mitigation of the spread of cancerous tumors; and
Combined application of natural botanicals, algae essential fatty acids, and cannabis oils.

 

Distribution

 

Our focus on distribution is intended to position us to meet demand for our formulations which is expected to occur through agreements with Licensed Producers with formulation, packaging and distribution/export (GMP facilities) together with international distribution agreements and strategies to distribute product both domestically and abroad.

 

Product Development

 

We are positioned to introduce products using both THC dominated formulations with other botanicals, including combinations with plant cannabinoids as well as CBD dominated formulations with other botanicals. We believe that a strategy of introducing a combination of compounds over time and in formulations that are correlated with observed benefits will allow us to penetrate and differentiate ourselves from competitors.

 

Licensed Producer Partnerships

 

We intend to pursue our business strategy through appropriate licensing arrangements with Licensed Producers. We believe our experience and focus on nutraceutical formulations in the past several years position us to execute this strategy through relationships we have formed and continue to develop.

 

Next Steps:

 

To fully exploit our competitive advantage, we intend to:

 

  Sign agreements with Licensed Producers/Distributors to manufacture and/or sell medicinal cannabis domestically and Internationally
  Schedule cannabis deliveries from Jamaican Medical Cannabis Corporation (“JMCC”) for supply of high-volume dry medicinal cannabis for our formulations or for referral to third party Licensed Producers
  Initiate human trials to further support our research and animal clinical trial results
  Secure license from Health Canada for Purchase/Sale, Import/Export - the Cannabis Act (non-possession)
  Formalize agreement with Licensed Processor – GMP facility, to package and distribute formulations
  Secure funding and list on the Canadian Securities Exchange (CSE) – dual listing
  Build brand awareness for sales and export – scientifically supported
  Support Universities on-going product development - Uniqueness (scientific data)
  File Provisional Patent Product Applications

 

7

 

 

Medical Cannabis – History and Benefits

 

Cannabis, also known as marijuana, is a family of plants called Cannabaceae. There are over 700 varieties of cannabis that have been described to date. Based on characteristics such as shape, colour, height, smell, etc., usually recognised by two Main types: Cannabis Sativa, which originated in the Western hemisphere and Cannabis Indica, which originated in Central and South Asia. Cannabis as a medicine can be found in the oldest Chinese tradition few thousand years ago, and indications showed different therapeutics use such as for malaria, rheumatic pain, constipation, disorders of reproductive system and many others.

 

Medical Cannabis refers to the use of cannabis and its constituent cannabinoids to treat disease or improve symptoms such as pain, muscle spasticity, nausea and other indications. Cannabinoids is a blanket term covering a family of complex chemicals, both natural and man-made, that bind with cannabinoid receptors (protein molecules on the surface of cells) and effect a wide number of responses. Cannabinoid receptors in the human body are part of a system called the Endocannabinoid System. This system produces chemicals called endocannabinoids, which also bind with cannabinoid receptors. Cannabinoid receptors are found in the brain and throughout the body. Scientists have found that cannabinoid receptors in the Endocannabinoid System are involved in a vast array of functions in our bodies, including helping to modulate brain and nerve activity (including memory and pain), energy metabolism, heart function, the immune system and even reproduction. While there are a large number of active cannabinoids found in cannabis, the two most common currently used for medical purposes are THC (tetrahydrocannabinol) and CBD (cannabidiol).

 

Our proposed cannabis formulations and related nutraceutical products will generally utilize:

 

a multiple combination of plant strains to target medical ailments at the neurological level;
the use of cannabis extracted and concentrated cannabinoid oils which are known to provide targeted benefits together with botanical oils and Algae-omega3 essential fatty acids (DHA and EPA);
cannabis extracted and separated terpenes (aroma, additional medicinal benefits); and
cannabis “whole plant” oil – with natural concentrations of THC or CBD.

 

From research done in the field it has been concluded that THC acts on 2 types of cannabinoid receptors: CB1 and CB2. CB1 receptors are mainly found in the brain, peripheral nerves, and nervous system, whereas CB2 are found both in the neurons and immune cells. Evidence suggests that THC helps alleviate symptoms suffered both by AIDS patients and by cancer patients undergoing chemotherapy, by increasing appetite and decreasing nausea. The other main ingredient is CBD, a non-psychoactive component of cannabis which accounts for more than 50% of the known therapeutic applications A range of clinical studies indicated that CBD appears to relieve convulsion, inflammation, anxiety, nausea and short-term memory loss.

 

While THC has a strong binding affinity for both CB1 and CB2 receptors, CBD has no particular binding affinity. Instead, many of the therapeutic benefits of CBD are created through indirect actions. These actions include activating TRPV1 Receptors. These receptors are involved in regulating pain, body temperature, and inflammation. We believe based on our consultations with Dr. Steve Laviolette, that these properties of THC may make it more desirable than CBD alone as it directly and more effectively treats several of these ailments while CBD only has an indirect effect. This is because THC is similar to Endocannabinoids that have a similar structure to naturally occurring Endocannaboids which are also naturally released by neurons in the human body to regulate the release of neurotransmitters.

 

While THC is known to have a positive impact in stabilizing the release of neurotransmitters responsible for PTSD and pain, THC selectively targets molecular and neuropharmacological signaling pathways in both cortical and sub-cortical regions of the brain. In particular, the diminished functioning of GABAergic neurons in the prefrontal cortex (PFC) may lead to the loss of control of the PFC to regulate proper sub-cortical dopamine neurotransmission. The action of THC on CB1Rs can impair PFC-CB1R signaling and associated GABAergic functionality leading to dysregulation of the normal prefrontal process. This results in an increase in the extracellular glutamate levels and lower GABA which normally inhibits dopamine production. Understanding this process provides the potential for the development of safer cannabinoid-derived formulations using THC and/or the development of novel THC formulations containing neuroprotectants to mitigate these neuropsychiatric risks. Accordingly, our primary formulation combines THC with specified quantities of a specific botanical extract. While both are naturally occurring products, we believe that our formulation is sufficiently novel as it combines these compounds in specified quantities to create a different neurological result. The specific botanical extract is a unique amino acid and is known to cross the blood-brain barrier. In addition, it may regulate the extracellular glutamine concentration in the neurons and by doing so may properly regulate GABA levels and thus inhibit the release of dopamine. This same formulation may lead to THC replacing opioids: since according to Dr. Steve Laviolette, “the primary addictive effects of opioids are believed to be due to causing a long-term ‘switching on’ of overactive dopamine, our formula would be predicted to be superior to THC alone (which does cause overactive DA similar to opioids), in that our formula prevents this side effect of THC”.

 

8

 

 

Competitive Landscape

 

The future of medical cannabis lies in medically accepted products for the management of neuropathic pain, hypertension, post-stroke neuroprotection, multiple sclerosis, epilepsy, cancer, and other disorders. An example list of publicly traded companies that have entered or are intending to enter the medicinal cannabis markets are listed as follows:

 

Aphria Inc (Canada Licensed Marijuana producer),
Aurora Cannabis (producer of Cannabis and medicinal solutions following its acquisition of Cannabid Inc.), Bedrocan Cannabis Corp Canada (Pharmaceutical grade medicinal cannabis), Mettrum Health Corp Canada (Licensed producer of medical cannabis),
OrganiGram Holdings Inc (Canada Licensed producer of organic medical marijuana),
Tweed Marijuana Inc. (Canada Licensed producer of medical cannabis),
Cannabis Science, Inc (USA OTC traded biotech company in Colorado),
Medical Marijuana Inc USA (OTC traded business solutions and partnerships),
GW Pharmaceuticals plc UK & USA (Owns a patented (MS) product – Sativex.).

 

We believe that while there is significant growth in this sector, our patented processes will continue to differentiate us and position us to succeed in this market.

 

Sponsored Research Programs

 

In order to support our mission, we have 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:

 

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

 

2) 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.

 

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 C$600,000 over the three-year life, and for four years at Western University, at a cost of C$1,000,000 over the life of the program.

 

Western University in Ontario has made significant progress in its research into anxiety, depression, schizophrenia, and post-traumatic stress disorder, drawing on twelve years of cannabis compound research. We believe this work will continue to result in patentable formulations utilizing cannabis oils and other nutraceutical products which we intend to commercialize, license and distribute. Collaborating with prominent Canadian universities is a core part of our plan to develop premium products and add to our portfolio of intellectual property. Through our Sponsored Research Programs, the Company is focusing primarily on the use of extracts from cannabis oil and nutraceutical products for the development of new pharmacotherapies in the context of cancer and for mental health and pain relief. Our intention is to utilize these patents to partner with licensed producers qualified under the Access to Cannabis for Medical Purposes Regulations (or ACMPR) and the Cannabis Act (collectively, Licensed Producers or LPs) to provide a secure source of cannabis plant material and to jointly produce patented formulated products for sale by the Licensed Producer. The Cannabis Act contains details of the application requirements for licenses and permits, which are similar in nature to the requirements of the ACMPR.

 

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Our near-term revenue generation goal, including until we are ready to outsource the manufacturing of our formulations, is to obtain referral revenue from the sale of medicinal cannabis to Licensed Producers from JMCC our collaboration and cultivation partner (with whom we have signed a Master Supply Agreement) for supply of high-volume dry cannabis for our formulations.

 

Our goals also 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 acquire the necessary licenses to market and sell cannabis and cannabis related medical products as necessary to implement our business objectives. The management team leading these initiatives together with our proposed collaboration partners have the relevant experience ranging from public company management and process experience to successful fund raising and commercialization. We believe that the commercialization of these formulations will lead to significant revenue generating opportunities.

 

In our view, there is a significant market for formulations involving compounds derived from cannabis strains together with other nutraceutical products. There is research to support that Cannabinoid receptors which are part of the endocannabinoid system of the human body and the primary focus of the application of cannabis derived oil compounds as well as algae, are involved in a variety of physiological processes including appetite, pain-sensation, mood, and memory. Accordingly, the Company is generally focused on penetrating the medical marijuana industry both domestically and internationally and believes that its formulations, backed by scientific research produced through its Sponsored Research Programs, will augment the demand and enhance the credibility of medical cannabis products.

 

Recent Developments in our Commercialization Strategy

 

As of the date of this Annual Report on Form 10-K, the Company, through its Sponsored Research Programs, has developed a very unique formulation involving cannabis and other nutraceutical products. We have submitted provisional patent applications for these formulations. The intellectual property (IP) protection of our formulations through appropriate patents will position us to formalize negotiations and eventually enter into domestic and international production and distribution agreements with Licensed Producers, or their equivalent in other jurisdictions. Our discussions with LPs have included production, distribution and related collaborative initiatives involving our specially formulated products and we are confident that the necessary agreements will be negotiated and executed over time so that our formulations can be introduced into the marketplace and complement or expand an increasingly attractive market for medicinal and health related cannabis applications. LPs we have spoken with to date have expressed significant interest but need to evaluate the strength of our patents and related formulations before finalizing licensing and related documentation. However, based on these discussions, we are confident that we will be able to establish relationships with business partners who understand the importance of scientifically backed medicinal cannabis products and the approach taken by Dr. Steven Laviolette, who is the primary researcher at Western University under our Sponsored Research Program and whose formulations will likely be marketed under a new brand name which is still to be determined.

 

We believe we have the potential to secure an enforceable patent for our first formulation (which combines THC and nutraceutical products), to treat mental health ailments. We believe that our new brand will provide us with a strong name brand and trademark to identify our formulations to the public and build brand awareness. In addition, we believe the fact that the combination of active ingredients in our formulations is scientifically backed by Dr. Laviolette’s research should distinguish us from our competitors. We believe these formulations have significant potential applications in the treatment of anxiety, addiction, depression, schizophrenia, and post-traumatic stress disorder “PTSD” based on his research on animals. Dr. Steven Laviolette, Western University, has indicated to us that, “Since cannabis is commonly prescribed for a host of ailments, including pain, nausea, glaucoma, multiple sclerosis, osteoarthritis, our formulations will again be hugely significant for the non-mental health patient sectors as well.”

 

10

 

 

We have three potential formulations – which we have termed the “F” Platforms and two provisional patents which we have filed.

 

F1 – a unique THC + botanical extract formulation which mitigates or eliminates the negative side-effects of THC: e.g. anxiety, depression, paranoia, cognitive/memory deficits. We expect F1 to be an alternative to opioids, thus addressing addiction and dependence and effective for pain management.

 

F2 – a unique CBD + select nutraceutical/dietary additives aimed at synergizing the therapeutic properties of CBD in the treatment of anxiety, depression, schizophrenia, PTSD (chronic stress induced) and addiction.

 

F3 – expansion of research and discovery of the novel formulations utilizing other cannabinoids in addition to THC and CBD will unravel specialized applications for targeted therapies in specific mental health symptom clusters.

 

Capital Requirement

 

In order to execute on our strategy as described above, we estimate an initial capital requirement of US$5.0 million to support activities over the following twelve months, including the following:

 

  1. Payment to the universities to support the sponsored existing and the new research programs
     
  2. Application to Health Canada for sale import/export license under the Cannabis Act
     
  3. Professional and other fees in connection with the development of our strategy, negotiations and formalizing agreements with our collaboration partners
     
  4. Expenditures related to Human Trials of F1 formula
     
  5. Purchase of cannabis
     
  6. Working capital to support ongoing operations and research

 

We have engaged investment bankers to assist with raising the required capital.

 

Legal and Business Context

 

The Company’s business of the development of unique health products and pharmaceuticals that utilize 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 marijuana won legal recognition of their rights to access marijuana as a medicine, the Federal Government implemented the Marijuana 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 marijuana 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 Marijuana 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 marijuana.

 

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 marijuana. In 2015, the Supreme Court of Canada held that the restriction making only dried medicinal marijuana 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 marijuana leaves and buds.

 

The ACMPR which was introduced to address these issues provided a more advanced and rigorous regulatory regime for the production, distribution and sale of medical marijuana in Canada, and regulated and contemplated the sale of medical marijuana by Licensed Producers to jurisdictions outside of Canada where the use and sale of medical marijuana and derivatives thereof are legally sanctioned. The ACMPR, like prior regulations, requires patients seeking medical marijuana to obtain medical approval from their health care practitioner and to provide a medical document to a Licensed Producer and have simplified the requirements of the MMPR, offering easier access to medical marijuana in Canada.

 

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The Cannabis Act was passed by the Senate of Canada on June 19, 2018. On June 20, 2018, the Government of Canada officially announced that the production, distribution and sale of cannabis for unqualified adult use will become legal on October 17, 2018, and subsequently on June 21, 2018, the Cannabis Act received royal assent. The commitment by the Government of Canada to implement the Cannabis Act did occur on October 17, 2018. On June 27, 2018, Health Canada established regulations under the Cannabis Act (the “Cannabis Regulations”). As a result, individuals who currently rely upon the medical cannabis market to supply their medical cannabis and cannabis-based products may cease this reliance, and instead turn to the adult-use cannabis market to supply their cannabis and cannabis-based products. The Company believes that its formulations will provide it with a competitive advantage in this market since they will be backed by scientific research and complement or enhance the use of existing medicinal marijuana products. However, the Company will need to ensure that it together with its collaboration partners remain in compliance with the Cannabis Act which provides a licensing and permitting scheme for the production, testing, packaging, labelling, sending, delivery, transportation, sale, possession and disposal of cannabis, which is implemented by the Cannabis Regulations. Provincial legislation will also implement measures authorizing the sale of cannabis that has been produced by a person authorized under the Cannabis Act to produce cannabis for commercial purposes. The licensing, permitting and authorization regime is implemented by the Cannabis Regulations. The Cannabis Act contains some details of the application requirements for licenses and permits, which are similar in nature to the requirements of the ACMPR (e.g. they include requirements for financial information, security information and security clearances). Below are additional highlights of the Cannabis Act:

 

 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;
 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.

 

According to Health Canada, more than 98,000 patients had enrolled with Licensed Producers under the ACMPR regime by September 30, 2016. Health Canada also indicates that, as of September 30, 2016, the average amount of dried marijuana for medical purposes authorized per client was 2.6 grams per day. For further information, see the Health Canada website at: http://www.hc-sc.gc.ca/dhpmps/marijuana/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.

 

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Regulatory Pathway

 

Health Canada recently released “Proposed Regulations Amending the Cannabis Regulations (new classes of cannabis) and Proposed Order Amending Schedules 3 and 4 to the Cannabis Act”. These proposed changes introduce three new classes of cannabis products: edibles, concentrates and topicals. The introduction of these new classes may present an opportunity for the Company to bring combination products to the market as an adult-use edible cannabis product. It is proposed that only approved food ingredients and additives will be permitted for use in this class of products – which will require the Company’s additives to qualify under such rules and which may also be influenced by the delivery mechanism for our formulations. Although health claims are not permitted on this type of product, this commercialization option represents the fastest route to market and allows for distribution through both healthcare practitioner-facilitated medical-use channels and recreational channels. Accordingly, our intention is to explore the use of these channels.

 

Currently the only commercialization option that will allow for making health claims and the distribution of literature to healthcare practitioners is as a prescription cannabis drug requiring a Drug Identification Number (DIN). This route requires evidence from human clinical trials that demonstrates the safety and efficacy of the products to allow for premarket authorization by Health Canada. Two cannabis drug products have received Health Canada authorization thus far. To commence a clinical trial program, we will collaborate with experienced partners who are able to obtain the No Objection Letter for the conduct of these studies and the Cannabis Research License required by Health Canada. Building a portfolio of clinical research data on our products will require time; however, has the benefit of gaining broader market acceptance and possibly inclusion on drug formularies approved by insurance providers.

 

Finally, Health Canada has indicated that further research is required before they will consider authorizing the inclusion of cannabis in self-care products (natural health products, over-the-counter drugs). Health Canada has also published proposed changes to the regulatory framework of self-care products with a plan to issue targeted changes to the Food and Drug Act in early 2019 for public consultation. Although these regulatory changes may not have a direct impact on the oversight of cannabis products at this time, they may also open the possibility of an expedited regulatory pathway for our formulations should an additional category for cannabis self-care products be added in time. Self-care products also require substantiating evidence for efficacy and safety derived from human clinical trials. In commencing a clinical trial program, the Company will be poised to capitalize on any changes that will facilitate the self-care market by already obtaining data to support health claims.

 

Markets

 

We believe that our focus on development of product formulations that utilize both cannabis oil and nutraceutical products, including algae oils, is a niche strategy that will give us a unique market position and allow further market penetration. 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.

 

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. In addition, it is estimated that there will be 630,000 (1.7% of the population) registered medical marijuana patients in Canada by 2024, resulting in annual demand of approximately 230,000 kilograms. In 2018, it is estimated the demand by medical marijuana patients will be roughly 95,000 kilograms. Based on these forecasts, it is estimated that by 2024, the value of the Canadian medical marijuana market could be $1.9 billion to $2.6 billion. (source: Mackie Research Capital Corporation (“MRCC”) September 20, 2017). In addition, Germany and Australia and an increasing number of countries are legalizing medical marijuana, like Canada did in 1999, and government officials are making public statements suggesting that the prohibition of marijuana is ineffective policy from a public health, fiscal and social justice perspective. Licensed Canadian companies have considerable operational experience, which can be leveraged to pursue high growth opportunities in the increasing number of federal licensing opportunities in international markets.

 

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Market for Algae Oil

 

The market data for algae oil 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. We have suspended the development of our BioSilo® algae cultivation system. However, we believe that there is still scope to leverage the research and expertise gained from our understanding of the medical properties and use of algae oil. In particular, studies have shown that EPA (eicosapentaenoic acid) and DHA (docosahexaenoic acid), which are long-chain omega-3 fatty acids, 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. We believe we can utilize these compounds in our formulations to further enhance their medicinal benefit.

 

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 botanical oils and cannabis oils and other nutraceutical products.

 

The Company’s core product development strategy has been previously focused on 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 and EPA is used as a health supplement product. In light of the potential synergies, the Company will continue to develop its strategy to create products and formulations that combine the health benefits of cannabis oils and algae oils.

 

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

 

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 manufacture and sell our product formulations mainly through Licensed Producers and target patients, medical doctors, and product distributors, subject to regulatory requirements and restrictions including on the promotion and labelling of medical marijuana products. 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.

 

We believe our efforts are starting to derive significant benefits and moving our business plan forward, particularly since our potential partners appear to be seeing the significant value in our first patented product formulation which has been developed as a result of the Sponsored Research Agreement with Dr. Steve Laviolette and Western University. While we were not able to move forward with certain arrangements with Licensed Producers (including 6779264 Manitoba Ltd dba Bonify as previously reported), there have been important developments with several other licensed entities who we may partner with us as follows:

 

Strategic International Licensed Producer: We have executed a Master Cannabis Supply Agreement for medical cannabis product supply with a strategic international licensed grower and producer (JMCC), that has access to a significant supply of low-cost dry cannabis product. As well, the grower is licensed in Jamaica to facilitate the processing and distribution of our medicinal cannabis products internationally, subject to regulatory approvals.

 

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Licensed Producers: We have engaged in several discussions with major Licensed Producers/Distributors to sell medicinal cannabis domestically and Internationally (supplied by our Strategic International Licensed Producer). As well, these companies are reviewing the strength of our IP to potentially facilitate the processing and distribution of our formulations because our formulated products do not compete with their product lines.

 

Licensed Processor/Pharmaceutical Company: We have engaged in several discussions with a major pharmaceutical company, international distributor and GMP manufacturer who has provided highly positive feedback of the approach Dr. Laviolette has adopted in his research and pre-clinical animal trials, the depth of research and the effective integration of the various research departments at Western University. We believe we can leverage their expertise with multiple formulations, delivery systems for improved bioavailability, including by integrating our formulation into soft gels and tablets for timed release of the formulations. We would also expect to take advantage of their supply, processing and distribution capabilities and collaborate further on R & D and human trials for our formulations.

 

We have reviewed our strategy and believe it is more efficient to partner with existing Licensed Producers who have facilities compliant with good manufacturing practices (GMP) necessary for the preparation of our formulations. Additionally, we are seeking our own purchase/sales, import/export license without possession under the Cannabis Act to distribute formulations and develop our brand as permitted under the Cannabis Act Regulations. We do not require similar special licensing with respect to algae-only related sales.

 

The Company’s strategy to achieve revenue can be summarized as follows:

 

We expect revenue generation from referral fees generated by our introduction of JMCC to licensed sellers of high volume dry medical cannabis and have signed a Supply Agreement with JMCC for that purpose.
We expect to generate additional revenue from our formulated products through our agreements with licensed partners.
We expect to provide a very specialized and unique patentable product, with more novel and patentable products to be produced over time.
We expect to secure a robust sales and distribution network and expand the network over time.
We expect to identify worldwide markets for our formulations.

 

While we have been in business since 2008, we have not generated any revenues to date. Our activities have been principally directed towards development of our BioSilo® algae cultivation system, as well as proving the ability of the system to scale to a level sufficient to meet commercial demand that may develop. The change in the strategy has been very much assisted by the knowledge gained from the algae cultivation plus the relationships which we have developed. The revised strategy is being very well received by suppliers and distributors as there are a number of firms who have expressed an interest to supply cannabis material for our products and to distribute it given that it has a strong basis in science and research performed through our Sponsored Research Program. These firms are also willing to enter into agreements to market the formulated product.

 

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 March 31, 2018, the Company has a working capital deficiency of $870,053 (March 31, 2017 - $852,514) and an accumulated deficit of $7,219,908 (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 financial information included in this Annual Report on Form 10-K does not include any adjustments that might be necessary if the Company is unable to continue as a going concern. Such adjustments could be material.

 

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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 be able to continue to access advances and sales of equity, without which we will not be able to continue operations. We are pursuing additional sources of financing, but there is no assurance that additional capital will be available to the Company on acceptable terms or at all.

 

Marketing Strategies and Competition

 

Advertising and marketing of medical marijuana in Canada is regulated by the Cannabis Act, 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 marijuana products or promoting their use.

 

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.

 

Research and Product Development Relationships and Scientific Advisors

 

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.

 

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. 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:

 

  Tumor 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. 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.

 

Strategic Partners:

 

Mark Jones

 

An experienced senior executive with 36 years in the Global Pharmaceutical Industry with career milestones including; President and CEO of AstraZeneca Canada; President of AstraZeneca UK and AstraZeneca Germany. Global Vice President Southern Europe.

 

Extensive experience in drug development as joint Global Head of AstraZeneca Cardiovascular and Respiratory Therapeutic Area Team; Global commercial lead of the international development and launch of Crestor (rosuvastatin) a $6.0 B brand.

 

Member of the Neuro Development Board of Canada and the Kids Brain Health Foundation Canada.

 

Currently Non-Executive Director of the NHS Foundation Trust Liverpool Heart and Chest Hospital Liverpool UK; Advisor to the Board of Algae Dynamics.

 

Mark Goldberg (Phd in Pharmacology)

 

Over 25 years of experience in biomedical research and as a regulatory consultant. Currently serves on PlantForm Corporation’s Board of directors, a biopharma start--up that he founded. Is also a director of MedCannAccess and an Entrepreneur in Residence at Innovation Guelph. Did his postdoctoral work in biochemical and genetic toxicology at the Ontario Cancer Institute. Joined the department of Biomedical Sciences at the Ontario Veterinary College of the University of Guelph in 1982, and was a tenured faculty member until 1994. Was awarded the University of Guelph’s Forster Fellowship, given annually to the University’s top researcher in 1987. Is the author of more than 50 scientific publications, primarily in the cancer research field. Was co--founder of GlobalTox International Consultants, a toxicology and regulatory affairs firm and serves as its President and CEO for 17 years. Is board--certified by the American Board of Toxicology. Received the Chartered directors (C.Dir.) designation from the directors College.

 

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Graeme G. Phipps (B.Sc.)

 

Oil Industry Expert

 

Over 30 years of oil & gas operational and management experience with Exxon, CanOxy/Nexen and Petro Canada. In 2005, he was Executive V P of PetroKazakhstan and was preparing to become President and CEO when it was successfully sold for US$4.2 billion to China National Petroleum Corporation. Mr. Phipps is a director of several public and private international oil & gas companies. He has extensive experience with financial transactions and investment banking.

 

Intellectual Property

 

We have three potential formulations – which we have termed the “F” Platforms and two provisional patents which we have filed.

 

F1 – a unique THC + botanical extract formulation which mitigates or eliminates the negative side-effects of THC: e.g. anxiety, depression, paranoia, cognitive/memory deficits. We expect F1 to be an alternative to opioids, thus addressing addiction and dependence and effective for pain management.

 

F2 – a unique CBD + select nutraceutical/dietary additives aimed at synergizing the therapeutic properties of CBD in the treatment of anxiety, depression, schizophrenia, PTSD (chronic stress induced) and addiction.

 

F3 – expansion of research and discovery of the novel formulations utilizing other cannabinoids in addition to THC and CBD will unravel specialized applications for targeted therapies in specific mental health symptom clusters.

 

History of Algae Dynamics

 

During 2008 and 2009, we developed the BioSilo® design. In 2010, we partnered with phycology experts Dr. Muller and Dr. McConkey at the University of Waterloo. This partnership provided us with exclusive access to proprietary algae species along with phycology expertise. Through this arrangement, we operated our laboratory and advanced from bench scale algae experiments to operating a onemeter diameter BioSilo® installation. We received funding in part from Ontario Power Authority “OPA” for the design and construction of the one-meter diameter BioSilo® system. Since that time, we have updated our strategy to focus on our cannabis formulations as discussed above.

 

Description of Property

 

The Company initially entered into a five-year operating lease, expiring November 2018, for Unit 37-4120 Ridgeway Drive in Mississauga, Ontario, which consists of 2,224 square feet of office and production facilities. The rental for this facility has been extended for a further 3 years. The current space is adequate for the purpose of constructing an initial production/testing operation. The monthly base rental of the current facility is $1,390 plus the Company’s estimated portion of property taxes and operating expenses which are currently $847 per month. Beginning in November 2018 the base monthly rental of the current facility will be $1,853.

 

Regulatory Risks

 

Algae Dynamics will be subject to various US, federal, provincial, and local environmental laws and regulations including the health and safety of employees, and manufacturing practices. In addition, some of these laws and regulations require contemplated facilities to operate under permits that are subject to renewal or modification. A violation of these laws and regulations or permit conditions can result in substantial fines, natural resource damages, criminal sanctions, permit revocations and/or facility shutdowns.

 

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The Company does not intend to conduct any cannabis related business in the United States due to the uncertain regulatory environment. However, it may distribute its algae produced products (if any) to the United States nutraceutical market.

 

Product Approvals

 

Prior to commencing operations and prior to making or permitting sales of our products in a market, we may be required to obtain an approval, license or certification from the relevant country’s ministry of health or comparable agency. Where a formal approval, license or certification is not required, we nonetheless may need to seek a favorable opinion of counsel regarding our compliance with applicable laws. Prior to entering a new market in which a formal approval, license or certificate is required, we intend to work extensively with local authorities in order to obtain the requisite approvals. We expect the approval process will generally require us to present each product and product ingredient to appropriate regulators and, in some instances, arrange for testing of products by local technicians for ingredient analysis. The approvals may be conditioned on reformulation of our products, or may be unavailable with respect to some products or some ingredients. Product reformulation or the inability to introduce some products or ingredients into a particular market may have an adverse effect on sales. We must also comply with product labeling and packaging regulations that vary from country to country. Our failure to comply with these regulations can result in a product being removed from sale in a particular market, either temporarily or permanently.

 

The Company cannot determine what effect additional domestic or international governmental legislation, regulations, or administrative orders, when and if promulgated, would have on Company’s business in the future. New legislation or regulations may require the reformulation, elimination, or relabeling of certain products to meet new standards and revisions to certain sales and marketing materials, and it is possible that the costs of complying with these new regulatory requirements could be material.

 

ITEM 1A. RISK FACTORS.

 

You should carefully consider the risks described below together with all of the other information included in our public filings before making an investment decision with regard to our securities. The statements contained in or incorporated into this Prospectus that are not historic facts are forward- looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those set forth in or implied by forward- looking statements. While the risks described below are the ones we believe are most important for you to consider, these risks are not the only ones that we face. If any of the following events described in these risk factors actually occurs, our business, financial condition or results of operations could be harmed. In that case, the trading price of our common shares could decline, and you may lose all or part of your investment.

 

General Risk Factors

 

We have a limited operating history and number of commercialized products, have incurred significant losses to date and anticipate continuing to incur losses in the future, and we may not achieve or maintain profitability. As a result, our financial statements contain a “going concern” explanatory paragraph.

 

The financial statements of the Company 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 March 31, 2018, the Company has a working capital deficiency of $870,053 (March 31, 2017 - $852,514) and an accumulated deficit of $7,219,908 (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.

 

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Our products are in the early stages of commercialization, and our business may fail if we are not able to successfully generate significant revenues from these products.

 

Our future success will depend in part on our ability to commercialize the product candidates we are developing. Successful development of our product candidates will require significant additional investment, including costs associated with research and development, completing field trials and obtaining regulatory approval, as well as the ability to manufacture our products in large quantities at acceptable costs while also preserving high product quality. Difficulties often encountered in scaling up production include problems involving production yields, quality control and assurance, shortage of qualified personnel, production costs and process controls. In addition, we are subject to inherent risks associated with new products and technologies. These risks include the possibility that any product candidate may:

 

be found unsafe;
   
be ineffective or less effective than anticipated;
   
fail to receive necessary regulatory approvals;
   
be difficult to competitively price relative to alternative methods of production;
   
be difficult or impossible to manufacture on an economically viable scale;
   
be subject to supply chain constraints for raw materials;
   
fail to be developed and accepted by the market prior to the successful marketing of similar products by competitors;
   
be impossible to market because it infringes on the proprietary rights of third parties; or
   
be too expensive for commercial use.

 

Failure to achieve expected manufacturing yields for our products could negatively impact our operating results.

 

Low yields may result from process design, development stage or process technology failures. We do not know whether a yield problem exists until our products are manufactured based on our design. When a yield issue is identified, the product is analyzed and tested to determine the cause. As a result, yield deficiencies may not be identified until well into the production process. We have limited experience producing our products at commercial scale, and we will not succeed if we cannot maintain or decrease our production costs and effectively scale our technology and manufacturing processes.

 

We have limited experience in marketing and selling our products and will need to expand our sales and marketing infrastructure.

 

We currently have limited sales and marketing experience and capabilities. We will need to further develop our sales and marketing capabilities in order to successfully commercialize the products we are developing, which may involve substantial costs. There can be no assurance that the members of our sales and marketing team will successfully compete against the sales and marketing teams of our current and future competitors, many of which may have more established relationships with distributors and growers. Our inability to recruit, train and retain sales and marketing personnel or their inability to effectively market and sell the products we are developing could impair our ability to gain market acceptance of our products and cause our sales to suffer.

 

If we are unable to maintain and further establish successful relations with third-party distributors and Licensed Producers, or they do not focus adequate resources on selling our products or are unsuccessful in selling them to end users, we may not achieve significant sales of our products.

 

Our future revenue growth will depend in large part on our success in establishing and maintaining this sales and distribution channel. If our distributors are unable to sell our products, or receive negative feedback from end users, they may not continue to purchase or market our products.

 

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In addition, there can be no assurance that our distributors will focus adequate resources on selling our products to end users or will be successful in selling them. Many of our potential distributors are in the business of distributing and sometimes manufacturing other, possibly competing, products. As a result, these distributors may perceive our products as a threat to various product lines currently being distributed or manufactured by them. In addition, these distributors may earn higher margins by selling competing products or combinations of competing products. If we are unable to establish or maintain successful relationships with independent distributors, we will need to further develop our own sales and distribution capabilities, which would be expensive and time-consuming and the success of which would be uncertain.

 

We rely on the experience and expertise of our senior management team and other key personnel, and if we are unable to recruit or retain qualified personnel, our development and commercialization efforts may be significantly delayed.

 

We depend heavily on the principal members of our management, particularly Richard Rusiniak, our co-founder and Chief Executive Officer, and Paul Ramsay, our co- founder and President, the loss of whose services might significantly delay or prevent the achievement of our business objectives. We do not maintain key-man insurance on their lives.

 

As we expand our operations, we will need to hire additional qualified research and development and management personnel to succeed. The process of hiring, training and successfully integrating qualified personnel into our operation is a lengthy and expensive one. The market for qualified personnel is very competitive because of the limited number of people available with the necessary technical skills and understanding of our technology and anticipated products. Our failure to hire and retain qualified personnel could impair our ability to meet our research and development and business objectives and adversely affect our results of operations and financial condition.

 

We also have relationships with scientific collaborators at academic and other institutions, some of whom conduct research at our request or assist us in formulating our research and development strategy. These scientific collaborators are not our employees and may have commitments to, or consulting or advisory contracts with, other entities that may limit their availability to us. We have limited control over the activities of these scientific collaborators and can generally expect these individuals to devote only limited amounts of time to our activities. The inability of any of these persons to devote sufficient time and resources to our programs could harm our business. In addition, these collaborators may have arrangements with other companies to assist those companies in developing technologies that may compete with our products.

 

Our intellectual property is integral to our business. If we are unable to protect our patents and proprietary rights, our business could be adversely affected.

 

Our success depends in part on our ability to obtain and maintain patent and other proprietary rights protection for our formulation and products in the United States and other countries. If we are unable to obtain or maintain these protections, we may not be able to prevent third parties from using our proprietary rights. It is also possible that we will fail to identify patentable aspects of our research and development output before it is too late to obtain patent protection. As of November 29th, 2018, two U.S. provisional patent application were submitted, and we anticipate filing additional patent applications as our research progresses.

 

The patent position of biotechnology and biochemical companies generally is highly uncertain, involves complex legal and factual questions and has in recent years been the subject of much litigation. As a result, the issuance, scope, validity, enforceability and commercial value of our patent rights are highly uncertain. Our future patent applications may not result in patents being issued which protect our technology or products, in whole or in part, or which effectively prevent others from commercializing competitive technologies and products. Changes in either the patent laws or interpretation of the patent laws in the United States and other countries may diminish the value of our patents or narrow the scope of our patent protection. The laws of some foreign countries do not protect proprietary rights to the same extent as the laws of the United States, and we may encounter significant problems and costs in protecting our proprietary rights in these foreign countries.

 

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Our patents may be challenged, narrowed, invalidated or circumvented. In addition, our issued patents may not contain claims sufficiently broad to protect us against third parties with similar technologies or products or provide us with any competitive advantage. We are not certain that our future patent applications will be issued. Moreover, our competitors could challenge or circumvent our patents or pending patent applications. It is also not possible to patent and protect all knowledge and know-how associated with our products so there may be areas that are not protected such as certain formulations and manufacturing processes. Costly and time-consuming litigation could be necessary to enforce and determine the scope of our proprietary rights, and failure to obtain or maintain trade secret protection could adversely affect our competitive business position.

 

Intellectual property litigation could cause us to spend substantial resources and could distract our personnel from their normal responsibilities.

 

Even if resolved in our favor, litigation or other legal proceedings relating to intellectual property claims may cause us to incur significant expenses and could distract our technical and management personnel from their normal responsibilities. In addition, there could be public announcements of the results of hearings, motions or other interim proceedings or developments. If securities analysts or investors perceive these results to be negative, it could have a substantial adverse effect on the price of our common shares. Such litigation or proceedings could substantially increase our operating losses and reduce the resources available for development, sales, marketing or distribution activities. We may not have sufficient financial or other resources to adequately conduct such litigation or proceedings. Some of our competitors may be able to sustain the costs of such litigation or proceedings more effectively than we can because of their greater financial resources. Uncertainties resulting from the initiation and continuation of patent litigation or other proceedings could have a material adverse effect on our ability to compete in the marketplace.

 

If we are unable to protect the confidentiality of our trade secrets, our business and competitive position could be harmed.

 

We have taken measures to protect our trade secrets and know-how, including the use of confidentiality agreements with our employees, consultants, advisors and third-party manufacturers. It is possible that these agreements may be breached and that any remedies for a breach will not make us whole. In addition, some courts inside and outside of the United States are less willing or unwilling to protect trade secrets. We generally control and limit access to, and the distribution of, our product documentation and other proprietary information. Despite our efforts to protect these proprietary rights, our trade secret-protected know-how could fall into the public domain, unauthorized parties may copy aspects of our process and obtain and use information that we regard as proprietary. We also cannot guarantee that other parties will not independently develop our knowledge or otherwise obtain access to our technologies.

 

Third parties may misappropriate our formulations.

 

Third parties, including contract manufacturers, often have custody or control of our formulations. If our formulations were stolen, misappropriated or reverse engineered, they could be used by other parties who may be able to reproduce the formulations for their own commercial gain. If this were to occur, it would be difficult for us to challenge and prevent this type of use, especially in countries with limited intellectual property protection. Other companies may claim that we infringe their intellectual property or proprietary rights, which could cause us to incur significant expenses or prevent us from selling our products.

 

Other companies may claim that we infringe their intellectual property or proprietary rights, which could cause us to incur significant expenses or prevent us from selling our products.

 

Our success depends in part on our ability to operate without infringing the patents and proprietary rights of third parties. Product development is inherently uncertain in a rapidly evolving technological environment such as ours in which there may be numerous patent applications pending, many of which are confidential when filed, with regard to similar technologies. Patents issued to third parties may contain claims that conflict with our patents and that may place restrictions on the commercial viability of our products and technologies. Third parties could assert infringement claims against us in the future. We may become party to, or threatened with, future adversarial proceedings or litigation regarding intellectual property rights with respect to our products, product candidates and technology. We may not be aware of all such third-party intellectual property rights potentially relevant to our products and product candidates.

 

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Any litigation, adversarial proceeding or proceeding before governmental authorities regarding intellectual property rights, regardless of its outcome, would probably be costly and require significant time and attention of our key management and technical personnel. Litigation, adversarial proceedings or proceedings before governmental authorities could also force us to:

 

stop or delay using our proprietary technology;
   
stop or delay selling, manufacturing or using products that incorporate the challenged intellectual property;
   
pay damages; and/or
   
enter into licensing or royalty agreements which, if available at all, may only be available on unfavorable terms.

 

Claims that we have misappropriated the confidential information or trade secrets of third parties could have a similar negative impact on our business.

 

If we fail to maintain and successfully manage our existing, or enter into new, strategic collaborations and other relationships, we may not be able to expand commercial development and sales of many of our products.

 

Our ability to enter into, maintain and manage collaborations and other relationships in our markets is fundamental to the success of our business. We may not be successful in entering into such arrangements with third parties for the sale and marketing of our products. Any failure to enter into new strategic arrangements on favorable terms or to maintain or manage our existing strategic arrangements could delay or hinder our ability to develop and commercialize our ingredients and could increase our costs of development and commercialization.

 

We may be exposed to product liability claims, which could harm our business.

 

The manufacture and sale of food additives and health products is regulated by various local, state, provincial federal and foreign environmental and public health agencies. The costs of remediation or product liability could materially adversely affect our future quarterly or annual operating results.

 

We may be held liable for, or incur costs to settle, liability claims if any products we develop, or any products that use or incorporate any of our technologies, cause injury or are found unsuitable during product testing, manufacturing, marketing, sale or use. These risks exist even with respect to products that have received, or may in the future receive, regulatory approval, registration or clearance for commercial use. We cannot guarantee that we will be able to avoid product liability exposure.

 

As part of the initial implementation process we will be putting in place product liability insurance at levels we believe will be sufficient and consistent with industry standards for companies at our stage of development. We cannot guarantee that our product liability insurance will be adequate and, at any time, it is possible that this insurance coverage may not be available on commercially reasonable terms or at all. A product liability claim could result in liability to us greater than our assets or insurance coverage. Moreover, even if we have adequate insurance coverage, product liability claims or recalls could result in negative publicity or force us to devote significant time and attention to those matters, which could harm our business.

 

We could be harmed by data loss or other security breaches.

 

As a result of certain of our direct to consumer services being web-based and the fact that we will process, store, and transmit data, including personal information, for our customers, failure to prevent or mitigate data loss or other security breaches, including breaches of our vendors’ technology and systems, could expose us or our customers to a risk of loss or misuse of such information, adversely affect our operating results, result in litigation or potential liability for us, and otherwise harm our business. We use third party technology and systems for a variety of reasons, including, without limitation, encryption and authentication technology, employee email, content delivery to customers, back-office support, and other functions. Although we have developed systems and processes that are designed to protect customer information and prevent data loss and other security breaches, including systems and processes designed to reduce the impact of a security breach at a third party vendor, such measures cannot provide absolute security.

 

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We face risks related to system interruption and lack of redundancy.

 

We may experience occasional system interruptions and delays that make our websites and services unavailable or slow to respond and prevent us from efficiently fulfilling orders, which may reduce our net sales and the attractiveness of our products and services. If we are unable to continually add software and hardware, effectively upgrade our systems and network infrastructure, and take other steps to improve the efficiency of our systems, it could cause system interruptions or delays and adversely affect our operating results.

 

Our computer and communications systems and operations could be damaged or interrupted by fire, flood, power loss, telecommunications failure, earthquakes, acts of war or terrorism, acts of God, computer viruses, physical or electronic break-ins, and similar events or disruptions. Any of these events could cause system interruption, delays, and loss of critical data, and could prevent us from accepting and fulfilling customer orders, which could make our product and service offerings less attractive and subject us to liability. Our systems are not fully redundant and our disaster recovery planning may not be sufficient. In addition, we may have inadequate insurance coverage to compensate for any related losses. Any of these events could damage our reputation and be expensive to remedy.

 

Our business is subject to various governmental regulations, and compliance with these regulations may cause us to incur significant expenses. If we fail to maintain compliance with applicable regulations, we may be forced to recall products and cease their manufacture and distribution, which could subject us to civil or criminal penalties.

 

The complex legal and regulatory environment exposes us to compliance and litigation costs and risks that could materially affect our operations and financial results. These laws and regulations may change, sometimes significantly, as a result of political or economic events. They include environmental laws and regulations, tax laws and regulations, import and export laws and regulations, government contracting laws and regulations, labor and employment laws and regulations, securities and exchange laws and regulations, and other laws such as the Foreign Corrupt Practices Act. In addition, proposed laws and regulations in these and other areas could affect the cost of our business operations. We face the risk of changes in both domestic and foreign laws regarding trade, potential loss of proprietary information due to piracy, misappropriation or foreign laws that may be less protective of our intellectual property rights. Violations of any of these laws and regulations could subject us to criminal or civil enforcement actions, any of which could have a material adverse effect on our business, financial condition or results of operations.

 

Risks related to the Company’s Cannabis-Related Business

 

The direction our cannabis initiative is uncertain and may not yield commercial results.

 

In early 2017, we announced a new initiative to explore the potential opportunities in the Canadian cannabis market for the Company’s technologies. As of the date of this Report on Form 10-K, the Company’s initiatives continue to be at an early stage. Full implementation will be dependent upon obtaining the full funding necessary to finalize and utilize such research, as well as obtaining the funding necessary to continue operations. While the Company is continuing to pursue research and development and funding opportunities, there can be no assurance that such pursuit will be successful, or that any research and development efforts will result in commercially saleable products.

 

The Company has made substantial commitments to research collaborations with its university partners but no commercial products may result.

 

A central focus of the Company’s cannabis initiative is its research collaborations with Western University and the University of Waterloo. Under the applicable agreements to the Company has provided substantial funding of specified research into the potential of algae and cannabis to work in combination to treat cancer and depression-related diseases and will have the opportunity to exclusively license any intellectual property developed from such research. However, the progress of scientific discovery is uncertain and there can be no assurance that any commercial products will result from such research.

 

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The Company is Not a Licensed Producer under the ACMPR or the Cannabis Act and may not get the requisite licenses to carry out its cannabis initiative.

 

Initially, the Company intends to conduct its cannabis-related activities through other Licensed Producers. In addition, the Company eventually intends to apply to Health Canada to acquire a license for sale of cannabis (a Sales License) under the Cannabis Act (which replaces the Access to Cannabis for Medical Purposes Regulations (Canada) (“ACMPR”)) issued pursuant to the Controlled Drugs and Substances Act (Canada) that would enable it to sell our medical marijuana formulations directly to patients across Canada. The Company has not yet applied for the licenses and there is no guarantee that the Company will acquire a Sales License. Health Canada has or is expected to receive many applications and only a small fraction has been approved to date under the ACMPR and/or the Cannabis Act. Furthermore, the timing and success of the Company at the various steps in the licensing process is beyond the Company’s control and the sole discretion thereof lies with Health Canada. The Company’s ability to store and/or sell medical marijuana in Canada is dependent on receiving a Sales License from Health Canada and there can be no assurance that the Company will obtain such licenses. The Company is dependent upon others to conduct several of its cannabis-related activities and may need to significantly curtail operations if it is not able to enter into the required outsourcing or collaboration arrangements or obtain the necessary licenses.

 

Even if the Company is successful in obtaining the Sales License, such license will be subject to ongoing compliance and reporting requirements. Failure to comply with the requirements of the license or any failure to maintain the license would have a material adverse impact on the business, financial condition and operating results of the Company. Although the Company believes that we will meet the requirements of the Cannabis Act, there can be no guarantee that Health Canada will grant this license. Should Health Canada not grant the license, the business, financial condition and operating results of the Company would be materially adversely affected. To the extent such license is not obtained, the Company may be curtailed or prohibited from proceeding with the development of its operations as currently proposed, and would be forced to pursue alternative and possibly less certain strategies.

 

The Company’s cannabis-related business is subject to additional regulatory risks.

 

The business and activities of the Company are heavily regulated. The Company’s operations are subject to various laws, regulations and guidelines by governmental authorities, particularly Health Canada, relating to the manufacture, marketing, management, transportation, storage, sale, pricing and disposal of medical marijuana and cannabis oil, and also including laws and regulations relating to health and safety, insurance coverage, the conduct of operations and the protection of the environment. Laws and regulations, applied generally, grant government agencies and self-regulatory bodies broad administrative discretion over the activities of the Company, including the power to limit or restrict business activities as well as impose additional disclosure requirements on the Company’s products and services.

 

Achievement of the Company’s business objectives are contingent, in part, upon compliance with regulatory requirements enacted by these governmental authorities and obtaining all regulatory approvals, where necessary, for the production and sale of its products. The Company cannot predict the time required to secure all appropriate regulatory approvals for its products, or the extent of testing and documentation that may be required by governmental authorities. Any delays in obtaining, or failure to obtain regulatory approvals would significantly delay the development of markets and products and could have a material adverse effect on the business, results of operations and financial condition of the Company.

 

Failure to comply with the laws and regulations applicable to its operations may lead to possible sanctions including the revocation or imposition of additional conditions on licenses to operate the Company’s business; the suspension or expulsion from a particular market or jurisdiction or of its key personnel; the imposition of additional or more stringent inspection, testing and reporting requirements; and, the imposition of fines and censures. To the extent that there are changes to the existing laws and regulations or the enactment of future laws and regulations that affect the sale or offering of the Company’s products or services in any way, the Company’s revenues may be adversely affected.

 

The regulatory environment for medical marijuana companies is rapidly-changing.

 

On June 30, 2016, the Government of Canada established the Task Force on Cannabis Legalization and Regulation (the “Task Force”) to seek input on the design of a new system to legalize, strictly regulate and restrict access to adult-use recreational cannabis. On December 13, 2016, the Task Force completed its review and published a report outlining its recommendations. On April 13, 2017, the Government of Canada released Bill C-45, An Act respecting cannabis and to amend the Controlled Drugs and Substances Act, the Criminal Code and other Acts (Canada) (the “Cannabis Act”). The Cannabis Act regulates the production, distribution and sale of cannabis for adult use.

 

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Several recommendations made by the Task Force reflected in the Cannabis Act could materially and adversely affect the business, financial condition and results of operations of the Company. These recommendations include, but are not limited to, permitting home cultivation, potentially easing barriers to entry into a Canadian recreational cannabis market and restrictions on advertising and branding. It remains possible that developments under the Cannabis Act could significantly and adversely affect the business, financial condition and results of operations of the Company.

 

While the production of cannabis will be under the regulatory oversight of the Government of Canada, the distribution of adult-use recreational cannabis will be the responsibility of the provincial and territorial governments. To date, the prevailing plans amongst Canadian jurisdictions is that the wholesale distribution of cannabis will fall under the responsibility of their provincial liquor authorities. The legal retail business for adult-use recreational cannabis will initially fall under a framework of new provincially owned and run stand-alone cannabis outlets in Ontario, Quebec, New Brunswick, Nova Scotia and Prince Edward Island. Crown corporation run retail outlets will thus have a monopoly over the legal retailing and distribution of cannabis in these provinces, which represent approximately 67% of the Canadian population. The provinces of Alberta, Manitoba, Saskatchewan and Newfoundland and Labrador have indicated they would allow private retailers to manage the retail sales of cannabis in their provinces, while British Columbia will allow a mix of private and Crown corporation run retail stores. Accordingly, the sales and distribution framework for cannabis products is constantly evolving and may require the Company to shift its strategy in response to these changes.

 

There has been limited study on the effects of medical cannabis and future clinical research studies may lead to conclusions that dispute or conflict with our understanding and belief regarding the medical benefits, viability, safety, efficacy, dosing and social acceptance of cannabis.

 

Research in Canada, the United States and internationally regarding the medical benefits, viability, safety, efficacy and dosing of cannabis or isolated cannabinoids (CBD, and THC) remains in relatively early stages. There have been few clinical trials on the benefits of cannabis or isolated cannabinoids conducted by us or by others. Future research and clinical trials may draw opposing conclusions to statements contained in the articles, reports and studies relied upon in the preparation of this report, or could reach different or negative conclusions regarding the medical benefits, viability, safety, efficacy, dosing or other facts and perceptions related to medical cannabis, which could adversely affect social acceptance of cannabis and the demand for our products.

 

If we do not maintain our costs, we may not be able to commercialize our business opportunities.

 

Success will largely be predicated upon the Company’s s ability to use its technology to develop, sell and with the assistance of third party distributions, distribute consistent, high quality, products at competitive prices, and at a commercial scale. There can be no assurance that the Company will be able to develop, sell and distribute its products and technology at competitive prices. Failure to do so will result in smaller profit margins or losses.

 

There is significant competition for nutraceutical formulations based on cannabinoids.

 

There can be no assurance that potential competitors of the Company, which may have greater financial, R&D, sales and marketing and personnel resources than Company, are not currently developing, or will not in the future develop, products and strategies that are equally or more effective and/or economical as any products or strategies developed by the Company or which would otherwise render its products or strategies obsolete. The Company operates within competitive markets and the Company believes that it has adopted a competitive business strategy. However, the Company’s business, results, operations and financial condition could be materially adversely affected by the actions of its competitors (including their marketing and pricing strategies and product and services development). We may be forced to change the nature of our business as a result of competitive factors and there is no assurance that the Company will be able to compete successfully in the market place in which it seeks to operate.

 

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Our prospects depend on the success of our formulations which remain at the early stages of development, and we may not generate revenue in the immediate future, if at all, from these formulations if they are not permitted by Health Canada or other regulators.

 

Given the stage of our product development, we can make no assurance that the research and development and patented formulations derived from our Sponsored Research Programs will result in commercially viable products. To achieve profitable operations, we, together with our collaboration partners, must successfully develop, gain regulatory approval (as required), and deliver products which contain our formulations. We currently have no products that have been approved by the United States Food and Drug Administration (FDA), Health Canada, or any similar regulatory authority. To obtain regulatory approvals for our formulations and to achieve commercial success, we may need to commission clinical trials to demonstrate that the formulations are safe for human use and that they demonstrate efficacy. We have no products which are currently in human clinical trials. Our only current potential source of revenue is from licensing agreements with collaboration partners for the use of our patented formulations. Such licensing agreements, if entered into, would provide only very limited revenues until a commercial product results from such agreement; significant revenues from such licenses may not be realized for several years. As a result, we are not currently generating revenue from our formulations and do not expect to generate significant revenue from our formulations over the next several years and may never generate revenue from the sale or licensing of our formulations, or otherwise.

 

Many product candidates which require testing or clinical trials never reach the stage of clinical testing and even those that do have only a small chance of successfully completing clinical development and gaining regulatory approval. Product candidates may fail for a number of reasons, including, but not limited to, being unsafe for human use or due to the failure to provide therapeutic benefits equal to or better than the standard of treatment at the time of testing. Positive results of early preclinical research may not be indicative of the results that will be obtained in later stages of preclinical or clinical research. Similarly, positive results from early stage clinical trials may not be indicative of favorable outcomes in later-stage clinical trials. We can make no assurance that any future studies, if undertaken, will yield favorable results. The early stage of our product development makes it particularly uncertain whether any of our product development efforts will prove to be successful and meet applicable regulatory requirements, and whether any of our product candidates will receive the requisite regulatory approvals, be capable of being manufactured at a reasonable cost or be successfully marketed. If we are successful in developing our current and future product candidates into approved products, we will still experience many potential obstacles such as the need to develop or obtain manufacturing, marketing and distribution capabilities. If we are unable to successfully commercialize any of our products, our financial condition and results of operations may be materially and adversely affected.

 

We will need to rely on contract manufacturers over whom we have limited control. If we are required to obtain Health Canada or similar approval for the formulation and distribution of our formulations, they may be subject to additional quality, cost or delivery issues with the preclinical and clinical grade materials supplied by contract manufacturers, in which case our business operations could suffer significant harm.

 

We currently have no manufacturing capabilities and intend to rely on contract manufacturing organizations, or CMOs, to manufacture our formulations for distribution as medical marijuana. Licensed Producers who have already obtained approval for the delivery of medical marijuana in soft-gel and other formats may require additional approvals for the distribution of our formulations as they contain additives and for preclinical studies and clinical trials if necessary to either demonstrate the efficacy of our formulations or to permit their formulation under current regulations. We expect to rely on CMOs for manufacturing, filling, packaging, storing and shipping of medical marijuana products and such manufacturing may require compliance with current good manufacturing practice, or cGMP, regulations if applicable to our products. The FDA ensures the quality of drug products by carefully monitoring drug manufacturers’ compliance with cGMP regulations. The cGMP regulations for drugs contain minimum requirements for the methods, facilities and controls used in manufacturing, processing and packing of a drug product If our CMOs increase their prices or fail to meet our quality standards, or those of regulatory agencies such as the FDA, and cannot be replaced by other acceptable CMOs, our ability to obtain regulatory approval for and commercialize our product candidates may be materially adversely affected.

 

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If clinical trials of our product candidates is necessary and they fail to demonstrate safety and efficacy to the satisfaction of regulatory authorities or do not otherwise produce positive results, we would incur additional costs or experience delays in completing, or ultimately be unable to complete, the development and commercialization of our formulations.

 

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 which assumes that our formulations may be marketed in the same manner as medical marijuana formulations that are currently marketed without Health Canada Approval. However, if we are required to obtain Health Canada Approvals or if our formulations cannot be marketed in the same manner as medical marijuana or products governed by the Cannabis Act (including in relation to proposed amendments to permit the sale of edible cannabis products), Food and Drug Act and/or the Natural Health Product Regulations (including in relation to self-care products), we may require marketing and other approvals from regulatory authorities for the sale of our formulations which require that we conduct preclinical studies in animals and extensive clinical trials in humans to demonstrate the safety and efficacy of the product candidates. Clinical testing is expensive and difficult to design and implement, can take many years to complete and has uncertain outcomes. The outcome of preclinical studies and early clinical trials may not predict the success of later clinical trials and interim results of a clinical trial do not necessarily predict final results. A number of companies in the pharmaceutical and biotechnology industries have suffered significant setbacks in advanced clinical trials due to lack of efficacy or unacceptable safety profiles, notwithstanding promising results in earlier trials. We do not know whether the clinical trials we may conduct will demonstrate adequate efficacy and safety to result in regulatory approval to market any of our product candidates in any jurisdiction. A product candidate may fail for safety or efficacy reasons at any stage of the testing process. A major risk we face is the possibility that none of our product candidates under development will successfully gain market approval by regulatory authorities, resulting in us being unable to derive any commercial revenue from them after investing significant amounts of capital in multiple stages of preclinical and clinical testing.

 

If we experience delays in clinical testing, we will be delayed in commercializing our product candidates, and our business may be substantially harmed.

 

We cannot predict whether any clinical trials that may be required will begin as planned, will need to be restructured, or will be completed on schedule, or at all. Our product development costs or those of our collaboration partners will increase if we experience delays in clinical testing. Significant clinical trial delays could shorten any periods during which we may have the exclusive right to commercialize our product candidates or allow our competitors to bring products to market before us, which would impair our ability to successfully commercialize our product candidates and may harm our financial condition, results of operations and prospects. Our product development costs will increase if we experience delays in testing or approval or if we need to perform more or larger clinical trials than planned. Additionally, changes in regulatory requirements and policies may occur, and we may need to amend study protocols to reflect these changes. Amendments may require us to resubmit our study protocols to regulatory authorities or IRBs or ethics committees for re-examination, which may impact the cost, timing or successful completion of that trial. Delays or increased product development costs may have a material adverse effect on our business, financial condition and prospects.

 

Negative results from clinical trials or studies of others and adverse safety events involving the targets of our products may have an adverse impact on our future commercialization efforts.

 

From time to time, studies or clinical trials on various aspects of biopharmaceutical products are conducted by academic researchers, competitors or others. The results of these studies or trials, when published, may have a significant effect on the market for the biopharmaceutical product that is the subject of the study. The publication of negative results of studies or clinical trials or adverse safety events related to our product candidates, or the therapeutic areas in which our product candidates compete, could adversely affect the price of our Common Shares and our ability to finance future development of our product candidates, and our business and financial results could be materially and adversely affected.

 

Compliance with the reporting requirements of federal securities laws can be expensive.

 

We are a public reporting company in the United States, and accordingly, subject to the information and reporting requirements of the Exchange Act and other federal securities laws, and the compliance obligations of the Sarbanes-Oxley Act of 2002. The costs of preparing and filing annual and quarterly reports and other information with the SEC and furnishing audited reports to shareholders are substantial. If we do not provide current information about our Company to market makers, they will not be able to trade our stock. Failure to comply with the applicable securities laws could result in private or governmental legal action against us or our officers and directors, which could have a detrimental impact on our business and financials, the value of our stock, and the ability of shareholders to resell their stock.

 

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If we fail to maintain an effective system of internal controls, we may not be able to accurately report our financial results or detect fraud. Consequently, investors could lose confidence in our financial reporting and this may decrease the trading price of our stock.

 

We must maintain effective internal controls to provide reliable financial reports and to detect and prevent fraud. If we cannot provide reliable financial reports or prevent fraud, we may not be able to manage our business as effectively as would be possible with an effective control system in place. We have not performed an in-depth analysis to determine if historical undiscovered failures of internal controls exist, and may in the future discover areas of our internal control that need improvement.

 

We have been assessing our internal controls to identify areas that need improvement. We are in the process of implementing changes to internal controls, but have not yet completed implementing these changes. Failure to implement these changes to our internal controls or any others that it identifies as necessary to maintain an effective system of internal controls could harm our operating results and cause investors to lose confidence in our reported financial information. Any such loss of confidence would have a negative effect on the trading price of our common shares.

 

Additional Risk Factors:

 

We have not voluntarily implemented various corporate governance measures, in the absence of which, shareholders may have more limited protections against interested director transactions, conflicts of interest and similar matters.

 

Federal legislation, including the Sarbanes-Oxley Act of 2002, has resulted in the adoption of various corporate governance measures designed to promote the integrity of corporate management and the securities markets. Some of these measures have been adopted in response to legal requirements. Others have been adopted by companies in response to the requirements of national securities exchanges, on which their securities are listed. Among the corporate governance measures that are required under the rules of national securities exchanges and NASDAQ are those that address board of directors’ independence, audit committee oversight and the adoption of a code of ethics. While our board of directors has adopted a Code of Ethics, we have not yet adopted any of the other corporate governance measures, and, since our securities are not currently listed on a national securities exchange or NASDAQ, we are not currently required to do so. In the event that our common shares become listed, we will be required to adopt these other corporate governance measures, and we intend to do so. It is possible that if we were to adopt some or all of these corporate governance measures, shareholders would benefit from somewhat greater assurances that internal corporate decisions were being made by disinterested directors and that policies had been implemented to define responsible conduct. For example, in the absence of audit, nominating and compensation committees comprised of at least a majority of independent directors, decisions concerning matters such as compensation packages to our senior officers and recommendations for director nominees may be made by a majority of directors who have an interest in the outcome of the matters being decided. Prospective investors should bear in mind our current lack of corporate governance measures in formulating their investment decisions.

 

Our Common Shares are traded over the counter, which could deprive shareholders of the full value of their shares.

 

Our Common Shares are currently traded over the counter on the OTC Pink, and as a result our common shares have fewer market makers, lower trading volumes and larger spreads between bid and asked prices than securities listed on an exchange such as the New York Stock Exchange or the NASDAQ Stock Market. These factors may result in higher price volatility and less market liquidity for our common shares.

 

We are currently delinquent in our Exchange Act filings and as a result, the Company is potentially subject to enforcement action and shareholders may not be able to resell securities under Rule 144.

 

As a result of the Company’s limited resources, it was unable to file certain periodic reports under the Exchange Act during 2017 and 2018. The Company is filing this Form 10-K as part of its plans to become current and intends to file past due reports as soon as practicable. In the meantime, the Company is potentially subject to enforcement action and/or revocation of its Exchange Act registration. In addition, resales of securities under SEC Rule 144 may be limited until it becomes current in its reports under the Exchange Act.

 

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Risks related to the Common Shares

 

Because we will likely issue additional Common Shares, investment in the Company could be subject to substantial dilution.

 

We anticipate that all or at least some of our future funding, if any, will be in the form of equity financing from the sale of our Common Shares. If we do sell more Common Shares, investors’ investment in the Company will likely be diluted. Dilution is the difference between what you pay for your shares and the net tangible book value per share immediately after the additional shares are sold by us. If dilution occurs, any investment in the Company’s Common Shares could seriously decline in value.

 

Penny stock

 

The SEC has adopted rules that regulate broker-dealer practices in connection with transactions in penny stocks. Penny stocks are generally equity securities with a market price of less than $5.00, other than securities registered on certain national securities exchanges or quoted on the NASDAQ system, provided that current price and volume information with respect to transactions in such securities is provided by the exchange or system. The penny stock rules require a broker-dealer, prior to a transaction in a penny stock, to deliver a standardized risk disclosure document prepared by the SEC, that: (a) contains a description of the nature and level of risk in the market for penny stocks in both public offerings and secondary trading; (b) contains a description of the broker’s or dealer’s duties to the customer and of the rights and remedies available to the customer with respect to a violation of such duties or other requirements of the securities laws; (c) contains a brief, clear, narrative description of a dealer market, including bid and ask prices for penny stocks and the significance of the spread between the bid and ask price; (d) contains a toll-free telephone number for inquiries on disciplinary actions; (e) defines significant terms in the disclosure document or in the conduct of trading in penny stocks; and (f) contains such other information and is in such form, including language, type size and format, as the SEC shall require by rule or regulation.

 

The broker-dealer also must provide, prior to effecting any transaction in a penny stock, the customer with (a) bid and offer quotations for the penny stock; (b) the compensation of the broker-dealer and its salesperson in the transaction; (c) the number of shares to which such bid and ask prices apply, or other comparable information relating to the depth and liquidity of the market for such stock; and (d) a monthly account statement showing the market value of each penny stock held in the customer’s account.

 

In addition, the penny stock rules require that prior to a transaction in a penny stock not otherwise exempt from those rules, the broker-dealer must make a special written determination that the penny stock is a suitable investment for the purchaser and receive the purchaser’s written acknowledgment of the receipt of a risk disclosure statement, a written agreement as to transactions involving penny stocks, and a signed and dated copy of a written suitability statement.

 

These disclosure requirements may have the effect of reducing the trading activity for our common shares. Therefore, shareholders may have difficulty selling our securities.

 

The Company has no current plans to pay dividends on its Common Shares.

 

The Company does not anticipate paying any cash dividends in the foreseeable future. If the Company incurs indebtedness in the future to fund its future growth, its ability to pay dividends may be further restricted by the terms of such indebtedness.

 

Because a small number of existing shareholders own a large percentage of the Company’s voting shares, you will have minimal influence over shareholder decisions.

 

Existing management has significant share ownership in the Company and will retain control of the Company in the future. As a result of such ownership concentration, these individuals will have significant influence over the management and affairs of the Company and its business. It will also exert considerable, ongoing influence over matters subject to shareholder approval, including the election of directors and significant corporate transactions, such as a merger, sale of assets or other business combination or sale of the Company. This concentration of ownership may have the effect of delaying, deferring, or preventing a change in control, impeding a merger, consolidation, takeover or other business combination involving us, or discouraging a potential acquirer from making a tender offer or otherwise attempting to obtain control of the Company, even if such a transaction would benefit other shareholders.

 

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If we fail to maintain proper and effective internal control over financial reporting in the future, our ability to produce accurate and timely financial statements could be impaired, which could harm our operating results, investors’ views of us and, as a result, the value of our common shares.

 

Pursuant to Section 404 of the Sarbanes-Oxley Act, our management will be required to report upon the effectiveness of our internal control over financial reporting beginning with the annual report for our fiscal year ending March 31, 2016. When and if we are a “large accelerated filer” or an “accelerated filer” and are no longer an “emerging growth company,” each as defined in the Exchange Act, our independent registered public accounting firm will be required to attest to the effectiveness of our internal control over financial reporting. However, for so long as we remain an emerging growth company, we intend to take advantage of an exemption available to emerging growth companies from these auditor attestation requirements. The rules governing the standards that must be met for management to assess our internal control over financial reporting are complex and require significant documentation, testing, and possible remediation. To comply with the requirements of being a reporting company under the Exchange Act, we will need to upgrade our systems including information technology; implement additional financial and management controls, reporting systems, and procedures; and hire additional accounting and finance staff. If we or, if required, our auditors are unable to conclude that our internal control over financial reporting is effective, investors may lose confidence in our financial reporting, and the trading price of our common shares may decline.

 

We are an emerging growth company, and the reduced reporting requirements applicable to emerging growth companies may make our common shares less attractive to investors.

 

We are an emerging growth company, as defined in the Jumpstart Our Business Startups Act of 2012, or the JOBS Act and are eligible to take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies, including, but not limited to, three years of audited financial statements in addition to any required unaudited interim financial statements with correspondingly reduced “Management’s Discussion and Analysis of Financial Condition and Results of Operations” disclosure, not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in its Form 10-K and our other periodic reports and proxy statements, exemptions from the requirements of holding non-binding advisory votes on executive compensation and seeking shareholder approval of any golden parachute payments not previously approved and not being required to adopt certain accounting standards until those standards would otherwise apply to private companies. We could be an emerging growth company until the last day of the fiscal year following the fifth anniversary of our initial offering in November 2014, although circumstances could cause us to lose that status earlier, including if we become a large accelerated filer (in which case we will cease to be an emerging company as of the date we become a large accelerated filer, which, generally, would occur if, at the end of a fiscal year, among other things, the market value of our common shares that is held by non-affiliates exceeds USD$700 million as of the last business day of our most recently completed second fiscal quarter), if we have total annual gross revenue of USD$1.0 billion or more during any fiscal year (in which cases we would no longer be an emerging growth company as of March 31 of such fiscal year), or if we issue more than USD$1.0 billion in non-convertible debt during any three year period before that time (in which case we would cease to be an emerging growth company immediately). Even after we no longer qualify as an emerging growth company, we may still qualify as a “smaller reporting company,” which would allow us to take advantage of many of the same exemptions from disclosure requirements including not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act and reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements. We cannot predict if investors will find our common shares less attractive because we may rely on these exemptions. If some investors find our common stock less attractive as a result, there may be a less active trading market for our common shares and our share price may be more volatile.

 

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You may face difficulties in protecting your interests, and your ability to protect your rights through the U.S. federal courts may be limited because we are incorporated under Canadian law, we conduct substantially all of our operations in Canada and most of our directors and all of our executive officers reside outside the United States.

 

We are incorporated in Canada and conduct substantially all of our operations in Canada. Most of our directors and all of our executive officers reside outside the United States and a substantial portion of their assets are located outside of the United States. As a result, it may not be possible for investors to enforce, outside the United States, judgments against the Company obtained in the United States in any such actions, including actions predicated upon the civil liability provisions of the United States federal and state securities laws. In addition, certain of the directors and officers of the Company are residents of Canada or other jurisdictions outside of the United States, and all or a substantial portion of the assets of those directors and officers are or may be located outside the United States. As a result, it may not be possible for investors to effect service of process within the United States upon those persons, or to enforce against them judgments obtained in United States courts, including judgments predicated upon the civil liability provisions of United States federal and state securities laws.

 

ITEM 1B. UNRESOLVED STAFF COMMENTS.

 

None.

 

ITEM 3. 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$29,941 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 court date was held on October 11, 2018 and further submissions from both the Plaintiff and Defendant were requested by the Judge. An additional court date has been scheduled for March 14, 2019.

 

ITEM 4. MINE SAFETY DISCLOSURES.

 

Not applicable.

 

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.

 

Public Market for Common Shares

 

Since January 4, 2016, our Common Shares have traded on the OTC operated by OTC Markets under the symbol “ADYNF”. The table below lists the high and low closing prices per share of our Common Shares from the date our shares were first traded on September 17, 2015, as quoted on OTC Markets. Prior to September 17, 2015, there was no public market for our Common Shares.

 

Quarter Ended  High   Low 
         
September 30, 2015  $1.62   $1.60 
           
December 31, 2015  $1.72   $1.59 
           
March 31, 2016  $1.74   $0.10 
           
June 30, 2016  $1.00   $0.12 
           
September 30, 2016  $0.75   $0.30 
           
December 31, 2016  $0.61   $0.15 
           
March 31, 2017  $0.62   $0.0001 
           
June 30, 2017  $0.3099   $0.09 
           
September 30, 2017  $0.11   $0.09 
           
December 31, 2017  $0.0711   $0.0711 
           
March 31, 2018  $0.09   $0.09 

 

On January 16, 2019, the Common Shares traded on the OTC was $0.13 per share.

 

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Holders

 

We had approximately 66 record holders of our Common Shares as of January 16, 2019, according to the books of our transfer agent. The number of shareholders of record excludes any estimate by us of the number of beneficial owners of shares held in street name, the accuracy of which cannot be guaranteed; however, we estimate the total number of shareholders to be approximately 250 to 300.

 

As of January 16, 2019 there were 20,136,377 common shares of our common stock issued and outstanding.

 

Dividends

 

We currently intend to retain future earnings for the operation of our business. We have never declared or paid cash dividends on our common shares, and we do not anticipate paying any cash dividends in the foreseeable future.

 

In the event that a dividend is declared, common shareholders on the record date are entitled to share ratably in any dividends that may be declared from time to time on the common shares by our board of directors from funds legally available.

 

There are no restrictions in our articles of incorporation or bylaws that restrict us from declaring dividends.

 

Securities Authorized for Issuance under Equity Compensation Plans

 

On December 11, 2014, our board of directors and majority shareholders approved the adoption of the Algae Dynamics Corp Stock Incentive Plan (the “Equity Incentive Plan”).

 

The purpose of the Equity Incentive Plan is to foster and promote our long-term financial success and increase shareholder value by motivating performance through incentive compensation. The Equity Incentive Plan is intended to encourage participants to acquire and maintain ownership interests in our company and to attract and retain the services of talented individuals upon whose judgment and special efforts the successful conduct of our business is largely dependent.

 

The Equity Incentive Plan became effective upon its approval by the majority of shareholders on August 28, 2014. The Plan is a fixed stock option plan, under which the aggregate number of Common Shares which may be reserved for issuance in respect of all options, restricted stock awards and restricted stock unit awards under the Plan together with any options, restricted stock awards or restricted stock unit awards under any other employee stock option plans or other share compensation arrangements of the Corporation, shall not exceed 15% of the Corporation’s total issued and outstanding Common Shares. At March 31, 2018, there were 16,600,435 common shares issued and outstanding.

 

The Equity Incentive Plan provides for the granting of non-qualified share options, to our employees, officers, directors and consultants.

 

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Equity Compensation Plans as of March 31, 2018

 

   A   B   C 
   Number of      

Number of
securities
remaining
available for
future issuance
under equity

 
Category 

securities to be
issued upon
exercise of
outstanding
options

  

Weighted-
average exercise
price of
outstanding
options

  

compensation
plans (excluding
securities
reflected in
column (A))

 
Equity compensation plans approved by security holders   2,020,000   $0.45    470,065 
Equity compensation plans not approved by security holders   0    0    0 
Total   2,020,000   $0.45    470,065 

 

Note 1 The stock option plan is based on 15% of the number of common shares (16,600,435) and the number on the table is as of March 31, 2018.

 

Recent Sales of Unregistered Securities

 

On May 15, 2016, 13,874 shares to be issued to a consulting firm were issued as common shares for services rendered in the amount of USD$22,500 ($31,140) during the year ended March 31, 2016. The amount was recorded as professional fees on the statement of operations during the year ended March 31, 2016.

 

On May 18, 2016, 44,500 common shares purchase warrants were exercised at USD$0.04 ($0.052) per warrant for total cash proceeds of USD$1,780 ($2,318).

 

On May 19, 2016, the Company signed a letter of engagement with an agent in connection with proposed placements of up to US$10,000,000 ($13,427,000), which included as part of the fee the issuance of 100,000 common shares as a non-refundable retainer at a value of $101,579 based upon an estimated fair market value of USD$0.78 ($1.02) per share at the time of the agreement. The amount of the retainer has been expensed to professional fees during the year ended March 31, 2017.

 

On June 22, 2016, 15,264 shares to be issued to a consulting firm were issued as common shares for services rendered in the amount of USD$22,500 ($29,185) during the year ended March 31, 2016. The amount was recorded as professional fees on the statement of operations during the year ended March 31, 2016.

 

On June 30, 2016, 66,667 common shares were issued to a consultant in settlement of a debt at a value of $64,585 based upon an estimated fair market value of USD$0.75 ($0.97) per share at the time of issuance.

 

On June 30, 2016, 250,000 common shares were issued to a consulting firm as a portion of the compensation for services initiated on June 24, 2016 at a value of $201,481 based upon an estimated fair market value of USD$0.62 ($0.81) per share at the date of issue. This amount was expensed during the year ended March 31, 2017 as professional fees on the statements of operations. A second issuance of 250,000 common shares was made on October 17, 2016 at a value of $113,225 based upon an estimated fair market value of USD$0.35 ($0.45) per share at the date of issue and the final issuance of 250,000 common shares was made on October 18, 2016 at a value of $125,766 based upon an estimated fair market value of USD$0.38 ($0.50) per share at the date of issue.

 

On July 7, 2016, the Company committed to issue 20,000 common shares to a consultant in settlement of a debt at a value of $19,500 (USD$15,000) based upon an estimated fair market value of USD$0.75 ($0.97) per share on that date. These common shares were issued on October 17, 2016.

 

On December 19, 2016, 25,000 stock options were exercised at an exercise price of $0.31 per common share for gross proceeds of $7,750. The proceeds were allocated to settle a debt with the consultant who exercised the stock options.

 

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On December 29, 2016, a consulting firm was issued 78,027 common shares for services rendered in the amount of USD$45,000 ($58,500), this amount has been recorded as professional fees on the statement of operations.

 

On December 29, 2016, 117,465 shares to be issued were issued as common shares, 72,465 of these shares were committed to be issued during the year ended March 31, 2016 in settlement of debt and 45,000 of these shares were committed to be issued during the year ended March 31, 2016 as compensation to three members of management.

 

On December 29, 2016, an aggregate of 600,000 shares were issued to three members of management as compensation at a value of $485,458 based upon an estimated fair market value of USD$0.60 ($0.81) per share at the date of issue.

 

On December 29, 2016, 1,316,173 shares were issued to two officers and directors as consideration for conversion of shareholder advances and accounts payable.

 

On January 9, 2017, the Company entered into a three-month contract with an investor relations firm. The terms of the contract specified a cash payment of USD$10,000 ($13,427) and 50,000 shares of common shares which were issued on January 10, 2017 at a value of $27,000 ($35,733) based upon an estimated fair market value of USD$0.55 ($0.728) per share. The portion applicable to the 9 days in April 2017 has been recorded as a prepaid expense ($4,916) at March 31, 2017.

 

On January 10, 2017, 75,000 stock options were exercised at $0.31 per common share for total proceeds of $23,250. The proceeds were used to settle a debt with the consultant who exercised the stock options.

 

On March 22, 2017, an aggregate of 75,000 shares were issued to three members of management as compensation valued at $29,007 based upon an estimated fair market value of $0.39 (USD$0.29) per share at the date of commitment.

 

On March 21, 2017, 50,000 common shares purchase warrants were exercised at $0.053 (USD$0.04) on a cashless basis with 39,500 common shares being issued.

 

Equity transactions March 31, 2017 to March 31, 2018

 

2018 Equity issued

 

Under the terms of convertible notes issued on June 21, 2017, for USD$50,000 ($66,550), the Company agreed to issue 100,000 restricted common shares as a commitment fee. The note matured on June 21, 2018 and a total of 560,000 common shares were issued plus 200,000 purchase warrants were also issued. One purchase warrant can be exchanged for one common share for USD$0.50 at any time until June 21, 2022.

 

Under the terms of a convertible note issued on July 25, 2017, for USD$50,000 ($62,535), the Company agreed to issue 100,000 restricted common shares as a commitment fee. The note matured on July 25, 2018 and a total of 560,000 common shares were issued plus 200,000 purchase warrants were also issued. One purchase warrant can be exchanged for one common share for USD$0.50 at any time until July 25, 2022.

 

The convertible notes issued on August 14, 2017, USD$53,000 ($67,602), September 18, 2017, USD$10,000 ($12,238), October 27, 2017, USD$250,000 ($321,850), November 1, 2017 USD$20,000 ($25,770), November 13, 2017, USD$25,000 ($31,833) for a total of USD$358,000 ($459,292) have matured and the Company issued a total of 3,639,931 common shares at the conversion rate of USD$0.10. The shares (2,541,781) for the USD$250,000 convertible note were issued on January 5, 2018 and the balance of the shares for the convertible notes (1,098,150) were issued subsequent to March 31, 2018.

 

On November 8, 2017, the Board approved the award of an aggregate of 1,050,000 common shares to three management personnel for services rendered, these shares were subsequently cancelled and awarded as deferred share units. In addition, the Board cancelled an aggregate of 600,000 common shares awarded in a prior period to three management personnel.

 

On December 1, 2017, the Company entered into an agreement with 908746 Ontario Inc., the agreement is for the provision of advisory services for ongoing capital market activities including investor relations. Under the agreement, a total of 71,133 shares were issued.

 

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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 common stock on signing, valued at USD$20,390 ($27,186).

 

The convertible notes issued on August 14, 2017, USD$53,000 ($67,602), September 18, 2017, USD$10,000 ($12,238), October 27, 2017, November 1, 2017 USD$20,000 ($25,770), November 13, 2017, USD$25,000 ($31,833) for a total of USD$358,000 ($459,292) have matured and the Company issued a total of 3,639,931 common shares at the conversion rate of $0.10. The shares (2,541,781) for the USD$250,000 convertible were issued on January 5, 2018 and the balance of the shares for the convertibles notes (1,098,150) were issued subsequent to March 31, 2018. The Company agreed to issue an additional 159,023 warrants with an exercise price of $0.75 and an expiry of January 2, 2020, on connection with the conversions.

 

Since inception, we have issued 20,136,377 common shares to 66 investors. The total value of these shares issued totaled $5,795,313 and were used for working capital. This information has been provided as part of the Form 10-K filing to March 31, 2018. These securities were issued pursuant to Section 4(2) of the Securities Act and/or Rule 506 and Regulation S promulgated thereunder. The holders represented their intention to acquire the securities for investment only and not with a view towards distribution. The investors were given adequate information about us to make an informed investment decision. We did not engage in any general solicitation or advertising. We directed our transfer agent to issue the with the appropriate restrictive legend affixed to the restricted stock.

 

These securities were issued pursuant to Section 4(2) of the Securities Act and/or Rule 506 and Regulation S promulgated thereunder. The holders represented their intention to acquire the securities for investment only and not with a view towards distribution. The investors were given adequate information about us to make an informed investment decision. We did not engage in any general solicitation or advertising. We directed our transfer agent to issue the stock certificates with the appropriate restrictive legend affixed to the restricted stock.

 

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ITEM 6. SELECTED FINANCIAL DATA.

 

As a smaller reporting company, as defined in Rule 12b-2 of the Securities Exchange Act of 1934, we are not required to provide the information required by this item.

 

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

 

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

 

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 incurred a net loss of $1,101,077 for the year ended March 31, 2018, (2017 - $2,585,661). We do not anticipate having a positive net income in the immediate future. Net cash from operating activities for the year ended March 31, 2018 was $27,539. 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, in accordance with ASC 9:115 and has not yet realized profitable operations and has relied on non-operational sources to fund operations. In addition, as of March 31, 2018, the Company has a working capital deficiency of $870,053 (March 31, 2017 - $852,514) and has accumulated deficit of $7,219,908 (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, 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.

 

Results of Operations for the year ended March 31, 2018 compared to the year ended March 31, 2017 Operating Expenses

 

The operating expenses decreased in 2018 ($1,101,077) versus 2017 ($2,585,661) by $1,484,584 as the Company continued to build the administrative infrastructure to support the development and implementation of the business plan. The decrease is primarily related to the decrease in the amount of expense related to investor relations.

 

Net Income (Loss)

 

We recognized a net loss of $1,101,077 for the year ended March 31, 2018 as compared to a net loss of $2,585,661 for the same period of 2017. Changes in net income (loss) are primarily attributable to changes in expenses, each of which is described above.

 

Liquidity and Capital Resources

 

Net cash flow from operating activities was $27,539 and ($341,945) for the years ended March 31, 2018 and 2017, respectively. The decrease is mainly attributable to the development of an appropriate funding strategy aligned with the implantation of the business plan.

 

We had negative working capital of $ 870,053 as of March 31, 2018 compared to $852,514 as of March 31, 2017. The current level of development activity necessitates a cash requirement of approximately $50,000 monthly.

 

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We do not have any material commitments for capital expenditures and have designed our business model such that we did not expect to have material requirements for capital expenditures in the foreseeable future.

 

We continue to rely on advances and sale of equity to fund operating shortfalls and we see changes in the near future as the business strategy detailed in the business plan is implemented. There can be no assurances that we will commence receiving the anticipated revenue or that we will continue to be able to access advances and sell equity, without which we will not be able to continue operations. The Company intends to continue to raise capital via private and public offerings of equity in the future. As of March 31, 2018, we estimate that the Company will need $20 million to fully execute our business plan.

 

The Company has revised its business strategy as outlined in the business plan (detailed in ITEM 1 Business) which positions the Company to participate in the developing medical cannabis market within Canada and potentially external to Canada in jurisdictions which has legalized medical cannabis. In order to process the appropriate legal documents, the Company has retained the legal firm of Rickette Harris LLP to provide recommendations in dealing with the Canadian regulatory and financing environment for the cannabis market as well as issues related to ongoing corporate matters.

 

If the funding from the private or public offerings is not available in a timely manner, then management will forego 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.

 

Additional Financing

 

Please see the section Recent Sales of Unregistered Securities– Notes 10 and 15 of the Audited Financial Statements.

 

Off-Balance Sheet Arrangements

 

There are no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors.

 

Our principal capital resources have been through the subscription and issuance of common stock, although we have also used stockholder loans.

 

Going Concern

 

The accompanying financial statements have been prepared on a going concern basis which assumes that adequate sources of financing will be obtained as required and that our assets will be realized and liabilities settled in the ordinary course of business. Accordingly, the financial statements do not include any adjustments related to the recoverability of assets and classification of assets and liabilities that might be necessary should we be unable to continue as a going concern.

 

As shown in the financial statements, the Company incurred a net operating loss of $1,101,077 for the year ended March 31, 2018, (2017 - $2,585,661). The Company’s current liabilities exceed its current assets by $870,053 as of March 31, 2018.

 

38

 

 

In view of the matters described in the preceding paragraph, recoverability of a major portion of the recorded asset amounts shown in the accompanying balance sheet is dependent upon continued operations of the Company, which in turn is dependent upon the Company’s ability to meet its financing requirements on a continuing basis by raising additional funds through debt or equity financing. The financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts and classification of liabilities that might be necessary should the Company be unable to continue in existence.

 

Accordingly, our independent auditors included an explanatory paragraph in their report on the March 31, 2018 financial statements regarding concerns about our ability to continue as a going concern. Our financial statements contain additional notes and disclosure describing the circumstances that lead to this disclosure by our independent auditors.

 

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.

 

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 Notes 2 and 3 of the Notes to the Financial Statements.

 

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.

 

Cash and Cash Equivalents

 

The company considers highly liquid financial instruments purchased with a maturity of three months or less to be cash equivalents.

 

Income Taxes

 

Please see Note 11 of the accompanying financial statements.

 

Fair Value of Financial Instruments

 

Please see Notes 9 and 14 of the accompanying financial statements.

 

Net Loss Per Common Share

 

Net loss per common share is computed pursuant to section 260-10-45 of the FASB Accounting Standards Codification. Basic net loss per common share is $0.08 computed by dividing net loss by the weighted average number of shares of common stock outstanding during the period. Diluted net loss per common share is computed by dividing net loss by the weighted average number of shares of common stock and potentially outstanding shares of common stock during the period to reflect the potential dilution that could occur from common shares issuable through stock options and warrants. Potentially dilutive securities which were not included in diluted weighted average shares for the years ended March 31, 2018 and 2017 consist of outstanding options (2,020,000 and 695,000) respectively and outstanding warrants (1,575,000 and 1,197,500) respectively.

 

39

 

 

Stock-Based Compensation

 

Please see Note 10c of the accompanying financial statements.

 

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 is not expected to 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.

 

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. Early adoption is permitted for any entity in any interim or annual period, however, certain requirements apply to the early adoption. The guidance is not expected to 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. The guidance is not expected to have a material impact 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. Early adoption is permitted, including adoption in any interim period. The guidance is not expected to have a material impact on the Company’s financial statements.

 

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

 

As a smaller reporting company, as defined in Rule 12b-2 of the Securities Exchange Act of 1934, we are not required to provide the information required by this item.

 

40

 

 

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

 

 

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

To the Board of Directors and
Stockholders of Algae Dynamics Corp.

 

Opinion on the Financial Statements

 

We have audited the accompanying balance sheets of Algae Dynamics Corp. (the “Company”) as of March 31, 2018 and 2017, and the related statements of operations, stockholders’ deficiency, and cash flows for each of the years in the two year period ended March 31, 2018 and 2017, and the related notes (collectively referred to as the financial statements). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of March 31, 2018 and 2017, and the results of its operations and its cash flows for each of the years in the two year period ended March 31, 218 and 2017, in conformity with accounting principles generally accepted in the United States of America.

 

Basis for Opinion

 

These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

 

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.

 

Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

 

The accompanying financial statements have been prepared assuming that Algae Dynamics Corp. will continue as a going concern. As discussed in Note 1 to the financial statements, Algae Dynamics Corp.’s operating losses, negative working capital and an accumulated deficit as at March 31, 2018 raise substantial doubt about its ability to continue as a going concern. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

 

We have served as the Company’s auditor since 2013.

 

 

UHY McGovern Hurley, LLP

 
  Chartered Professional Accountants
  Licensed Public Accountants

 

Toronto, Ontario

January 16, 2019

 

41

 

 

ALGAE DYNAMICS CORP.

Balance Sheets

(Stated in Canadian Dollars)

 

   As at March 31,  As at March 31,
   2018  2017
       
ASSETS          
           
Current Assets          
Cash  $8   $87 
Prepaid expenses   25,311    32,878 
Amounts receivable, net   1,380    11,963 
Advances to shareholders and related parties (Note 13)   51,499    - 
Total Current Assets   78,198    44,928 
           
Equipment and leasehold improvements, net (Note 4)   32,121    47,828 
           
Total Assets  $110,319   $92,756 
           
LIABILITIES          
           
Current Liabilities          
Accounts payable and accrued liabilities (Note 13)  $584,522  $286,792 
Advances from shareholders and related parties (Note 6)   -    22,347 
Promissory note (Note 8a)   -    16,456 
Term loan (Note 7)   52,000    48,894 
Convertible notes (Note 8)   101,579    26,076 
Derivative liability (Note 9)   118,676    260,677 
Warrant liability (Note 10b)   91,474    236,200 
Total Current Liabilities   948,251    897,442 
           
Going Concern (Note 1)          
Commitments and Contingencies (Note 12)          
           
STOCKHOLDERS’ (DEFICIENCY)          
           
Common stock (Note 10a), no par value, unlimited amount authorized, 16,600,435 issued and outstanding as of March 31, 2018, (March 31, 2017 - 13,337,521)   4,585,877    4,313,931 
Additional paid in capital (Notes 10b and 10c)   1,631,025    1,016,324 
Equity to be issued (Note 10a)   165,074    - 
Accumulated deficit         (7,219,908)   (6,134,941)
Total Stockholders’ (Deficiency)   (837,932)   (804,686)
           
Total Liabilities and Stockholders’ (Deficiency)  $110,319   $92,756 

 

These financial statements are approved by the Directors:

 

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

 

The accompanying notes are an integral part of these financial statements

 

42

 

 

ALGAE DYNAMICS CORP.

Statements of Operations

(Stated in Canadian Dollars)

 

   For the   For the 
   Year Ended   Year Ended 
   March 31,   March 31, 
   2018   2017 
         
OPERATING EXPENSES          
Accretion expenses (Notes 7 and 8)  $247,612   $62,033 
Application and membership fees   10,220    12,646 
Amortization expense (Note 4)   15,707    17,424 
Bad debt (recovery) (Note 13)   (8,300)   17,656 
Business development   3,810    7,715 
Convertible debt financing cost (Note 8 and 9)   -    113,225 
Fair value change in derivative liability (Note 9)   (264,072)   7,359 
Foreign exchange   3,301    852 
Interest   85,904    4,611 
Loss on extinguishment of debt (Notes 6, 10a and 13)   -    548,711 
Management fees (recovery)   (8,125)   8,125 
Occupancy costs   34,369    32,201 
Office and general   6,425    7,102 
Professional fees (Notes 10a, 10b, 10c and 14e)   141,992    1,193,944 
Research and development   262,007    7,629 
Stock based compensation (Note 10c)   546,812    515,624 
Telephone and internet services   11,933    13,304 
Travel   11,482    15,500 
Total Operating Expenses   1,101,077    2,585,661 
           
Net loss before income taxes   1,101,077    2,585,661 
Income tax   -    - 
Net Loss for the Year  $1,101,077   $2,585,661 
           
Net loss per common share - basic and diluted  $0.08   $0.23 
           
Weighted average common shares outstanding - basic and diluted   14,277,143    11,324,138 

 

The accompanying notes are an integral part of these financial statements

 

43

 

 

ALGAE DYNAMICS CORP.

Statements of Stockholders’ Equity (Deficiency)

(Stated in Canadian Dollars)

 

   Common   Common   Additional             
   Shares   Shares   Paid in   Equity to   Accumulated   Stockholders’ 
   Number   Amount   Capital   be Issued   Deficit   (Deficiency) 
                         
March 31, 2016   9,701,051   $1,466,352   $1,216,963   $339,949   $(3,723,368)  $(700,104)
                               
Warrants exercised (Notes 10a and 10b)   84,000    57,639    -    -    -    57,639 
Warrants expired   -    -    (174,088)   -    174,088    - 
Stock based compensation (Notes 10a and 10c)   720,000    621,697    1,049    (107,122)   -    515,624 
Options exercised   100,000    58,600    (27,600)   -    -    31,000 
Shares issued for conversion of debt (Note 10a)   1,475,305    1,326,650    -    (172,501)   -    1,154,149 
Shares issued to consultants as compensation for services rendered (Note 10a)   1,257,165    782,993    -    (60,326)   -    722,667 
Net loss for the year   -    -    -    -    (2,585,661)   (2,585,661)
March 31, 2017   13,337,521    4,313,931    1,016,324    -    (6,134,941)   (804,686)
                               
Warrants expired (Note 10b)   -    -    (16,110)   -    16,110    - 
Shares cancelled (Notes 10a and 10c)   (600,000)   (84,000)        -    -    (84,000)
Stock options (Note 10c)             134,960              134,960 
Stock based compensation transferred to Deferred Share Units, with the cancellation completed after the year end (Note 10a and 10c)   1,050,000          147,000              147,000 
Deferred Share Units issued (Note 10c)             348,851              348,851 
Commitment shares issued on convertible note (Note 10a)   200,000    25,245         -         25,245 
Shares issued for conversion convertible notes (Note 10a)   2,541,781    322,701                   322,701 
Shares issued to and to be issued to consultants as compensation for services (Note 10a)   71,133    8,000    -    27,185    -    35,185 
Conversion of convertible notes (Note 10a)                  137,889         137,889 
Net loss for the year   -    -    -    -    (1,101,077)   (1,101,077)
March 31, 2018   16,600,435   $4,585,877   $1,631,025   $165,074   $(7,219,908)  $(837,932)

 

The accompanying notes are an integral part of these financial statements

 

44

 

 

ALGAE DYNAMICS CORP.

Statements of Cash Flows

(Stated in Canadian Dollars)

 

   Year Ended   Year Ended 
   March 31,   March 31, 
   2018   2017 
         
Cash flows from operating activities          
           
Net loss for the year  $(1,101,077)  $(2,585,661)
Adjustments to reconcile net loss to net cash used in operating activities:          
Amortization   15,707    17,424 
Stock based compensation (Note 10c)   929,943    1,155,982 
Extinguishment of debt   -    544,066 
Change in derivative warrant liabilities (Note 9 and 14e)   (264,072)   (368,957)
Shares issued and to be issued for services (Note 10a)   -    722,668 
Gain on settlement of debt   -    4,643 
Accretion expense   247,612    62,032 
Realized foreign exchange loss   -    - 
Convertible debt financing cost   -   102,612 
           
Change in operating assets and liabilities          
Prepaid expenses   7,567    (18,126)
Amounts receivable   (40,916)   17,103 
Accounts payable and accrued liabilities   232,775    4,269 
Net cash flows used in operating activities   27,539    (341,945)
           
Cash flows from financing activities          
Advances from shareholders   (22,347)   159,443 
Term loan proceeds   -    40,000 
Convertible notes issued   128,986    140,099 
Convertible notes repaid   (70,482)     
Promissory note repaid   (63,775)     
Warrant exercise proceeds   -    2,317 
Net cash flows from financing activities   (27,618)   341,859 
           
Net change in cash   (79)   (86)
Cash position - beginning of year   87    173 
           
Cash position - end of year  $8   $87 
           
Supplemental Information:          
           
Income taxes paid  $-   $-  
Common shares and shares to be issued, for conversion of debt   3,639,931    

208,764

 
Common shares to be cancelled   (1,050,000)    -  

 

The accompanying notes are an integral part of these financial statements

 

45

 

 

Algae Dynamics Corp.

Notes to Financial Statements

(Stated in Canadian Dollars)

March 31, 2018 and 2017

 

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 and algae oil. The Company’s planned principal operations are the development and sale of health products, design and development of a facility to extract botanical oils, and design, engineering and manufacturing of a proprietary algae cultivation system for the high-volume production of pure contaminant-free algae biomass.

 

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 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 March 31, 2018, the Company has a working capital deficiency of $870,053 (March 31, 2017 - $852,514) and an accumulated deficit of $7,219,908 (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.

 

46

 

 

Algae Dynamics Corp.

Notes to Financial Statements

(Stated in Canadian Dollars)

March 31, 2018 and 2017

 

2.) Presentation of Financial Statements

 

Basis of Presentation

 

These financial statements have been prepared in accordance with U.S. Generally Accepted Accounting Principles (“US GAAP”). All adjustments considered necessary for a fair presentation of financial position, results of operations and cash flows have been included.

 

The Company’s financial statements are prepared using the accrual basis of accounting in accordance with US GAAP and the Company’s functional and reporting currency is the Canadian dollar.

 

Use of Estimates and Assumptions

 

The preparation of the financial statements in accordance with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual amounts could materially differ from these estimates. The significant areas requiring the use of management estimates are related to provision for doubtful accounts, accrued liabilities, contingencies, the valuation of deferred taxes, stock based compensation, warrants, convertible debt and intangible assets. Although these estimates are based on management’s knowledge of current events and actions management may undertake in the future, actual results may ultimately differ materially from those estimates.

 

47

 

 

Algae Dynamics Corp.

Notes to Financial Statements

(Stated in Canadian Dollars)

March 31, 2018 and 2017

 

3.) Summary of Significant Accounting Policies

 

Cash and Cash Equivalents

 

Cash and cash equivalents include cash on hand, and all highly liquid debt instruments purchased with an original maturity of three months or less. As at March 31, 2018 and 2017, there were no cash equivalents.

 

Prepaid Expenses

 

Prepaid expenses consist of services paid, for which the Company has not yet received the benefit.

 

Equipment and Leasehold Improvements

 

Equipment and leasehold improvements are stated at cost less accumulated depreciation and accumulated impairment losses. Cost includes expenditures that are directly attributable to the acquisition of the asset. Subsequent costs are included in the asset’s carrying amount or recognized as a separate asset, as appropriate, only when it is probable that future economic benefits associated with the item will flow to the Company and the cost can be measured reliably. The carrying amount of an asset is derecognized when replaced.

 

Repairs and maintenance costs are charged to the statements of operations, during the year in which they are incurred.

 

Depreciation is provided for over the estimated useful life of the asset as follows:

 

Computer equipment 30% on a declining balance  
Production equipment 20% on a declining balance  

 

Leasehold improvements are amortized over the term of the lease or useful life of the improvements, whichever is shorter, which is currently 5 years.

 

Useful lives and residual values are reviewed and adjusted, if appropriate, at the end of each reporting period. An asset’s carrying amount is written down immediately to its recoverable amount if the asset’s carrying amount is greater than its estimated recoverable amount. The cost and accumulated depreciation of assets retired or sold are removed from the respective accounts and any gain or loss is recognized in operations.

 

48

 

 

Algae Dynamics Corp.

Notes to Financial Statements

(Stated in Canadian Dollars)

March 31, 2018 and 2017

 

3.) Summary of Significant Accounting Policies (continued)

 

Intangible Assets

 

Intangible assets are comprised of patents. Patents represent capitalized legal costs incurred in connection with applications for patents which have a probable future economic benefit. In-process patents are not amortized. All patents subject to depreciation are amortized on a straight line basis over their estimated useful life. The Company regularly evaluates patents and patent applications for impairment or abandonment, at which point the Company charges the remaining net book value to expenses.

 

Impairment of Long-Lived Assets

 

The Company reviews its long-lived assets for impairment whenever events and circumstances indicate that the carrying value of an asset might not be recoverable. An impairment loss, measured as the amount by which the carrying amount exceeds the fair value, is recognized if the carrying amount exceeds estimated undiscounted future cash flows.

 

Research and Development

 

Research and development costs include costs directly attributable to the conduct of research and development programs, including the cost of consulting fees, materials, supplies, and the maintenance of research equipment. All costs associated with research and development are expensed as incurred. The approved refundable portion of tax credits are netted against the related expenses. Non-refundable investment tax credits are recorded in the period when reasonable assurance exists that the Company has complied with the terms and conditions required for approval of the tax credit and it is more likely than not that the Company will realize the benefits of these tax credits against the deferred taxes. Refundable investment tax credits are recorded in the period when reasonable assurance exists that the Company has complied with the terms and conditions required for approval of the tax credit and it is more likely than not that the Company will collect it.

 

Stock-based Compensation

 

The Company uses the fair value based method of accounting for all its stock-based compensation in accordance with FASB Accounting Standards Codification (“ASC”) ASC 718 “Compensation – Stock Compensation”. The estimated fair value of the options and warrants that are ultimately expected to vest based on performance related conditions, as well as the options and warrants that are expected to vest based on future service, is recorded over the instrument’s requisite service period and charged to stock-based compensation. In determining the amount of options and warrants that are expected to vest, the Company takes into account, voluntary termination behavior as well as trends of actual option and warrant forfeitures. Stock options and warrants which are indexed to a factor which is not a market, performance or service condition, in addition to the Company’s share price, are classified as liabilities and re-measured at each reporting date based on the Black-Scholes option pricing model with a charge to operations, until the date of settlement.

 

49

 

 

Algae Dynamics Corp.

Notes to Financial Statements

(Stated in Canadian Dollars)

March 31, 2018 and 2017

 

3.) Summary of Significant Accounting Policies (continued)

 

Income Taxes

 

Income taxes are accounted for under the asset and liability method of accounting for income taxes. Under the asset and liability method, deferred tax liabilities and assets are recognized for the estimated future tax consequences attributable to differences between the amounts reported in the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted income tax rates expected to apply when the asset is realized or the liability is settled. The effect of a change in income tax rates on deferred tax liabilities and assets is recognized in income in the period in which the change occurs. Deferred tax assets are recognized to the extent that they are considered more likely than not to be realized.

 

FASB issued ASC 740-10 “Accounting for Uncertainty in Income Taxes”. ASC 740-10 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements. This standard requires a company to determine whether it is more likely than not that a tax position will be sustained upon examination based upon the technical merits of the position. If the more-likely-than-not threshold is met, a company must measure the tax position to determine the amount to recognize in the financial statements.

 

Fair Value of Financial Instruments

 

ASC 820 “Fair Value Measurement” defines fair value, establishes a framework for measuring fair value under generally accepted accounting principles and enhances disclosures about fair value measurements. Fair value is defined under ASC 820 as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value under ASC 820 must maximize the use of observable inputs and minimize the use of unobservable inputs. The standard describes a fair value hierarchy based on three levels of inputs, of which the first two are considered observable and the last unobservable, that may be used to measure fair value as follows:

 

Level 1 – unadjusted quoted prices in active markets for identical assets or liabilities;

Level 2 – inputs other than quoted prices that are observable for the asset or liability or indirectly; and

Level 3 – inputs that are not based on observable market data.

 

The carrying amounts of the Company’s financial instruments including cash, amounts receivable, accounts payable and accrued liabilities, promissory note, term loan, convertible notes and advances from shareholders and related parties approximate their fair values due to their short-term nature. Management is of the opinion that the Company is not exposed to significant interest, credit or currency risks from these financial instruments.

 

50

 

 

Algae Dynamics Corp.

Notes to Financial Statements

(Stated in Canadian Dollars)

March 31, 2018 and 2017

 

3.) Summary of Significant Accounting Policies (continued)

 

Fair Value of Financial Instruments (continued)

 

The Company’s equity-linked financial instruments reflected as warrant liability on the balance sheet represent financial liabilities classified as Level 3 as per ASU 2009-05. As required by the guidance, assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. The fair values of the warrant liability and derivative liability which are not traded in an active market have been determined using an option pricing model based on assumptions that are not supported by observable market conditions.

 

Derivative Financial Instruments

 

The Company evaluates all of its agreements to determine if the financial instruments have derivatives or contain features that qualify as embedded derivatives. For derivative financial instruments that are accounted for as liabilities, the derivative instrument is initially recorded at its fair value and is then re-valued at each reporting date, with changes in the fair value reported in the statements of operations. For stock-based derivative financial instruments, the Company uses an option pricing model to value the derivative instruments at inception and on subsequent valuation dates. The classification of derivative instruments, including whether such instruments should be recorded as liabilities or as equity, is evaluated at the end of each reporting period. Derivative instrument liabilities are classified in the balance sheet as current or non-current based on whether or not net-cash settlement of the derivative instrument could be required within 12 months of the balance sheet date.

 

Foreign Currency Transactions and Translation

 

Monetary assets and liabilities are translated into Canadian dollars, which is the functional currency of the Company, at the year-end exchange rate, while foreign currency expenses are translated at the exchange rate in effect on the date of the transaction. The resultant gains or losses are included in the statement of operations. Non-monetary items are translated at historical rates.

 

Loss per Share

 

Basic loss per share is calculated by dividing the net loss available to common shareholders by the weighted average number of common shares outstanding during the year. Diluted loss per share is calculated using the treasury stock method and reflects the potential dilution of securities by including warrants and contingently issuable shares, if any, in the weighted average number of common shares outstanding for a year, if dilutive. In a loss year, dilutive common shares are excluded from the loss per share calculation as the effect would be anti-dilutive. Accordingly, for the years ended March 31, 2018 and 2017, the basic loss per share was equal to diluted loss per share as there were no dilutive securities.

 

51

 

 

Algae Dynamics Corp.

Notes to Financial Statements

(Stated in Canadian Dollars)

March 31, 2018 and 2017

 

3.) Summary of Significant Accounting Policies (continued)

 

Comprehensive Income (Loss)

 

ASC 220 “Comprehensive Income” establishes standards for reporting and display of comprehensive income, its components and accumulated balances. The net loss is equivalent to the comprehensive loss for the periods presented.

 

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 on April 1, 2017 did not have a material impact on the Company’s 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.

 

52

 

 

Algae Dynamics Corp.

Notes to Financial Statements

(Stated in Canadian Dollars)

March 31, 2018 and 2017

 

3.) Summary of Significant Accounting Policies (continued)

 

New Accounting Pronouncements (continued)

 

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, as adopted on April 1, 2017, did 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. The guidance is not expected to have a material impact 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. The guidance is not expected to have a material impact on the Company’s financial statements.

 

53

 

 

Algae Dynamics Corp.

Notes to Financial Statements

(Stated in Canadian Dollars)

March 31, 2018 and 2017

 

4.) Equipment and Leasehold Improvements

 

   March 31, 2018   March 31, 2017 
       Accumulated       Accumulated 
   Cost   Depreciation   Cost   Depreciation 
Computer equipment  $3,558   $2,838   $3,558   $2,530 
Production equipment   67,367    42,004    67,367    35,663 
Leasehold improvements   42,290    36,252    42,290    27,194 
Total  $113,215   $81,094   $113,215   $65,387 
Net carrying amount       $32,121        $47,828 

 

During the year ended March 31, 2018, the Company recorded total amortization of $15,707 (2017 - $17,424) which was recorded to depreciation expense on the statements of operations.

 

5.) Intangible Assets

 

The Company has patents and patents pending with a cost of $Nil as of March 31, 2018 (2017 – $Nil). During the year ended March 31, 2018, the Company reported an impairment of $Nil (2017 -$Nil) with respect to its intangible assets.

 

6.) Advances from Shareholders and Related Parties

 

As at March 31, 2018, the Company had received cumulative net working capital advances in the amount of $Nil (March 31, 2017 - $22,347) from two shareholders who are also officers and directors of the Company.

 

During the year ended March 31, 2017, two shareholders converted advances and accounts payable of $265,298 and $255,788 into 1,316,173 common shares of the Company. The common shares were valued at $1,065,152 based upon an estimated fair value of (USD$0.60) $0.81 per share at the time of issuance. The difference between the fair market value of the common shares and the carrying value of the advances from the shareholders and the amount included in accounts payable was recorded as a loss on extinguishment of related party debt of $548,711. The advances from shareholders are unsecured, payable upon demand and non-interest bearing.

 

54

 

 

Algae Dynamics Corp.

Notes to Financial Statements

(Stated in Canadian Dollars)

March 31, 2018 and 2017

 

7.) 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 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 year ended March 31, 2018, the Company recorded accretion expense of $3,106 (2017 - $8,894). 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 November 30, 2017 was agreed to with the same terms. The unsecured loan has now been extended indefinitely with the same terms until the Company has the appropriate liquidity to repay the initial loan plus the premium on repayment. The loan is non-interest bearing.

 

8.) Convertible

 

The carrying values of our secured convertible notes consist of the following as of March 31, 2018 and 2017 respectively:

 

Convertible Notes  March 31, 2018   March 31, 2017 
         
USD$50,000 face value convertible note due August 15, 2017  $-   $(26,076)
USD$56,000 face value convertible note due August 18, 2017   -    (16,456)
USD$50,000 face value convertible notes due June 21, 2018   (51,869)   - 
USD$50,000 face value convertible note due July 25, 2018   (49,710)   - 
   $(101,579)  $(42,532)

 

(a) Promissory Note

 

On February 14, 2017, the Company issued a USD$50,000 ($65,350) face value convertible promissory note, due August 15, 2017 to Salamon Partners LLC (“Salamon”) for net proceeds of USD$47,500, which consisted of the principal amount, net of transaction cost of USD$2,500. The Salamon Note accrues interest at 12% per annum, payable in cash at maturity. However, the principal amount, plus accrued interest, may be converted at the option of the holder at any time during the term to maturity into shares of our common stock at a variable conversion price of 65% of market per share subject to adjustment for capital reorganization events and subsequent sales by the Company of shares of its common stock at a price per share below the conversion price of the Salamon note. The Salamon Note also embodies certain traditional default provisions that are linked to credit or interest risks, such as bankruptcy proceedings, liquidation events and corporate existence. The Company has concluded that the embedded conversion option is not indexed to our stock due to the variability in the conversion price and the down-round protection features afforded to the holder as well as the foreign exchange rate fluctuations. Therefore, the embedded conversion option is subject to classification in the financial statements in liabilities at fair value both at inception and subsequently pursuant to ASC 480-10-25-14. On August 15, 2017, the Company paid a total of USD$53,000 ($67,591) which consisted of the principal amount due USD$50,000 ($63,775) plus accrued interest USD$3,000 ($3,816). During the year ended March 31, 2018, the Company recorded an accretion expense of $48,499 to as discount to the carrying value of the note (2017 - $16,449)

 

55

 

 

Algae Dynamics Corp.

Notes to Financial Statements

(Stated in Canadian Dollars)

March 31, 2018 and 2017

 

8.) Convertible (continued)

 

(b)Securities Purchase Agreement and Convertible Note

 

On November 18, 2016, the Company issued a USD$56,000 ($76,382) face value secured convertible note, due August 18, 2017 to GHS Investments, LLC (“GHS”) for net proceeds of USD $50,000. The GHS Note is secured and accrues interest at 12% per annum, payable in cash at maturity. However, the principal amount, plus accrued interest, may be converted at the option of the holder at any time during the term to maturity into shares of our common stock at variable conversion price of 62% of market per share subject to adjustment for capital reorganization events and subsequent sales by the Company of shares of its common stock price per share below the conversion price of the GHS note. The GHS Note also embodies certain traditional default provisions that are linked to credit or interest risks, such as bankruptcy proceedings, liquidation events and corporate existence. The Company has concluded that the embedded conversion option is not indexed to our stock due to the variability in the conversion price and the down-round protection features afforded to the holder as well as the foreign exchange rate fluctuations. Therefore, the embedded conversion option is subject to classification in the financial statements in liabilities at fair value both at inception and subsequently pursuant to ASC 480-10-25-14. During the fiscal year, the Company repaid the convertible note in full. During the year ended March 31, 2018, the Company recorded an accretion expense of $45,854 as discount to the carrying value of the note (2017 - $36,689).

 

(c) Convertible Notes – issued June 21, 2017

 

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. On June 21, 2017, the Company issued two notes totaling USD$50,000 ($66,451). 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 for a period of five years. The Company has concluded that the embedded conversion option and warrants are not indexed to our stock due to the down-round protection features afforded to the holder and foreign exchange rate fluctuations. Therefore, the embedded conversion option and warrants are subject to classification in our financial statement in liabilities at fair value both at inception and subsequently pursuant to ASC 480-10-25-14. During the year ended March 31, 2018, the Company recorded an accretion expense of $42,914 as discount to the carrying value of the note (2017 - $Nil).

 

Subsequent to March 31, 2018, the principal plus accrued interest were converted into common shares (560,000) at a price of USD$0.10 per share. The issuance of subsequent convertible notes (Note 8e) with an exercise price of USD$0.10 per share correspondingly reduced the exercise price for the June 21, 2017, convertible notes issued in accordance with the terms of the convertible notes.

 

56

 

 

Algae Dynamics Corp.

Notes to Financial Statements

(Stated in Canadian Dollars)

March 31, 2018 and 2017

 

8.) Convertible (continued)

 

(d) Convertible Notes – issued July 25, 2017

 

On July 25, 2017, the Company added a second one-year 12% convertible note as a continuation of the financing commenced with the convertibles notes on June 21, 2017 (Note 8a). The amount of this convertible note is USD$50,000 ($62,535). The note is convertible at the option of the holder into common shares of the Company at a price of USD$0.25 per share, and is 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. The Company also granted 200,000 common share purchase warrants to the holder of the USD$50,000 note. Each warrant is exercisable into one common share at USD$0.50 for a period of five years. The Company has concluded that the embedded conversion option and warrants are not indexed to our stock due to the down-round protection features afforded to the holder and foreign exchange rate fluctuations. Therefore, the embedded conversion option and warrants are subject to classification in the financial statements in liabilities at fair value both at inception and subsequently pursuant to ASC 480-10-25-14. During the year ended March 31, 2018, the Company recorded an accretion expense of $31,030 to amortize the discount to the carrying value of the note (2017 - $Nil).

 

Subsequent to March 31, 2018, the principals plus accrued interest was converted into common shares (560,000) at a price of USD$0.10 per share. The issuance of subsequent convertible notes (Noe 8e) with an exercise price of USD$0.10 per share correspondingly reduced the exercise price for the July 25, 2017, convertible note issued in accordance with the terms of the convertible note.

 

(e) Convertible Notes – issued August to November 2017

 

The Company issued several convertible notes on August 14, 2017 with face value of USD$53,000 ($67,602), September 18, 2017 with face value of USD$10,000 ($12,238), October 27, 2017 with face value of USD$250,000 ($321,850), November 1, 2017 with face value of USD$20,000 ($25,770) and November 13, 2017 with face value of USD$25,000 ($31,833) for a total of USD$358,000 ($459,293). The notes have all matured two months after issuance and converted into a total of 3,639,931 common shares at the conversion rate of USD$0.10 during the year. The Company issue 2,541,781 common shares during the year with the remaining 1,098,150 shares for the October 27, 2017 USD$250,000 convertible note issued subsequent to March 31, 2018 (Note 10a). The Company agreed to issue an additional 159,023 warrants with an exercise price of $0.75 and an expiry of January 2, 2020, in connection with conversions. During the year ended March 31, 2018, the Company recorded an accretion expense of $76,471 as the discount to the carrying value of the notes (2017 - $Nil).

 

Accounting for the convertible notes

 

The Company has evaluated the terms and conditions of the convertible notes issued under the guidance of ASC 815. Because the economic characteristics and risks of the equity-linked conversion options are not clearly and closely related to a debt-type host, the conversion features require classification and measurement as derivative financial instruments. The other embedded derivative features were also not considered clearly and closely related to the host debt instruments. Further, these features individually were not afforded the exemption normally available to derivatives indexed to a company’s own stock. Accordingly, the evaluation resulted in the conclusion that this compound derivative financial instrument requires bifurcation and liability classification, at fair value. The compound derivative financial instrument consists of (i) the embedded conversion features and the (ii) down-round protection features. Current standards contemplate that the classification of financial instruments requires evaluation at each report date.

 

57

 

 

Algae Dynamics Corp.

Notes to Financial Statements

(Stated in Canadian Dollars)

March 31, 2018 and 2017

 

8.) Convertible (continued)

 

(d) Convertible Notes (continued)

 

Discounts on the convertible notes arise from (i) the allocation of basis to other instruments issued in the transaction, (ii) fees paid directly to the creditor and (iii) initial recognition at fair value, which is lower than face value. The discount to the carrying value of the convertible notes is being amortized as a non-cash interest expense over the term of the promissory note using the effective interest rate method. Amortization of discounts on the convertible notes in accretion expense amounted to $247,874 during the year ended March 31, 2018 (2017 - $53,138).

 

58

 

 

Algae Dynamics Corp.

Notes to Financial Statements

(Stated in Canadian Dollars)

March 31, 2018 and 2017

 

9.) Derivative Liability

 

The carrying value of the compound embedded derivative and warrant derivative liabilities are on the balance sheet, with changes in the carrying value being recorded as derivative (gain)/loss on the statements of operations. The components of the compound embedded derivative and warrant derivative liabilities as of March 31, 2018 and March 31, 2017 respectively are:

 

   March 31, 2018   March 31, 2017 
Financing giving rise to derivative financial  Indexed   Fair   Indexed   Fair 
instruments  Shares   value   Shares   Value 
Compounded embedded derivatives:                    
Salamon (Note 8a)       $-    407,020   $132,712 
GHS (Note 8b)        -    339,368    127,965 
June 21, 2017 convertible (Note 8c)   780,743    59,490    -    - 
July 25, 2017 convertible (Note 8d)   772,757    59,186    -    - 
                     
Warrant derivative liabilities:                    
June 21, 2017 (Note 8c)   200,000    15,423    -    - 
July 25, 2017 (Note 8d)   200,000    18,051    -    - 
Midtown warrants   900,000    54,000    900,000    222,300 
Connectus warrants   50,000    4,000    50,000    13,900 
    2,903,500   $210,150    1,696,388   $496,607 

 

Fair Value Considerations

 

GAAP establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. As presented in the tables below, this hierarchy consists of three broad levels:

 

  Level 1 valuations: Quoted prices in active markets for identical assets and liabilities.
     
  Level 2 valuations: Quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; and model-derived valuations whose inputs or significant value drivers are observable.
     
  Level 3 valuations: Significant inputs to valuation model are unobservable.

 

59

 

 

Algae Dynamics Corp.

Notes to Financial Statements

(Stated in Canadian Dollars)

March 31, 2018 and 2017

 

9.) Derivative Liability (continued)

 

The Company follows the provisions of ASC 820 with respect to our financial instruments. As required by ASC 820, assets and liabilities measured at fair value are classified in their entirety based on the lowest level of input that is significant to their fair value measurement. The derivative financial instruments which are required to be measured at fair value on a recurring basis under of ASC 815 as of March 31,2018 and 2017 respectively, are all measured at fair value using Level 1 inputs. Level 1 inputs are observable inputs that are supported by market activity.

 

The compound embedded derivative and warrants were valued using a binomial-lattice-based valuation model. The lattice-based valuation technique was utilized because it embodies all the requisite assumptions (including the underlying price, exercise price, term, volatility, and risk-free interest-rate) that are necessary to fair value these instruments. For forward contracts that contingently require net-cash settlement as the principal means of settlement, the Company projects and discounts future cash flows applying probability-weighted to multiple possible outcomes. Estimating fair values of derivative financial instruments requires the development of significant and subjective estimates that may, and are likely to, change over the duration of the instrument with related changes in internal and external market factors. In addition, option-based techniques are highly volatile and sensitive to changes in the trading market price of our common stock. Because derivative financial instruments are initially and subsequently carried at fair values, the income will reflect the volatility in these estimate and assumption changes. The following table sets forth (i) the range of inputs for each significant assumption and (ii) the equivalent, or averages, of each significant assumption as of March 31, 2018:

 

Compound Embedded Derivative:

 

   March 31, 2018   March 31, 2017 
Stock Price  $0.09 USD   $0.23 USD 
Risk free rate   2.09%   1.02%
Expected volatility   322%   308%
Conversion/Exercise price  $0.07 USD   $0.15 USD 
Expected dividend rate   0%   0%
Expected life (in years)   0.27    0.38 

 

Derivative Liability Warrants

 

   March 31, 2018   March 31, 2017 
Stock Price  $0.09 USD    N/A 
Risk free rate   2.56%   N/A 
Expected volatility   228%   N/A 
Conversion/Exercise price  $0.50 USD    N/A 
Expected dividend rate   0%   N/A 
Expected life (in years)   4.28    N/A 

 

60

 

 

Algae Dynamics Corp.

Notes to Financial Statements

(Stated in Canadian Dollars)

March 31, 2018 and 2017

 

9.) Derivative Liability (continued)

 

The following table represents the Company’s derivative liabilities activity for the years ended March 31, 2018 and 2017 respectively:

 

   March 31,   March 31, 
   2018   2017 
   Amount   Amount 
Embedded conversion feature:          
Derivative liabilities balance, beginning of year  $260,677   $- 
Issuance of derivatives liabilities during the year   113,405    253,318 
Change in dervivative liabilities during the year   (282,608)   (7,359)
Derivavtive liabilities, end of year  $91,474   $260,677 

 

   March 31,   March 31, 
   2018   2017 
   Amount   Amount 
Liability warrants