UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 1-SA
x SEMIANNUAL REPORT PURSUANT TO REGULATION A
or
o SPECIAL FINANCIAL REPORT PURSUANT TO REGULATION A
For the Fiscal Semiannual Period Ended March 31, 2022
ZENLABS HOLDINGS INC.
(Exact name of issuer as specified in its charter)
BRITISH COLUMBIA | N/A |
(State or other jurisdiction of incorporation or organization) | (IRS Employer Identification No.) |
595 Howe Street, Suite 704 Vancouver, BC, Canada V6C 2T5 (Full mailing address of principal executive offices) | |
(619) 763-4901 (Issuer’s telephone number, including area code) |
Forward Looking Statements
This Semiannual Report on Form 1-SA of Zenlabs Holdings Inc., a British Columbia, Canada corporation, contains certain forward-looking statements that are subject to various risks and uncertainties. Forward-looking statements are generally identifiable by use of forward-looking terminology such as “may,” “will,” “should,” “potential,” “intend,” “expect,” “outlook,” “seek,” “anticipate,” “estimate,” “approximately,” “believe,” “could,” “project,” “predict,” or other similar words or expressions. Forward-looking statements are based on certain assumptions, discuss future expectations, describe future plans and strategies, contain financial and operating projections or state other forward-looking information. Our ability to predict results or the actual effect of future events, actions, plans or strategies is inherently uncertain. Although we believe that the expectations reflected in our forward-looking statements are based on reasonable assumptions, our actual results and performance could differ materially from those set forth or anticipated in our forward-looking statements. Factors that could have a material adverse effect on our forward-looking statements and upon our business, results of operations, financial condition, funds derived from operations, cash flows, liquidity and prospects include, but are not limited to, the factors referenced in the Zenlabs Holdings Inc. Offering Statement filed pursuant to Regulation A on September 13, 2021 and supplemented on October 5, 2021 and November 16, 2021, or the Offering Circular contained therein, under the caption “RISK FACTORS” and which are incorporated herein by reference to the Offering Circular.
When considering forward-looking statements, you should keep in mind the risk factors and other cautionary statements in this report. Readers are cautioned not to place undue reliance on any of these forward-looking statements, which reflect our views as of the date of this report. The matters summarized below and elsewhere in this report could cause our actual results and performance to differ materially from those set forth or anticipated in forward-looking statements. Accordingly, we cannot guarantee future results or performance. Furthermore, except as required by law, we are under no duty to, and we do not intend to, update any of our forward-looking statements after the date of this report, whether as a result of new information, future events or otherwise.
As used in this Semiannual Report, the terms “we”, “us”, “our”, “Zenlabs”, and the “Company”, means Zenlabs Holdings Inc., unless otherwise indicated. All dollar amounts in this Semiannual Report are expressed in U.S. dollars, unless otherwise indicated.
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ITEM 1. | MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. |
The following discussion of our financial condition and results of operations should be read in conjunction with our unaudited consolidated financial statements and the related notes included in this report. Unless otherwise indicated, the latest results discussed below are as of March 31, 2022.
The consolidated financial statements included in this filing as of and for the six months ended March 31, 2022 are unaudited, and may not include year-end adjustments necessary to make those financial statements comparable to audited results, although, in the opinion of management, all adjustments and disclosures necessary for a fair presentation of the unaudited consolidated financial statements have been included. The results of operations for the six-months ended March 31, 2022 are not necessarily indicative of the results that may be expected for the full year and may be forward-looking in nature.
Overview
The Company was incorporated in British Columbia, Canada under the name “Zenlabs Holdings Inc.” on March 4, 2019. The operations of the Company are carried on through its wholly owned subsidiaries, Zenwa Holdings, Inc.(“Zenwa”), Zenleaf LLC (“Zenleaf”) and PBI Design LLC (“PBI”). Zenleaf and PBI are limited liability companies formed under the laws of the State of California. Zenlabs acquired PBI January 1, 2019 and Zenleaf on October 31, 2019. Zenwa is a wholly owned subsidiary incorporated under the laws of the State of Washington on March 12, 2020. Prior to the acquisition of Zenleaf and PBI, Zenlabs had no active operations.
Zenleaf is the Company’s operational arm. Zenleaf was formed in December 2017 for the purpose of cultivating, producing and selling high quality cannabis through sophisticated pathogen indexing and elimination via high quality tissue cultures and proprietary propagation methodologies. PBI acts as paymaster entity for Zenleaf, handling financing, salaries and other financial activities for Zenleaf. Zenwa is used for certain non-plant touching banking activities.
Zenleaf completed a merger with Zenleaf Labs LLC, a California limited liability company (“Zenleaf Labs”) on August 14, 2019 (the “Zenleaf Labs Merger”) pursuant to a merger agreement and plan of merger dated August 13, 2019 (the “Zenleaf Labs Merger Agreement”). As a result of the Zenleaf Labs Merger, Zenleaf Labs merged with and into Zenleaf, with Zenleaf as the surviving entity, for the total consideration of $10.00 paid to the members of Zenleaf Labs.
On October 31, 2019, Zenlabs acquired Zenleaf pursuant to the terms of a merger agreement (the “Zenleaf Merger Agreement”), and its addendum (the “Addendum”), entered into among Zenlabs, Zenlabs Merger Sub, LLC, a wholly owned subsidiary of Zenlabs formed for the purpose of completing the acquisition of Zenleaf (“Zenlabs MergeCo”), and Zenleaf. Zenlabs MergeCo was merged with and into Zenleaf, with Zenleaf as the surviving entity, and Zenleaf became a wholly owned subsidiary of Zenlabs. Pursuant to the terms of the Zenleaf Merger Agreement and the Addendum, Zenlabs issued a total of 149,998 Multiple Voting Shares to the former members of Zenleaf.
Financial Operations Overview
The following discussion sets forth certain components of our statements of operations as well as factors that impact those items.
RESULTS OF OPERATIONS FOR SIX MONTHS ENDED MARCH 31, 2022
The Company’s cash balance as of March 31, 2022 was $223,678.
Revenue
Total revenue was $1,091,301 for the six months ended March 31, 2022, compared to $291,016 for the six months ended March 31, 2021, representing an increase of 275%.
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The increase in revenue was due to the Company increasing the number of grow rooms at the Arjons facility and transitioning its nursery operations to its greenhouse at the Oceanside property. By doing so, it opened up the ability to realize its initial goal for the Arjons facility of full cultivation for finished flower, which brings higher revenues. Moving the nursery business to Oceanside increases production space constraints and provides ample room to scale operations.
Having moved it nursery operations to Oceanside has enabled the Company to expand from 2,000 square feet of nursery operations inside the Arjons building to 22,000 square feet in Oceanside. To date the Company has seen a month over moth increase in sales with just over 19,500 plants in March 2022, being the highest plants sales yet.
Cost of Revenue
Cost of revenue was $1,272,553 for the six months ended March 31, 2022, compared to $274,475 for the six months ended March 31, 2021, representing an increase of 364%. The increase was primarily driven by the associated 275% increase in revenue for the period and a 1196% decrease in the gross margin.
Operating Expenses
The Company incurred operating expenses of $848,420 for the six months ended March 31, 2022, including general and administrative costs of $542,374, compared to $830,722 and $669,681, respectively, for the six months ended March 31, 2021, representing an increase of 0% and a decrease of 19%, respectively. The decrease in general and administrative costs was primarily related to reductions in executive payroll and employee benefits associated with senior management costs.
Operating expenses for the periods were comprised of general and administrative expense, sales and marketing expense and amortization and depreciation as follows:
General and administrative expense | For the six months ended March 31, | |||||||||||||||
2022 | 2021 | $ Change | % Change | |||||||||||||
Management fee and payroll | $ | 134,676 | $ | 390,907 | $ | (256,231 | ) | -66 | % | |||||||
Stock based compensation | 20,949 | 86,891 | (65,942 | ) | -76 | % | ||||||||||
Travel | 14,373 | 17,286 | (2,913 | ) | -17 | % | ||||||||||
Professional fees and consulting | 211,531 | 69,124 | 142,407 | 206 | % | |||||||||||
Licenses and permits | 23,943 | 26,285 | (2,342 | ) | -9 | % | ||||||||||
Office and insurance | 37,360 | 23,986 | 13,374 | 56 | % | |||||||||||
Business and property taxes | 68,874 | 33,967 | 34,907 | 103 | % | |||||||||||
Occupancy and facilities | 30,667 | 21,235 | 9,432 | 44 | % | |||||||||||
Total general and administrative expense | $ | 542,374 | $ | 669,681 | $ | (127,307 | ) | -19 | % |
Sales and marketing expense | For the six months ended March 31, | |||||||||||||||
2022 | 2021 | $ Change | % Change | |||||||||||||
Marketing | $ | 3,742 | $ | 10,689 | $ | (6,947 | ) | -65 | % | |||||||
Trade shows and conventions | - | - | ||||||||||||||
Advertising | - | - | ||||||||||||||
Public relations | - | - | ||||||||||||||
Total sales and marketing expense | $ | 3,742 | $ | 10,689 | $ | (6,947 | ) | -65 | % |
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Depreciation and amortization | For the six months ended March 31, | |||||||||||||||
2022 | 2021 | $ Change | % Change | |||||||||||||
Depreciation | $ | 205,580 | $ | 33,507 | $ | 172,073 | 514 | % | ||||||||
Amortization of right of use asset | 137,091 | 116,845 | 20,246 | 17 | % | |||||||||||
Total depreciation and amortization | $ | 342,671 | $ | 150,352 | $ | 192,319 | 138 | % |
LIQUIDITY AND CAPITAL RESOURCES
WORKING CAPITAL | March 31, 2022 | September 30, 2021 | ||||||
Current assets | $ | 478,137 | $ | 825,176 | ||||
Current liabilities | 1,266,556 | 952,390 | ||||||
Working capital (deficit) | $ | (788,419 | ) | $ | (127,214 | ) | ||
For the six months ended | ||||||||
CASH FLOWS | March 31, 2022 | March 31, 2021 | ||||||
Cash flow used by operating activities | $ | (270,680 | ) | $ | (381,377 | ) | ||
Cash flow used by investing activities | (128,851 | ) | (1,189,849 | ) | ||||
Cash flow used by financing activities | (50,769 | ) | 2,174,276 | |||||
Net increase (decrease) in cash during year | $ | (450,300 | ) | $ | 603,050 |
Working capital will be utilized for general and administrative purposes, maintenance and leasehold improvements of grow rooms and nurseries, along with other normal and customary expenses related to the cultivation of cannabis seedlings in a nursery environment, including purchase of equipment, fertilizer, supplies and materials.
During the six months ended March 31, 2022, Investing Activities used cash of $128,851 for the purpose of construction of the facilities and purchase of equipment at both the Arjons and Oceanside sites.
During the six months ended March 31, 2022, Financing Activities used $50,769, which included $27,986 in proceeds from a Regulation A offering, $43,317 of financing costs, and $35,437 in lease payments as described in Note 14 to the Consolidated Financial statements hereafter.
Since inception, the sole source of financing has been sales of the Company’s debt and equity securities. Zenlabs Holdings Inc. has not attained profitable operations and its ability to pursue any future plan of operation is dependent upon our ability to obtain financing.
Zenlabs Holdings Inc. anticipates continuing to rely on sales of its debt and/or equity securities in order to continue to fund ongoing operations. Issuances of additional shares of common stock may result in dilution to the Company’s existing stockholders. There is no assurance that the Company will be able to complete any additional sales of equity securities or that it will be able arrange for other financing to fund its planned business activities.
In the near future, the Company looks to use its revenue to fund operations and use the sale of equity securities to fund expansion
Going Concern
The Company’s continuation as a going concern is dependent upon its ability to generate sufficient cash flow to meet its obligations on a timely basis, to obtain additional financing as may be required, or ultimately to attain profitability. Potential sources of cash, or relief of demand for cash, include additional external debt, the sale of shares of the Company’s stock or alternative methods such as mergers or sale of the Company’s assets. No assurances can be given, however, that the Company will be able to obtain any of these potential sources of cash. The Company currently requires additional cash funding from outside sources to sustain existing operations and to meet current obligations and ongoing capital requirements.
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The Company plans for the long-term continuation as a going concern include financing future operations through sales of our equity and/or debt securities and the anticipated operation of the Company’s production and sale of plants and flower.
COVID-19 and Industry Trends
In March 2020, the World Health Organization declared the outbreak of COVID-19 as a pandemic based on the rapid increase in global exposure. Though many restrictions have been lifted, COVID-19 continues to spread throughout the world. The world outbreak of COVID-19 has not, to date, had any material negative effects on the Company and/or its operations.
The unprecedented nature of the COVID-19 pandemic and its impact results in uncertainty about future market conditions, the impacts on our business, and consequently, the assumptions we use to develop forecasts of business performance. There is no guarantee that the Company’s revenue will grow or remain at similar levels in 2022. Depending on conditions, we may have to review our assumptions which may result in additional adjustments or impairments of assets in 2022.
Industry-wide, sales of cannabis have remained strong during the COVID-19 quarantines and restrictions, and the outlook for continued growth is favorable. Prices of cannabis have remained strong but given the potential economic effects of continued restrictions, there is no guarantee demand will continue to grow and may be adversely affected by the consumer’s ability to purchase.
Supply chain slowdowns negatively impacted the Company’s ability to procure certain equipment to be utilized in the cultivation rooms at its Arjons facilities which has adversely affected the timeline for production at that site.
OFF-BALANCE SHEET ARRANGEMENTS
The Company has no significant off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to its stockholders.
CRITICAL ACCOUNTING POLICIES
We have identified the policies below as critical to our business operations and the understanding of our results of operations. The impact on our business operations and any associated risks related to these policies are discussed throughout Management’s Discussion and Analysis of Financial Condition and Results of Operations when such policies affect our reported or expected financial results.
In the ordinary course of business, we have made a number of estimates and assumptions relating to the reporting of results of operations and financial condition in the preparation of our financial statements in conformity with accounting principles generally accepted in the United States (“GAAP”). We base our estimates on historical experience and on various other assumptions that we believe are reasonable under the circumstances. The results form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results could differ significantly from those estimates under different assumptions and conditions.
ITEM 2. | OTHER INFORMATION. |
None
ITEM 3. | FINANCIAL STATEMENTS. |
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ZENLABS HOLDINGS, INC.
INDEX TO THE UNAUDITED FINANCIAL STATEMENTS
March 31, 2022
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ZENLABS HOLDINGS INC.
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in United States Dollars)
For the six months ended
March 31, 2022
ZENLABS HOLDINGS INC.
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION (UNAUDITED)
(Expressed in US Dollars)
March 31, 2022 | September 30, 2021 | |||||||
ASSETS | ||||||||
CURRENT ASSETS | ||||||||
Cash and cash equivalents | $ | 223,678 | $ | 673,979 | ||||
Accounts receivable | 61,951 | 14,884 | ||||||
Other receivables | - | - | ||||||
Inventory (Note 5) | 22,093 | 12,166 | ||||||
Biological assets (Note 6) | 150,009 | 45,138 | ||||||
Prepaid expenses and other current assets | 20,407 | 79,009 | ||||||
TOTAL CURRENT ASSETS | 478,138 | 825,176 | ||||||
Property and equipment (Note 7) | 2,512,124 | 2,590,201 | ||||||
Right of use asset (Note 11) | 1,795,714 | 1,932,805 | ||||||
Deposit | 35,302 | 30,000 | ||||||
TOTAL ASSETS | $ | 4,821,278 | $ | 5,378,182 | ||||
LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||
CURRENT LIABILITIES: | ||||||||
Accounts payable and accrued liabilities (Note 8) | $ | 485,264 | $ | 363,486 | ||||
Lease liability (Note 11) | 209,811 | 193,524 | ||||||
Derivative liability (Note 13) | 139,761 | 153,409 | ||||||
�� Due to related parties | 418,671 | 228,921 | ||||||
Long term debt, current portion | 13,050 | 13,050 | ||||||
TOTAL CURRENT LIABILITIES | 1,266,557 | 952,390 | ||||||
Deferred Operating Lease Obligation | - | - | ||||||
Long term debt, net of current portion (Note 10) | 294,543 | 38,062 | ||||||
Long term lease liability (Note 11) | 1,999,028 | 2,107,673 | ||||||
TOTAL LIABILITIES | 3,560,128 | 3,098,125 | ||||||
SHAREHOLDERS’ EQUITY | ||||||||
Share capital (Note 15) | 8,178,514 | 8,221,832 | ||||||
Reserve for share based compensation | 296,414 | 275,464 | ||||||
Subscription receivable | 27,986 | - | ||||||
Deficit | (7,241,764 | ) | (6,217,239 | ) | ||||
TOTAL SHAREHOLDERS’ EQUITY | 1,261,150 | 2,280,057 | ||||||
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY | $ | 4,821,278 | $ | 5,378,182 |
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ZENLABS HOLDINGS INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS (UNAUDITED)
For the six months ended March 31, 2022 and 2021
(Expressed in US Dollars)
2022 | 2021 | |||||||
REVENUE | ||||||||
Product sales | $ | 1,074,959 | $ | 284,616 | ||||
Delivery income | 16,342 | 6,400 | ||||||
TOTAL REVENUE | 1,091,301 | 291,016 | ||||||
Cost of goods sold | (1,272,533 | ) | (274,475 | ) | ||||
GROSS MARGIN, excluding fair value items | (181,252 | ) | 16,541 | |||||
Realized fair value amounts included in inventory sold | (45,138 | ) | (15,260 | ) | ||||
Unrealized fair value gain on growth of biological assets | 150,009 | 31,886 | ||||||
GROSS PROFIT | (76,381 | ) | 33,167 | |||||
OPERATING EXPENSE | ||||||||
General and administrative (Note 18) | 542,374 | 669,681 | ||||||
Sales and marketing | 3,742 | 10,689 | ||||||
Depreciation and amortization (Note 7 and Note 11) | 282,304 | 150,352 | ||||||
TOTAL OPERATING EXPENSES | 828,420 | 830,722 | ||||||
LOSS FROM OPERATIONS | (904,801 | ) | (797,555 | ) | ||||
OTHER INCOME (EXPENSE) | ||||||||
Interest, net | (133,373 | ) | (128,210 | ) | ||||
Acquisition expense (Note 12) | - | - | ||||||
Change in fair value of derivative liability | 13,648 | (83,683 | ) | |||||
Foreign exchange | - | (577 | ) | |||||
TOTAL OTHER INCOME (EXPENSE) | (119,725 | ) | (212,470 | ) | ||||
Net loss and comprehensive loss | $ | (1,024,526 | ) | $ | (1,010,025 | ) | ||
Loss per share - basic and diluted | $ | (0.04 | ) | $ | (0.05 | ) | ||
Weighted average number of shares outstanding | 23,266,515 | 20,604,521 |
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ZENLABS HOLDINGS INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
For the six months ended March 31, 2022 and 2021
Multi-voting shares | Subordinate shares | Capital | Reg A Shares Payable | Reserve for share based payment | Deficit | Total | ||||||||||||||||||||||
BALANCE, September 30, 2020 | 149,998 | 20,454,523 | $ | 5,279,906 | $ | - | $ | 16,379 | $ | (3,707,742 | ) | $ | 1,588,543 | |||||||||||||||
Shares issued for sale of common stock and warrants | - | 2,171,213 | 2,605,456 | - | - | - | 2,605,456 | |||||||||||||||||||||
Financing costs | - | - | (244,754 | ) | - | - | - | (244,754 | ) | |||||||||||||||||||
Subscriptions receivable | - | - | (102,024 | ) | - | - | - | (102,024 | ) | |||||||||||||||||||
Share-based compensation | - | - | - | - | 86,891 | - | 86,891 | |||||||||||||||||||||
Net loss | - | - | - | - | - | (1,010,025 | ) | (1,010,025 | ) | |||||||||||||||||||
BALANCE, March 31, 2021 | 149,998 | 22,625,736 | $ | 7,538,584 | $ | - | $ | 103,270 | $ | (4,717,767 | ) | $ | 2,924,087 | |||||||||||||||
BALANCE, September 30, 2021 | 149,998 | 23,116,516 | $ | 8,221,832 | $ | - | $ | 275,464 | $ | (6,217,239 | ) | $ | 2,280,057 | |||||||||||||||
Shares issued for sale of common stock and warrants | - | - | - | - | - | - | - | |||||||||||||||||||||
Financing costs | - | - | (43,318 | ) | - | - | - | (43,318 | ) | |||||||||||||||||||
Subscriptions receivable | - | - | - | $ | 27,986 | - | - | 27,986 | ||||||||||||||||||||
Share-based compensation | - | - | - | - | 20,950 | - | 20,950 | |||||||||||||||||||||
Net loss | - | - | - | - | (1,024,526 | ) | (1,024,526 | ) | ||||||||||||||||||||
BALANCE, March 31, 2022 | 149,998 | 23,116,516 | $ | 8,178,514 | $ | 27,986 | $ | 296,414 | $ | (7,241,764 | ) | $ | 1,261,150 | |||||||||||||||
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ZENLABS HOLDINGS INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
For the six months ended March 31, 2022 and 2021
(EXPRESSED IN US DOLLARS)
2022 | 2021 | |||||||
OPERATING ACTIVITIES | ||||||||
Net income (loss) | $ | (1,024,526 | ) | $ | (1,010,025 | ) | ||
Adjustments to reconcile net income to net cash used for operating activities: | ||||||||
Share based compensation | - | 86,891 | ||||||
Depreciation and amortization | 342,671 | 181,954 | ||||||
Interest accretion | - | - | ||||||
Change in fair value of derivative liability | (13,648 | ) | 83,683 | |||||
Change in fair value of biological assets | (104,871 | ) | 3,619 | |||||
Listing expense | - | - | ||||||
Changes in assets and liabilities: | ||||||||
Amounts receivable | (47,067 | ) | 8,130 | |||||
Prepaid expenses | 58,602 | 1,971 | ||||||
Inventory | (9,927 | ) | (3,532 | ) | ||||
Accounts payable and accrued liabilities | (77,907 | ) | 242,319 | |||||
Accrued interest | 145,290 | - | ||||||
Due to related parties | 439,750 | 23,613 | ||||||
Cash used in operating activities | (270,681 | ) | (381,377 | ) | ||||
INVESTING ACTIVITIES | ||||||||
Net cash acquired from reverse acquisition | - | - | ||||||
Purchase of property and equipment | (128,851 | ) | (1,189,849 | ) | ||||
Cash provided by (used in) investing activities | (128,851 | ) | (1,189,849 | ) | ||||
FINANCING ACTIVITIES | ||||||||
Proceeds from shareholder loans | - | - | ||||||
Subscriptions payable | 27,986 | - | ||||||
Proceeds from issuance of common stock and warrants, net of financing costs | (43,318 | ) | 2,258,678 | |||||
Repayment of debt | - | (6,525 | ) | |||||
Lease principal payments | (35,437 | ) | (77,877 | ) | ||||
Cash used in financing activities | (50,769 | ) | 2,174,276 | |||||
Net increase in cash and cash equivalents | (430,301 | ) | 603,050 | |||||
Cash and cash equivalents, beginning | 673,979 | 850,374 | ||||||
Cash and cash equivalents, ending | $ | 243,678 | $ | 1,453,424 | ||||
SUPPLEMENT DISCLOSURE OF CASH FLOW INFORMATION (Note 18) | ||||||||
NON-CASH INVESTING AND FINANCING ACTIVITIES (Note 18) |
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ZENLABS HOLDINGS INC.
Notes to the Condensed Consolidated Financial Statements
(Expressed in U.S. dollars unless otherwise stated)
For the six months ended March 31, 2022 (unaudited)
1. | NATURE OF OPERATIONS |
Zenlabs Holdings Inc. (the “Company” or “Zenlabs”) was incorporated on March 4, 2019, under the Business Corporations Act (British Columbia). The Company’s head office is located at 7745 Arjons Drive, San Diego, California, USA 92126. The Company’s registered and records office is located at #704 - 595 Howe Street, Box 35, Vancouver, BC, V6C 2T5. The Company California based subsidiaries which services to both the THC and Hemp markets. The subsidiaries are engaged in the genetic preservation, pathogen elimination, young plant production, cultivation and sales of hemp and THC plants.
These consolidated financial statements have been prepared on the assumption that the Company will continue in operation for the foreseeable future and, accordingly, will be able to realize its assets and discharge its liabilities in the normal course of operations. The Company’s ability to realize its assets and discharge its liabilities is dependent upon the Company obtaining the necessary financing and ultimately upon its ability to achieve profitable operations. These material uncertainties raise substantial doubt on the Company’s ability to continue as a going concern.
Failure to arrange adequate financing on acceptable terms and/or achieve profitability may have an adverse effect on the financial position, results of operations, cash flows and prospects of the Company. These consolidated financial statements do not give effect to adjustments to assets or liabilities that would be necessary should the Company be unable to continue as a going-concern. These adjustments could be material.
Zenleaf LLC (“Zenleaf”) was incorporated on October 27, 2017, in California, USA. The Company operates in the cannabis space. Zenleaf offers services to both the THC and Hemp markets. In these markets Zenleaf is engaged in the genetic preservation, pathogen elimination, young plant production and cultivation. Zenleaf has developed proprietary processes for initiation and treatment of cannabis in tissue culture through its licensed lab in San Diego California.
On October 31, 2019 the Company issued 149,998 multiple voting shares (the “Multiple Voting Shares”), for 100% of the ownership units of Zenleaf LLC, a California company. Included in the 149,998 Multiple Voting Shares issued were 38,254 shares issued to the CEO of the Company. The transaction constituted a reverse takeover of the Company by the shareholders of Zenleaf LLC, but did not meet the definition of a business combination as defined under IFRS 3. As such, the transaction will be accounted for under IFRS 2, where the difference between the consideration given to acquire the Company and the net asset value of the Company is recorded as a transaction expense. See Note 12.
At the time of the Transaction, Zenlabs did not constitute a business as defined under IFRS 3 - Business Combinations, and therefore the Transaction is accounted for as an asset acquisition. As Zenleaf is deemed to be the acquirer for accounting purposes, the resulting consolidated statement of financial position was presented as a continuance of Zenleaf’s operations at their historical carrying values, and the comparative figures presented before the Transaction are those of Zenleaf. The results of operations, the cash flows, and the assets and liabilities of Zenlabs have been included in these consolidated financial statements since October 31, 2019. Accordingly, the equity structure of Zenleaf (the accounting acquirer) was recast using the exchange ratio established in the acquisition agreement to reflect the number of shares of Zenlabs (the accounting acquiree) issued in the reverse acquisition.
Since March 2020, several governmental measures have been implemented in the United States, where the Company’s operations are located, and the rest of the world in response to the coronavirus (COVID-19) pandemic. While the impact of COVID-19 and these measures are expected to be temporary, the current circumstances are dynamic and the impacts of COVID-19 on the Company’s business operations cannot be reasonably estimated at this time. The Company anticipates this could have an adverse impact on its business, results of operations, financial position and cash flows in 2022. The Company continues to operate its business, and in response to US Federal and State and Canadian Federal and Provincial emergency measures, has requested its employees and consultants work remotely wherever possible. These government measures, which could include government mandated closures of the Company or its customers and vendors could impact the Company’s ability to conduct its planned programs in a timely manner, and the Company is evaluating the best way to move its activities forward when the emergency measures are lifted.
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2. | SIGNIFICANT ACCOUNTING POLICIES |
These financial statements were approved and authorized for issue on October 7, 2022, by the Directors of the Company.
The accounting policies applied in these condensed consolidated financial statements are the same as those applied in the Company’s consolidated financial statements for the year ended September 30, 2021. The annual consolidated financial statements are available on EDGAR at www.sec.gov. The policies have been applied throughout the periods reported.
Statement of Compliance
These unaudited condensed consolidated financial statements have been prepared by management of the Corporation in accordance with International Accounting Standard (“IAS”) 34, “Interim Financial Reporting”, following the same accounting principles and methods of computation as outlined in the Corporation’s consolidated financial statements for the year ended September 30, 2021. A description of accounting standards and interpretations that have been adopted by the Corporation can be found in the notes of the annual consolidated financial statements for the year ended September 30, 2021. These unaudited condensed consolidated financial statements include all necessary disclosures required for interim financial statements but do not include all disclosures required for annual financial statements. Therefore, these unaudited condensed consolidated financial statements should be read in conjunction with the most recent audited annual consolidated financial statements and the notes thereto for the year ended September 30, 2021.
3. | MAIN SOURCES OF ESTIMATION UNCERTAINTY AND CRITICAL JUDGMENTS BY MANAGEMENT |
The preparation of condensed consolidated interim financial statements in conformity with IFRS requires management to make estimates and assumptions that affect the reported amount of assets and liabilities, the disclosure of contingent assets and liabilities as at the date of the condensed consolidated interim financial statements and the reported amounts of revenues and expenses for the reporting period.
The main sources of estimation uncertainty and critical judgments by management applicable to these condensed consolidated interim financial statements are the same as those presented in the Company’s consolidated financial statements for the year ended September 30, 2021.
4. | INVENTORY |
Details of the Company’s inventory at March 31, 2022 and September 30, 2021 are shown in the table below:
March 31, 2022 | September 30, 2021 | |||||||
Raw materials | $ | 22,093 | $ | 12,166 | ||||
Finished goods | - | - | ||||||
Balance | $ | 22,093 | $ | 12,166 |
5. | BIOLOGICAL ASSETS |
The Company’s biological assets consist of cannabis plants that are cultivated at the Company’s own grow facilities. The valuation of biological assets is based on a market approach where fair value at the point of harvest is estimated based on the selling price less any costs to sell up to the point of harvest.
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For biological assets, the fair value ascribed to them is a percentage of the fair value at its point of harvest, based on where the plants are in their grow cycle. As of March 31, 2022, on average, the biological assets were approximately 87% complete relative to the next expected harvest date.
In determining the fair value of biological assets, management is required to make several estimates with respect to significant unobservable inputs, including the expected selling price of the plants, the stage of plant growth at which point of harvest is determined, wastage and costs to sell. Estimated wastage per plant varies by strain and is obtained through historical growing results or grower estimate if historical results are not available. The listed selling price of cannabis plants varies by strain and is obtained through listed selling prices or estimated selling prices if historical results are not available. The Company used a price range from $7.00 to $12.00 per plant in valuing biological assets at March 31, 2022. Fair value at the point of harvest is estimated based on the selling price less any costs to sell at harvest.
The following significant unobservable inputs, all of which are classified as level 3 on the fair value hierarchy, were key inputs used by management in determining the fair value of biological assets:
- Selling price per plant– calculated as the weighted average selling price for all strains of cannabis sold by the Company, which is expected to approximate future selling prices. As of March 31, 2022, these prices represented the ultimate selling prices to wholesale buyers.
- Stage of growth – represents the weighted average number of weeks out of the 8-week growing cycle that biological assets have reached as of the measurement date.
- Wastage – represents the weighted average percentage of biological assets which are expected to be destroyed due to failure to mature into cannabis plants that can be sold.
The following table quantifies averages for each significant unobservable input, and also provides the impact a 10% increase/decrease in each input would have on the fair value of biological assets:
March 31, 2022 | 10% change at March 31, 2022 | ||||||||
Selling price per plant | $ | 6.05 | $ | 15,607 | |||||
Stage of growth | 93.47 | % | $ | 13,268 | |||||
Wastage | 10 | % | $ | 15,001 |
The Company capitalizes its periodic cost related to growing its biological assets and accretes fair value using percentage of completion based on weeks of growth.
This gain was calculated using a periodic change in value based on plant count and estimated value of the various products from the plants.
Details of the Company’s biological assets at March 31, 2022 are shown in the table below:
Biological assets | ||||
Balance – September 30, 2020 | 26,673 | |||
Loss on fair value of biological assets | (151,386 | ) | ||
Productions costs capitalized | 1,137,669 | |||
Transfer to inventory | (967,818 | ) | ||
Balance – September 30, 2021 | $ | 45,138 | ||
Loss on fair value of biological assets | (145,141 | ) | ||
Productions costs capitalized | 1,522,565 | |||
Transfer to inventory | (1,272,553 | ) | ||
Balance – March 31, 2022 | $ | 150,009 |
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6. | PROPERTY AND EQUIPMENT |
Hemp assets | Vehicle | Furniture and equipment | Leasehold improvement | Total | ||||||||||||||||
Cost | ||||||||||||||||||||
Balance, September 30, 2020 | $ | 41,500 | $ | 112,298 | $ | 187,536 | $ | 925,835 | $ | 1,267,169 | ||||||||||
Additions | - | - | 599,558 | 1,048,952 | 1,648,510 | |||||||||||||||
Balance, September 30, 2021 | $ | 41,500 | $ | 112,298 | $ | 787,094 | $ | 1,974,787 | $ | 2,915,679 | ||||||||||
Additions | - | - | 58,353 | 69,150 | 127,503 | |||||||||||||||
Balance, March 31, 2022 | $ | 41,500 | $ | 112,298 | $ | 845,446 | $ | 2,043,938 | $ | 3,043,182 | ||||||||||
Amortization | ||||||||||||||||||||
Balance, September 30, 2020 | $ | (6,225 | ) | $ | (20,350 | ) | $ | (25,450 | ) | $ | (17,956 | ) | $ | (69,981 | ) | |||||
Expense | (4,150 | ) | (22,459 | ) | (74,555 | ) | (154,332 | ) | (255,496 | ) | ||||||||||
Balance, September 30, 2021 | $ | (10,375 | ) | $ | (42,809 | ) | $ | (100,005 | ) | $ | (172,288 | ) | $ | (325,477 | ) | |||||
Expense | (10,375 | ) | (11,213 | ) | (94,764 | ) | (89,229 | ) | (205,582 | ) | ||||||||||
Balance, March 31, 2022 | $ | (20,750 | ) | $ | (54,022 | ) | $ | (194,770 | ) | $ | (261,518 | ) | $ | (531,059 | ) | |||||
Carrying value | ||||||||||||||||||||
Balance, September 30, 2021 | $ | 31,125 | $ | 69,489 | $ | 687,088 | $ | 1,802,499 | $ | 2,590,202 | ||||||||||
Balance, March 31, 2022 | $ | 20,750 | $ | 58,276 | $ | 650,677 | $ | 1,782,420 | $ | 2,512,122 |
7. | ACCOUNTS PAYABLE AND ACCRUED LIABILITIES |
March 31, 2022 | September 30, 2021 | |||||||
Accounts payable | $ | 328,793 | $ | 283,459 | ||||
Accrued liabilities | 116,388 | 80,026 | ||||||
Balance | $ | 445,181 | $ | 363,485 |
8. | RELATED PARTY TRANSACTIONS |
Key management personnel include those persons having authority and responsibility for planning, directing and controlling the activities of the Company as a whole. The Company has determined the key management personnel consist of members of the Company’s Board of Directors and corporate officers.
During the six months ended March 31, 2022 and 2021, respectively, the Company leased its primary facility from ZLCA LLC, a California limited liability company whose managing member is an officer and director of Zenlabs Holdings, Inc. (Note 11). During the six months ended March 31, 2022 and 2021, the Company paid ZLCA LLC $0 and $307,560, respectively, in lease payments. As of March 31, 2022, the accrued balanced due to ZLCA, LLC is $410,903.
During the six months ended March 31, 2022 and 2021, the Company leased from an entity owned by a Director of the Company on a facilities and acreage related to its cannabis operation. During the six months ended March 31, 2022 and 2021, the Company paid the related party entity $30,000 and $30,000, respectively. Also, during the six months ended March 31, 2022 and 2021, the Company purchased $5,936 and $3,585, respectively, of raw materials from a related party entity owned by a Director of the Company.
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The remuneration of directors and key management personnel during the six months ended March 31, 2022 and March 31, 2021, respectively, was as follows:
2022 | 2021 | |||||||
Management fees | $ | 70,663 | $ | 123,481 | ||||
Supplies and materials | 5,936 | 3,585 | ||||||
Lease payments | - | 307,560 | ||||||
Total related party | $ | 76,599 | $ | 434,626 |
The following amounts were due to related parties at March 31, 2022 and September 30, 2021:
2022 | 2021 | |||||||
Due to a company controlled by a director | $ | - | $ | - | ||||
Accounts payable, related parties | 418,671 | 228,921 | ||||||
Total due to related parties | $ | 418,671 | $ | 228,921 |
9. | LONG TERM DEBT |
During the year ended September 30, 2020, the Company obtained a loan secured by a vehicle with monthly payment of $1,087. The loan has a term of sixty (60) months and is non-interest bearing.
September 30, 2020 | ||||
Balance, September 30, 2019 | $ | - | ||
Issued | 65,249 | |||
Repayments | (1,087 | ) | ||
Balance, September 30, 2020 | 64,162 | |||
Repayments | (13,050 | ) | ||
Balance, September 30, 2021 | 51,112 | |||
Repayments | (6,525 | ) | ||
Balance, March 31, 2022 | 44,587 | |||
Less current portion | (13,050 | ) | ||
Long term debt, March 31, 2022 | $ | 31,537 |
A schedule of the Company future minimum principal payments over the term of the loan is as follows:
Year ended March 31, | ||||
2022 | 13,050 | |||
2023 | 13,050 | |||
2024 | 13,050 | |||
2025 | 5,437 | |||
2026 | - | |||
Total | $ | 31,537 |
10. | RIGHT OF USE ASSET AND LEASE LIABILITY |
The Company and its subsidiaries operate in a leased property in San Diego, California for use as corporate offices, wholesale warehouse and grow facilities (the “Arjons Facility”). On June 16, 2019, the Company’s subsidiary, Zenleaf LLC, executed a Lease Agreement (the “2019 Lease”) with ZLCA, LLC, a California limited liability company whose managing member is an officer and director of Zenlabs Holdings, Inc. For the year ended September 30, 2020, $24,063 was capitalized to Biological Assets.
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The schedule of Base Rent monthly payments under the 2019 Lease was as follows:
On February 21, 2020, the 2019 Lease was replaced with a new lease agreement (the “2020 Lease”). Under the 2020 Lease, for any given year in which the Company generates more than $3,000,000 in annual sales, the lessor shall be entitled to receive five percent (5%) of the net revenues generated by the Company for sale of cannabis products on the premises, less a credit for Base rent paid. The percentage rent due to the lessor cannot exceed $300,000 per year.
The Company revalued its Lease Liability to reflect an incremental borrowing rate of 10.72% as of February 21, 2020. As a result, the Right of Use Asset and Lease Liability increased by $33,638.
On May 1, 2020, the Company entered into a lease with purchase option (the “5712 Lease”) with Metz Properties, LLC (the “Landlord”) a California limited liability company entity controlled by a member of the Company’s Board of Directors, for the use of approximately ten (10) acres in Oceanside, California. The term of the lease is five (5) years ending on April 30, 2025. The monthly payment is $10,000 per acre utilized. Upon notification to the landlord, the Company may occupy and utilize additional one (1) acre increments. In the event the Company elects to occupy the entire leased premises, the Company must give six (6) month notice to the landlord before taking possession. The Company also had an option to purchase the entire property for $4,000,000. The option to purchase the property expired on December 31, 2020.
The Right of Use Asset consists of the following:
Right of Use Asset | ||||
As of September 30, 2020 | $ | 2,206,984 | ||
Amortization | (274,179 | ) | ||
Balance, September 30, 2021 | $ | 1,932,805 | ||
Amortization | (137,089 | ) | ||
Balance, March 31, 2022 | $ | 1,795,716 |
The Lease Liability consists of the following:
Lease Liability | ||||
As of September 30, 2021 | $ | 2,464,854 | ||
Payments | (420,488 | ) | ||
Interest expense | 256,831 | |||
Balance, September 30, 2021 | $ | 2,301,197 | ||
Payments | (213,813 | ) | ||
Interest expense | 121,455 | |||
Balance, March 31, 2022 | $ | 2,208,839 | ||
Less Lease liability, current portion | (209,811 | ) | ||
Total Long term lease liability, March 31, 2022 | $ | 1,999,028 |
As of March 31, 2022, the total of future minimum lease payments are as follows:
From April 1, 2022 to September 30, 2022 | $ | 217,489 | ||
From October 1, 2022 to September 30, 2023 | 442,441 | |||
From October 1, 2023 to September 30, 2024 | 453,915 | |||
From October 1, 2024 to September 30, 2025 | 440,732 | |||
Thereafter | 1,631,930 | |||
Total minimum lease payments | 3,186,507 | |||
Less implied interest | (977,668 | ) | ||
Total | $ | 2,208,839 |
As of March 31, 2022, 6 months of lease payments to the Arjon’s facility had not been made but accrued for.
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11. | REVERSE ACQUISITION |
On October 31, 2019 the Company completed the acquisition of Zenleaf, LLC. Pursuant to a merger agreement, Zenlabs acquired all of the issued and outstanding ownership units of Zenleaf LLC in consideration of shares of the Company on a 1:1 basis. The Company issued 148,998 multiple voting shares to the former members of Zenleaf, LLC, including 38,254 shares issued to the Company’s chief executive officer.
As discussed in Note 1, the Transaction has been accounted for as a reverse acquisition whereby Zenleaf LLC is the acquirer for accounting purposes and the assets and liabilities of Zenlabs were acquired in consideration for the fair value of the Zenleaf LLC ownership units. Under this premise, as consideration for 100% of outstanding shares of Zenlabs by way of reverse acquisition, the Company issued 20,122,841 subordinate shares to the shareholders of Zenlabs. The fair value of the purchase consideration was determined in accordance with IFRS 2 – Share-based Payment, with the difference between the fair value of the consideration transferred and the fair value of Zenlab’s net liabilities assets assumed acquired being recorded as acquisition expense. The shares were assigned a value of $0.23 CAD per share, which was determined by the value of the recent financing realized through private placements, for a total consideration of $4,207,657.
The companies are related parties at the date of the Transaction by virtue of common management.
Consideration: | ||||
20,122,841 shares | $ | 3,522,514 | ||
14,622,840 warrants | 685,143 | |||
Total consideration | 4,207,657 | |||
Net assets acquired (liabilities assumed): | ||||
Cash | 2,802,660 | |||
Amounts receivable | 610,497 | |||
Accounts payable and accrued liabilities | (128,592 | ) | ||
Net assets acquired | 3,284,565 | |||
Acquisition expense | 923,092 | |||
Total | $ | 4,207,657 |
12. | DERIVATIVE LIABILITY |
Balance - September 30, 2019 | $ | - | ||
Fair value of warrants –issued during the period | 25,715 | |||
Change in fair value of warrants outstanding | (11,452 | ) | ||
Balance – September 30, 2020 | $ | 14,263 | ||
Change in fair value of warrants outstanding due to modification of terms | 70,166 | |||
Change in fair value of warrants outstanding | 68,980 | |||
Balance – September 30, 2021 | $ | 153,409 | ||
Change in fair value of warrants outstanding | (13,648 | ) | ||
Balance – March 31, 2022 | $ | 139,761 |
The derivative liability consists of the fair value of share purchase warrants that have exercise prices that differ from the functional currency of the Company. Details of these warrants and their fair value are as follows:
Expiration date | Exercise Price ($CAD) | Number of warrants outstanding at March 31, 2022 | Fair value of warrants at March 31, 2022 | |||||||||
December 13, 2021 | 1.00 | 331,682 | 139,761 | |||||||||
$ | 1.00 | 331,682 | $ | 139,761 |
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The fair values of the warrants were estimated using the Black-Scholes Option Pricing Model using the following assumptions:
● | The stock price was based on the most recent private placement for the Company at the time of issuance. |
● | The risk-free interest rate assumption is based on US Treasury marketable bonds for a period consistent with the expected term of the option in effect at the time of grant; |
● | The Company does not pay dividends on common stock and does not anticipate paying dividends on its common stock in the foreseeable future. Therefore, the expected dividend rate was 0%. |
● | The expected life of the warrants was estimated to be the remaining contractual term; and |
● | The expected volatility was based off of the historical trading prices of comparable companies’ common stock price over a period equivalent to the expected life of the warrants. |
The fair values of these warrants during the six months ended March 31, 2022 were estimated using the Black-Scholes Option Pricing Model using the following inputs:
Expected volatility | 92.82% |
Expected life | 1.24 years |
Dividend | 0% |
Risk-free interest rate | 0.76% |
13. | SHARE CAPITAL |
Common Shares (Subordinate Voting Shares)
Authorized: unlimited number of Subordinate Voting Shares without nominal or par value.
Common Shares (Multiple Voting Shares)
- | On October 31, 2019 the Company completed the acquisition of Zenleaf, LLC. Pursuant to a merger agreement, the Company issued 149,998 Multiple Voting Shares, for 100% of the ownership units of Zenleaf LLC, a California limited liability company. Included in the 149,998 Multiple Voting Shares issued were 38,254 shares issued to the CEO of the Company. Holders of Multiple Voting Shares have the following rights: |
o | At meetings of shareholders, holders of Multiple Voting Shares are entitled to two votes in respect of each Subordinate Voting Share into which such Multiple Voting Share could ultimately then be converted, |
o | Each holder of Multiple Voting Shares (other than an Initial Holder) is entitled to one vote in respect of each Subordinate Voting Share into which such Multiple Voting Share could ultimately be converted. For greater certainty, subject to adjustment as set forth in the Company’s Articles, each Multiple Voting Share is initially convertible into 100 Subordinate Voting Shares, each Initial Holder is initially entitled to 200 votes per Multiple Voting Share, and each registered holder of Multiple Voting Shares other than an Initial Holder is initially entitled to 100 votes per Multiple Voting Share. Each Multiple Voting Share shall be convertible, at the option of the registered holder. Initial Holder means the initial registered holder of a Multiple Voting Share at the time such Multiple Voting Share was issued. |
- | On December 13, 2019 the Company issued 331,682 Units at a price of $0.50 CAD per unit for proceeds of $125,000 USD. Each Unit consists of one (1) Subordinate Voting Share and one share purchase warrant. Each share purchase warrant entitles the holder to purchase one (1) additional Subordinate Voting Share at a price of $1.00 per share until December 31, 2021. The Subordinate Voting Shares issued under this financing will be subject to following voluntary resale restrictions: (i) 20% of the Subordinate Voting shares will not be subject to voluntary restrictions on resale, (ii) 20% of the Subordinate Voting Shares will be subject to restrictions on resale until three months after listing on a stock exchange; (iii) an additional 20% of the Subordinate Voting Shares will be subject to restrictions on resale until six months after listing on a stock exchange, (iv) an additional 20% of the Subordinate Voting Shares will be subject to restrictions on resale until nine months after listing on a stock exchange, and (v) an additional 20% of the Subordinate Voting Shares will be subject to restrictions on resale until twelve months after listing on a stock exchange. |
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- | On June 15, 2020, the Company initiated a financing for gross proceeds of up to $20,400,000 through the issuance of 17,000,000 units at $1.20 per unit, utilizing a Regulation A Offering Memorandum under the US Securities Act of 1933. Each unit consists of one share of the Company’s subordinate voting stock and one warrant to purchase an additional share of subordinate share at an exercise price of $3.00 per share for a period beginning one year after the offering statement was qualified by the Securities and Exchange Commission. For the year ended September 30, 2021, gross proceeds of $2,605,456 have been received and 2,171,213 subordinate shares and warrants to purchase subordinate shares have been issued related to this offering. |
Share Purchase Warrants
The following table reflects the continuity of share purchase warrants for the year ended September 30, 2021 and six months ended March 31, 2022:
Number of warrants | Weighted average exercise price ($CAD) | |||||||
Balance – September 30, 2020 | 14,954,522 | 0.61 | ||||||
Warrants issued – private placement (i) | - | - | ||||||
Warrants issued – private placement (ii) | - | - | ||||||
Warrants issued – Reg A offering (iii) | 2,661,993 | - | ||||||
Warrants exercised | - | - | ||||||
Warrants expired | - | - | ||||||
Balance – September 30, 2021 | 17,616,515 | $ | 0.61 | |||||
Warrants issued – Reg A offering (iii) | - | - | ||||||
Balance – March 31, 2022 | 17,616,515 | $ | 0.61 |
(iii) | For the year ended December 31, 2021, the Company issued 2,661,993 share purchase warrants related to a Reg A offering. Each warrant entitles the holder to acquire a subordinate share of the Company’s stock at an exercise price of $3.00 USD. These warrants expire on March 31, 2024. |
(iii) | For the six months ended March 31, 2022, no new warrants were issued. |
As at March 31, 2022, there are 17,616,515 outstanding share purchase warrants, with the first three issues having an adjusted expiration date of June 30, 2023.
Issue date | Expiration date (Adjusted) | Warrants | Exercise price ($CAD) | Exercise price ($USD) | Remaining life (years) | |||||||||||||
June 30, 2019 | June 30, 2023 | 9,448,200 | $ | 0.60 | $ | - | 1.25 | |||||||||||
October 21, 2019 | June 30, 2023 | 5,174,640 | 0.60 | - | 1.25 | |||||||||||||
December 13, 2019 | June 30, 2023 | 331,682 | 1.00 | - | 1.25 | |||||||||||||
June 15, 2021 | June 15, 2024 | 2,661,993 | - | 3.00 | 2.21 | |||||||||||||
17,616,515 | $ | 0.61 | $ | 3.00 | 1.39 |
The weighted average remaining contractual life of warrants outstanding as of March 31, 2022 was 0.97 years.
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Stock options
The continuity of outstanding stock options for the period ended March 31, 2022 is as follows:
Number of options | Weighted average exercise price per share ($USD) | |||||||
Balance - September 30, 2020 | 220,000 | $ | 0.38 | |||||
Issued | 460,000 | 1.20 | ||||||
Forfeited | (50,000 | ) | 1.20 | |||||
Balance – September 30, 2021 | 630,000 | $ | 0.91 | |||||
Issued | - | - | ||||||
Balance – March 31, 2022 | 630,000 | $ | 0.91 | |||||
a) | On February 28, 2020 the Company granted 120,000 stock options to the Chief Financial Officer of the Company. Each stock option is exercisable into subordinate shares of the Company at an exercise price of CAD $0.50 per share ($USD $0.38). The options vested as follows: 25% on the grant date, 25% every four months thereafter. The options expire on February 28, 2023. |
b) | On March 12, 2020 the Company granted 100,000 stock options to an employee of the Company. Each stock option is exercisable into subordinate shares of the Company at an exercise price of CAD $0.50 per share ($USD $0.38). The options vested as follows: 25% on the grant date, 25% every four months thereafter. The options expire on March 12, 2023. |
c) | On March 31, 2021, the Company granted 460,000 options to employees of the Company. Each stock option is exercisable into subordinate shares of the Company at an exercise price of $1.20 per share. with a fair value at grant date of $314,808. The options vested as follows: 25% at date of grant, 25% every three months thereafter. The options expire on March 12, 2026. During the period ending March 31, 2022, 50,000 options were cancelled, leaving a balance of 410,000. |
The fair values of the options were estimated using the Black-Scholes Option Pricing Model using the following assumptions:
Expected volatility | 100% |
Expected life | 2.90 years |
Dividend | 0% |
Risk-free interest rate | 0.58% to 0.85% |
As at March 31, 2022, there are 630,000 options to purchase subordinate shares outstanding of which 630,000 options were exercisable.
Issue date | Expiry date | Options | Exercisable options | Exercise price ($USD) | Remaining life (years) | |||||||||||||
February 28, 2020 | February 28, 2023 | 120,000 | 120,000 | $ | 0.38 | 0.92 | ||||||||||||
March 12, 2020 | March 12, 2023 | 100,000 | 100,000 | 0.38 | 0.95 | |||||||||||||
March 31, 2021 | March 12, 2026 | 410,000 | 410,000 | 1.20 | 3.95 | |||||||||||||
630,000 | 630,000 | $ | 0.91 | 2.90 |
The weighted average remaining life of options outstanding as of March 31, 2022 was 2.90 years. Unrecognized compensation expense as of March 31, 2022 was USD $0.
14. | CAPITAL MANAGEMENT |
The Company manages its capital structure and adjusts it, based on the funds available to the Company, in order to support its operations and business development. The Board of Directors does not establish quantitative return on capital criteria for management, but rather relies on the expertise of the Company’s management to sustain future development of the business.
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The Company generated limited revenue and cash flows from its operations since its inception; therefore, the Company is dependent on external financing to fund its future intended business plan. The capital structure of the Company currently consists of common shares, divided into Multiple Voting Shares and Subordinate voting Shares. The Company manages the capital structure and adjusts it in the light of changes in economic conditions and the risk characteristics of the underlying assets. In order to maintain or adjust the capital structure, the Company may issue new shares through private placements. Management reviews its capital management approach on an ongoing basis and believes that this approach, given the relative size of the Company, is reasonable. The Company is not subject to any externally imposed capital requirements.
15. | FINANCIAL INSTRUMENTS |
The judgements and estimates are made in determining the fair values of the financial instruments that are recognized and measured at fair value in the financial statements. To provide an indication about the reliability of the inputs used in determining fair value, The Company has classified its financial instruments into the three levels prescribed under the accounting standards. An explanation of each level is as follows:
● | Level 1 fair value measurements are those derived from quoted prices (unadjusted) in active markets for identical assets or liabilities; |
● | Level 2 fair value measurements are those derived from inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly (i.e., as prices) or indirectly (i.e., derived from prices); and |
● | Level 3 fair value measurements are those derived from valuation techniques that include inputs for the asset or liability that are not based on observable market data (unobservable inputs). |
The Company’s cash is classified as Level 1 whereas other financial assets (amounts receivables) are classified as Level 2. Carrying values of financial assets do not differ significantly from their fair values due to their short-term nature. The Company’s accounts payables and accrued liabilities and derivative liability are classified as Level 2. Fair values of financial liabilities (accounts payable and accrued liabilities) are assumed to approximate their carrying values due to their short term.
Financial Instrument risks:
(a) | Credit risk |
Credit risk is the risk that one party to a financial instrument will cause a financial loss for the other party by failing to discharge an obligation. The Company’s cash is exposed to credit risk. The Company reduces its credit risk on cash by placing these instruments with institutions of high credit worthiness. The Company does not have significant exposure to credit risk.
(b) | Liquidity risk |
Liquidity risk is managed by ensuring sufficient financial resources are available to meet obligations associated with financial liabilities. The Company manages liquidity risk through the management of its capital structure. As at March 31, 2022 the Company had cash of $245,253 to settle current financial liabilities of $1,348,444. The Company addresses its liquidity through debt and equity financing obtained through the sale of common shares and the exercise of warrants and options. There is no assurance that it will be able to do so in the future.
(c) | Interest rate risk |
Interest rate risk is the risk that the fair value or cash flows of a financial instrument will fluctuate because of changes in market interest rates. The Company is not significantly exposed to interest rate risk as at March 31, 2022.
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(d) | Foreign exchange risk |
As at March 31, 2022, the Company is not exposed to significant foreign exchange risk.
16. | SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION AND NON-CASH INVESTING AND FINANCING ACTIVITIES |
March 31, 2022 | March 31, 2021 | |||||||
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION | ||||||||
Interest paid | $ | 11,918 | $ | 31,429 |
17. | GENERAL AND ADMINISTRATIVE EXPENSE |
Activity during the six months ended March 31, 2022 and 2021, respectively, for general and administrative expense is as follows:
2022 | 2021 | |||||||
Management fee and payroll | $ | 134,676 | $ | 390,907 | ||||
Stock based compensation | 20,949 | 86,891 | ||||||
Travel | 14,373 | 17,286 | ||||||
Professional fees and consulting | 211,531 | 69,124 | ||||||
Licenses and permits | 23,943 | 26,285 | ||||||
Office and insurance | 37,360 | 23,986 | ||||||
Business and property taxes | 68,874 | 33,967 | ||||||
Occupancy and facilities | 30,667 | 21,235 | ||||||
Total general and administrative expense | $ | 542,374 | $ | 669,681 |
18. | SUBSEQUENT EVENTS |
None.
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ITEM 4. | EXHIBITS. |
(1) | Filed with the Offering Statement on Form 1-A filed with the SEC on March 9, 2020 and incorporated herein by reference. |
(2) | Filed with the Offering Statement on Form 1-A filed with the SEC on September 13, 2021 and incorporated herein by reference. |
(3) | Filed with the Offering Statement on Form 1-A/A filed with the SEC on May 28, 2020 and incorporated herein by reference. |
(4) | Filed with the Supplement to Offering Circular on Form 235G2 filed with the SEC on July 1, 2020 and incorporated herein by reference. |
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SIGNATURES
Pursuant to the requirements of Regulation A, the issuer has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
ZENLABS HOLDINGS INC. | |||
Date: | October 13, 2022 | /s/ MICHAEL BOSHART | |
By: | Michael Boshart | ||
President, Interim Chief Financial Officer and Director | |||
(Principal Executive Officer and Principal Financial Officer) |
Pursuant to the requirements of Regulation A, this report has been signed below by the following persons on behalf of the issuer and in the capacities and on the dates indicated.
Date: | October 13, 2022 | By: | /s/ MICHAEL BOSHART |
Michael Boshart | |||
Director | |||
Date: | October 13, 2022 | /s/ CRAIG DICKHOUT | |
By: | Craig Dickhout | ||
Director | |||
Date: | October 13, 2022 | /s/ KARL METZ | |
By: | Karl Metz | ||
Director |
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