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CubicFarm Systems Corp. — Management Reports 2021
May 1, 2021
47769_rns_2021-04-30_4c788156-cba2-4f76-9537-2c85de1162a7.pdf
Management Reports
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Management’s Discussion and Analysis
For the transition year (three and six months) ended December 31, 2020
Dated: April 30, 2021
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CubicFarm Systems Corp. Management’s Discussion and Analysis For the transition year (three and six months) ended December 31, 2020
The following Management’s Discussion and Analysis (“MD&A”) is prepared as of April 30, 2021 and reports on the operating results and financial condition of CubicFarm Systems Corp., (the “Company” or “CubicFarms”) for the three months and six months ended December 31, 2020. This MD&A is prepared by management and should be read in conjunction with the consolidated financial statements for the transition year ended December 31, 2020 as well as the consolidated financial statements for the year ended June 30, 2020, which have been prepared in accordance with International Financial Reporting Standards (“IFRS”). All dollar amounts herein are expressed in Canadian dollars unless stated otherwise.
In this discussion, unless otherwise indicated, a reference to the business and operations of the Company includes the business and operations of CubicFarm Systems Corp. and its wholly owned subsidiaries: CubicFarm Manufacturing Corp., CubicFarm Innovation Corp., CubicFarm Services Corp., CubicFarm Produce (Canada) Corp., CubicFarm Capital Corp. CubicFarm Systems U.S. Corp., HydroGreen, Inc., and CubicFarm Systems (Shanghai) Corp.
Additional information, including news releases, has been filed electronically through the System for Electronic Document Analysis and Retrieval (“SEDAR”) and is available under the Company’s profile at www.sedar.com.
Forward-Looking Statements
Certain statements contained in the following MD&A constitute forward-looking statements. These statements are based on the beliefs of management as well as assumptions made by and information currently available to the Company. When used in this document, the words “plans”, “forecasts”, “budgets”, “anticipate”, “believe”, “estimate”, “expect” and similar expressions, as they relate to the Company or management, are intended to identify forwardlooking statements. Such forward-looking statements include but are not limited to statements related to future sales of modules (in particular under the heading “Forward-Looking Guidance”), statements regarding the Company’s ability to close sales in the current sales pipeline, continue generating revenues, scale its operations, available funds and use and principal purpose of available funds, and its ability to raise sufficient financing, if and when necessary, to continue its operations. These forward-looking statements involve a number of known and unknown risks, uncertainties and other factors including, but not limited to, financial, operational, environmental and political risks, general equity and market conditions. The outcome of these factors may cause the actual results and performance of the Company to be materially different from any plans or results expressed or implied by such forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements. The Company has attempted to identify important factors that could cause actual actions, events or results to differ materially from those described in forward-looking statements, however, there may be other factors that cause actions, events or results not to be as anticipated, estimated or intended. The Company provides no assurance that forward-looking statements will prove to be accurate, as actual results and future events could differ materially from those anticipated in such statements. Forward looking information will not be updated unless required by law or securities regulations. For a comprehensive list of the risks and uncertainties applicable to the Company, refer to Item 21 of the Company’s application for the listing of its common shares on the TSX Venture Exchange (“TSXV”) available at www.sedar.com.
About the Company and Nature of Business
The Company was incorporated under the Business Corporations Act of British Columbia on October 8, 2015. The Company is domiciled in Canada and its principal address is 19951-80A Avenue, Unit 353, Langley, BC, V2Y 0E2.
The Company listed its common shares on the TSXV as a Tier 1 issuer in July 2019. The Company’s common shares trade on the TSXV in Canada under the symbol “CUB”.
CubicFarms is a local chain agricultural technology company that provides unique automated on site commercialscale food and livestock feed technologies. CubicFarms’ technologies convert wasteful long supply chain agriculture into local chains to improve independent access to quality food and maximize crop yield all while reducing the environmental cost of food and feed production. These technologies provide independent and efficient fresh produce and livestock feed supply for every city, community, government, and country, 365 days a year.
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CubicFarm Systems Corp. Management’s Discussion and Analysis For the transition year (three and six months) ended December 31, 2020
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CubicFarms has two distinct technologies that address two distinct markets. The first technology is its patented CubicFarm™ System, which contains CubicFarms’ patented technology for growing leafy greens and other crops. It is a unique modular growing system, using undulating path technology, addresses two of the most difficult challenges in the vertical farming industry, being high electricity and labour costs. CubicFarms leverages its patented technology by operating its own Research & Development (“R&D”) facility in Pitt Meadows, British Columbia, selling the System to farmers, licensing its technology and providing industry-leading vertical farming expertise to its customers.
The second technology is CubicFarms’ HydroGreen System, the Company’s technology for growing nutritious livestock feed. The HydroGreen System was invented by Dihl Grohs, a rancher with operations in South Dakota, Utah and Missouri. This system utilizes a unique process to sprout grains, such as barley and wheat, in a controlled environment with minimal use of land, labour and water. The HydroGreen System is fully automated and performs all growing functions including seeding, watering, lighting, harvesting, and re-seeding – all with the push of a button – to deliver nutritious livestock feed without the typical investment in fertilizer, chemicals, fuel, field equipment and transportation. The HydroGreen System not only provides superior nutritious feed to benefit the animal, but also enables significant environmental benefits to the farm. The Company’s HydroGreen operations and R&D facilities are located in Renner, South Dakota.
The Company operates two segments, which are the Fresh Division, for leafy greens and other crops, and the Feed Division, for livestock feed.
Highlights Subsequent to the transition Year Ended December 31, 2020
On January 19, 2021, the Company announced a change of financial year-end. The Company has changed its fiscal year-end from June 30 to December 31 in order to align the financial year-ends of the Company and all its subsidiaries, as well as with its peers. For details regarding the length and ending dates of the financial periods, including the comparative periods of the interim and annual financial statements to be filed for the Company's transition year and its new financial year, reference is made to the Notice of Change in Financial Year-End filed by the Company on SEDAR pursuant to Section 4.8 of National Instrument 51-102, a copy of which is available electronically at www.sedar.com.
In addition, the Company has changed its auditor from MNP LLP (the "Former Auditor") to KPMG LLP (the "Successor Auditor"). At the request of the Company, the Former Auditor resigned as the auditor of the Company effective January 7, 2021 and the Company appointed the Successor Auditor as the Company's auditor effective January 7, 2021, until the next Annual General Meeting of the Company.
On March 2, 2021, the Company announced the appointment of Edoardo De Martin as Chief Technology Officer. As a proven technology leader with more than 20 years of experience in the technology industry, Mr. De Martin will bring significant experience to advancing artificial intelligence (AI), robotics, and mixed reality technologies supporting the Company's innovative growing technologies. Mr. De Martin will be creating the Tech team, which will be working on the projects in AI/Automation/Machine learning initiatives and creating the next generation of indoor growing technologies.
Prior to joining CubicFarms, Mr. De Martin spent 10 years at Microsoft working in various roles including General Manager of the Microsoft Vancouver Development Centre, as well as driving innovation as GM of Dynamics Mixed Reality Applications on HoloLens. Mr. De Martin's broad software experience across video games, holographic, and enterprise solutions, coupled with his leadership ability in leading technical innovation teams, will bring a unique perspective to Ag-Tech.
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CubicFarm Systems Corp. Management’s Discussion and Analysis For the transition year (three and six months) ended December 31, 2020
On March 18, 2021, the Company announced the appointment of a Scientific Advisory Board (“SAB”) to guide and advise CubicFarms. The SAB is comprised of top experts in the fields of agriculture and technology and is primarily responsible for making recommendations to the Company’s senior leadership team regarding R&D priorities.
Inaugural members of the SAB include:
Dr. Lenore Newman (SAB Chair) — Director of the Food and Agriculture Institute at the University of the Fraser Valley (UVF) where she holds a Canada Research Chair in Food Security and Environment. She’s an associate professor in the department of geography and the environment at UFV and is a member of the Royal Society of Canada’s New College. She holds a PhD in Environmental Studies from Toronto’s York University and has published over 50 academic journal articles and book chapters.
Dr. Tammara Soma — Dr. Soma MCIP RPP is an Assistant Professor at the School of Resource and Environmental Management (Planning program) at Simon Fraser University and Research Director of the Food Systems Lab. Dr. Soma was selected as a committee member of the U.S. National Academies of Science and coauthored the consensus study A National Strategy to Reduce Consumer Food Waste. She is registered professional planner (RPP) and holds a Member of the Canadian Institute of Planners (MCIP) designation.
Dr. Laila Benkrima — Director of LB Plant Biosciences Research and Consulting Inc. at Simon Fraser University. Dr. Benkrima has extensive experience in research, training, and teaching horticulture techniques and as a crop consultant to greenhouse and farming operators. She holds a Ph.D. in Plant Biology and Master of Science Degree in Plant Physiology from the University of Paris, France.
Dr. Evan Fraser — Professor Evan Fraser, PhD, is a full professor at the University of Guelph, the Director of the Arrell Food Institute, a Fellow of the Trudeau Foundation, and a Fellow of the Royal Canadian Geographic Society. Dr. Fraser helps lead the Food from Thought initiative, which is a $76.6 million research program based at the University of Guelph exploring how to use big data to reduce agriculture’s environmental footprint. He works with large multi-disciplinary teams on developing solutions to help feed the world’s growing population. He co-chairs the Arrell Food Summit and manages the Arrell Food Scholarship program, as well as the Arrell Food Innovation Awards that deliver hundreds of thousands of dollars annually to groups that have made tremendous impacts on global food systems.
In addition to these members, the SAB will also include current leadership from CubicFarms including Leo Benne, Founder of CubicFarms; Tim Fernback, Chief Financial Officer, CubicFarms; and Edoardo De Martin, Chief Technology Officer, CubicFarms.
On March 19, 2021, the Company announced that a scientific journal has published a case study involving HydroGreen, that has pioneered innovative technologies to produce live green animal feed. The article, published by Canadian Science Publishing in FACETS, the official journal of the Royal Society of Canada’s Academy of Science, finds that HydroGreen’s technology has great potential for reducing greenhouse gas emissions in the animal agriculture industry. It warns of the imminent pressures on our food systems through demand for consumption of animal products, which are becoming more apparent as our global population increases, with estimates suggesting a global population of almost 10 billion by 2050. This scientific research was developed through a collaboration of academic researchers and industry experts, including: Dr. Newman (Director and Canada Research Chair in Food Security), Dr. Robert Newell (Associate Director), and Charmaine White (Research Associate), who are all members of the prestigious Food and Agriculture Institute at the University of the Fraser Valley; as well as Mathew Dickson, Managing Director of Hallbar Consulting, a sustainability and waste consulting firm; Bill Vanderkooi, President and CEO of Nutriva Group, a strategic consulting firm to the dairy, egg, and beef industry; and Tim Fernback, Chief Financial Officer of CubicFarms.
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CubicFarm Systems Corp. Management’s Discussion and Analysis For the transition year (three and six months) ended December 31, 2020
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On April 5, 2021, the Company announced that pursuant to a non-brokered private placement, Burnett Land & Livestock Ltd., (Burnett) has agreed to purchase 1,464,622 common shares of the Company at a purchase price of CA$1.29 per common share for gross proceeds of US$1,500,000 (approximately CA$1,886,427). Burnett is a strategic investor to CubicFarms interested in further advancing the HydroGreen technology and is a large USbased beef cattle rancher and dairy farmer with over 17,000 cattle located on 35,000 acres. The Company intends to use the proceeds of the Private Placement for advancing the research and development for HydroGreen and for general working capital purposes.
On April 6, 2021, the Company announced an agreement with Burnett, for 12 HydroGreen Grow System beta modules, daily feed production supply, and includes collaboration on a research program and feed analysis with HydroGreen. As part of the agreement, HydroGreen and Burnett will collaborate on the collection of data and research to quantify the livestock feed nutrition benefits, dry matter yield gain, performance of the herd, with special interest in fertility, milk production, and overall wellbeing of the animals. This beta project, called HydroGreen Vertical Pastures™, will include the first installation of the commercial scale HydroGreen GLS808 modules on a large-scale farm. The 12 HydroGreen GLS808 modules, once installed, can produce 80% more fresh livestock feed than HydroGreen’s legacy systems, providing Burnett with up to 72,000lbs of feed daily. As part of the feed ration, that’s enough to feed 2,000 animals daily. Burnett will purchase all the daily feed production supply with the option to purchase the modules and expand to accommodate Burnett’s full operational needs.
On April 6, 2021, the Company announced the appointment of Thomas Liston as Vice President (VP) of Corporate Development. Mr. Liston will provide CubicFarms with strategic business development and capital markets advisory services in his role as VP of Corporate Development. Mr. Liston is a technology investor, advisor, and a Chartered Financial Analyst® with over 20 years of experience in capital markets. He’s the founder of Water Street Corp and currently serves on several boards of directors for public and private technology companies, and he has a strong track record of shareholder value creation in that capacity. He has served on the Board of Directors of WELL Health Technologies (TSX: WELL) since April 2018 and Tantalus Systems Holding Inc. (TSX.V: GRID) since January 2021.
On April 20, 2021, the Company was awarded a Nexus Innovation Award for HydroGreen's Vertical Pastures™ Grow System, an automated, on farm fresh livestock feed technology. HydroGreen's unique automated technology for growing on farm fresh livestock feed was selected by dairy farmers because with this technology, dairies can gain more control over feed production and conserve water and land without the need for chemicals or fertilizers.
On April 23, 2021, the Company announced the sale of 18 modules of the CubicFarm System onsite indoor growing technology at a sale price of US$2,700,000 to BoomA Food Group. BoomA Food Group will use these modules to grow commercial scale amounts of produce in New South Wales, Australia, specializing in herbs and microgreens. This purchase of equipment represents the first commercial sale in Australia.
On April 29, 2021, the Company amended its loan with BDC Capital Inc. The amendment includes cancelling the second $2,500,000 tranche and adjusting the principal instalments to 47 monthly instalments of $25,000 commencing July 15, 2021, with a balloon payment of $1,325,000 payable on June 15, 2025. The variable loan bonus was also replaced with a fixed bonus of $425,000, consisting of $225,000 in cash and $200,000 in common shares. The payment of the fixed bonus will take place as early as possible, and no later than 10 days after the filing of the Company’s December 31, 2020 financial statements.
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CubicFarm Systems Corp. Management’s Discussion and Analysis For the transition year (three and six months) ended December 31, 2020
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Forward-Looking Guidance
Systems Sales
The Company has entered into sales discussions with a number of companies in Canada and internationally and has developed significant sales leads for the purchase of additional modules. It also expects to expand sales with at least one current customer in the coming year. The Company’s sales pipeline currently includes individuals and companies in Canada, Ireland, the United States, Africa, Puerto Rico, Europe, the Middle East, and China. There can be no assurances that any of these pipeline opportunities will lead to sales of modules or identification of partner farms.
Sales and deposits
The Company currently has a total of 157 modules under contract and deposit. The amount of System sales orders that are pending manufacturing and installation is approximately USD $21 million. The table below shows the projects under contract and deposit:
| Project Name | Number of Modules | Value, USD |
|---|---|---|
| Surrey | 100 | $ 12,561,538 |
| Montana | 21 | $ 2,930,816 |
| Abbotsford | 16 | $ 2,129,815 |
| Indiana | 20 | $ 2,969,500 |
| Total | 157 | $ 20,591,669 |
Revenue from System sales is dependent on the transfer of legal title upon the completion of the sales and delivery process – consisting of signing the purchase agreement, customer deposit, manufacture of modules, customer’s site preparation, shipping, and installation of the System. Unforeseen delays attributable to the COVID-19 pandemic and the global recovery efforts employed by both individual companies and countries may delay the Company’s completion of the module sales and delivery process. Based on the Company’s operating plan identified within the MD&A dated November 30, 2020, the Company’s results in the October – December 2020 period are in alignment with management’s expectations. The Company does not expect to start delivering modules for the Surrey project until 2023. This is due to the expected time for the chosen site to be prepared.
The Company considers a sales order to have taken place when a binding equipment purchase agreement is signed and a first deposit has been provided. This forward-looking order volume estimate is based on the Company’s current sales pipeline and internal estimates of module demand and is subject to several risks and uncertainties. See “Forward-Looking Statements”.
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CubicFarm Systems Corp. Management’s Discussion and Analysis For the transition year (three and six months) ended December 31, 2020
During the three months ended December 31, 2020, the Company signed contracts and received deposits for the projects below:
| Project Name | Number of Modules | Value, USD |
|---|---|---|
| Abbotsford | 16 | $ 2,129,815 |
| Indiana | 20 | $ 2,969,500 |
| Total | 36 | $ 5,099,315 |
Ongoing projects progress:
| Project Name | Number of Modules | Value, USD | Stage | Completion |
|---|---|---|---|---|
| Calgary | 22 | $ 3,154,000 | Start-up and training |
Feb-21 |
| Armstrong | 14 | $ 2,381,400 | Start-up and training |
Mar-21 |
| San Diego | 1 | $ 143,500 | Installation |
Feb-21 |
| Total | 37 | $ 5,678,900 |
Corporate and Operational Highlights for the six months ended December 31, 2020
On July 10, 2020, the Company announced that its automated, controlled-environment system had been selected by a new customer to grow commercial quantities of leafy greens for retail markets in the Okanagan region in British Columbia, Canada. The Company has finalized an agreement for the sale of 16 CubicFarms modules and received a deposit of C$323,000.
On July 15, 2020, the Company announced a non-brokered private placement with Harry DeWit and several company insiders, involving the issuance of 1,659,600 common shares of CubicFarms at a price of C$0.70 per share for gross proceeds of up to C$1,161,720 (the "Offering"). Insiders participating in the Offering include Jeff Booth, Chairman of the Board of Directors; Rodrigo Santana, Chief Operating Officer; and Tim Fernback, Chief Financial Officer. Harry DeWit is CEO and President of Blue Sky Farms, LLC, a Texas and Ohio-based dairy and farming business producing 1.2 million pounds of quality milk per day. He has been lauded as a forward-thinking dairy entrepreneur, having been awarded the International Dairy Foods Association's "Innovative Dairy Farmer of the Year", which recognizes the valuable contributions of progressive dairy producers. His soil conservation efforts were recognized by the USDA's National Resources Conservation Service.
On July 23, 2020, the Company announced that it entered into a Letter of Offer of financing with BDC Capital Inc. ("BDC"), a wholly owned subsidiary of Business Development Bank of Canada. BDC's Cleantech Practice has agreed to provide CubicFarms with growth capital in the amount of C$5,000,000 through a commercial debt financing (the "Loan"). The Loan will bear interest at an annual fixed rate of 10%, which will be decreased as the Company meets performance targets set by BDC. There is a provision for payment of a variable loan bonus based on the Company’s consolidated enterprise value at maturity or payment of loan or occurrence of any other events stipulated in the loan agreement. The initial fair value of the embedded derivative liability related to the variable loan bonus was estimated to be $595,712, and as at December 31, 2020, the variable loan bonus had a fair value of $1,002,129. On August 28, 2020, the Company received the first tranche payment of $2,500,000. The loan is to be repaid by June 2025.
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CubicFarm Systems Corp. Management’s Discussion and Analysis For the transition year (three and six months) ended December 31, 2020
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On August 4, 2020, the Company announced the appointment of Sandy Gerber as Head of Marketing. As Head of Marketing for CubicFarms, Ms. Gerber is responsible for creating and launching a global marketing strategy that successfully positions CubicFarms in the market and drives lead generation and sales.
On August 7, 2020, the Company announced that Ospraie Ag Science, LLC ("Ospraie") purchased 7,500,000 common shares of the Company pursuant to private share purchase agreements at a purchase price of C$0.70 per common share for total consideration of C$5,250,000 (the "Transaction") from several existing Company shareholders. Before the Transaction, Ospraie held 22,000,630 common shares of CubicFarms, representing approximately 18.9% of the current issued and outstanding common shares on a non-diluted basis. Following the Transaction, Ospraie owns and exercises control and direction over an aggregate of 29,500,630 common shares of CubicFarms, representing approximately 25.4% of the issued and outstanding common shares of CubicFarms on a non-diluted basis.
On August 31, 2020, the Company announced the sale of three control rooms to Terramera Inc., a global ag-tech leader transforming how food is grown and the economics of agriculture. Terramera Inc. is a British Columbia-based company on a mission to reduce global synthetic pesticide use by 80 percent by 2030 with its revolutionary Actigate™ technology platform and was named a 2020 World-Changing Idea by Fast Company.
On September 2, 2020, the Company announced that a six-section HydroGreen automated system for growing nutritious livestock feed, left its manufacturing facility in South Dakota, USA, and was shipped to GrassGo Co., Ltd. ("GrassGo") in Tokyo, Japan. In May, GrassGo purchased the system and became an authorized HydroGreen dealer/distributor for the Japan market. GrassGo will use this system to demonstrate its unique, patent-pending technology to potential customers eager to have reliable, consistent, and high-quality supply of feed for their herds.
On September 9, 2020, the Company announced that it signed a global reseller agreement with Hydrogreen Global, LLC ("HGG"). HGG has the non-exclusive right to globally market and sell CubicFarms' HydroGreen fully automated hydroponic growing systems that produce live, green, nutritious feed for livestock. Kevin Fiske has been appointed the Chief Executive Officer of HGG. Mr. Fiske currently serves as President of Fiske Electric, an established electrical contractor specializing in large commercial and agricultural projects for over 35 years. Fiske Electric has completed the design and build of multiple dairies ranging in size from 700 to 6,000 cows. This global reseller agreement replaced CubicFarms' relationship with Artex Feed Solutions, first announced in the Company's press release dated December 11, 2019. Artex Feed Solutions was dissolved on November 16, 2020.
On September 17, 2020, the Company announced that it appointed Mr. Chris Papouras to the Board of Directors. Mr. Papouras currently serves as strategic advisor at leading ag-tech investor Ospraie. He has a special focus on manufacturing best practices in the controlled-environment agriculture (CEA) space.
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CubicFarm Systems Corp. Management’s Discussion and Analysis For the transition year (three and six months) ended December 31, 2020
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On October 5, 2020, the Company announced the sale of its automated, controlled-environment system to Agragene Inc. (“Agragene”), a San Diego, US-based ag-tech company developing novel biological pest protection for crops, utilizing live sterile male insects as a form of insect pest control. This sale marks a new vertical for CubicFarms’ fresh produce system, which will now be used by Agragene to grow insects predictably in an indoor, controlled environment. The Company finalized an agreement for the sale of one CubicFarms growing modules and received a deposit from Agragene of US$72K. Agragene plans to trial the breeding of its proprietary insect lines to produce only sterile male crop pests inside the module. The sterile males are then released into the field where they effectively and safely control the wild pest population. Upon satisfactory completion of the trial, Agragene plans to scale up its insect factory with multiple CubicFarms modules.
On October 8, 2020, the Company announced the appointment of Dan Schmidt as Senior Vice President of Global Sales. In Mr. Schmidt’s new role, he is responsible for growing and leading the Company’s global sales strategy as it enters its next phase of rapid growth.
On November 23, 2020, the Company announced sale of commercial scale system to Aright Greentech Canada Ltd. (“Aright”), a British Columbia based agriculture investor-operator, to grow commercial quantities of fresh produce for retail markets in the Abbotsford and Chilliwack regions in British Columbia, Canada. Aright is an international company with interests in environmentally focused companies in India and other countries, and this B.C. launch is a soft pilot project for potential future international roll-out. The Company's commercial agreement with Aright for the sale of 16 CubicFarms modules includes 14 growing modules, two propagation modules and an irrigation system, representing a total of approximately C$2.8 million (including installation and shipping) in sales revenue to the Company. The system is expected to be installed in Abbotsford by August 2021.
On November 25, 2020, the Company announced sale of commercial scale system to Vertical Acres Farm LLC ("Vertical Acres"), an Indiana based produce company, to grow commercial quantities of fresh produce for the region. The Company's commercial agreement with Vertical Acres is for the sale of 21 CubicFarms modules, including 17 cultivators, three propagators, and one fertigator, for a complete CubicFarm installation. The agreement, which includes a deposit received from Vertical Acres, represents approximately C$3.8 million in anticipated revenue to the Company. The technology is expected to be installed in Indiana in the first half of 2021.
On December 14, 2020, the Company announced the sale of commercial scale systems in Metropolitan Vancouver to 1241876 B.C. Ltd., doing business as FutureLife Produce ("FutureLife"). The sale of 10 CubicFarms modules represents approximately C$1.7 million in sales revenue to the Company. FutureLife is constructing CubicFarms' largest vertical farming system installation to date with a 100-module project currently planned to operate in Surrey, B.C., and wishes to install an additional 10 modules at a strategic location in in order to service the local food services market directly and seamlessly.
On December 15, 2020, the Company announced that it entered into an agreement with Raymond James Ltd. as lead underwriter and sole bookrunner, on behalf of a syndicate of underwriters (collectively, the “Underwriters”), pursuant to which the Underwriters agreed to purchase, on a “bought deal” basis, 11,111,111 common shares (the “Common Shares”) in the capital of the Company at a price of C$0.90 per Common Share (the “Issue Price”) for aggregate gross proceeds to the Company of approximately C$10,000,000 (the “Offering”). The Company agreed to grant the Underwriters an over-allotment option to purchase up to an additional 15% of the Common Shares issued under the Offering at the Issue Price, exercisable in whole or in part at any time for a period ending 30 days from the closing of the Offering. In addition, CubicFarms entered into a subscription agreement with existing shareholder Harry DeWit, CEO and President of BlueSky Farms, LLC (“BlueSky Farms”), a Texas and Ohio-based dairy and farming business, pursuant to which BlueSky Farms will purchase common shares on a private placement basis at the Issue Price for gross proceeds to CubicFarms of up to C$5,000,000 (the “Concurrent Private Placement”). The net proceeds from the Offering and Concurrent Private Placement will be used to support CubicFarms’ continued global growth, R&D efforts to optimize module yields, automation, and functionality, expand addressable crop varieties and for working capital and other general corporate purposes.
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CubicFarm Systems Corp. Management’s Discussion and Analysis For the transition year (three and six months) ended December 31, 2020
On December 16, 2020, the Company announced that the Company held its Annual General Meeting of shareholders virtually on December 16, 2020. Voting results can be seen on the Company website or press-release.
On December 21, 2020, the Company announced the closing of its equity financing consisting of the Offering, and Concurrent Private Placement. Pursuant to the Offering, the Company issued a total of 12,777,777 Common Shares at a price of C$0.90 per Common Share for gross proceeds to the Company of C$11,499,999, which includes the exercise, in full, by the Underwriters of the over-allotment option granted by the Company to purchase an additional 1,666,666 Common Shares at a price of C$0.90 per Common Share. In addition, CubicFarms closed the previously announced Concurrent Private Placement with existing shareholder Harry DeWit, CEO and President of BlueSky Farms, pursuant to which Blue Sky Farms purchased 5,222,300 Common Shares at a price of C$0.90 per Common Share for gross proceeds to CubicFarms of C$4,700,070.
Acquisition of HydroGreen
In January 2020, CubicFarms completed the acquisition of HydroGreen, Inc., a private company headquartered in South Dakota. The Acquisition was completed by way of a reverse triangular merger of CubicFeed Systems U.S. Corp., a wholly owned subsidiary of the Company, and HydroGreen, resulting in HydroGreen being renamed “CubicFeed Systems U.S. Corp” and becoming an indirect and wholly owned subsidiary of the Company. The new CubicFarms subsidiary will operate the existing business of HydroGreen moving forward. Subsequently, the Company renamed this subsidiary HydroGreen, Inc. on June 4, 2020 to align both the company name and product name more closely.
Under the terms of the merger agreement, holders of HydroGreen shares (“HydroGreen Shareholders”) received 10,000,000 common shares of CubicFarms on the closing date, with up to 1,000,000 shares to be issued on the six-month anniversary of closing, subject to any set-off relating to indemnification (the “Consideration Shares”). The acquisition did not result in any of the shareholders of HydroGreen holding more than 5% of the common shares of the Company. On September 1, 2020, the Company issued 926,845 common shares in satisfaction of its remaining obligation to the HydroGreen Shareholders for Consideration Shares.
In connection with the closing, principals of HydroGreen holding in excess of 80% of the Consideration Shares entered into a pooling agreement with respect to their Consideration Shares. Under the terms of the pooling agreement, 25% of their Consideration Shares were released on the closing of the acquisition and an additional 25% will be released on each of the dates which are 6 months, 12 months and 18 months following closing of the acquisition. Details of the purchase price allocation are disclosed in Note 6 of the Company’s audited financial statements ending December 31, 2020.
Joint Venture with Artex Feed Solutions
CubicFarms acquired a 25% investment in Artex Feed Solutions Ltd., a company incorporated on November 8, 2019. On January 17, 2020, the Company increased its ownership in Artex Feed to 50%. On September 9, 2020, the Company announced that a new non-exclusive global reseller, Hydrogreen Global LLC, a Colorado-based company owned by Total Dairy Solutions Inc., will replace Artex Feed Solutions Ltd. On November 16, 2020 Artex Feed Solutions Ltd. was dissolved.
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CubicFarm Systems Corp. Management’s Discussion and Analysis For the transition year (three and six months) ended December 31, 2020
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Joint Venture with Pacific Maple Enterprise Group Ltd. and Canada High-Tech Investment Group Co. Ltd.
The Company, Pacific Maple Enterprise Group Ltd. (“PME”) and Canada High-Tech Investment Group Co. Ltd. (“CHTI”) have set up a “joint venture” company, 1241876 B.C. Ltd. (“1241”), for the purpose of carrying out a number of transactions, including the purchase by 1241 of 100 modules from the Company for a proposed real estate development site located in Surrey, British Columbia.
CubicFarms subscribed for 200,000 common shares in the capital of the 1241 company, representing 20% of the total issued and outstanding common shares, at the subscription price of $0.0001 per share, for the aggregated purchase price of $20.00. For context, PME and CHTI have subscribed for and are the legal and beneficial holders of 700,000 and 100,000 common shares in the capital of the 1241, respectively, representing 70% and 10% of the total issued and outstanding common shares of 1241.
Incorporation of CubicFarm Systems (Shanghai) Corp.
The Company incorporated a wholly owned subsidiary in China’s Shanghai Free Trade zone, “CubicFarm Systems (Shanghai) Corp.” on December 10, 2020, to represent the Company’s interests in the Asia-Pacific region. The main role of this subsidiary will be to have a direct relationship with the Company’s vendors in China, to conduct quality control of the manufacture of the Company’s product; and negotiate vendor pricing by selecting reliable vendors with supreme parts quality and prices, as well as facilitate the China supply chain and improve logistics capability to further improve product profitability. The other major role of the established entity is to explore new business opportunities for the CubicFarm equipment and technology in China. Jerry Li has joined the Company to lead CubicFarm Systems (Shanghai) Corp. as the subsidiary President. Jerry Li is a long-time partner to CubicFarm Systems with well-established business connections in China.
FRESH DIVISION
CubicFarms growing modules can grow a wide variety of fresh produce. Each new crop that is optimized presents an opportunity for a new sales market. To facilitate research and development for new markets, the Company is ramping up cultivation and research and development activities at the Pitt Meadows facility. This will allow the Company to actively pursue new markets and business lines in the nutraceutical and cosmeceutical space, in addition to its current markets for vegetables, herbs, microgreen and germinating plants. Additionally, growing styles that accommodate different methods of automation and harvesting are also being tested.
One specific area of focus at present is fine tuning the optimal conditions for germination, cloning, growing highgross margin crops, and additionally optimizing for automated harvesting and processing to then transform these same crops into high quality ingredients for nutraceuticals and cosmeceuticals through juicing, powdering, and/or extraction. In the next six months, the Company expects to develop standard operating procedures for growing and transforming into ingredients for at least five high gross margin crops and expects to secure supply contracts for the products with at least one strategic customer.
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CubicFarm Systems Corp. Management’s Discussion and Analysis For the transition year (three and six months) ended December 31, 2020
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FEED DIVISION
Through the Company’s acquisition of HydroGreen, Inc. it now has a fully automated hydroponic growing system that produces live, green livestock feed. HydroGreen’s unique process sprouts grains, such as barley and wheat, in a controlled environment with minimal use of land, labour and water.
Over the last six months, HydroGreen has been focused on designing and developing the larger, commercial-scale, eight-section by eight-row module, as well as growing its team to execute its growth plans. The HydroGreen team has grown from seven employees when it was acquired by the Company, to 22 employees and full-time contractors as of December 31, 2020. HydroGreen also developed a 12,000 square foot Innovation Center that contains three grow systems and will be used for R&D, product testing, customer visits, partner training, and feed trials.
The original HydroGreen system consists of a six-section by six-row module that can produce approximately 3,200 lbs of feed per day. This is the smallest system available for sale and is best suited for herds of up to 100. According to the most recent census from the U.S. Department of Agriculture, there are 11,018 farms with over 1,000 cattle in the U.S., with 35,828,074 total cattle. The Company recognized the opportunity to sell into the large-scale commercial market and developed a system consisting of 6 eight-section by eight-row modules that can produce approximately 35,000 lbs of feed per day and is best suited for herds of over 1,000. The system was designed in 2020 and assembled and tested at the Innovation Center in 2021. The modular design of both HydroGreen Systems allows farmers to combine multiple systems to feed hundreds or thousands of livestock.
As discussed earlier, FACETS, the official journal of the Royal Society of Canada’s Academy of Science, published a case study involving HydroGreen, that found the technology has great potential for reducing greenhouse gas emissions in the animal agriculture industry. The journal article explores the potential for hydroponic fodder production for contributing to climate mitigation in fodder agriculture. Results of the case study indicate that incorporating hydroponic systems into barley production has the potential to reduce greenhouse gas emissions.
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CubicFarm Systems Corp. Management’s Discussion and Analysis For the transition year (three and six months) ended December 31, 2020
Selected Annual Information
The following table sets out selected annual financial information of the Company and is derived from the Company’s audited consolidated financial statements for the six months ended December 31, 2020, representing the transition year, and twelve months ended June 30, 2020, 2019 and 2018, prepared in accordance with IFRS.
| Six months | Twelve months | Twelve months | Twelve | months | months | |||
|---|---|---|---|---|---|---|---|---|
| ended December | ended June 30, | ended June 30, | ended June 30, | |||||
| 31, 2020 | 2020 | 2019 | 2018 | |||||
| $ | $ | $ | $ | |||||
| Sales | 624,774 | 5,167,488 | 5,356,031 | - | ||||
| Cost of sales | 1,564,021 | 2,928,981 | 4,076,833 | - | ||||
| Gross profit | (939,247) | 2,238,507 | 1,279,198 | - | ||||
| Operating expenses | 8,732,177 | 11,692,605 | 7,654,233 | 1,367,761 | ||||
| Loss before (expense) |
other | income | (9,671,424) | (9,454,098) | (6,375,035) | (1,367,761) | ||
| Total comprehensive the period |
loss for | (10,172,063) | (10,110,752) | (7,630,624) | (1,394,896) | |||
| Earnings (loss) per share: | ||||||||
| Basic and diluted | (0.08) | (0.11) | (0.11) | (0.02) | ||||
| As at | ||||||||
| December 31, 2020 | June 30, 2020 | June 30, 2019 | June 30, | 2018 | ||||
| $ | $ | $ | $ | |||||
| Total assets |
34,736,855 | 21,140,607 | 18,102,494 | 4,627,868 | ||||
| Total non- | ||||||||
| current | 4,474,071 | 2,974,817 | Nil | Nil | ||||
| liabilities | ||||||||
| Dividends declared |
Nil | Nil | Nil | Nil |
During 2018 the Company did not record any sales due to being in the early stage of the business, where the focus was on R&D of the first generation of the CubicFarms System. 2018 expenses were mainly salaries and wages, due to an increase in employees, as well as consulting and professional fees as a result of continued expansion of the business.
During 2019 sales increased to $5,356,031 primarily due to the Company recording its first Systems sales totaling $5,201,198, as well as revenue from fresh produce sales from the Pitt Meadows facility totaling $154,833. Gross Margin was 24% due to the first generation of the CubicFarm Systems with higher cost. Operating and SG&A expenses increased by $6,286,472 to $7,654,233, which were predominantly R&D expenses totaling $2,458,234 due to further Systems development and moving to the manufacturing stage; as well as salaries and wages, and consulting and professional fees totaling $2,883,090 due to the company’s rapid expansion.
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CubicFarm Systems Corp. Management’s Discussion and Analysis For the transition year (three and six months) ended December 31, 2020
During the twelve months ended June 30, 2020, sales decreased slightly to $5,167,488 compared to 2019. The Company recorded initial revenue from a project in Calgary of 22 grow systems, plus sales of six control rooms. The Company also recorded the first HydroGreen 6’x6’ system sale to a customer in Japan. Gross margin was 43%, due to improvements in the manufacturing process, as well as higher volume of high margin consumable sales. Operating and SG&A expense growth was driven mainly by continued efforts by the Company to expand the Operations team and by creating a dedicated Customer Experience team to support the continually growing customer base. Thus, salaries and benefits, and consulting and professional fees increased during 2020 to $7,002,284.
During the six months ended December 31, 2020, the Company recorded $624,774 in revenue, influenced by shipping income and one irrigation system for the Calgary project, as well as one HydroGreen system sale. The Company made the decision to upgrade existing customer equipment to the newest version, which resulted in cost of sales exceeding revenue. Operating expenses increased due to continued expansion of the Company. Salaries and benefits, and consulting and professional fees totaled $5,477,251 due to the expansion of the Sales and Marketing team to support revenue growth, and the Installation team to support upcoming installations of several projects, such as: Calgary, Alberta, Armstrong, British Columbia, and Rensselaer, Indiana. They HydroGreen team more than doubled in size since the acquisition date, in order to support the anticipated demand for livestock feed systems around the globe.
Discussion of Operations
Three months ended December 31, 2020 and 2019, and six months ended December 31, 2020 and 2019.
| Revenue | ||||
|---|---|---|---|---|
| Fresh Division | 2020 | 2019 | Change | % |
| Three months ended | $ 93,396 | $ 320,140 | $ (226,744) |
-71% |
| Six months ended | $ 486,678 | $ 560,841 | $ (74,163) |
-13% |
| Feed Division | 2020 | 2019 | Change | % |
| Three months ended | $ 130,853 | $ - | $ 130,853 |
n.a. |
| Six months ended | $ 138,096 | $ - | $ 138,096 |
n.a. |
| Total | 2020 | 2019 | Change | % |
| Three months ended | $ 224,249 | $ 320,140 | $ (95,891) | -30% |
| Six months ended | $ 624,774 | $ 560,841 | $ 63,933 | 11% |
The Company is still in its early stages of operations which has resulted in fluctuating sales on a quarter-by-quarter basis. In addition, the Company has recently acquired HydroGreen, Inc. and is in the process of expanding its product portfolio and integrating its systems, operations and sales staff into the Company which has had an impact on revenues from this subsidiary. As such, the Company expects financial results to fluctuate from period to period in the near term. The Company has three main sources of revenue - revenue from sales of Systems, revenue from services, and revenue from consumables. Consumables include produce sales, parts, seeds, nutrients, fertilizers, and substrates, and services include customer support subscriptions and consulting. As the Company matures, management expects to receive a larger percentage of overall sales as recurring revenue. Sales in the six months ended December 31, 2020 included Systems and accessories of $477,084, services of $26,766, and consumables of $120,924.
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CubicFarm Systems Corp. Management’s Discussion and Analysis For the transition year (three and six months) ended December 31, 2020
Gross margin
| 2020 | 2019 | Change | % | |
|---|---|---|---|---|
| Three months ended | $ (1,247,369) | $ 113,198 | $ (1,360,567) | -1202% |
| Six months ended | $ (939,247) | $ 233,198 | $ (1,172,445) | -503% |
Overall Gross profit for the six months ended December 31, 2020 was negative due to the increased cost to upgrade existing customer systems to the newest version of the equipment available. The Company made this decision to ensure its customers achieve the highest possible productivity and efficiency from its systems. In the prior year, a non-refundable customer deposit was written off, resulting in revenue with no associated cost of sales, thereby increasing gross profit.
General administrative expenses
| 2020 | 2019 | Change | % | |
|---|---|---|---|---|
| Three months ended | $ 2,716,669 | $ 1,604,165 | $ 1,112,504 | 69% |
| Six months ended | $ 5,630,856 | $ 3,216,366 | $ 2,414,490 | 75% |
Selling expenses
| 2020 | 2019 | Change | % | |
|---|---|---|---|---|
| Three months ended | $ 628,824 | $ 126,884 | $ 501,940 | 396% |
| Six months ended | $ 745,390 | $ 218,731 | $ 526,659 | 241% |
Research and development
| 2020 | 2019 | Change | % | |
|---|---|---|---|---|
| Three months ended | $ 1,688,536 | $ 421,192 | $ 1,267,344 | 301% |
| Six months ended | $ 2,355,931 | $ 792,012 | $ 1,563,919 | 197% |
The Company changed its presentation of expenses in the six months ended December 31, 2020. Expenses are now classified by function, whereas the comparative expenses are classified by a combination of nature and function. Total operating expenses increased during both the three months and the six months ended December 31, 2020, compared to the same periods in the prior year. This is in line with the Company’s continued expansion of its business and staffing additions. Research and development expenses were for the continued automation of the Fresh and Feed growing systems, as well as research and development associated with growing new crops and animal feed in the equipment.
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CubicFarm Systems Corp. Management’s Discussion and Analysis For the transition year (three and six months) ended December 31, 2020
Total comprehensive loss
| 2020 | 2019 | Change | % | |
|---|---|---|---|---|
| Three months ended | $ (6,384,518) | $ (1,989,433) | $ (4,395,085) | 221% |
| Six months ended | $ (10,172,063) | $ (4,267,196) | $ (5,904,867) | 138% |
The Company’s net comprehensive loss in the six months ended December 31, 2020, reflect the Company’s continued expansion of its business and staffing additions that management believes are necessary to both develop and sell its manufactured products within the global controlled-environment agricultural market. Net comprehensive loss also includes $595,964 in other income consisting of government grants and loan forgiveness. The Company also had $367,977 in unrealized loss on the change in fair value of the earnout payable, and $406,416 in unrealized loss on the change in fair value of the derivative liability.
Use of Proceeds
The following table outlines the use of proceeds from the Company’s financing activities as of December 31, 2020:
| Month | Amount | Use of Proceeds | Expected | % | Actual | % |
|---|---|---|---|---|---|---|
| July 2020 | $1,161,450 | R&D and working capital | $1,161,450 | 100% | $1,161,450 | 100% |
| August 2020 | $2,458,204 | R&D and working capital | $2,458,204 | 100% | $2,458,204 | 100% |
| December 2020 |
$15,475,595 | Sales and marketing |
$5,700,000 | 37.7% | Funds not yet used |
0% |
| R&D | $5,225,000 | 34.6% | Funds not yet used |
0% |
||
| Working capital and general corporate purposes |
$4,194,068 | 27.7% | Funds not yet used |
0% |
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CubicFarm Systems Corp. Management’s Discussion and Analysis For the transition year (three and six months) ended December 31, 2020
Summary of Quarterly Results
The financial results for each of the eight most recently completed quarters are summarized below, prepared in accordance with IFRS:
| July – December 2020 | |||
|---|---|---|---|
| Total comprehensive income (loss) for | Basic and fully diluted income (loss) per | ||
| Period | Revenues | the period | share |
| $ | $ | ||
| Jul-Sep | 400,525 | (3,787,545) | (0.03) |
| Oct-Dec | 224,249 |
(6,384,518) | (0.05) |
| YTD | 624,774 | (10,172,063) | (0.08) |
| July 2019 – June 2020 | |||
|---|---|---|---|
| Period | Revenues | Total comprehensive income (loss) | Basic and fully diluted income (loss) |
| for the period | per share | ||
| $ | $ | ||
| Jul-Sep | 240,701 | (2,277,762) | (0.03) |
| Oct-Dec | 671,076 |
(1,989,441) | (0.02) |
| Jan-Mar | 192,689 |
(3,459,496) | (0.04) |
| Apr-Jun | 4,063,022 | (2,384,053) | (0.02) |
| YTD | 5,167,488 | (10,110,752) | (0.11) |
| January – June 2019 | |||
| Period | Revenues | Total comprehensive income (loss) for | Basic and fully diluted income (loss) |
| the period | per share | ||
| $ | $ | ||
| Jan-Mar | 1,461,226 |
(1,669,591) | (0.02) |
| Apr-Jun | 24,110 | (3,153,026) | (0.04) |
| YTD | 1,485,336 | (4,822,617) | (0.06) |
There is no established seasonality trend at this stage of the Company’s development. Revenue is recorded based on the achieved revenue recognition milestones, which are transfer of title, shipping to a client site, installation, and training. There are two quarters with significantly higher revenue, where the Company recorded revenue from transfer of title for the Calgary project (June 2020) and the Swiss Leaf Farm project (March 2019).
The Company does not recognize revenue until customers have either accepted ownership or the Company has delivered and fully installed CubicFarms modules at customer sites. There are factors beyond the Company’s control, such as the customer’s ability to secure permitting, complete site preparations, as well as weather and transportation delays. As such, the Company expects it would need to complete an additional year of sales and installation activities in order to achieve smoother and more predictable sales cycles.
During the three months ended June 30, 2020 the Company recorded sales of 22 systems to the Calgary project, which resulted in the highest quarterly revenue recorded of $4,063,022 and Gross Margin of 40%. The total comprehensive loss of $2,384,053 in the three months ended June 30, 2020 was due to continued efforts to expand
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CubicFarm Systems Corp. Management’s Discussion and Analysis For the transition year (three and six months) ended December 31, 2020
of operations both in Canada and U.S.A. by increasing staff on the Customer Experience, Production, and Installation teams to support growing customers’ base and installations.
During the three months ended September 30, 2020 the Company recorded revenue of shipping income and an irrigation system sold to a Calgary client, plus the first revenue from consulting services of approximately $27,000 under Cubic Gardens, created to provide support for existing and potential clients. The total comprehensive loss of $4,253,303 during the three months period was mainly due to continued expansion of the Sales and Marketing team; as well as the Operations team and HydroGreen, which has more than doubled in size since the date of acquisition in order to support the Feed system redesign, which will enable the Company to target large farms with more than 1000 cattle.
During the three months ended December 31, 2020 the Company sold one HydroGreen module, as well as produce and consumables. Operating expenses increased due to the Company’s continued expansion and research and development. An additional 16 employees joined the Company including SVP Global Sales, Head of People, Inhouse Legal Counsel, and President of CubicFarm China to lead global sales.
Liquidity and Capital Resources
Working capital increased from $6,334,754 as at June 30, 2020 to $15,244,610 as at December 31, 2020. The increase in working capital is primarily due to an increase in cash through the recent equity financing. The Company’s objective when managing its working capital and capital resources is to maintain liquidity so as to meet financial obligations when they come due, while actioning its strategic plan. The Company manages its working capital by monitoring operational and cash flow forecasts to identify cash flow needs for general corporate and working capital purposes.
Operating Activities
Cash outflows from operating activities for the six months ended December 31, 2020 were $5,639,993 compared to $10,587,689 for the twelve months ended June 30, 2020. During the six months ended December 31, 2020 the Company collected $3,101,804 in customer deposits. This is offset by an increase in inventory of $2,164,297.
Investing Activities
Cash from investing activities decreased from an outflow of $1,102,243 during the twelve months ended June 30, 2020 to an outflow of $482,513 for the six months ended December 31, 2020. The increase in cash inflows from investing activities is primarily due to a reduction in capital expenditures and loans to associates.
Financing Activities
Cash inflows from financing activities increased to $18,732,997 during the six months ended December 31, 2020 as compared to $5,368,721 during the twelve months ended June 30, 2020. The increase in cash flows from financing is primarily due to the equity financing of $16,637,045 and debt financing of $2,339,517.
Capital Management
The Company’s source of funding to date has been from equity and debt financing, as well as the sales of modules, consumables, and produce. Management expects that the Company’s existing cash and cash equivalents balance will be adequate to meet the Company’s expansion of facilities and operational activities for the next six months. However, the Company may seek additional financing through issuance of equity or debt to support further expansion and research and development activities.
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CubicFarm Systems Corp. Management’s Discussion and Analysis For the transition year (three and six months) ended December 31, 2020 Transactions with Related Parties
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All transactions with related parties have occurred in the normal course of operations at the exchange amount agreed between the parties. All amounts are unsecured, non-interest bearing and have no specific terms of settlement, unless otherwise noted. Related parties including the members of Board of Directors and Key management personnel, as well as close family members and enterprises that are controlled by these individuals and shareholders. All transactions with related parties have occurred in the normal course of operations. All amounts are unsecured, non-interest bearing and have no specific terms of settlement, unless otherwise noted.
Rent is paid to Bevo Farms Ltd. for the Pitt Meadows farm, where the Company’s Research and Development facility is located, and for storage of inventory containers at Bevo Farms in Langley, BC, as well as associated offices expenses (Refer to Note 20 in the Company’s Financial Statements dated December 31, 2020):
Six months Ended December 31, 2020 Twelve months Ended June 30, 2020 |
Six months Ended December 31, 2020 Twelve months Ended June 30, 2020 |
|---|---|
| $ $ |
|
| Rent | 36,561 10,000 |
| Office expenses | 37,570 - |
| Total | 74,132 10,000 |
Key management compensation
Key management of the Company are members of the Board of Directors and officers of the Company. The Company paid and/or accrued the following compensation to key management during the reporting periods:
Six months Ended December 31, 2020 Twelve months Ended June 30, 2020 |
Six months Ended December 31, 2020 Twelve months Ended June 30, 2020 |
|---|---|
| $ $ |
|
| Wages and salaries | 472,500 953,287 |
| Consulting fees 508,694 401,977 |
|
| Share-based compensation 445,154 851,982 |
|
| Total 1,426,348 2,207,246 |
Following balances are related to Related Parties:
As at December |
As at December |
31, | 2020 | As at June | 30, | 2020 |
|---|---|---|---|---|---|---|
| Accounts Receivable | 8,001 | - | ||||
| Accounts Payable | 23,394 | 11,475 |
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CubicFarm Systems Corp. Management’s Discussion and Analysis For the transition year (three and six months) ended December 31, 2020
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Outstanding Share Data
As at the date of this MD&A, the Company had 139,479,491 outstanding common shares. The Company also had 29,645,767 share purchase options outstanding at weighted average exercise price of $0.46.
Shares outstanding as of December 31, 2020:
| December | June 30, |
June 30, | June 30, |
|||
|---|---|---|---|---|---|---|
| 31, 2020 | 2020 | 2019 | 2018 |
|||
| Class | Par Value | Number | Number | Number |
Number | Number |
| Authorized | Issued | Issued |
Issued | Issued |
||
| Common Shares | No par value | Unlimited | 137,704,536 | 116,315,015 |
84,179,714 | 60,130,186 |
| Preferred Shares(1) | No par value | Unlimited | - | - |
- | 4,266,868 |
| 137,704,536 | 116,315,015 |
84,179,714 | 64,370,054 |
(1) Converted to common shares upon listing of the Company’s shares on the TSXV.
Summary of options outstanding as of December 31, 2020:
| Grant date - Expiry date | Options | Contractual life | Exercise | Options |
|---|---|---|---|---|
| Outstanding | of options | price | Exercisable | |
| (#) | years | $ | (#) | |
| May 3, 2017-April 1, 2027 | 14,130,096 | 10 | 0.19 | 5,434,624 |
| November 1, 2017 - January 30, 2023 | 2,474,670 | 5 | 0.19 | 1,359,400 |
| March 20, 2018 - March 30, 2023 | 268,334 | 5 | 0.19 | 199,334 |
| July 15, 2018 – July 15, 2023 | 7,238,000 | 5 | 0.83 | 1,805,400 |
| June 18, 2019 – December 15, 2023 | 605,000 | 5 | 1 | 385,000 |
| September 03, 2019- September 02, 2024 |
10,000 | 5 | 0.68 | 2,000 |
| November 30, 2019-December 30, 2024 | 50,000 | 5 | 1 | 50,000 |
| December 02, 2019-Decembe 01, 2024 | 10,000 | 5 | 0.39 | 3,333 |
| June 17, 2020 -June 18, 2025 | 3,620,000 | 5 | 0.63 | 1,206,667 |
| November 18, 2020 – February 16, 2023 | 50,000 | 2 | 0.78 | - |
| Total share purchase options | 28,456,100 | 10,445,758 |
Off-Balance Sheet Arrangements
There are no off-balance sheet arrangements to which the Company is committed. The Company is not a party to any off-balance sheet arrangements that have, or are reasonably likely to have, a current or future material effect on the Company’s financial condition, changes in financial condition, revenues, expenses, results of operations, liquidity, capital expenditures or capital resources.
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CubicFarm Systems Corp. Management’s Discussion and Analysis For the transition year (three and six months) ended December 31, 2020
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Financial Instruments
The Company classifies its fair value measurements with the following fair value hierarchy:
Level 1 –Unadjusted quoted prices at the measurement date for identical assets or liabilities in active market.
Level 2 - Observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets and liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.
Level 3 – Unobservable inputs which are supported by little or no market activity.
The carrying value of the Company’s cash & cash equivalents, trade and other receivables and trade and other payables approximate fair value due to their immediate and short-term nature.
The earnout payable is measured at fair value based on unobservable inputs and is considered a Level 3 financial instrument. The determination of the fair value is primarily driven by the Company’s expectations of HydroGreen achieving certain revenue targets. The expected related cash flows were discounted to derive the fair value of the earnout payable. As at December 31, 2020, the discount rate was estimated to be 17% (June 30, 2020 – 24%). If the discount rate decreased by 5%, the estimated fair value of the earnout payable would increase by approximately $70,018 (June 30, 2020 - $120,710). If the discount rate increased by 5%, the estimated fair value of the earnout payable would decrease by approximately $64,502 (June 30, 2020 - $101,902).
The fair value of the Company’s Loans payable is the carrying value discounted at the effective interest rate. As at December 31, 2020 the fair value of the Loans payable was $1,990,278 and the carrying value was $2,034,835.
The derivative liability is measured at fair value based on unobservable inputs and is considered a Level 3 financial instrument. The determination of the fair value is primarily driven by the Company’s expected earnings before interest, taxes, depreciation, and interest (“EBITDA”) in 2024. The expected related cash flows were discounted to derive the fair value of the derivative liability. As at December 31, 2020, the discount rate was estimated to be 47% (June 30, 2020 - Nil). If 2024 EBITDA changed by 25%, the estimated fair value of the derivative liability would increase or decrease by approximately $191,219 (June 30, 2020 - $Nil). If discount rates decreased by 5%, the estimated fair value of the derivative liability would increase by approximately $167,232. If discount rates increased by 5%, the estimated fair value of the derivative liability would decrease by approximately $138,870 (June 30, 2020 - $Nil).
The fair values of the Company’s financial instruments are outlined below:
| As at December 31, 2020 | As at December 31, 2020 | |||
|---|---|---|---|---|
| FVTPL | Amortized Cost | Fair Value | ||
| Asset (Liability) | Level 2 | Level 3 | ||
| Cash and cash equivalents | - | 16,206,535 | - | - |
| Trade and other receivables | - | 1,338,265 | - | - |
| Trade and other payables | - | (1,465,666) | - | - |
| Earnout payable | (1,643,033) | - | - | (1,643,033) |
| Loans payable | - | (2,034,835) | (1,990,278) | - |
| Derivative liability | (1,002,128) | - | - | (1,002,128) |
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CubicFarm Systems Corp. Management’s Discussion and Analysis
For the transition year (three and six months) ended December 31, 2020
| As at June 30, 2020 | ||||||
|---|---|---|---|---|---|---|
| FVTPL | Amortized Cost | Fair Value | ||||
| Asset (Liability) | Level 2 | Level 3 | ||||
| Cash and cash equivalents | - | 3,604,412 | - | - | ||
| Trade and other receivables | - | 2,186,568 | - | - | ||
| Trade and other payables | - | (1,298,598) | - | - | ||
| Earn out payable | (1,364,756) | - |
- | (1,364,756) | ||
| Loans payable | - | (265,121) | (194,853) | - |
The continuity for Earn out payable is as follows:
| December 31 2020 | June 30 2020 | |
|---|---|---|
| $ | $ | |
| Opening balance | 1,364,756 |
- |
| Fair Value on acquisition of Hydrogreen Inc. | - |
1,397,473 |
| Foreign exchange | (89,700) | 68,827 |
| Fair Value change duringtheyear | 367,977 |
(101,544) |
| Ending balance | 1,643,033 |
1,364,756 |
The continuity for Derivative liability is as follows:
| The continuityfor Derivative liabilityis as follows: | ||
|---|---|---|
| December 31, 2020 | June 30, 2020 | |
| $ | $ | |
| Opening Balance | - |
- |
| Derivative liability – Initial recognition (July 20, 2020) | 595,712 |
- |
| Change in fair value of derivative liability | 406,416 |
- |
| - | ||
| EndingBalance | 1,002,128 | - |
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CubicFarm Systems Corp. Management’s Discussion and Analysis For the transition year (three and six months) ended December 31, 2020
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The Company is exposed to certain risks relating to its financial instruments. The Company does not use derivative financial instruments to manage these risk exposures. As at December 31, 2020, the primary risks were as follows:
Credit risk
Credit risk is the potential loss to the Company if a customer or third party to a financial instrument fails to meet its contractual obligations. The Company is exposed to credit risk from its Cash and cash equivalents, and Trade and other receivables. The risk exposure is limited to their carrying amounts reflected on the statement of financial position. The risk for cash and cash equivalents is mitigated by holding these instruments with highly rated financial institutions.
Trade and other receivables primarily consist of trade accounts receivable and sales tax receivable. To mitigate credit risk, the Company requires deposits from customers, normally consisting of 10% upon signing of the contract, 40% 90 days prior to shipping, another 40% 30 days prior to shipping, and 10% upon successful set up on site, within 30 days of completion. Credit risk is generally limited for receivables from government bodies, which generally have a low default risk. As at December 31, 2020, one customer accounted for 29% of the trade accounts receivable, which the Company believes to be collectible. The Company performs regular credit assessments on its customers and associates and provides allowances for potentially uncollectible Trade and other receivables.
Interest rate risk
Interest rate risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market interest rates. Financial assets and liabilities with variable interest rates expose the Company to cash flow interest rate risk. The Company does not hold any financial liabilities with variable interest rates. The Company does maintain bank accounts which earn interest at variable rates, but it does not believe it is currently subject to any significant interest rate risk.
Liquidity risk
Liquidity risk is the risk that the Company will not be able to meets it financial obligations as they fall due. The Company manages its liquidity risk by forecasting cash flows from operations and anticipating any investing and financing activities.
Management and the Board of Directors are actively involved in the review, planning and approval of significant expenditures and commitments. Accounts payable and accrued liabilities generally have contractual maturities of less than 30 days and are subject to normal trade terms. Management is continuing efforts to increase sales and attract additional equity and capital investors to continue R&D activities, and, from the other side, implement effective cost control measures to maintain adequate levels of working capital .
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CubicFarm Systems Corp. Management’s Discussion and Analysis For the transition year (three and six months) ended December 31, 2020
At December 31, 2020, the Company has financial liabilities which are due on a fiscal year basis as follows:
| As at December 31, 2020 | <1 Year | 1-5 Years | >5 Years | Total |
|---|---|---|---|---|
| $ | $ | $ | $ | |
| Trade and other payables | 1,465,666 | - | - | 1,465,666 |
| Earn out payable | 1,336,860 | 572,940 | - | 1,909,800 |
| Lease liability | 514,988 | 841,952 | 678,434 | 2,035,374 |
| Loans payable | 648,534 | 3,601,336 | - | 4,249,870 |
| Derivative liability | - | 5,575,533 | - | 5,575,533 |
| Total | 3,966,048 | 10,591,761 | 678,434 | 15,236,243 |
Foreign currency risk
The Company enters into transactions denominated in US dollars for which the related revenues, expenses, accounts receivable, and accounts payable balances are subject to exchange rate fluctuations. As of December 31, 2020, the following items are denominated in US dollars:
| December 31, 2020 | June 30, 2020 | |
|---|---|---|
| $ | $ | |
| Cash | 3,616,464 | 93,424 |
| Trade and other receivables | 1,251,269 | 1,446,332 |
| Trade and other payables | (432,742) | (313,060) |
| Customer deposits | (524,941) | (243,883) |
| Earn out payable | (1,290,475) | (1,001,457) |
| Loans payable | (58,622) | (165,194 |
| Net exposure | 2,560,954 | (183,838) |
Foreign currency risk is the risk that the fair value of future cash flows of a financial instrument will fluctuate because of changes in foreign exchange rates. The Company has not made any special arrangements to reduce the related currency risk.
A 10% increase in the US dollar exchange rate would decrease the Company’s net loss by approximately $256,000. A 10% decrease in the exchange rate would increase net loss by the same amount.
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CubicFarm Systems Corp. Management’s Discussion and Analysis For the transition year (three and six months) ended December 31, 2020
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COVID-19 Disclosure
The outbreak of the novel strain of coronavirus, specifically identified as “COVID-19”, has resulted in governments worldwide enacting emergency measures to combat the spread of the virus. These measures, which include the implementation of travel bans, self-imposed quarantine periods and social distancing, have caused material disruption to businesses globally resulting in an economic slowdown. Global equity markets have experienced significant volatility and weakness. Governments and central banks have reacted with significant monetary and fiscal interventions designed to stabilize economic conditions. The duration and impact of the COVID-19 outbreak is unknown currently, as is the efficacy of the government and central bank interventions. As of December 31, 2020, the Company has not observed any material impairments of our assets or a significant change in the fair value of assets due to the COVID-19 pandemic. Due to the rapid developments and uncertainty surrounding COVID-19 it is not possible to predict the impact it will have on the Company’s business, financial position, and operating results in the future. It is possible that estimates in the Company’s financial statements will change in the near term as a result of COVID-19 and the affect of any such changes could be material, which could result in, among other things, impairment of long-lived assets including intangibles and goodwill. The Company is closely monitoring the impact of COVID-19 on all aspects of its business.
Additional Information & Approval
Additional information relating to the Company is on SEDAR at www.sedar.com. The Board has approved the disclosure contained in this MD&A as of April 30, 2021.
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