ParcelPal Logistics Inc. — Annual Report 2020

Apr 30, 2021

Item 5.

Operating and Financial Review and Prospects

The following discussion and analysis should be read in conjunction with Item 18. “Financial Statements” included below. Operating results are not necessarily indicative of results that may occur in future periods. This discussion and analysis contains forward- looking statements that involve risks, uncertainties and assumptions. The actual results may differ materially from those anticipated in the forward-looking statements as a result of many factors including, but not limited to, those set forth under “Forward-Looking Statements” and “Risk Factors” in Item 3 “Key Information” included above in this annual report on Form 20-F. All forward-looking statements included in this document are based on the information available to the Company on the date of this document and the Company assumes no obligation to update any forward-looking statements contained in this annual report.

Critical accounting policies

We prepare our financial statements in accordance with International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB). As such, we are required to make certain estimates, judgments, and assumptions that management believes are reasonable based upon the information available. These estimates, judgments and assumptions affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the periods presented. The critical accounting policies are summarized in Item 18. “Financial Statements—Note 2—Critical Accounting Policies”.

A. Operating results

The following discussion relates to our results of operations, financial condition and capital resources. You should read this discussion in conjunction with our financial statements and the notes thereto contained elsewhere in this report.

Audited Financial Years

	For the year ended December 31,	For the year ended December 31,	For the year ended December 31,
	2020 C$	2019 C$	2018
			C$
Revenue	6,317,329	4,782,865	3,369,630
Total revenue and other income	6,317,329	4,790,627	3,375,520

Year 2020 compared to year 2019

Revenue

Our revenue increased from C$4,782,865 in 2019, to C$6,317,329 in 2020, primarily due to an increase in deliveries with Amazon as well as the addition of new customer agreements.

Cost of Revenue

Our cost of revenue increased from C$4,336,556 in 2019 to C$5,947,895 in 2020. This was due to an increase in staff and acquisition/leasing of additional fleet vehicles for more Amazon routes as well as higher vehicle fuel costs.

Personnel costs increased from C$3,352,985 in 2019 to C$4,983,299 in 2020. This was due to an increase in staff for Amazon routes as well as expansion into new areas.

Vehicle fuel costs increased from C$422,726 in 2019 to C$396,343 in 2020. This was due to increased fuel costs for vehicles due to more Amazon routes.

Amortization expense increased from C$349,668 in 2019 to C$388,859 in 2020 due to the Company entering into lease agreements to increase the delivery fleet to meet the delivery demand for Amazon.

Gross Profit

Gross profit as a percentage of revenue decreased from C$446,309 (9.3%) in 2019 to C$369,434 (5.8%) in 2020. This was due to an increase in staffing costs for an increase in Amazon routes.

Expenses

Marketing and promotion decreased from C$1,586,284 in 2019, to C$29,146 in 2020, due to decreased promotional activities in 2020.

Management and director fees increased from C$190,800 in 2019, to C$305,158 in 2020, due to increased fees to officers of the Company in 2020.

Share-based compensation decreased from C$776,962 in 2019, to C$473,103 in 2020, due to fewer stock options being granted.

Consulting fees decreased from C$860,248 in 2019, to C$656,405 in 2020, due to fewer consultants to the business.

Foreign exchange costs improved from a loss of C$12,243 in 2019, to a gain of C$61,236 in 2020, due to decrease in the exchange rate of the U.S. dollar against the Canadian dollar.

Interest expense increased from C$29,958 in 2019, to C$323,931 in 2020, due to an increase in interest due to the convertible note issuances throughout the year.

Professional fees increased from C$124,550 in 2019, to C$655,378 in 2020, due to increase in accounting and legal fees as a result of more services required by the Company due to an increase in the business activity, financing transactions and expansion onto United States markets and exchanges.

Regulatory and filing fees increased from C$48,924 in 2019, to C$78,945 in 2020, due to an increase in charges associated with the issuance of shares.

Travel and accommodation expenses decreased from C$62,459 in 2019, to C$31,692 in 2020, due to a significant decrease in travel as a result of COVID-19.

Salaries increased from C$358,074 in 2019, to C$533,193 in 2020, primarily related to expansion into additional cities.

Office and miscellaneous expenses increased from C$994,124 in 2019, to C$1,155,805 in 2020, due to increased company activity and expansion into additional cities.

In 2019 the Company recorded a loss on debt settlement of C$857 compared to a C$191,773 loss on debt settlement in 2020.

In 2019 the Company did not record a derivative liability compared to a C$866,238 derivative liability in 2020 due to the convertible note issuances throughout the year.

Net loss

The Company had a net loss of C$4,610,512 in 2019 compared to C$4,874,082 in 2020, primarily due to the factors described below, including numerous one-time expenses.

The Company had its largest gross revenue quarter since inception with over $2.3M in the fourth quarter of 2020 (compared to Q4 2019 of $1.9M). Consulting fees in the fourth quarter of 2020 decreased to $210,033 (compared to Q4 2019 of $292,450) as the Company reduced the number of external consultants to conserve cash. Administrative, office and miscellaneous expenses decreased in the fourth quarter 2020 to $213,536 (from 2019 Q4 of $262,927) due to cost saving measures undertaken by management to streamline the business. During the threemonths ended December 31, 2020 the Company had an operating profit of $74,939 after factoring in non-recurring professional fees related to the Company’s SEC listing, compared to an operating loss of $651,640 during the three

months ended December 31, 2019.

It is important to note, however, that in FY 2020, approximately $2.3M of primarily non-cash expenses, including amortization, share issuances (including those related to debt settlements), derivative liabilities and approximately $500K in non-recurring (in some cases cash) expenses related to the Company’s primary exchange listing in the United States on the OTCQB, our becoming a United States SEC compliant filer under the Exchange Act of 1934, as amended, the establishment of a $5M equity line of credit facility and the preparation and filing of a Registration Statement on Form F-1 in connection therewith, debt facility financings and the termination and costs (cash and stock) related to numerous previously existing contractual arrangements.

We believe these undertakings have better positioned the Company for lower operating expenses moving forward (as demonstrated, in part, by our cash operating performance in the final three months of 2020), and which provide the Company with significant additional capital to better position the Company moving forward in terms of both cashflow, and for possible acquisitions, mergers, securitization of our own warehousing facility and/or other strategic transactions as they may arise, and which the Company may actively seek.

Year 2019 compared to year 2018

Revenue

Our revenue increased from C$3,369,630 in 2018, to C$4,782,865 in 2019, primarily due to an increase in deliveries with Amazon.

Cost of Revenue

Our cost of revenue increased from C$2,883,176 in 2018 to C$4,336,556 in 2019. This was due to an increase in staff for more Amazon routes as well as higher fuel costs for vehicles.

Personnel costs increased from C$2,187,768 in 2018 to C$3,352,985 in 2019. This was due to an increase in staff for Amazon routes.

Fuel costs increased from C$350,357 in 2018 to C$422,726 in 2019. This was due to increased fuel costs for vehicles due to more Amazon routes.

Amortization expense increased from C$315,581 in 2018, to C$349,668 in 2019 due to the Company entering into lease agreements to increase the delivery fleet to meet the delivery demand for Amazon.

Gross Profit

Gross profit as a percentage of revenue decreased from C$486,454 (14.4%) in 2018 to C$446,309 (9.3%) in 2019. This was due to an increase in staffing costs for an increase in Amazon routes.

Expenses

Marketing and promotion increased from C$470,394 in 2018, to C$1,586,284 in 2019, due to increased promotional activities in 2019 as the Company expanded into new markets.

Management and director fees increased from C$108,000 in 2018, to C$190,800 in 2019, due to increased fees to officers of the Company in 2019.

Share-based compensation decreased from C$1,548,784 in 2018, to C$776,962 in 2019, due to fewer stock options being granted.

Consulting fees increased from C$815,060 in 2018, to C$860,248 in 2019, due to additional billing from insiders and outside consultants as a result of more time required to expand business.

Foreign exchange costs increased from C$1,029 in 2018, to C$12,243 in 2019, due to increase in the U.S. dollar against the Canadian dollar.

Interest expense decreased from C$49,669 in 2018, to C$29,958 in 2019, due to an interest reduction as a result of lease adjustment resulting from the application of IFRS 16.

Professional fees increased from C$119,713 in 2018, to C$124,550 in 2019, due to increase in accounting and legal fees as a result of more services required by the Company due to an increase in the business activity.

Regulatory and filing fees increased from C$27,654 in 2018, to C$48,924 in 2019, due to an increase in charges associated with the issuance of shares.

Travel and accommodation expenses decreased from C$97,328 in 2018, to C$62,459 in 2019, due to a significant decrease in travel as a result of COVID-19.

Salaries increased from no salaries in 2018, to C$358,074 in 2019, related to expansion into Alberta, Saskatoon and Toronto.

Office and miscellaneous expenses increased from C$551,213 in 2018, to C$994,124 in 2019, due to increased company activity and expansion into Alberta province, Saskatoon and Toronto.

In 2018 the Company recorded an impairment of marketable securities of C$300,000 compared to none in

Net loss

The Company had a net loss of C$4,610,512 in 2019 compared to C$3,664,376 in 2018, primarily due to an increase in marketing and promotional expenses as a result of increased promotional activities.

Liquidity and capital resources

Since our inception, our operations have, in significant measure, been financed through the issuance of equity securities. Additional funding has come through convertible debt issuances . We believe that our current working capital (together with access to our available equity line of credit) is sufficient for our present business requirements; however, if we undertake a significant expansion, acquisition or joint venture in Canada, the United States or elsewhere, we will likely need to raise additional capital through one or more sources to fund such transaction(s). While we generate cash flow, it is currently not sufficient to maintain operations. As a result, we believe we will need to raise additional capital, and also have the ability to draw upon the equity line of credit with Tangiers Global, LLC under the terms of the Investment Agreement we entered with them, for our aforementioned expansion plans through the end of 2021. Such financings may come in the form of equity, debt or through a combination of debt and/or equity financing structures.

We have incurred significant losses since our inception. We incurred losses of C$4,874,082, C$4,610,512 and C$3,664,376 in 2020, 2019 and 2018, respectively. As at December 31, 2020, the Company had a working capital deficit of C$2,379,864 compared to net working capital of C$229,552 as at December 31, 2019.

The Company manages its capital. In doing so, the Company’s objective is to ensure the entity continues as a going concern as well as to maintain optimal returns to shareholders and benefits for other stakeholders. The Company manages its capital structure and makes adjustments to it, based on the funds available to the Company, in order to support the development of a social collaborative charting, news and communication platform for traders. 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. Management reviews its capital management approach on an ongoing basis and believes that this approach, given the relative size of the Company, is reasonable. There were no changes to the Company’s approach to capital management during the year ended December 31, 2020.

Equity issues

For more information, see Item 10A “Share Capital”.

Convertible notes

On April 14, 2020 the Company executed a non-brokered private placement pursuant in which it issued an unsecured convertible note to Tangiers Global, LLC (“Tangiers”) with a face value of US$367,500 (the April 2020 Note). Under the terms of the Note, US$250,000 was advanced to the Company on closing, and a second tranche of US$100,000 was funded to us in May 2020. In connection with this convertible note, the Company issued 300,000 unregistered common shares to Tangiers as investment incentive shares. The “Maturity Date” of this note, as amended, was 6 months from the funding of any tranche. The April 2020 Note carried a one-time guaranteed interest rate of 10% on the principal sum of each funded tranche. The principal amount was convertible into unregistered common shares of the Company prior to the Maturity Date, at the option of the Noteholder, at a fixed conversion price of US$0.06 per share; however, if the Note is not fully repaid or fully converted on or before the Maturity Date, then the Noteholder has the option to convert the remaining outstanding amount under the Note into common shares at the variable conversion price equal to the lower of (a) US$0.06 per share or (b) 65% of the lowest volume weighted average price of the Company’s common shares during the 10 consecutive trading prior to the date on which the Noteholder elects to convert all or part of the Note, provided that any such discount to the conversion price is in compliance with applicable Canadian securities laws and the policies and rules of the CSE. The April 2020 Note has been fully converted and is retired from the books of the Company, and any reserve shares applicable to it have been placed back into treasury.

On June 29, 2020 the Company executed a non-brokered private placement pursuant in which it issued an unsecured convertible single tranche note to Tangiers with a face value of US$210,000 (the “June Note”). Under the terms of the June Note, US$200,000 was advanced to the Company at closing, and the Company issued 300,000 unregistered common shares to Tangiers as investment incentive shares. The June Note carried a one-time guaranteed interest rate of 5% on the principal sum, and, as amended, had a maturity date of six months from the effective date of the transaction (or February 14, 2021). The principal sum was convertible into unregistered common shares of the Company prior to the Maturity Date, at the option of the Noteholder, at a fixed conversion price of US$0.08 per share; however, if the Note is not fully repaid or fully converted on or before the Maturity Date, then the Noteholder had the option to convert the remaining outstanding amount under the Note into common shares at the variable conversion price equal to the lower of (a) US$0.08 per share or (b) 75% of the average of the two lowest volume weighted average price of the Company’s common shares during the 15 consecutive trading prior to the date on which the Noteholder elects to convert all or part of the Note, provided that any such discount to the conversion price is in compliance with applicable Canadian securities laws and the policies and rules of the CSE. The June Note has been fully converted and is retired from the books of the Company, and any reserve shares applicable to it have been placed back into treasury.

On September 29, 2020, the Company executed a non-brokered private placement pursuant to which it issued an unsecured convertible three tranche note to Tangiers with a face value of US$525,000 (the “September Note”). Under the terms of the September Note, US$150,000 was advanced to the Company at closing, and the Company issued 150,000 unregistered common shares to Tangiers as investment incentive shares. On October 15, an additional US$75,000 was funded by Tangiers to the Company, and the Company issued 75,000 unregistered common shares to Tangiers as investment incentive shares. On December 15, an additional US$100,000 was funded by Tangiers to the Company, and the Company issued 100,000 unregistered common shares to Tangiers as investment incentive shares. On January 12, 2021, an additional US$175,000 was funded by Tangiers to the Company, and the Company issued 175,000 unregistered common shares to Tangiers as investment incentive shares. The September Note carries a onetime guaranteed interest rate of 5% on the principal sum of the funded tranches, and has a maturity date of six months from the effective date of the initial tranche of (or March 29, 2021), and six months from the funding date of each subsequent tranche. The principal amount shall be convertible into unregistered common shares of the Company prior to the Maturity Date, at the option of the Noteholder, at a fixed conversion price of US$0.06 per share; however, if the Note is not fully repaid or fully converted on or before the Maturity Date, then the Noteholder has the option to convert the remaining outstanding amount under the Note into common shares at the variable conversion price equal to the lower of (a) US$0.06 per share or (b) 75% of the average of the two lowest volume weighted average price of the Company’s common shares during the 15 consecutive trading days prior to the date on which the Noteholder elects

to convert all or part of the Note, provided that any such discount to the conversion price is in compliance with applicable Canadian securities laws and the policies and rules of the CSE. A portion of the September Note has been converted and carries a remaining principal balance of approximately US$288,500 as of the date of this annual report.

See also Subsequent Events in Note 14 for a description of the March 2021 convertible note financing, consummated on March 12, 2021.

Cash flows

Audited Financial Years

The following table set forth the sources and uses of cash for the past three years:

(inC$)	2020	2019		2018
Net cash used in operating activities	(927,129 )	(2,690,049 )		(1,098,318	)
Net cash from/(used in) investing activities	(112,034 )	68,374		(404,125	)
Net cash from/(used in) financing activities	999,238	837,282		3,527,542

Comparison of cash flows for the Year ended December 31, 2020, with the Year ended December 31, 2019

Operating activities.

Net cash flow in operating activities decreased from a negative C$2,690,049 in 2019 to a negative C$927,129 in 2020, primarily as a result of a decrease in marketing and promotion expenses as well as an decrease in shares issued in lieu of consulting fees.

Investing activities.

Net cash flow in investing activities changed from a positive C$68,374 in 2019 to a negative C$112,034 in 2020, primarily as a result of the purchase of fleet vehicles for company expansion.

Financing activities.

Net cash flow in financing activities increased from C$837,282 in 2019 to C$999,238 in 2020, primarily as a result of the issuance of convertible notes in 2020.

Comparison of cash flows for the Year ended December 31, 2019, with the Year ended December 31, 2018

Operating activities.

Net cash flow in operating activities increased from a negative C$1,098,318 in 2018 to a negative C$2,690,049 in 2019, primarily as a result of an increase in marketing and promotion expenses as well as an increase in shares issued in lieu of consulting fees.

Investing activities.

Net cash flow in investing activities increased from a negative C$404,125 in 2018 to a positive C$68,374 in 2019, primarily as a result of the repayment of approximately the entire outstanding balance under a loan agreement that we had entered into with a company related to one of our directors.

Financing activities.

Net cash flow in financing activities decreased from C$3,527,542 in 2018 to C$837,282 in 2019, primarily as a result of a decrease in the amounts received from the conversion of warrants and a decrease in the amounts of proceeds received from private placements of our equity securities.

C. Research and development

The Company had been focusing on the development of back-end tooling, operational tooling, and sales tooling. However, with the shift in Company strategy from a B2C to a B2B focus, we determined to end the back end tooling development in the fourth quarter of 2020, and instead in-licensed a technology platform for last-mile delivery and cross docking going forward.

D. Trend Information

On January 30, 2020, the World Health Organization declared COVID-19 a global pandemic. This contagious disease outbreak and any related adverse public health developments, has adversely affected workforces, economies, and financial markets globally, leading to an economic downturn. Despite the rollout of vaccines and therapeutics in late 2020 and into 2021, the COVID-19 pandemic could continue to have a negative impact on the stock market, including trading prices of the Company’s shares and its ability to raise new capital.

The Company has been focused on increasing its sales and operations with Amazon, but as disclosed elsewhere, we have also been focused on customer diversification, expansion into profitable industries and exploring options related to continue our expansion and growth geographically and operationally. Our CEO has been focusing on small and medium enterprise clients, and in mid-2020 enhanced our B2B business focus to further expand and diversify our customer base and revenue streams going forward, including by engaging with meal kit, health, grocery and pharmacy companies, which are also less seasonal.

Overall company costs have been stable. Increases in fuel prices will have a negative impact on our gross margins. In 2020, we began implementing initiatives to right-size the business by focusing on becoming more costefficient, and believe we have achieved that objective based on our current position at this time. This does not preclude the possibility that we may need to expand staff or management if and as needs arise from expansion or other changes in our business, or in other ways as the broader market may require going forward.

E. Off-balance sheet arrangements

The Company does not have any off-balance sheet arrangements.

F. Tabular disclosure of contractual obligations

As of December 31, 2020, our contractual obligations were as set forth below:

Contractual Obligations		Payments Due by Period	Payments Due by Period	Payments Due by Period	More than 5years
	Total	Less than 1year	1-3years	3-5years
Debt obligations	766,070	766,070	—	—	—
Lease obligations	212,903	92,736	94,727	25,440	—
Total	978,973	858,806	94,727	25,440	—