AGRIFORCE GROWING SYSTEMS LTD

NOTES TO THE CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

For the three months ended March 31, 2024 and 2023 (unaudited)

(Expressed in US Dollars, except where noted)

1. NATURE OF OPERATIONS AND BASIS OF PREPARATION

Business Overview

AgriFORCE Growing Systems Ltd. (“AgriFORCE™” or the “Company”) was incorporated as a private company by Articles of Incorporation issued pursuant to the provisions of theBusiness Corporations Act (British Columbia) on December 22, 2017. The Company’s registered and records office address is at 800 – 525 West 8 th Avenue, Vancouver, British Columbia, Canada, V5Z 1C6.

The Company is an innovative agriculture-focused technology company that delivers reliable, financially robust solutions for high value crops through our proprietary facility design and automation Intellectual Property to businesses and enterprises globally through our AgriFORCE™ Solutions division (“Solutions”) and delivers nutritious food products through our AgriFORCE™ Brands division (“Brands”). During 2023, the Company launched its UN(THINK) Awakened Flour™ flour, which is a nutritious flour that provides many health advantages over traditional flour.

Solutions intends to operate in the plant based pharmaceutical, nutraceutical, and other high value crop markets using its unique proprietary facility design and hydroponics based automated growing system that enable cultivators to effectively grow crops in a controlled environment (“FORCEGH+™”). The Company has designed FORCEGH+™ facilities to produce in virtually any environmental condition and to optimize crop yields to as near their full genetic potential possible whilst substantially eliminating the need for the use of pesticides and/or irradiation. The Company also has a global license to sell and distribute hydroxyl devices. During 2023, the Company completed sales and deliveries of its hydroxyl devices.

Brands is focused on the development and commercialization of plant-based ingredients and products that deliver healthier and more nutritious solutions. We will market and commercialize both branded consumer product offerings and ingredient supply.

Basis of Presentation

The accompanying Unaudited Condensed Consolidated Interim Financial Statements and related financial information of AgriFORCE Growing Systems Ltd. should be read in conjunction with the audited financial statements and the related notes thereto for the years ended December 31, 2023 and 2022 included in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission (“SEC”) on April 1, 2024. These unaudited interim financial statements have been prepared in accordance with the rules and regulations of the United States Securities and SEC for interim financial information. Accordingly, they do not include all of the information and footnotes required by the accounting principles generally accepted in the United States of America (“U.S. GAAP”) for complete financial statements.

In the opinion of management, the accompanying interim financial statements contain all adjustments which are necessary to state fairly the Company’s financial position as of March 31, 2024 and December 31, 2023, and the results of its operations and cash flows during the three months ended March 31, 2024 and 2023. Such adjustments are of a normal and recurring nature. The results for the three months ended March 31, 2024 are not necessarily indicative of the results to be expected for the full fiscal year ending December 31, 2024, or for any future period.

Liquidity and Management’s Plan

The Company has incurred substantial operating losses since its inception and expects to continue to incur significant operating losses for the foreseeable future. As reflected in the interim financial statements for the three months ended March 31, 2024, the Company had a net loss of $3.3 million, $1.3 million of net cash used in operating activities, and the Company had a working capital deficit of $0.7 million.

The accompanying interim financial statements have been prepared on a going concern basis, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. The interim financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might result from the outcome of this uncertainty. The Company is at the development stage of its business plan. As such it is likely that additional financing will be needed by the Company to fund its operations and to develop and commercialize its technology. These factors raise substantial doubt about the Company’s ability to continue as a going concern. For the next twelve months from issuance of these interim financial statements, the Company will seek to obtain additional capital through the sale of debt or equity financings or other arrangements to fund operations; however, there can be no assurance that the Company will be able to raise needed capital under acceptable terms, if at all. The sale of additional equity may dilute existing shareholders and newly issued shares may contain senior rights and preferences compared to our currently outstanding common shares. If the Company is unable to obtain such additional financing, future operations would need to be scaled back or discontinued. Due to the uncertainty in the Company’s ability to raise capital, management believes that there is substantial doubt in the Company’s ability to continue as a going concern for twelve months from the issuance of these interim financial statements.

Reverse Stock Split

On October 11, 2023, the Company executed a one-for-fifty reverse stock split of the Company’s common shares (the “Reverse Split”). As a result of the Reverse Split, every 50 shares of the Company’s old common shares were converted into one share of the Company’s new common shares. Fractional shares resulting from the reverse split were rounded up to the nearest whole number. The Reverse Split automatically and proportionately adjusted all issued and outstanding shares of the Company’s common shares, as well as convertible debentures, convertible features, prefunded warrants, stock options and warrants outstanding at the time of the date of the Reverse Split. The exercise price on outstanding equity based-grants was proportionately increased, while the number of shares available under the Company’s equity-based plans was proportionately reduced. Share and per share data (except par value) for the periods presented reflect the effects of the Reverse Split. References to numbers of common shares and per share data in the accompanying financial statements and notes thereto for periods ended prior to October 11, 2023 have been adjusted to reflect the Reverse Split on a retroactive basis.

2. SIGNIFICANT ACCOUNTING POLICIES

Recent Accounting Pronouncements

The Company is an “emerging growth company,” as defined in Section 2(a) of the Securities Act of 1933, as amended, as modified by the Jumpstart Our Business Start-ups Act of 2012, (the “JOBS Act”). Section 107 of the JOBS Act provides that an emerging growth company can take advantage of the extended transition period provided in Section 13(a) of the Securities Exchange Act of 1934, as amended, for complying with new or revised accounting standards applicable to public companies. In other words, an emerging growth company can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies.

In November 2023, FASB issued ASU 2023-07, “Segment Reporting (Topic 820): Improvements to Reportable Segment Disclosures.” ASU 2023-07 provides guidance to improve reportable segment disclosure requirements, primarily through enhanced disclosures about significant segment expenses. ASU 2023-07 is effective for fiscal years beginning after December 15, 2023. We are currently assessing the impact this guidance will have on our financial statements.

In December 2023, the FASB issued ASU 2023-09, “Income Taxes (Topic 740): Improvements to Income Tax Disclosures.” ASU 2023-09 requires companies to provide enhanced rate reconciliation disclosures, including disclosure of specific categories and additional information for reconciling items. The standard also requires companies to disaggregate income taxes paid by federal, state and foreign taxes. ASU 2023-09 is effective for fiscal years beginning after December 15, 2024. We are currently assessing the impact this guidance will have on our financial statements.

Other accounting standards that have been issued or proposed by FASB that do not require adoption until a future date are not expected to have a material impact on the consolidated financial statements upon adoption. The Company does not discuss recent pronouncements that are not anticipated to have an impact on or are unrelated to its financial condition, results of operations, cash flows or disclosures.

Inventories

Inventories consist of finished goods of milled flour and related packaging material recorded at the lower of cost or net realizable value with the cost measured using the average cost method. Inventories includes all costs that relate to bringing the inventory to its present condition and location under normal operating conditions.

Revenue Recognition

Product revenue during the fourth quarter of 2023 was limited to sales from hydroxyl generators and will expand to include sales of our UN(THINK) Foods products in 2024. We recognize product revenue when we satisfy performance obligations by transferring control of the promised products or services to customers. Product revenue is recognized at a point in time when control of the promised good or service is transferred to the customer, which is at the point of shipment or delivery of the goods.

Convertible Instruments

The Company evaluates and accounts for conversion options embedded in its convertible instruments in accordance with ASC 815, Derivatives and Hedging (“ASC 815”), which provides that if three criteria are met, the Company is required to bifurcate conversion options from their host instruments and account for them as free-standing derivative financial instruments. These three criteria include circumstances in which;

(a) the economic characteristics and risks of the embedded derivative instrument are not clearly and closely related to the economic characteristics and risks of the host contract;

(b) the hybrid instrument that embodies both the embedded derivative instrument and the host contract is not re-measured at fair value under otherwise applicable generally accepted accounting principles with changes in fair value reported in earnings as they occur; and

(c) a separate instrument with the same terms as the embedded derivative instrument would be considered a derivative instrument.

ASC 815 also provides an exception to this rule when the host instrument is deemed to be conventional as defined under professional standards as “The Meaning of Conventional Convertible Debt Instrument.”. Accordingly, the Company records, when necessary, discounts to convertible notes for the intrinsic value of conversion options embedded in debt instruments based upon the differences between the fair value of the underlying common stock at the commitment date of the note transaction and the effective conversion price embedded in the note. Debt discounts under these arrangements are amortized over the term of the related debt to their earliest date of redemption. The Company also records when necessary deemed dividends for the intrinsic value of conversion options embedded in preferred shares based upon the differences between the fair value of the underlying common stock at the commitment date of the note transaction and the effective conversion price embedded in the note. ASC 815 provides that, among other things, generally, if an event is not within the entity’s control or could require net cash settlement, then the contract shall be classified as an asset or a liability.

Foreign Currency Transactions

The financial statements of the Company and its subsidiaries whose functional currencies are the local currencies are translated into USD for consolidation as follows: assets and liabilities at the exchange rate as of the balance sheet date, shareholders’ equity at the historical rates of exchange, and income and expense amounts at the average exchange rate for the period. Translation adjustments resulting from the translation of the subsidiaries’ accounts are included in “Accumulated other comprehensive income” as equity in the consolidated balance sheets. Transactions denominated in currencies other than the applicable functional currency are converted to the functional currency at the exchange rate on the transaction date. At period end, monetary assets and liabilities are remeasured to the reporting currency using exchange rates in effect at the balance sheet date. Non-monetary assets and liabilities are remeasured at historical exchange rates. Gains and losses resulting from foreign currency transactions are included within non-operating expenses.

Definite Lived Intangible Asset

Definite lived intangible asset consists of a granted patent. Amortization is computed using the straight-line method over the estimated useful life of the asset. The estimated useful life of the granted patent is 20 years and the patent was available for use starting January 2023.

Impairment of Long-Lived Assets

The Company reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. In order to determine if assets have been impaired, assets are grouped and tested at the lowest level for which identifiable independent cash flows are available (“asset group”). An impairment loss is recognized when the sum of projected undiscounted cash flows is less than the carrying value of the asset group. The measurement of the impairment loss to be recognized is based on the difference between the fair value and the carrying value of the asset group. Fair value can be determined using a market approach, income approach or cost approach. The reversal of impairment losses is prohibited.

Loss per Share

The Company presents basic and diluted loss per share data for its common shares. Basic loss per common share is calculated by dividing the profit or loss attributable to common shareholders of the Company by the weighted average number of common shares outstanding during the year. The number of common shares used in the loss per shares calculation includes all outstanding common shares plus all common shares issuable for which there are no conditions to issue other than time. Diluted loss per common share is calculated by adjusting the weighted average number of common shares outstanding to assume conversion of all potentially dilutive share equivalents, such as stock options and warrants and assumes the receipt of proceeds upon exercise of the dilutive securities to determine the number of shares assumed to be purchased at the average market price during the year.

Fair Value Accounting

The fair value of the Company’s accounts receivable, accounts payable and other current liabilities approximate their carrying amounts due to the relatively short maturities of these items.

As part of the issuance of debentures on June 30, 2022, January 17, 2023, October 18, 2023 and November 30, 2023 as well as the private placement on June 20, 2023, the Company issued warrants having strike price denominated in USD. This creates an obligation to issue shares for a price that is not denominated in the Company’s functional currency and renders the warrants not indexed to the Company’s stock, and therefore, must be classified as a derivative liability and measured at fair value at the end of each reporting period. On the same basis, the Series A Warrants and the representative warrants issued as part of the IPO are also classified as a derivative liability and measured at fair value.

The fair value of the Company’s warrants is determined in accordance with FASB ASC 820, “Fair Value Measurement,” which establishes a fair value hierarchy that prioritizes the assumptions (inputs) to valuation techniques used to price assets or liabilities that are measured at fair value. The hierarchy, as defined below, gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. The guidance for fair value measurements requires that assets and liabilities measured at fair value be classified and disclosed in one of the following categories:

Reclassifications

The Company has reclassified certain share base payment expenses fromWages and salaries toShare based compensation in the 2023 consolidated statements of comprehensive loss to align with the 2024 presentation.

**3. PREPAID EXPENSES AND OTHER CURRENT ASSETS **

4. INVENTORIES

As at March 31, 2024, the Company had $nil (December 31, 2023 – $38,857) in finished goods.

5. INTANGIBLE ASSET

Intangible asset represents $12,265,856 (December 31, 2023 - $12,733,885) for intellectual property (“Manna IP”) acquired under an asset purchase agreement with Manna Nutritional Group, LLC (“Manna”) dated September 10, 2021. The Manna IP encompasses patented technologies to naturally process and convert grains, pulses, and root vegetables, into low-starch, low-sugar, high-protein, fiber-rich baking flour products, as well as a wide range of breakfast cereals, juices, natural sweeteners, and baking enhancers. The Company paid $1,475,000 in cash and issued 147,600 prefunded warrants valued at $12,106,677 (the “Purchase Price”). Subject to a 9.99% stopper and SEC Rule 144 restrictions, the prefunded warrants will vest in tranches up until March 10, 2024 (all tranches have fully vested). When vested the tranches of prefunded warrants are convertible into an equal number of common shares.

On January 3, 2023, Manna satisfied all of its contractual obligations when the patent was approved by the US Patent and Trademark Office and the title was transferred to the Company. During the year ended December 31, 2023, the Company issued 141,175 shares in relation to this transaction. As at March 31, 2024 and December 31, 2023, there were 6,425 unconverted prefunded warrants outstanding.

Based on the terms above and in conformity with US GAAP, the Company accounted for purchase as an asset acquisition. The asset was available for use on January 3, 2023. The asset has a useful life of 20 years. The Company recorded $164,295 in amortization expense related to the Manna IP for the three months ended March 31, 2024 (March 31, 2023 - $163,750).

The estimated annual amortization expense for the next five years are as follows:

6. INVESTMENT

On June 18, 2023, the Company signed a memorandum of understanding with Radical Clean Solutions Ltd. (“RCS”) to purchase common shares issued by RCS. The Company paid RCS $225,000 for 14% of the issued and outstanding common shares of the Company. Under the terms of the MOU, the use of proceeds is exclusively for the advance purchase of hydroxyls generating devices for commercial sales into controlled environment agriculture, food manufacturing, warehousing and transportation verticals. The Company will receive one of five board of director seats of RCS and has a right of first refusal to maintain an ownership percentage in RCS of not less than 10% of the total issued and outstanding common shares. On October 1, 2023 the Company and RCS signed a definitive agreement to convert the advance into a 14% ownership investment in RCS.

As at March 31, 2024, the carrying value of the investment in RCS was $218,449 (December 31, 2023 - $223,801) adjusted for foreign exchange differences of $6,551. As at March 31, 2024, the Company assessed the investment for the presence of the following impairment indications:

None of the above qualitative factors demonstrating potential impairment were present.

7. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES

8. DEBENTURES

On June 30, 2022, the Company executed the definitive agreements (the “Purchase Agreements”) with arm’s length accredited institutional investors (the “Investors”) for $14,025,000 in debentures with a 10% original issue discount for gross proceeds of $12,750,000 (“First Tranche Debentures”). The First Tranche Debentures were convertible into common shares at $111.00 per share. In addition, the Investors received 82,129 warrants at a strike price of $122.10, which expire on December 31, 2025 (the “First Tranche Warrants”). The First Tranche Warrants and First Tranche Debentures each have down round provisions whereby the conversion and strike prices will be adjusted downward if the Company issues equity instruments at lower prices. The First Tranche Warrants strike price and the First Tranche Debenture conversion price will be adjusted down to the effective conversion price of the issued equity instruments. The transaction costs incurred in relation to first tranche were $1,634,894. The Debentures are senior to all other indebtedness or claims in right of payment, other than indebtedness secured by purchase money security interested.

The Investors had the right to purchase additional tranches of $5,000,000 each, up to a total additional principal amount of $33,000,000.

On January 17, 2023, the Investors purchased additional debentures totaling $5,076,923 with a 10% original issue discount for gross proceeds of $4,615,385 (the “Second Tranche Debenture”). The Second Tranche Debentures were convertible into common shares at $62.00 per share and the Investors received an additional 53,226 warrants at a strike price of $62.00, which expire on December 31, 2025 (the “Second Tranche Warrants”). The issuance of the additional tranche triggered the down round provision, adjusting the exercise prices of the First Tranche Debentures and the First Tranche Warrants to $62.00. The transaction costs incurred in relation to second tranche were $325,962.

On June 26, 2023, the Company entered into waiver and amendment agreements (“Debenture Modification Agreements”) with the Investors to modify terms of the Purchase Agreements. The Debenture Modification Agreements provide as follows:

On August 9, 2023, the Company entered into another waiver and amendment agreement (“Agreement”) with the Investors with respect to a certain Senior Convertible Debenture (the “Debentures”) due July 17, 2025 issued by the Company to that Investor. The Agreement provides as follows:

On October 18, 2023, the Investors purchased additional debentures totaling $2,750,000 with a 10% original issue discount for gross proceeds of $2,500,000 (the “Third Tranche Debenture”). The Third Tranche Debentures were convertible into common shares at $2.62 per share and the Investors received an additional 620,230 warrants at a strike price of $2.62, which expire on April 18, 2027 (the “Third Tranche Warrants”). The issuance of the additional tranche triggered the down round provision, adjusting the exercise prices of the First and Second Tranche Debentures and the First and Second Tranche Warrants to $2.62. The transaction costs incurred in relation to third tranche were $31,915.

On November 30, 2023, the Investors purchased additional debentures totaling $2,750,000 with a 10% original issue discount for gross proceeds of $2,500,000 (the “Fourth Tranche Debenture”). The Fourth Tranche Debentures were convertible into common shares at $0.90 per share and the Investors received an additional 1,986,112 warrants at a strike price of $0.90, which expire on May 30, 2027 (the “Fourth Tranche Warrants”). The issuance of the additional tranche triggered the down round provision, adjusting the exercise prices of the First, Second and Third Tranche Debentures and the First, Second and Third Tranche Warrants to $0.90. The transaction costs incurred in relation to fourth tranche were $30,040.

On February 21, 2024, the Investors purchased additional debentures totaling $1,100,000 with a 10% original issue discount for gross proceeds of $1,000,000 (the “Fifth Tranche Debenture”). The Fifth Tranche Debentures were convertible into common shares at $0.214 per share and the Investors received an additional 3,341,122 warrants at a strike price of $0.2354, which expire on August 21, 2027 (the “Fifth Tranche Warrants”). The issuance of the additional tranche triggered the down round provision, adjusting the exercise prices of the First, Second, Third and Fourth Tranche Debentures and the First, Second, Third and Fourth Tranche Warrants to $0.214. The transaction costs incurred in relation to fifth tranche were $50,000.

The First, Second, Third, Fourth and Fifth Tranche Debentures (the “Debentures”) have an interest rate of 5% for the first 12 months, 6% for the subsequent 12 months, and 8% per annum thereafter. Principal repayments will be made in 25 equal installments which began on September 1, 2022 for the First Tranche Debentures, July 1, 2023 for the Second Tranche Debentures, January 1, 2024 for the Third Tranche Debentures, May 1, 2024 for the Fourth Tranche Debentures and August 1, 2024 for the Fifth Tranche Debentures. The Debentures may be extended by nine months at the election of the Company by paying a sum equal to nine months’ interest on the principal amount outstanding at the end of the 18 th month, at the rate of 8% per annum.

The following table summarizes our outstanding debentures as of the dates indicated:

During the three months ended March 31, 2024, the Investors converted $1,760,290 (March 31, 2023 - $881,400) of principal and $92,880 (March 31, 2023 - $nil) of interest into shares of the Company resulting in a $272,732 (March 31, 2023 - $419,703) loss on the conversion of convertible debentures. During the three months ended March 31, 2024, the Company incurred $1,364,205 (March 31, 2023 - $1,872,470) in accretion interest and made cash repayments of $668,568 (March 31, 2023 - $1,180,950).

During the three months ended March 31, 2024, the Investors converted $2,200,657 of the First and Second Tranche Debentures into 8,758,422 shares of the Company. The conversions were determined to be an extinguishment of the existing debt and issuance of new debt. As a result, the Company recorded a loss on debt extinguishment in the amount of $410,433.

9. CONTRACT BALANCES

As at March 31, 2024*,*contract balances consisted of $29,815 of advance payments for product sales not yet delivered, which are recognized as a contract liability (December 31, 2023 - $15,336).

10. LONG TERM LOAN

During the year ended December 31, 2020, the Company entered into a loan agreement with Alterna Bank for a principal amount of $29,520 (CAD$40,000) (December 31, 2023 - $30,243(CAD$40,000)) under the Canada Emergency Business Account Program (the “Program”).

The Program, as set out by the Government of Canada, requires that the funds from this loan shall only be used by the Company to pay non-deferrable operating expenses including, without limitation, payroll, rent, utilities, insurance, property tax and regularly scheduled debt service, and may not be used to fund any payments or expenses such as prepayment/refinancing of existing indebtedness, payments of dividends, distributions and increases in management compensation.

In April 2021, the Company applied for an additional loan with Alterna Bank under the Program and received $14,760 (CAD$20,000) (December 31, 2022 -15,122 (CAD$20,000)). The expansion loan is subject to the original terms and conditions of the Program.

The loan was interest free for an initial term that ended on January 18, 2024. Any outstanding loan after initial term carries an interest rate of 5% per annum, payable monthly during the extended term i.e. January 19, 2024 to December 31, 2025. The loan is due December 31, 2026.

The balance as at March 31, 2024 was $44,280 (CAD $60,000) (December 31, 2023 was $45,365 (CAD $60,000)).

11. DERIVATIVE LIABILITIES

Warrant Liabilities

As at March 31, 2024, the Warrant Liabilities represent aggregate fair value of publicly traded 61,765 Series A warrants (“IPO Warrants”),2,721 representative’s warrants (“Rep Warrants”),82,129 First Tranche Warrants,53,226 Second Tranche Warrants,620,230 Third Tranche Warrants,1,986,112 Fourth Tranche Warrants and 20,000 warrants issued in a private placement (“Private Placement Warrants”).

The fair value of the IPO Warrants, Rep Warrants and Private Placement Warrants amounted to $28,296 (December 31, 2023 - $11,308). As at March 31, 2024 the Company utilized the Black-Scholes option-pricing model for the IPO Warrants, Rep Warrants and Private Placement Warrants and used the following assumptions: stock price $0.18 (December 31, 2023 - $0.47), dividend yield –nil (December 31, 2023 –nil), expected volatility 105% to 155% (December 31, 2023 –105% to 117%), risk free rate of return 3.91% to 4.17% (December 31, 2023 –3.67% to 3.88%), and expected term of 1.25 to 3 years (December 31, 2023 – expected term of 1.50 to 3 years).

As at March 31, 2024 the First Tranche Warrants had a fair value that amounted to $9,000 (December 31, 2023 - $24,000). As at March 31, 2024 the Company utilized the Monte Carlo option-pricing model to value the First Tranche Warrants using the following assumptions: stock price $0.18 (December 31, 2023 - $0.47), dividend yield –nil (December 31, 2023 –nil), expected volatility 100.0% (December 31, 2023 –100.0%), risk free rate of return 4.70% (December 31, 2023 –4.23%), and expected term of 1.75 years (December 31, 2023 – expected term of 2 years).

As at March 31, 2024 the Second Tranche Warrants had a fair value that amounted to $6,000 (December 31, 2023 - $15,000). As at March 31, 2024 the Company utilized the Monte Carlo option-pricing model to value the Second Tranche Warrants using the following assumptions: stock price $0.18 (December 31, 2023 - $0.47), dividend yield –nil (December 31, 2023 –nil), expected volatility 97.5% (December 31, 2023 –105.0%), risk free rate of return 4.50% (December 31, 2023 –4.12%), and expected term of 2.30 years (December 31, 2023 – expected term of 2.55 years).

As at March 31, 2024 the Third Tranche Warrants had a fair value that amounted to $76,000 (December 31, 2023 - $192,000). As at March 31, 2024 the Company utilized the Monte Carlo option-pricing model to value the Third Tranche Warrants using the following assumptions: stock price $0.18 (December 31, 2023 - $0.47), dividend yield –nil (December 31, 2023 –nil), expected volatility 95.0% ((December 31, 2023 –107.5%), risk free rate of return 4.40% ((December 31, 2023 –3.98%), and expected term of 3.05 years ((December 31, 2023 – expected term of 3.30 years).

As at March 31, 2024 the Fourth Tranche Warrants had a fair value that amounted to $272,000 (December 31, 2023 - $724,000). As at March 31, 2024 the Company utilized the Monte Carlo option-pricing model to value the Fourth Tranche Warrants using the following assumptions: stock price $0.18 (December 31, 2023 - $0.47), dividend yield –nil (December 31, 2023 –nil), expected volatility 95.0% (December 31, 2023 –107.5%), risk free rate of return 4.38% (December 31, 2023 –3.97%), and expected term of 3.17 years (December 31, 2023 – expected term of 3.42 years).

As at March 31, 2024 the Fifth Tranche Warrants had a fair value that amounted to $396,000 (February 21, 2024 - $564,000). As at March 31, 2024 the Company utilized the Monte Carlo option-pricing model to value the Fifth Tranche Warrants using the following assumptions: stock price $0.18 (February 21, 2024 - $0.21), dividend yield –nil (February 21, 2024 –nil), expected volatility 95.0% (February 21, 2024 –105.0%), risk free rate of return 4.36% (February 21, 2024 –4.40%), and expected term of 3.39 years (February 21, 2024 – expected term of 3.50 years).

Debenture Convertible Feature

As at March 31, 2024 the fair value of the First Tranche Debentures’ convertible feature amounted to $137,000 (December 31, 2023 – $164,000). The Company utilized the Monte Carlo option-pricing model for valuing the convertible feature using the following assumptions: stock price $0.18 (December 31, 2023 - $0.47), dividend yield –nil (December 31, 2023 –nil), expected volatility 100.0% (December 31, 2023 –100.0%), risk free rate of return 5.21% (December 31, 2023 –5.03%), discount rate 18.25% (December 31, 2023 –17.50%), and expected term of 0.75 year (December 31, 2023 –1 year).

As at March 31, 2024 the fair value of the Second Tranche Debentures’ convertible feature amounted to $252,000 (December 31, 2023 – $429,000). The Company utilized the Monte Carlo option-pricing model for valuing the convertible feature using the following assumptions: stock price $0.18 (December 31, 2023 – $0.47), dividend yield –nil December 31, 2023 –nil), expected volatility 97.5% (December 31, 2023 –105.0%), risk free rate of return 4.81% (December 31, 2023 –4.51%), discount rate 18.00% (December 31, 2023 –17.50%), and expected term of 1.30 years (December 31, 2023 –1.55 years).

As at March 31, 2024 the fair value of the Third Tranche Debentures’ convertible feature amounted to $618,000 (December 31, 2023 – $491,000). The Company utilized the Monte Carlo option-pricing model for valuing the convertible feature using the following assumptions: stock price $0.18 (December 31, 2023 – $0.47), dividend yield –nil (December 31, 2023 –nil), expected volatility 95.0% (December 31, 2023 –107.5%), risk free rate of return 4.59% (December 31, 2023 –4.12%), discount rate 18.00% (December 31, 2023 –17.25%), and expected term of 2.05 years (December 31, 2023 –2.30 years).

As at March 31, 2024 the fair value of the Fourth Tranche Debentures’ convertible feature amounted to $786,000 (December 31, 2023 – $640,000). The Company utilized the Monte Carlo option-pricing model for valuing the convertible feature using the following assumptions: stock price $0.18 (December 31, 2023 - $0.47), dividend yield –nil (December 31, 2023 –nil), expected volatility 95.0% (December 31, 2023 –107.5%), risk free rate of return 4.50% (December 31, 2023 –4.12%), discount rate 17.75% (December 31, 2023 –17.25%), and expected term of 2.17 years (December 31, 2023 –2.42 years).

As at March 31, 2024 the fair value of the Fifth Tranche Debentures’ convertible feature amounted to $359,000 (February 21, 2024 - $359,000). The Company utilized the Monte Carlo option-pricing model for valuing the convertible feature using the following assumptions: stock price $0.18 (February 21, 2024 – $0.21), dividend yield –nil (February 21, 2024 –nil), expected volatility 95.0% (February 21, 2024 –105.0%), risk free rate of return 4.50% (February 21, 2024 –4.54%), discount rate 17.75% (February 21, 2024 –16.00%), and expected term of 2.39 years (February 21, 2024 –2.50 years).

The IPO Warrants, Rep Warrants, and Private Placement Warrants (the “Equity Warrants”) are classified as Level 1 financial instruments, while the Debenture Warrants and Debenture Convertible Feature are classified as Level 3 financial instruments.

Changes in the fair value of the Company’s financial instruments for the nine months ended March 31, 2024 and 2023 were as follows:

Due to the expiry date of the warrants and conversion feature being greater than one year, the liabilities have been classified as non-current.

**12. SHARE CAPITAL **

On March 31, 2024, the Company owed $44,214 worth of stock-based compensation to Company officers. The balance issuable was classified as anObligation to issue shares.

Basic and diluted net loss per share represents the loss attributable to shareholders divided by the weighted average number of shares and prefunded warrants outstanding during the period on an as converted basis.

Potentially dilutive securities that are not included in the calculation of diluted net loss per share because their effect is anti-dilutive are as follows (in common equivalent shares):

13. LEASES

The components of lease expenses were as follows:

As at March 31, 2024, the Company terminated its short-term office lease.

14. COMMITMENTS AND CONTINGENCIES

Debenture principal repayments

The following table summarizes the future principal payments related to our outstanding debt as of March 31, 2024:

Contingencies

Litigation

On August 11, 2023, AgriFORCE’s former CEO, Ingo Wilhelm Mueller filed a Notice of Civil Claim in which he alleges that AgriFORCE wrongfully terminated his employment without notice, in breach of the parties’ underlying employment agreement. Mr. Mueller alleges to have suffered damages including, among other things, a loss of base salary of $473,367 CAD per annum and damages from not receiving common stock of AgriFORCE equivalent in value to $468,313 CAD. AgriFORCE’s position is that Mr. Mueller was terminated for ‘just cause’ because he breached his fiduciary duty to act in AgriFORCE’s best interest by, among other things, submitting a sizeable bid for the acquisition of a company without first obtaining Board approval. In doing so, Mr. Mueller misrepresented AgriFORCE’s financial standing and forged, or instructed others to forge, a document by affixing the electronic signature of AgriFORCE’s CFO.

As at December 31, 2023, the parties were in the discovery stage of litigation. AgriFORCE has produced relevant documents to Mr. Mueller, and is awaiting Mr. Mueller’s production of relevant documents. The parties are also in the process of scheduling examinations for discovery. Management is instructing counsel to advance the matter given the relative strength of AgriFORCE’s case.

The likelihood of an unfavorable outcome is relatively low given the facts supporting AgriFORCE’s ‘for cause’ termination of Mr. Mueller as well as the significant expense that Mr. Mueller would have to incur to advance this matter to trial.

On September 31, 2023, Stronghold filed a Complaint with the Superior Court of California for Breach of Contract; Breach of the Covenant of Good Faith and Fair Dealing; and Common Count: Goods and Services Rendered in relation to the purchase and sale agreement for the Coachella property. Stronghold alleges that AgriFORCE breached the PSA by failing to deposit certain stocks certificates into Escrow, failing to pay amounts owed for its costs incurred in connection with the Sellers Work, and for terminating the PSA despite Stronghold’s performance of the Sellers Work. Stronghold is claiming $451,684 plus interest in damages based on invoices it provided. AgriFORCE will dispute, among other things, the amount and invoices, estimating approximately $230,000 as Stronghold’s true expenses that may be claimed. The Company filed their answer on February 26, 2024. The trial date has not been set for this case.

On March 27, 2024, BV Peeters Advocaten-Avocats (“Peeters”) summoned the Company to appear on May 31, 2024 at the First Chamber of the Dutch-Speaking Division of the Business Court in Brussels. Peeters is seeking payment for €467,249 of unpaid bills for legal services plus penalties and interest. The Company believes that Peeters performed actions that were not in the Company’s best interest. The Company does not intend to pay the outstanding legal bills and intends to vigorously defend its position in court.

15. SUBSEQUENT EVENTS

The Company evaluated subsequent events through May 15, 2024, the date on which these interim financial statements were issued, to ensure that this filing includes appropriate disclosure of events both recognized in the interim financial statements as of and subsequent to March 31, 2024, but were not recognized in the interim financial statements. Except as disclosed below, there were no events that required recognition, adjustment or disclosure in the financial statements.

From April 1, 2024 through May 15, 2024, the Company issued 3,440,489 common shares upon conversion of convertible debt and conversion of convertible debt in lieu of repayment in cash (principal and interest of $454,312).

From April 1, 2024 through May 15, 2024, the Company issued 15,664 common shares to consultants for services rendered.

From April 1, 2024 through May 15, 2024, the Company issued 6,425 common shares upon conversion of prefunded warrants.

On April 11, 2024, an Investor purchased an additional tranche of $550,000. The convertible debt and warrants were issued with an exercise price of $0.163 and $0.18, respectively. The issuance of the additional tranche triggered the down round provision, adjusting the conversion prices of the First, Second, Third, Fourth and Fifth Tranche Debentures and the exercise prices of First, Second, Third, Fourth and Fifth Tranche Warrants to $0.163.