NOTE 5 - RELATED PARTY TRANSACTIONS

A related party is any individual or entity that can exercise significant influence over the Company, or over which the Company can exercise significant influence. Related parties include affiliates, principal owners, directors, executive management, their immediate family members, and entities under common control. The Company has a significant amount of related party balances and transactions.

A summary of the Company’s related party transactions is as follows:

Revenue

During the three and six months ended June 30, 2026, the Company recognized revenue of $276,218 and $903,680, respectively (2025 - $231,608 and $231,608, respectively) from related parties being D.N.S. CANTEK 2019 LTD (“Cantek”), an Israeli limited corporation owned 100% by Koze, and for which Mr. Tal serves as a financial advisor.

Lease expense

The Company has a lease with Formosa, which became a related party upon the appointment of its manager, Elliot Zemel, as a director of the Company on March 11, 2025.

Professional fees

Royalty expense

On March 17, 2025, the Company and Alberta Ltd., entered into a security and royalty agreement with Koze (the “Royalty Agreement”) (Note 2), pursuant to which the Company is required to pay a royalty of CAD $0.20 per gram on cannabis product sales, payable at the beginning of the month for the previous month, as additional consideration related to the lease with Formosa. Immediately upon failure to pay the royalty when due, the royalty rate increases to CAD $0.40 per gram sold for the applicable month. As at June 30, 2026, Alberta Ltd. was in default of its payment obligations, and Koze agreed to forbear from exercising its rights over the ownership interest until August 31, 2026.

During the three and six months ended June 30, 2026, the Company sold 221,055 and 671,055 grams of cannabis products, respectively, (2025 - 192,384 and 192,384 grams respectively) and for the three and six months ended June 30, 2026, the Company incurred a royalty expense of $63,875 and $195,095, respectively (2025 - $55,599 and $55,599, respectively) which is calculated using royalty rate of CAD $0.40 per gram sold since no royalty payments have been made by the Company.

Interest expense

Imputed interest expense

Other expense

During the six months ended June 30, 2025, the Company made a non-cash one-time adjustment of $1,930,000 to lease-related rent expense due to a clarification in the interpretation of the lease terms for the Facility, which is recorded as other expense.

A summary of the Company’s related party liabilities is as follows: 

Accounts payable and accrued liabilities

A summary of accounts payable and accrued liabilities include balances owing to related parties is as follows:

Loans payable to related parties

On March 11, 2025, Koze became a related party upon the appointment of its manager as a director of the Company. As a result, the balance owing on promissory notes was reclassified from notes payable to loans payable to related parties during the year ended December 31, 2025.

On August 7, 2025, the Company entered into an agreement (the “Debt Modification”) with Mr. Tal, Koze and Formosa to amend the annual interest rates on all outstanding promissory and convertible notes held by them to 6%, compounding annually. This was deemed to be a substantial modification of the terms of the agreements and was accounted for as an extinguishment of the promissory and convertible notes and recognition of new notes at the new 6% rate. The term to maturity was unchanged. In connection with the issuance of the new notes resulting from the Debt Modification, the Company determined that the market interest rate for similar instruments was 15%. Accordingly, the debt was recorded at a discount to reflect this effective interest rate, with the discount amortized to imputed interest expense over the term of the debt using the effective interest method.

Mr. Tal and Koze are related parties of the Company by virtue of their equity rights. During 2026 the maturity date of all outstanding promissory and convertible notes held by them was extended to December 31, 2026 (the “2026 Debt Amendment”). The stated annual interest rate of 6% and the 15% market rate used to impute interest were unchanged by the 2026 Debt Amendment. Because the notes bear interest below the market rate and are held by shareholders of the Company, the discount arising on initial imputation was recognized as a capital contribution to additional paid-in capital, rather than in the condensed interim consolidated statements of operations and comprehensive loss.

A summary of the outstanding principal on the loans payable to related parties is as follows:

Interest-free loan from PLC, a company owned by Dominic Colvin, a director of the Company.

On November 22, 2023, the Company entered into promissory notes of $2,550,000 with Koze, as part of the LTB transaction, bearing interest at 13% per annum. Originally due on November 22, 2024, the maturity date for this note was extended to December 31, 2025, by agreement with Koze. On March 18, 2026, Mr. Tal and Koze agreed to extend the maturity date of the promissory notes to December 31, 2026.

As a result of the Debt Modification, principal and accrued interest outstanding related to the note as at August 7, 2025 of $2,550,000 and $555,406, respectively, were extinguished. A new note (“Koze LTB”) of $2,978,661 bearing 6% interest, compounding annually, was recognized resulting in a gain of $126,745 from extinguishment, recorded directly to additional paid-in capital.

As a result of the 2026 Debt Amendment, a discounting effect of $244,792 was recognized as a capital contribution to additional paid-in capital.

On May 25, 2023, the Company entered into a promissory note with Koze, bearing annual interest at 24% compounded monthly, to fund certain documented expenses.

As a result of the 2025 Debt Modification, principal and accrued interest outstanding related to the note as at August 7, 2025 of $849,278 and $443,339, respectively, were extinguished. A new note (“Koze A”) of $1,134,669 bearing 6% interest, compounding annually, was recognized resulting in a gain of $157,949 from extinguishment, recorded directly to additional paid-in capital.

As a result of the 2026 Debt Amendment, a discounting effect of $124,239 was recognized as a capital contribution to additional paid-in capital.

During the three and six months ended June 30, 2026, the Company had $102,168 and $263,981 in net additions to the promissory note.

On May 25, 2023, the Company entered into another promissory note with Koze, bearing annual interest at 24% compounded monthly, to fund the Company for certain documented expenses.

As a result of the Debt Modification, principal and accrued interest outstanding related to the note as at August 7, 2025 of $4,040,474 and $1,366,780, respectively, were extinguished. A new note (“Koze B”) of $4,767,106 bearing 6% interest, compounding annually, was recognized resulting in a gain of $640,148 from extinguishment, recorded directly to additional paid-in capital.

As a result of the 2026 Debt Amendment, a discounting effect of $473,849 was recognized as a capital contribution to additional paid-in capital.

During the three and six months ended June 30, 2026, the Company had $611,266 and $1,130,797 in additions on the promissory note. During the three and six months ended June 30, 2026, the Company had $269,084 and $785,105 in repayments on the promissory note.

On February 8, 2024, the Company entered into another promissory note with Koze, bearing annual interest at 24% compounded monthly.

As a result of the Debt Modification, principal and accrued interest outstanding related to the note as at August 7, 2025 of $275,000 and $97,403, respectively, were extinguished. A new note (“Koze C”) of $330,551 bearing 6% interest, compounding annually, was recognized resulting in a gain of $41,852 from extinguishment, recorded directly to additional paid-in capital.

As a result of the 2026 Debt Amendment, a discounting effect of $30,562 was recognized as a capital contribution to additional paid-in capital.

The Company has a convertible note with Koze, bearing annual interest at 24%. As a result of the Debt Modification, principal and accrued interest outstanding related to the note as at August 7, 2025 of $68,555 and $75,714, respectively, were extinguished. A new note, Koze CN, of $126,275 bearing 6% interest, compounding annually, was recognized resulting in a gain of $17,995 from extinguishment, recorded directly to additional paid-in capital.

As a result of the 2026 Debt Amendment, a discounting effect of $11,675 was recognized as a capital contribution to additional paid-in capital.

On November 22, 2023, the Company entered into a promissory note of $450,000 with Mr. Tal as part of the LTB transaction, bearing interest at 13% per annum. Originally due on November 22, 2024, the maturity date for this note was extended to December 31, 2025, by agreement with Mr. Tal. On March 18, 2026, Mr. Tal and Koze agreed to extend the maturity date of the promissory notes to December 31, 2026.

As a result of the Debt Modification, principal and accrued interest outstanding related to the note as at August 7, 2025 of $438,296 and $89,768, respectively, were extinguished. A new note (“Mr. Tal LTB”) of $507,422 bearing 6% interest, compounding annually, was recognized resulting in a gain of $20,641 from extinguishment, recorded directly to additional paid-in capital.

As a result of the 2026 Debt Amendment, a discounting effect of $39,888 was recognized as a capital contribution to additional paid-in capital.

During the three and six months ended June 30, 2026, the Company made repayments of $nil and $30,000 on the promissory note and accrued interest.

The Company had a convertible note with Mr. Tal, bearing annual interest at 24%.

As a result of the Debt Modification, principal and accrued interest outstanding related to the note as at August 7, 2025 of $212,555 and $121,427, respectively, were extinguished. A new note, Mr. Tal CN, of $294,850 bearing 6% interest, compounding annually, was recognized resulting in a gain of $39,132 from extinguishment, recorded directly to additional paid-in capital.

As a result of the 2026 Debt Amendment, a discounting effect of $29,435 was recognized as a capital contribution to additional paid-in capital.

On January 1, 2025, the Company entered into a promissory note with Formosa in the amount of $1,930,000, bearing interest at 5% per annum, with respect to a one-time adjustment made to lease-related rent expense due to a clarification in the interpretation of the lease terms for the Facility.

As a result of the Debt Modification, principal and accrued interest outstanding related to the note as at August 7, 2025 of $1,930,000 and $58,098, respectively, were extinguished. A new note of $1,775,707 bearing 6% interest, compounding annually, was recognized resulting in a gain of $212,391 from extinguishment, recorded directly to additional paid-in capital.

A summary of the accrued interest of the Company’s loans payable to related parties is as follows:

A summary of the interest expense related to the Company’s loans payable to related parties is as follows:

A summary of the imputed interest expense related to the Company’s loans payable to related parties is as follows:

Royalty payable

Pursuant to the Royalty Agreement, as at June 30, 2026, the royalty amount payable to Koze was $483,554 (CAD $687,130) (December 31, 2025 - $305,492 (CAD $418,707)).

Obligation to issue shares

As at June 30, 2026, the Company has an obligation to issue an additional 181,692 Class C preferred shares to each of Mr. Tal and Koze (December 31, 2025 - 166,668 each) as part of the LTB transaction, valued at $545,078 for each party (December 31, 2025 - $1,083,341 each).

Liability for right-of-use building

On March 11, 2025, Formosa became a related party upon the appointment of its manager as a director of the Company.

As at June 30, 2026, the liability for right-of-use building was $5,782,769 (December 31, 2025 - $6,034,080).

Under the terms of the agreement, a default occurs if Alberta Ltd. fails to make such payments or lease payments for three consecutive months or for any four months within any rolling six-month period. As collateral for the obligations under the agreement, the Company granted Koze a security interest in all of its ownership interest in Alberta Ltd. The security interest will remain in place until all obligations are fully satisfied. As at June 30, 2026, Alberta Ltd. has failed to make the payments under the agreement and Koze agreed to forbear from exercising his right of ownership interest in Alberta Ltd. until August 31, 2026 (Note 2). During the three and six months ended June 30, 2026, the Company recognized interest expense related to rent in default of $169,646 and $330,969, respectively, associated with unpaid lease payments (2025 - $135,040 and $289,742, respectively). As at June 30, 2026, accrued interest related to rent in default was $1,321,250 (December 31, 2025 - $1,037,180).

Deferred revenue

As at June 30, 2026, the Company had deferred revenue of $36,242 (December 31, 2025 - $260,561) related to transactions with related parties. The deferred revenue balance represents consideration received in advance for products to be delivered.