REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of Body and Mind Inc.:
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Body and Mind Inc. (“the Company”) as of July 31, 2022 and 2021, the related consolidated statements of operations and comprehensive loss, changes in stockholders’ equity, and cash flows for each of the years in the two-year period ended July 31, 2022 and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company as of July 31, 2022, and the results of its operations and its cash flows for each of the years in the two-year period ended July 31, 2022, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) related to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgements. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
Business Combinations
Description of the Critical Audit Matter
As described in note 11 to the consolidated financial statements, the Company completed an acquisition wherein the Company acquired certain net assets from one entity for total consideration of approximately $5.8 million. The acquisition was accounted for as a business combination using the acquisition method of accounting which requires the determination of the fair value of the consideration transferred, assets acquired, and liabilities assumed. The Company utilized a third-party valuation specialist to assist in the determining the fair value of assets acquired, and liabilities assumed. The Company determined it acquired intangible assets (dispensary licenses and tradenames) with a fair value of approximately $1.2 million and recorded goodwill of approximately $4.8 million. The dispensary license was valued using the multi-period excess earnings model and trade names were valued using the relief-from-royalty method.
The recognition, measurement, and disclosure of the Company’s business combinations in the financial statements were considered especially challenging and required significant auditor judgment due to the complex determination by management of the appropriate assumptions, such as discount rates, revenue growth rates, and projected profit margins, for the valuation of acquired net assets and expected probabilities of key outcomes. In addition, the audit effort involved the use of professionals with specialized skill and knowledge.
How the Critical Audit Matter Was Addressed in the Audit
Our audit procedures related to the following:
| · | Testing management’s process for developing the respective fair value estimates for intangible assets. |
| · | Evaluating management’s and the valuation specialist’s identification of assets acquired and liabilities assumed. |
| · | Evaluating the appropriateness of the valuation models used by the third-party specialist. |
| · | Testing the completeness and accuracy of underlying data provided to the specialist by management and used in the fair value estimates. |
| · | Evaluating the significant assumptions used related to sales growth, discount rates, gross profit margins, contributary asset charges, tax rate and useful lives to discern whether they are reasonable considering (i) the current and past performance of the entity; (ii) the consistency with external market and industry data; and (iii) whether these assumptions were consistent with evidence obtained in other areas of the audit. |
| · | Evaluated the qualifications of the third-party firm engaged by the Company based on their credentials and experience. |
| · | Evaluated the accuracy and completeness of the financial statement presentation and disclosure of the acquisitions. |
Professionals with specialized skill and knowledge were utilized by the Firm to assist in the evaluation of the valuation models and discount rate assumptions.
Goodwill Impairment Assessment
Description of the Critical Auditing Matter
As described in note 12 to the consolidated financial statements, the Company tests goodwill for impairment annually at the reporting unit level, or more frequently if events or circumstances indicate it is more likely than not that the fair value of a reporting unit is less than its carrying amount. Reporting units are tested for impairment by comparing the estimated fair value of each reporting unit with its carrying amount. If the carrying amount of a reporting unit exceeds its estimated fair value, an impairment loss is recorded based on the difference between the fair value and carrying amount, not to exceed the associated carrying amount of goodwill. The Company’s annual impairment test occurred on July 31, 2022. The Company utilized a third-party valuation specialist to assist in the determining the fair value of each reporting unit. The valuation specialist primarily used a discounted cash flow income method to estimate the fair value of the reporting unit.
We identified the evaluation of the impairment analysis for goodwill as a critical audit matter because of the significant estimates and assumptions management used in the discounted cash flow analysis performed by the valuation specialist to determine fair value of the reporting unit. Performing audit procedures to evaluate the reasonableness of these estimates and assumptions required a high degree of auditor judgment and an increased extent of effort. In addition, the audit effort involved the use of professionals with specialized skill and knowledge.
How the Critical Audit Matter was Addressed in the Audit
Our audit procedures related to the following:
| · | Testing management’s processes for estimating the fair value of the reporting unit. |
| · | Evaluating the appropriateness of the discounted cash flow models utilized by the Company for the respective impairment analyses. |
| · | Testing the completeness and accuracy of underlying data used in the discounted cash flow models. |
| · | Evaluating the significant assumptions provided by management related to revenues, EBITDA, long term growth rates to discern whether they are reasonable considering (i) the current and past performance of the entity; (ii) the consistency with external market and industry data; and (iii) whether these assumptions were consistent with evidence obtained in other areas of the audit. |
| · | Evaluate assumptions developed by the valuation specialist, such as discount rates, net working capital needs and long-term growth rates, for reasonableness. |
In addition, professionals with specialized skill and knowledge were utilized by the Firm to assist in the evaluation of the discounted cash flow model, discount rate assumptions and market method approaches.
Indefinite Lived Intangible Asset Impairment Assessment
Description of the Critical Auditing Matter
As described in note 12, the Company has two indefinite lived intangible assets (license and brand). Further, as described in note 12 to the consolidated financial statements, the Company tests indefinite lived intangible assets for impairment annually, or more frequently if events or circumstances indicate it is more likely than not that the fair value of the indefinite lived intangible asset is less than its carrying amount. Indefinitely lived intangible assets are tested for impairment by comparing the estimated fair value of such asset with its carrying amount. If the carrying exceeds its estimated fair value, an impairment loss is recorded based on the difference between the fair value and carrying amount. The Company performed an impairment analysis on July 31, 2022, on its license and brand indefinite lived intangible assets. The Company utilized a third-party valuation specialist to assist in the determining the fair value of each indefinite lived intangible asset. The valuation specialist primarily used a discounted cash flow income method to estimate the fair value of these assets.
We identified the evaluation of the impairment analysis for these indefinite lived intangible assets as a critical audit matter because of the significant estimates and assumptions used in the discounted cash flow analysis performed by the valuation specialist to determine fair value of such assets. Performing audit procedures to evaluate the reasonableness of these estimates and assumptions required a high degree of auditor judgment and an increased extent of effort. In addition, the audit effort involved the use of professionals with specialized skill and knowledge.
How the Critical Audit Matter was Addressed in the Audit
Our audit procedures related to the following:
| · | Testing management’s processes for estimating the fair value of the indefinite lived intangible assets. |
| · | Evaluating the appropriateness of the discounted cash flow models utilized by the Company for the respective impairment analyses. |
| · | Testing the completeness and accuracy of underlying data used in the discounted cash flow models. |
| · | Evaluating the significant assumptions provided by management related to revenues, EBITDA, long term growth rates to discern whether they are reasonable considering (i) the current and past performance of the entity; (ii) the consistency with external market and industry data; and (iii) whether these assumptions were consistent with evidence obtained in other areas of the audit. |
| · | Evaluate assumptions developed by the valuation specialist, such as discount rates, contributory asset charges and long-term growth rates, for reasonableness. |
In addition, professionals with specialized skill and knowledge were utilized by the Firm to assist in the evaluation of the discounted cash flow model, discount rate assumptions and market method approaches.
/s/ Sadler, Gibb & Associates, LLC
We have served as the Company’s auditor since 2021.
Draper, UT
January 17, 2023
Body and Mind Inc. | | | | | Statement 1 | |
| | | | | | |
Consolidated Balance Sheets | | | | | | |
(U.S. Dollars) | | | | | | |
ASSETS | | As of 31 July 2022 | | | As of 31 July 2021 | |
| | | | | | |
Current | | | | | | |
Cash | | $ | 1,854,277 | | | $ | 7,374,194 | |
Amounts receivable, net | | | 475,578 | | | | 1,544,957 | |
Interest receivable on convertible loan (Note 6) | | | 222,000 | | | | 150,000 | |
Prepaid expenses | | | 775,701 | | | | 413,246 | |
Inventory (Note 5) | | | 3,880,000 | | | | 2,936,156 | |
Convertible loan receivable (Note 6) | | | - | | | | 1,250,000 | |
Other loans receivable (Note 7) | | | 789,984 | | | | 638,650 | |
Total Current Assets | | | 7,997,540 | | | | 14,307,203 | |
| | | | | | | | |
Deposit | | | 113,828 | | | | 470,546 | |
Loan receivable from NMG Ohio LLC (Note 8) | | | - | | | | 891,279 | |
Convertible loan receivable (Note 6) | | | 1,250,000 | | | | - | |
Property and Equipment, net (Note 10) | | | 5,640,534 | | | | 4,893,790 | |
Operating lease right-of-use assets (Note 15) | | | 4,162,647 | | | | 2,539,023 | |
Brand and Licenses, net (Note 12) | | | 11,861,315 | | | | 19,855,068 | |
Goodwill, net (Note 12) | | | - | | | | 5,168,902 | |
TOTAL ASSETS | | $ | 31,025,864 | | | $ | 48,125,811 | |
| | | | | | | | |
LIABILITIES | | | | | | | | |
Current | | | | | | | | |
Accounts payable | | $ | 2,489,353 | | | $ | 1,686,376 | |
Accrued liabilities | | | 325,385 | | | | 105,538 | |
Income taxes payable | | | 3,021,539 | | | | 2,865,086 | |
Due to related parties (Note 13) | | | 163,862 | | | | 52,074 | |
Loan payable (Note 14) | | | 12,535 | | | | 16,874 | |
Current portion of operating lease liabilities (Note 15) | | | 604,445 | | | | 761,415 | |
Total Current Liabilities | | | 6,617,119 | | | | 5,487,363 | |
| | | | | | | | |
Long-term operating Lease Liabilities (Note 15) | | | 5,514,928 | | | | 2,323,525 | |
Loans payable (Note 14) | | | 7,393,636 | | | | 4,798,871 | |
Income taxes payable | | | 966,992 | | | | 966,992 | |
Deferred Tax Liability | | | 427,770 | | | | 198,339 | |
TOTAL LIABILITIES | | | 20,920,445 | | | | 13,775,090 | |
| | | | | | | | |
STOCKHOLDERS’ EQUITY | | | | | | | | |
Capital Stock– Statement 3 (Note 16) | | | | | | | | |
Authorized: | | | | | | | | |
900,000,000 Common Shares – Par Value $0.0001 | | | | | | | | |
Issued and Outstanding: | | | | | | | | |
113,668,613 (2021–109,077,778) Common Shares | | | 11,366 | | | | 10,907 | |
Additional Paid-in Capital | | | 52,344,573 | | | | 50,312,013 | |
Shares to be Issued | | | 1,853,403 | | | | - | |
Other Comprehensive Income | | | 1,224,093 | | | | 1,127,713 | |
Accumulated Deficit | | | (45,803,026 | ) | | | (17,126,510 | ) |
TOTAL STOCKHOLDERS’ EQUITY ATTRIBUTABLE TO BAM STOCKHOLDERS | | | 9,630,409 | | | | 34,324,123 | |
NON-CONTROLLING INTEREST | | | 475,010 | | | | 26,598 | |
TOTAL EQUITY | | | 10,105,419 | | | | 34,350,721 | |
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY | | $ | 31,025,864 | | | $ | 48,125,811 | |
The accompanying notes are an integral part of these consolidated financial statements.
Body and Mind Inc. | | Statement 2 |
| | |
Consolidated Statements of Operations and Comprehensive Loss |
(U.S. Dollars) | | | | | | |
| | Years Ended 31 July | |
| | 2022 | | | 2021 | |
| | | | | | |
Sales | | $ | 31,638,163 | | | $ | 26,900,869 | |
Cost of sales | | | (20,694,217 | ) | | | (14,910,660 | ) |
Gross profit | | | 10,943,946 | | | | 11,990,209 | |
| | | | | | | | |
Operating Expenses | | | | | | | | |
Accounting and legal | | | 948,719 | | | | 973,594 | |
Business development | | | 669,471 | | | | 282,865 | |
Consulting fees | | | 967,860 | | | | 537,760 | |
Depreciation and amortization | | | 1,490,516 | | | | 1,457,550 | |
Lease expense | | | 856,697 | | | | 431,427 | |
Licenses, utilities and office administration | | | 4,627,009 | | | | 2,938,525 | |
Management fees (Note 13) | | | 559,937 | | | | 405,134 | |
Salaries and wages | | | 4,343,237 | | | | 4,376,027 | |
Total Operating Expenses | | | (14,463,446 | ) | | | (11,402,882 | ) |
Net Operating Income (Loss) | | | (3,519,500 | ) | | | 587,327 | |
Other Income (Expenses) | | | | | | | | |
Foreign exchange, net | | | 323 | | | | 235 | |
Interest expense | | | (1,372,208 | ) | | | (53,394 | ) |
Interest income | | | 72,000 | | | | 163,558 | |
Loss on impairment (Notes 12 and 15) | | | (20,517,192 | ) | | | (592,547 | ) |
Loss on settlement (Note 21) | | | (460,001 | ) | | | - | |
Other income (expenses) | | | 161,639 | | | | (95,416 | ) |
Gain on bargain purchase (Note 11) | | | - | | | | 167,266 | |
Equity-method investment change from earnings (Note 8) | | | - | | | | 13,219 | |
Total Other Expenses | | | (22,115,439 | ) | | | (397,079 | ) |
Net Income (Loss) Before Income Tax | | $ | (25,634,939 | ) | | $ | 190,248 | |
Income tax expense | | | (2,593,165 | ) | | | (2,166,709 | ) |
Net Loss | | | (28,228,104 | ) | | | (1,976,461 | ) |
Other Comprehensive Income (Loss) | | | | | | | | |
Foreign currency translation adjustment | | | 96,380 | | | | 395,945 | |
Comprehensive Loss | | $ | (28,131,724 | ) | | $ | (1,580,516 | ) |
Net income (loss) attributable to: | | | | | | | | |
Body and Mind Inc. | | | (28,676,516 | ) | | | (2,260,902 | ) |
Non-controlling interest | | | 448,412 | | | | 284,441 | |
| | | | | | | | |
Comprehensive income (loss) attributable to: | | | | | | | | |
Body and Mind Inc. | | | (28,580,136 | ) | | | (1,864,957 | ) |
Non-controlling interest | | | 448,412 | | | | 284,441 | |
Loss per Share – Basic and Diluted | | $ | (0.25 | ) | | $ | (0.02 | ) |
Weighted Average Number of Shares Outstanding | | | 112,209,254 | | | | 108,463,019 | |
The accompanying notes are an integral part of these consolidated financial statements.
Body and Mind Inc. | | | | | | | | | | | | Statement 3 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Consolidated Statements of Changes in Stockholders’ Equity |
(U.S. Dollars) | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | Additional | | | | | | Other | | | | | | Non- | | | | |
| | Common Shares | | | paid-in | | | Shares to be | | | comprehensive | | | Accumulative | | | controlling | | | | |
| | Number | | | Amount | | | capital | | | issued | | | income | | | Deficit | | | interest | | | Total | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Balance – 31 July 2021 | | | 109,077,778 | | | | 10,907 | | | | 50,312,013 | | | | - | | | | 1,127,713 | | | | (17,126,510 | ) | | | 26,598 | | | | 34,350,721 | |
Common stock issued in acquisition of Canopy (Note 11) | | | 2,728,156 | | | | 273 | | | | 939,047 | | | | 1,853,403 | | | | - | | | | - | | | | - | | | | 2,792,723 | |
Common stock issued for operating leases (Note 15) | | | 1,862,679 | | | | 186 | | | | 578,662 | | | | - | | | | - | | | | - | | | | - | | | | 578,848 | |
Warrants issued for loan amendment (Note 14) | | | - | | | | - | | | | 79,585 | | | | - | | | | - | | | | - | | | | - | | | | 79,585 | |
Stock-based compensation (Note 16) | | | - | | | | - | | | | 435,266 | | | | - | | | | - | | | | - | | | | - | | | | 435,266 | |
Foreign currency translation adjustment | | | - | | | | - | | | | - | | | | - | | | | 96,380 | | | | - | | | | - | | | | 96,380 | |
Loss for the year | | | - | | | | - | | | | - | | | | - | | | | - | | | | (28,676,516 | ) | | | 448,412 | | | | (28,228,104 | ) |
Balance – 31 July 2022 | | | 113,668,613 | | | | 11,366 | | | | 52,344,573 | | | | 1,853,403 | | | | 1,224,093 | | | | (45,803,026 | ) | | | 475,010 | | | | 10,105,419 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Balance – 31 July 2020 | | | 107,513,812 | | | | 10,751 | | | | 47,665,678 | | | | 19,703 | | | | 731,768 | | | | (14,865,608 | ) | | | (257,843 | ) | | | 33,304,449 | |
Common stock issued in acquisition of NMG Ohio LLC (Note 8) | | | 793,466 | | | | 79 | | | | 296,963 | | | | - | | | | - | | | | - | | | | - | | | | 297,042 | |
Exercise of options (Note 16) | | | 700,000 | | | | 70 | | | | 316,975 | | | | - | | | | - | | | | - | | | | - | | | | 317,045 | |
Escrow release | | | 70,500 | | | | 7 | | | | 19,696 | | | | (19,703 | ) | | | - | | | | - | | | | - | | | | - | |
Warrants issued with debt (Note 14) | | | - | | | | - | | | | 1,037,146 | | | | - | | | | - | | | | - | | | | - | | | | 1,037,146 | |
Stock-based compensation (Note 16) | | | - | | | | - | | | | 975,555 | | | | - | | | | - | | | | - | | | | - | | | | 975,555 | |
Foreign currency translation adjustment | | | - | | | | - | | | | - | | | | - | | | | 395,945 | | | | - | | | | - | | | | 395,945 | |
Loss for the year | | | - | | | | - | | | | - | | | | - | | | | - | | | | (2,260,902 | ) | | | 284,441 | | | | (1,976,461 | ) |
Balance – 31 July 2021 | | | 109,077,778 | | | | 10,907 | | | | 50,312,013 | | | | - | | | | 1,127,713 | | | | (17,126,510 | ) | | | 26,598 | | | | 34,350,721 | |
The accompanying notes are an integral part of these consolidated financial statements.
Body and Mind Inc. | | Statement 4 | |
| | | |
Consolidated Statements of Cash Flows |
(U.S. Dollars) |
| | Years Ended 31 July | |
Cash Resources Provided By (Used In) | | 2022 | | | 2021 | |
Operating Activities | | | | | | |
Net loss for the year | | $ | (28,228,104 | ) | | $ | (1,976,461 | ) |
Items not affecting cash: | | | | | | | | |
Accrued interest and accretion | | | 1,035,592 | | | | 15,474 | |
Accrued interest income | | | (72,000 | ) | | | (72,000 | ) |
Amortization of intangible assets | | | 1,266,753 | | | | 1,122,415 | |
Amortization of operating lease ROU assets | | | 517,163 | | | | 431,427 | |
Bargain purchase | | | - | | | | (167,266 | ) |
Deferred tax expense (benefit) | | | 229,431 | | | | (214,110 | ) |
Depreciation | | | 969,157 | | | | 765,857 | |
Foreign exchange | | | - | | | | (236 | ) |
Equity-method investment change from earnings | | | - | | | | (13,219 | ) |
Impairment loss | | | 20,517,192 | | | | 592,747 | |
Loss on settlement of contingent consideration | | | 503,179 | | | | - | |
Gain on settlement of lease liabilities | | | (43,178 | ) | | | | |
Stock-based compensation | | | 435,266 | | | | 975,555 | |
Amounts receivable and prepaids | | | 1,009,578 | | | | (528,364 | ) |
Inventory | | | (291,168 | ) | | | (809,491 | ) |
Deposits | | | (113,828 | ) | | | - | |
Trade payables and accrued liabilities | | | 653,068 | | | | (194,328 | ) |
Income taxes payable | | | (1,072,760 | ) | | | 1,798,668 | |
Due to related parties | | | 111,788 | | | | (3,439 | ) |
Lease liabilities | | | (871,407 | ) | | | (536,985 | ) |
Loan to NMG Ohio LLC | | | - | | | | (891,279 | ) |
Cash provided by (used in) operating activities | | | (3,444,278 | ) | | | 294,965 | |
| | | | | | | | |
Investing Activities | | | | | | | | |
Investment in NMG Ohio, LLC, net of cash received | | | (54,415 | ) | | | (136,325 | ) |
Investment in GLDH, net of cash received | | | - | | | | 65,340 | |
Acquisition of Canopy, net of cash received | | | (871,497 | ) | | | - | |
Purchase of property and equipment | | | (828,406 | ) | | | (402,459 | ) |
Loan receivable | | | (391,168 | ) | | | (358,553 | ) |
Cash used in investing activities | | | (2,145,486 | ) | | | (831,997 | ) |
| | | | | | | | |
Financing Activities | | | | | | | | |
Issuance of shares, net of share issue costs | | | - | | | | 313,415 | |
Proceeds from (repayment of) loans payable, net | | | (26,533 | ) | | | 5,852,311 | |
Cash provided by financing activities | | | (26,533 | ) | | | 6,165,726 | |
| | | | | | | | |
Effect of exchange rate changes on cash | | | 96,380 | | | | 393,370 | |
| | | | | | | | |
Net Increase (Decrease) in Cash | | | (5,519,917 | ) | | | 6,022,064 | |
Cash– Beginning of Year | | | 7,374,194 | | | | 1,352,130 | |
Cash– End of Year | | $ | 1,854,277 | | | $ | 7,374,194 | |
Supplemental Disclosures with Respect to Cash Flows (Note 18)
The accompanying notes are an integral part of these consolidated financial statements.
Body and Mind Inc. | |
| |
Notes to Consolidated Financial Statements | |
For the year ended 31 July 2022 | |
U.S. Dollars | |
1. | Nature and Continuance of Operations |
Body and Mind Inc. (the “Company”) was incorporated on 5 November 1998 in the State of Delaware, USA, under the name Concept Development Group, Inc. In May 2004, the Company acquired 100% of Vocalscape, Inc. and changed its name to Vocalscape, Inc. On October 28, 2005, the Company changed its name to Nevstar Precious Metals Inc. On October 23, 2008, the Company changed its name to Deploy Technologies Inc. (“Deploy Tech”) and, on 15 September 2010, the Company incorporated a wholly-owned subsidiary, Deploy Acquisition Corp. (“Deploy”) under the laws of the State of Nevada, USA. On 17 September 2010, the Company merged with and into Deploy under the laws of the State of Nevada. Deploy, as the surviving corporation of the merger, assumed all the assets, obligations and commitments of Deploy Tech, and we were effectively re-domiciled in the State of Nevada. Upon the completion of the merger, Deploy assumed the name “Deploy Technologies Inc.”, and all of the issued and outstanding common stock of Deploy Tech was automatically converted into and became Deploy’s issued and outstanding common stock.
On 14 November 2017, the Company acquired Nevada Medical Group, LLC (“NMG”) and changed its name to Body and Mind Inc. The Company is now a supplier and grower of medical and recreational cannabis in the state of Nevada, and has retail operations in California, Ohio, and Arkansas.
Principles of Consolidation
These consolidated financial statements include the financial statements of the Company and its subsidiaries as follows:
Name | | Jurisdiction | | Ownership | | | Date of acquisition or formation | |
DEP Nevada Inc. (“DEP Nevada”) | | Nevada, USA | | | 100 | % | | 10 August 2017 | |
Nevada Medical Group LLC (“NMG”) | | Nevada, USA | | | 100 | % | | 14 November 2017 | |
NMG Long Beach LLC (“NMG LB”) | | California, USA | | | 100 | % | | 18 December 2018 | |
NMG Cathedral City LLC | | California, USA | | | 100 | % | | 4 January 2019 | |
NMG San Diego LLC (“NMG SD”) | | California, USA | | | 60 | % | | 30 January 2019 | |
NMG Ohio LLC (“NMG Ohio”) | | Ohio, USA | | | 100 | % | | 27 April 2017 | |
NMG OH 1, LLC (“NMG OH 1”) | | Ohio, USA | | | 100 | % | | 30 January 2020 | |
NMG OH P1, LLC (“NMG OH P1”) | | Ohio, USA | | | 100 | % | | 30 January 2020 | |
NMG MI 1, Inc. (“NMG MI1”) | | Michigan, USA | | | 100 | % | | 24 June 2021 | |
NMG MI C1 Inc. (“NMG MI C1”) | | Michigan, USA | | | 100 | % | | 24 June 2021 | |
NMG MI P1 Inc. (“NMG MI P1”) | | Michigan, USA | | | 100 | % | | 24 June 2021 | |
Canopy Monterey Bay, LLC (“Canopy”) | | California, USA | | | 100 | % | | 30 November 2021 | |
NMG CA P1, LLC (“NMG CA P1”) | | California, USA | | | 100 | % | | 7 January 2020 | |
NMG CA C1, LLC (“NMG CA C1”) | | California, USA | | | 100 | % | | 7 October 2020 | |
| (1) | Dissolved on March 8, 2022. |
All inter-company transactions and balances are eliminated upon consolidation.
2. | Recent Accounting Pronouncements |
In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-13 “Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments” which requires the measurement and recognition of expected credit losses for financial assets held at amortized cost. ASU 2016-13 replaces the existing incurred loss impairment model with an expected loss methodology, which will result in more timely recognition of credit losses. ASU 2016-13 is effective for annual reporting periods, and interim periods within those years beginning after 15 December 2022. The Company does not anticipate this amendment to have a significant impact on the consolidated financial statements.
In October 2021, the FASB issued ASU 2021-08, Business Combinations (Topic 805), Accounting for Contract Assets and Contract Liabilities from Contracts with Customers. ASU 2021-08 requires the recognition and measurement of contract assets and contract liabilities acquired in a business combination in accordance with ASC 606, Revenue from Contracts with Customers. Considerations to determine the amount of contract assets and contract liabilities to record at the acquisition date include the terms of the acquired contract, such as timing of payment, identification of each performance obligation in the contract and allocation of the contract transaction price to each identified performance obligation on a relative standalone selling price basis as of contract inception. ASU 2021-08 is effective for the Company beginning in the first quarter of 2023. ASU 2021-08 should be applied prospectively for acquisitions occurring on or after the effective date of the amendments. Early adoption of the proposed amendments would be permitted, including adoption in an interim period. The Company does not anticipate this amendment to have a significant impact on the consolidated financial statements.
The Company does not believe other recently issued but not yet effective accounting standards, if currently adopted, would have a material effect on the consolidated financial position, statements of operations and cash flows.
3. | Significant Accounting Policies |
The following is a summary of significant accounting policies used in the preparation of these consolidated financial statements.
Reclassification
Certain amounts in the prior period financial statements have been reclassified to conform to the presentation of current period financial statements. These reclassifications had no effect on the previously reported net loss.
Significant reclassifications are as follows:
| 1. | the Company segregated out a portion of the loan receivable balance of $638,650 from the convertible loan amount of $1,250,000. |
| 2. | the Company’s long-term portion of the income tax liabilities in the amount of $966,992 was reclassified to long-term liabilities. |
Basis of presentation
These consolidated financial statements and related notes are presented in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and are expressed in U.S. dollars. The Company’s fiscal year end is 31 July.
Amounts receivable
Amounts receivable represents amounts owed from customers for sale of medical and recreational cannabis and sales tax recoverable. Amounts are presented net of the allowance for doubtful accounts, which represents the Company’s best estimate of the amount of probable credit losses in the existing accounts receivable balance. The Company determines the allowance for doubtful accounts based on historical experience and current economic conditions. The Company reviews the adequacy of its allowance for doubtful accounts on a quarterly basis. As of 31 July 2022 and 2021, the Company has no allowance for doubtful accounts.
Revenue recognition
The Company recognizes revenue from product sales when our customers obtain control of our products. This determination is based on the customer specific terms of the arrangement for wholesale operations. Upon transfer of control, the Company has no further performance obligations. All retail sales are considered Cash on Delivery.
Due to the nature of the Company’s revenue from contracts with customers, the Company does not have material contract assets or liabilities that fall under the scope of ASC 606.
The Company’s revenues accounted for under ASC 606, generally, do not require significant estimates or judgments based on the nature of the Company’s revenue streams. The sales prices are generally fixed and all consideration from contracts is included in the transaction price. The Company’s contracts do not include multiple performance obligations or material variable consideration.
See Note 17 for revenue disaggregation table.
Inventory and cost of goods sold
Inventory consists of work in progress (live plants and plants in the drying process), finished goods, and consumables. The Company values its finished goods and consumables at the lower of the actual costs or its current estimated market value less costs to sell. The Company values its work in progress at cost using the average cost method.
Costs incurred during the growing and production process are capitalized as incurred to the extent that cost is less than net realizable value. These costs include materials, labor and manufacturing overhead used in the growing and production processes. The Company capitalizes pre-harvest costs.
The Company periodically reviews its inventory for obsolete and potentially impaired items. Any identified slow moving and obsolete items are written down to its net realizable value through a charge to cost of goods sold. As of 31 July 2022 and 2021, the Company has no allowance for inventory obsolescence.
Cost of goods sold includes the costs directly attributable to product sales and includes amounts paid for finished goods, such as flower, edibles and concentrates, packaging and other supplies, fees for services and processing, and allocated overhead, such as allocations of rent, administrative salaries, utilities and related costs.
Loans receivable
The Company carries its loans receivable at cost and are reviewed for indicators of impairment at least annually.
Property and equipment
Property and equipment are recorded at cost and are amortized over their estimated useful lives on a straight-line basis as follows:
Office equipment | | 7 years |
Cultivation equipment | | 7 years |
Production equipment | | 7 years |
Kitchen equipment | | 7 years |
Vehicles | | 7 years |
Vault equipment | | 7 years |
Leasehold improvements | | shorter of useful life or the term of the lease |
Intangible Assets
Intangible assets acquired from third parties are measured initially at fair value and either classified as indefinite life or finite life depending on their characteristics. Intangible assets with indefinite lives are tested for impairment at least annually and intangible assets with finite lives are reviewed for indicators of impairment at least annually. The Company’s brands and licenses acquired from NMG have indefinite lives; therefore no amortization is recognized. The Company’s brands and licenses acquired by NMG SD have a finite life of 10 years, brands and licenses acquired by NMG LB and NMG OH 1 have a finite life of 10 years, customer relationships acquired by NMG OH 1 have a finite life of five years, licenses acquired by Canopy have a finite life of 10 years and are amortized over these estimated useful lives on a straight-line basis. For the year ended 31 July 2022, the Company recorded an impairment loss of $7,967,000 (2021 - $Nil) related to its brands and licenses acquired from NMG.
Goodwill
Goodwill represents the excess of the aggregate purchase price paid over the fair value of the net assets acquired in our business combinations. Goodwill is not amortized and is tested for impairment at least annually or whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Events or changes in circumstances that could trigger an impairment review include a significant adverse change in business climate, an adverse action or assessment by a regulator, unanticipated competition, a loss of key personnel, significant changes in the manner of our use of the acquired assets or the strategy for our overall business, significant negative industry or economic trends, or significant underperformance relative to expected historical or projected future results of operations. The Company has the option to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying value, including goodwill. If, after assessing the totality of events or circumstances, the Company determines that it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, additional impairment testing is not required. The Company tests for goodwill impairment annually as of 31 July.
Impairment of long-lived assets
The Company reviews long-lived assets, including property and equipment and definite life intangible assets for impairment whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. 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.
Income taxes
Deferred income taxes are reported for timing differences between items of income or expense reported in the consolidated financial statements and those reported for income tax purposes in accordance with ASC 740, “Income Taxes”, which requires the use of the asset/liability method of accounting for income taxes. Deferred income taxes and tax benefits are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of assets and liabilities and their respective tax bases, and for tax losses and credit carry-forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The Company provides for deferred taxes for the estimated future tax effects attributable to temporary differences and carry-forwards when realization is more likely than not.
The Company recognizes uncertain income tax positions at the largest amount that is more-likely-than-not to be sustained upon examination by the relevant taxing authority. An uncertain income tax position will be recognized if it has less than a 50% likelihood of being sustained. Recognition or measurement is reflected in the period in which the likelihood changes. Any interest and penalties related to unrecognized tax liabilities are presented within income tax expense in the consolidated statements of operations and comprehensive income.
Basic and diluted net income (loss) per share
The Company computes net income (loss) per share in accordance with ASC 260, “Earnings per Share”. ASC 260 requires presentation of both basic and diluted earnings per share (“EPS”) on the face of the income statement. Basic EPS is computed by dividing net income (loss) available to common shareholders (numerator) by the weighted average number of shares outstanding (denominator) during the period. Diluted EPS gives effect to all dilutive potential common shares outstanding during the period using the treasury stock method using the if-converted method. In computing diluted EPS, the average stock price for the period is used in determining the number of shares assumed to be purchased from the exercise of stock options or warrants. Diluted EPS excluded all dilutive potential shares if their effect is anti-dilutive. Potentially dilutive options of 9,453,000 and warrants of 18,215,284 existed at 31 July 2022. This figure does not include 3,200,000 warrants issued to the Agent pursuant to the Loan Agreement, which warrants are held in escrow by us and are to be released to the Agent if we draw on the Delayed Draw Term Loan by March 31, 2023 or cancelled if we do not draw on the Delayed Draw Term Loan. Each warrant, if released to the Agent, will entitle the holder to acquire one share of common stock at an exercise price of US$0.45 per share until 19 July 2025.
Comprehensive loss
ASC 220, “Comprehensive Income”, establishes standards for the reporting and display of comprehensive income/loss and its components in the consolidated financial statements. As of 31 July 2022 and 2021, the Company reported foreign currency translation adjustments as other comprehensive income or loss and included a schedule of comprehensive income/loss in the consolidated financial statements.
Foreign currency translation
The Company’s functional currency is the Canadian dollar and its reporting currency is in U.S. dollars. The Company’s subsidiaries have a functional currency in U.S. dollars. The consolidated financial statements of the Company are translated to U.S. dollars in accordance with ASC 830, “Foreign Currency Matters”. Exchange gains and losses on inter-company balances that form part of the net investment in foreign operations are included in other comprehensive income. Monetary assets and liabilities denominated in foreign currencies are translated using the exchange rate prevailing at the balance sheet date. The exchange rates used to translate Canadian dollar to U.S. dollar was 0.7798 for monetary assets and liabilities and 0.7881 as an average rate for transactions occurred during the year ended 31 July 2022. Gains and losses arising on translation or settlement of foreign currency denominated transactions or balances are included in the determination of net loss.
Stock-based compensation
The Company estimates the fair value of each stock option award at the grant date by using the Black-Scholes Option Pricing Model. The fair value determined represents the cost for the award and is recognized over the required service period, generally defined as the vesting period. The Company’s accounting policy is to recognize forfeitures as they occur.
Fair value measurements
The Company accounts for certain assets and liabilities at fair value. The hierarchy below lists three levels of fair value based on the extent to which inputs used in measuring fair value are observable in the market. We categorize each of our fair value measurements in one of these three levels based on the lowest level input that is significant to the fair value measurement in its entirety. These levels are:
| · | Level 1 – inputs are based upon unadjusted quoted prices for identical instruments in active markets. |
| | |
| · | Level 2 – inputs are based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques (e.g. the Black-Scholes model) for which all significant inputs are observable in the market or can be corroborated by observable market data for substantially the full term of the assets or liabilities. Where applicable, these models project future cash flows and discount the future amounts to a present value using market-based observable inputs including interest rate curves, credit spreads, foreign exchange rates, and forward and spot prices for currencies. |
| | |
| · | Level 3 – inputs are generally unobservable and typically reflect management’s estimates of assumptions that market participants would use in pricing the asset or liability. The fair values are therefore determined using model-based techniques, including option pricing models and discounted cash flow models. Our Level 3 assets and liabilities include investments in other private entities, and goodwill and intangible assets, when they are recorded at fair value due to an impairment charge. Unobservable inputs used in the models are significant to the fair values of the assets and liabilities. |
The Company measures equity investments without readily determinable fair values on a nonrecurring basis. The fair values of these investments are determined based on valuation techniques using the best information available, and may include quoted market prices, market comparables, and discounted cash flow projections.
The Company’s convertible note receivable was measured at fair value using Level 3 inputs.
Other current financial assets and current financial liabilities have fair values that approximate their carrying values.
Use of estimates and assumptions
The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenditures during the reporting period. Actual results could differ from these estimates.
Lease accounting
Under ASC 842, leases are separated into two classifications: operating leases and financial leases. Lease classification under ASC 842 is relatively similar to ASC 840. For a lease to be classified as a finance lease, it must meet one of the five finance lease criteria: (1) transference of title/ownership to the lessee, (2) purchase option, (3) lease term for major part of the remaining economic life of the asset, (4) present value represents substantially all of the fair value of the asset, and (5) asset specialization. Any lease that does not meet these criteria is classified as an operating lease. ASC 842 requires all leases to be recognized on the Company’s balance sheet. Specifically, for operating leases, the Company recognize a right-of-use asset and a corresponding lease liability upon lease commitment.
Non-controlling Interest
Non-controlling interests (“NCI”) represent equity interests owned by outside parties. NCI may be initially measured at fair value or at the NCI’s proportionate share of the recognized amounts of the acquiree's identifiable net assets. The choice of measurement is made on a transaction-by-transaction basis. The Company has elected to measure each NCI at its proportionate share of the recognized amounts of the acquiree’s identifiable net assets. The share of net assets attributable to NCI are presented as a component of equity. NCI's share of net income or loss is recognized directly in equity. Total income or loss of subsidiaries is attributed to the shareholders of the Company and to the NCI, even if this results in the NCI having a deficit balance.
The following table represents the Company’s assets that are measured at fair value as of 31 July 2022 and 2021:
| | As of 31 July 2022 | | | As of 31 July 2021 | |
Financial assets at fair value | | | | | | |
Cash | | $ | 1,854,277 | | | $ | 7,374,194 | |
Convertible loan receivable | | | 1,250,000 | | | | 1,250,000 | |
| | | | | | | | |
Total financial assets at fair value | | $ | 3,104,277 | | | $ | 8,624,194 | |
Management of financial risks
The financial risk arising from the Company’s operations include credit risk, liquidity risk, interest rate risk and currency risk. These risks arise from the normal course of operations and all transactions undertaken are to support the Company’s ability to continue as a going concern. The risks associated with these financial instruments and the policies on how to mitigate these risks are set out below. Management manages and monitors these exposures to ensure appropriate measures are implemented on a timely and effective manner.
Credit risk
Credit risk is the risk that one party to a financial instrument will fail to discharge an obligation and cause the other party to incur a financial loss. The Company reduces its exposure to credit risk by maintaining its cash with major financial institutions. Credit risk associated with the convertible loans receivable arises from the possibility that the principal and/or interest due may become uncollectible. The Company mitigates this risk by managing and monitoring the underlying business relationship.
Liquidity risk
Liquidity risk is the risk that the Company will not be able to meet its financial obligations as they fall due. The Company ensures, as far as reasonably possible, that it will have sufficient capital in order to meet short-term business requirements, after taking into account cash flows from operations and the Company’s holdings of cash. The Company had working capital of $1,380,421 at 31 July 2022 and the Company required additional financing to meet all current and future financial obligations which caused substantial doubt about its ability to continue as a going concern. Subsequent to year-end, the Company alleviated the factor that caused substantial doubt by securing long term debt. The Company anticipates that cash on hand and working capital will ensure coverage for all expenses associated with current operations for at least the next 12 months from the issuance of these financial statements. Management believes that the Company has access to capital resources through potential public or private issuances of debt or equity securities to further contribute to the growth.
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. The Company is not exposed to interest rate risk as it does not hold financial instruments that will fluctuate in value due to changes in interest rates.
Currency risk
Currency risk is the risk that the fair values of future cash flows of a financial instrument will fluctuate because they are denominated in currencies that differ from the respective functional currency. The Company is exposed to currency risk by incurring expenditures and holding assets denominated in currencies other than its functional currency.
| | 31 July 2022 | | | 31 July 2021 | |
| | | | | | |
Work in progress | | $ | 610,030 | | | $ | 503,215 | |
Finished goods | | | 1,961,244 | | | | 1,547,493 | |
Consumables | | | 1,308,726 | | | | 885,448 | |
| | | | | | | | |
Total | | $ | 3,880,000 | | | $ | 2,936,156 | |
During the year ended 31 July 2022 and 2021, overhead expenses of approximately $3,678,312 and $739,605, respectively, were included in inventory.
6. | Convertible loan receivable |
Effective March 15, 2019, the Company, through its wholly owned subsidiaries, DEP Nevada and NMG, entered into a convertible loan agreement and a management agreement with Comprehensive Care Group LLC (“CCG”), an Arkansas limited liability company, with respect to the development of a medical cannabis dispensary facility in West Memphis, Arkansas. The convertible loan agreement can be extended by either party and the current agreement has a maturity date of 30 March 2023. Under no circumstances the maturity date of the convertible loan agreement shall extend beyond the expiration of the management agreement as described below.
Pursuant to the management agreement, NMG will provide operations and management services, including management, staffing, operations, administration, oversight, and other related services. Under the management agreement, NMG will be required to obtain approval from CCG for any key decisions as defined in the agreement and accordingly the Company does not control CCG. NMG will be paid a monthly management fee equal to 66.67% of the monthly net profits of CCG, subject to conversion of the convertible loan as discussed below upon which the monthly management fee shall be $6,000 per month, unless otherwise agreed by the parties in writing. The management agreement has an expiration of 15 March 2024 and can be mutually extendable.
The convertible loan agreement is for an amount up to $1,250,000 from DEP to CCG with proceeds to be used to fund construction of a facility, working capital and initial operating expenses. The loan bears interest at a fixed rate of $6,000 per month until the parties mutually agree to increase the interest. Upon the latter of one year of granting of a medical cannabis dispensary license by the appropriate authorities or one year after entering into the convertible loan agreement, DEP may elect to convert the loan into preferred units of CCG equal to 40% of all outstanding units of CCG, subject to approval of the Arkansas Medical Marijuana Commission.
The Company evaluated the convertible loan receivable’s settlement provisions and elected the fair value option in accordance with ASC 825 “Financial Instruments”, to value this instrument as management deems fair value to be more relevant than historical cost. Under such election, the loan receivable is measured initially and subsequently at fair value, with any changes in the fair value of the instrument being recorded in the consolidated financial statements as a change in fair value of the financial instruments. The Company estimates the fair value of this instrument by first estimating the fair value of the straight debt portion, excluding the embedded conversion option, using a discounted cash flow model. The Company then estimates the fair value of the embedded conversion option using the Black-Scholes Option Pricing Model. The sum of these two valuations is the fair value of the loan receivable balance of $1,250,000. At 31 July 2022, the Company had advanced $1,250,000 (2021 - $1,250,000) and accrued interest income of $72,000 (2021 - $72,000) for the year ended 31 July 2022. As of 31 July 2022, total interest receivable was $222,000 (2021 - $150,000).
The assumptions used in the Black-Scholes Option Pricing Model are as follows: (i) equity price of $28,571 calculated as BAM’s portion of the future projected profits, on a per unit basis, discounted using Weighted Average Cost of Capital of 27.5%; (ii) exercise price of $31,250 per unit as there are 40 units in total, (iii) volatility of 90% using BAM as benchmark, and (iv) risk-free rate of 2.92%.
During the year ended 31 July 2022, the Company advanced $1,234,168 (2021 - $1,207,375) to CCG and received repayments totaling $843,000 (2021 - $848,821) for a net increase in loan receivable of $391,168 (2021 - $358,554). At 31 July 2022, the amount receivable from CCG was $789,984 (2021 - $398,816).
The loan receivable at 31 July 2021 in the amount of $239,834 acquired from NMG LB (Note 11) is due from an arm’s length party that is unsecured, non-interest bearing and due on demand. During the year ended 31 July 2022, the Company recorded an impairment loss of $239,834 related to this loan to a carry value of $Nil at 31 July 2022 (2021 - $239,834).
8. | Loan receivable from NMG Ohio LLC |
On 7 June 2018, the Company acquired a 30% interest in NMG Ohio, which had a cannabis dispensary and a provisional production license. On 31 January 2019, the Company entered into a definitive agreement (“Definitive Agreement”) to acquire 100% ownership of NMG Ohio, or the remaining 70% interest for total cash payments of $1,575,000 and issuance of 3,173,864 common shares of the Company.
On 17 September 2021, the Company closed the acquisition of the remaining 70% interest in NMG Ohio. The transaction included the transfer of a dispensary license for the Clubhouse Dispensary in Elyria, Ohio to our wholly owned subsidiary, NMG OH 1, which became effective on 4 September 2020 (see Acquisition of the Clubhouse Dispensary in Note 11). The transaction also included the final award of a production license which has now been transferred to our wholly owned subsidiary, NMG OH P1. As a result of the closing of this acquisition, the Company now directly owns 100% of NMG Ohio. The following table is a representation of amounts advanced, the majority of which is property and equipment, which has been reclassified as assets.
| | 31 July 2022 | | | 31 July 2021 | |
Loan receivable (payable) to NMG Ohio | | | | | | |
Opening balance | | $ | 891,279 | | | $ | (466,495 | ) |
Advances provided to NMG Ohio | | | 64,598 | | | | 1,120,015 | |
Foreign exchange | | | - | | | | 4,671 | |
Transferred to NMG OH 1 and reclassified to respective net assets acquired | | | (955,877 | ) | | | 233,088 | |
| | | | | | | | |
Loan receivable (payable) to NMG Ohio | | $ | - | | | $ | 891,279 | |
9. | Investment in and advances to GLDH |
On 3 July 2019, the Company entered into the following agreements with GLDH and other third parties:
| 1. | a definitive asset purchase agreement (the “Purchase Agreement”) between the Company’s wholly owned subsidiary, NMG LB, GLDH and Airport Collective, Inc. to acquire 100% ownership interest in GLDH’s Long Beach, California dispensary. The Purchase Agreement was executed under the following terms: |
| | |
| | The purchase price is USD$6,700,000 (the “Purchase Price”). The consideration under the Purchase Agreement includes the following on closing: |
| i. | The USD$5,200,000 Note and accrued interest; and |
| | |
| ii. | USD$1,500,000 to be paid in common shares of the Company at a price of CAD$0.7439 per common share to a maximum of 2,681,006 common shares (the “Share Payment”) (issued) (Note 16) upon NMG LB receiving the transfer of all licenses, permits and BCC authorizations for NMG LB to conduct medical and adult-use commercial cannabis retail operations. The Share Payment is subject to reduction equal to the net liability of GLDH and Airport Collective. The Share Payment reduction is pending and, as a result, the related shares have not been released from escrow. |
| 2. | a settlement agreement (“NMG SD Settlement Agreement”) between the Company and its subsidiaries, and GLDH and its subsidiaries, to acquire a 60% ownership interest in GLDH’s San Diego, California dispensary. The NMG SD Settlement Agreement’s consideration includes the following on closing: |
| i. | USD$500,000 to be paid in common shares (624,380 common shares issued) (Note 16) to SGSD at a share price equal to the maximum allowable discount pursuant to Canadian Securities Exchange policies, upon execution of the settlement agreement; |
| | |
| ii. | USD$750,000 to be paid in common shares (issued) (Note 16) to Barakett at a price of CAD$0.7439 per common share to a maximum of 1,340,502 Common Shares (the “DB Share Payment”) upon NMG SD receiving all licenses, permits and authorizations for NMG SD to conduct medical commercial cannabis retail operations; and |
| | |
| iii. | USD$750,000 to be paid in common shares (issued) (Note 16) to Barakett at a price of CAD$0.7439 per common share to a maximum of 1,340,502 common shares (the “DB Additional Shares Payment”) upon NMG SD receiving all licenses, permits and authorizations for NMG SD to conduct adult-use commercial cannabis retail operations. |
| 3. | a lease assignment (the “Lease Assignment Agreement”) on the San Diego operation between the Company’s 60%-owned subsidiary, NMG SD, Green Road, LLC, Show Grow San Diego, LLC (“SGSD”), and SJJR LLC. The Lease Assignment Agreement was executed under the following terms: |
| i. | USD$700,000, payable in common shares (1,031,725 common shares issued) (Note 16) at a share price equal to the maximum allowable discount pursuant to Canadian Securities Exchange policies, upon execution of the assignment agreement; |
| | |
| ii. | USD$783,765, payable in cash (paid), within 5 business days following execution of the assignment agreement (paid); and |
| iii. | USD$750,000, payable in cash (paid), including interest at 5% per annum, upon receipt of the San Diego Conditional Use Permit allowing adult-use commercial cannabis retail operations. |
In April 2020, the Company fulfilled all obligations under the NMG SD Settlement Agreement and the Lease Assignment Agreement and completed the acquisition of a 60% owned dispensary located in San Diego (the “SD Transaction”). The SD Transaction was accounted for as an asset acquisition. The Company acquired the rights to an existing lease that was zoned for use as a cannabis dispensary.
The Company owns the dispensary through a 60% owned subsidiary, NMG SD. The Company consolidated 100% of the assets, liabilities and the operations of NMG SD with 40% disclosed as a non-controlling interest.
Additionally:
| 1. | The Company is to provide a loan to GLDH in the amount of USD$200,000 at an interest rate of 12% per annum, accrued and compounded quarterly and due within 3 years (provided); |
| | |
| 2. | The Company is to enter into a consulting agreement with Barakett through NMG LB to provide certain consulting and advisory services to NMG LB, agreeing to pay Barakett a total of USD$200,000 ($50,000 paid in fiscal 2019 and additional $150,000 paid during the year ended 31 July 2020); |
| | |
| 3. | The Company will forgive approximately USD$800,000 for prior operating loans advanced by the Company to GLDH; and; |
| | |
| 4. | The Company licenses certain intellectual property from Green Light District Management, LLC and GLDH (collectively referred to as “Licensor”). The Licensor grants the Company a perpetual license to utilize its operational intellectual property consisting of customer data, sales data, customer outreach strategies standard operating procedures, and other proprietary operational intellectual property. Licensor grants the Company a license for 2 years to utilize intellectual property such as trademarks and branding (the “Branding IP”). As consideration for the licenses, the Company has agreed to utilize the Branding IP until 19 June 2021 at the Company’s premises and at the San Diego retail locations for a period of 2 years from operations commencing at that location. Additionally, the Company agreed to pay the Licensor 3% of gross receipts from sales at the Long Beach dispensary. |
The Company’s total investment in GLDH was as follows:
Note receivable | | $ | 8,910,854 | |
Interest income accrued on the Note | | | 88,143 | |
Advances for working capital | | | 3,030 | |
Expensed during the year | | | (188,879 | ) |
Foreign exchange | | | 99,585 | |
| | | | |
Balance – 31 July 2020 | | | 8,912,733 | |
| | | | |
Impairment loss | | | (534,165 | ) |
Acquisition of ShowGrow Long Beach dispensary (Note 11) – 28 August 2020 | | | (8,378,568 | ) |
Balance – 31 July 2021 | | | - | |
10. | Property and Equipment |
| | Office Equipment | | | Cultivation Equipment | | | Production Equipment | | | Kitchen Equipment | | | Vehicles | | | Vault Equipment | | | Leasehold Improvements | | | Total | |
Cost: | | | | | | | | | | | | | | | | | | | | | | | | |
Balance, 31 July 2021 | | $ | 401,571 | | | $ | 466,110 | | | $ | 570,702 | | | $ | 51,108 | | | $ | 38,717 | | | $ | 10,335 | | | $ | 5,055,799 | | | $ | 6,594,342 | |
Additions (disposals) | | | 237,416 | | | | - | | | | 10,633 | | | | 11,994 | | | | - | | | | - | | | | 1,454,392 | | | | 1,714,435 | |
Balance, 31 July 2022 | | | 638,987 | | | | 466,110 | | | | 581,335 | | | | 63,102 | | | | 38,717 | | | | 10,335 | | | | 6,510,191 | | | | 8,308,777 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Accumulated Depreciation: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Balance, 31 July 2021 | | | 49,765 | | | | 250,544 | | | | 210,166 | | | | 21,722 | | | | 24,328 | | | | 1,790 | | | | 1,142,237 | | | | 1,700,552 | |
Depreciation | | | 73,826 | | | | 68,312 | | | | 80,563 | | | | 8,158 | | | | 5,531 | | | | 1,476 | | | | 729,825 | | | | 967,691 | |
Balance, 31 July 2022 | | | 123,591 | | | | 318,856 | | | | 290,729 | | | | 29,880 | | | | 29,859 | | | | 3,266 | | | | 1,872,062 | | | | 2,668,243 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Net Book Value: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
At 31 July 2021 | | | 351,806 | | | | 215,566 | | | | 360,536 | | | | 29,386 | | | | 14,389 | | | | 8,545 | | | | 3,913,562 | | | | 4,893,790 | |
At 31 July 2022 | | $ | 515,396 | | | $ | 147,254 | | | $ | 290,606 | | | $ | 33,222 | | | $ | 8,858 | | | $ | 7,069 | | | $ | 4,638,129 | | | $ | 5,640,534 | |
For the year ended 31 July 2022, a total depreciation of $223,764 (2021 - $765,857) was included in General and Administrative Expenses and a total depreciation of $745,393 (2021 - $453,884) was included in Cost of Sales.
The Clubhouse dispensary
The acquisition of The Clubhouse dispensary allows the Company to expand into the State of Ohio. On 4 September 2020, NMG OH 1 received all approvals and final license and name transfer from the Ohio Department of Pharmacy for Clubhouse dispensary located in Elyria, Ohio. The acquisition was accounted for as a business combination in accordance with ASC 805, Business Combinations. The following table summarizes the fair value of the assets acquired and the liabilities assumed, which were recorded as of the acquisition date, as well as the aggregate consideration for the acquisition of NMG OH 1 made by the Company:
Purchase consideration (Note 8) | | $ | 3,814,788 | |
| | | | |
Assets acquired: | | | | |
Cash | | | 257,462 | |
Amounts receivable | | | 510,367 | |
Prepaid expenses | | | 4,965 | |
Inventory | | | 178,898 | |
Property and equipment | | | 763,951 | |
Licenses and customer relationships | | | 2,710,000 | |
| | | | |
Liabilities assumed: | | | | |
Trade payable and accrued liabilities | | | (443,589 | ) |
| | | | |
Net assets acquired | | | 3,982,054 | |
Bargain purchase | | | (167,266 | ) |
TOTAL | | $ | 3,814,788 | |
ShowGrow Long Beach dispensary
The acquisition of ShowGrow Long Beach dispensary allows the Company to expand its presence in the California market. On 28 August 2020, NMG LB received all approvals and final license transfer for the ShowGrow Long Beach dispensary. The acquisition was accounted for as a business combination in accordance with ASC 805, Business Combinations. The following table summarizes the fair value of the assets acquired and the liabilities assumed, which were recorded as of the acquisition date, as well as the aggregate consideration for the acquisition of NMG LB made by the Company:
Purchase consideration (Note 9) | | $ | 8,378,568 | |
| | | | |
Assets acquired: | | | | |
Cash | | | 65,340 | |
Prepaid expenses | | | 15,264 | |
Inventory | | | 177,930 | |
Property and equipment | | | 5,402 | |
Loan receivable (Note 7) | | | 239,834 | |
Liabilities assumed: | | | | |
Trade payable and accrued liabilities | | | (732,262 | ) |
Income taxes payable | | | (423,931 | ) |
Loans payable (Note 14) | | | (12,190 | ) |
| | | | |
Net liabilities acquired | | | (664,613 | ) |
Brand and licenses | | | 6,510,000 | |
Goodwill | | | 2,533,181 | |
TOTAL | | $ | 8,378,568 | |
Canopy Monterey Bay, LLC
On 30 November 2021, the Company entered into two definitive agreements with Canopy Monterey Bay, LLC (“Canopy”) and the membership interest owners (the “Sellers”) of Canopy to acquire an aggregate of 100% of Canopy, which owns a retail dispensary in the limited license jurisdiction of Seaside, California, to expand our retail operations.
The first purchase agreement (“PA #1”) between DEP and Canopy and all of the Sellers provides for the assignment of 80% of the membership interests of Canopy to DEP in exchange for a purchase price of $4,800,000 comprised of $2,500,000 in cash (the “Cash Purchase Price”) and a secured promissory note in the amount of $2,300,000 bearing interest at a rate of 10% per annum compounded annually and having a maturity date of five years from the effective date of PA #1. Interest is payable for the first 6 months with the principal and accrued interest due at maturity. There are no prepayment penalties. The Cash Purchase Price is to be paid into escrow pursuant to an escrow agreement between the parties to PA #1 and Secured Trust Escrow, which Cash Purchase Price is to be released to the Sellers upon the receipt of city and state approval and completion of the audited annual financial statements (the “Financial Statements”) of Canopy, or returned to DEP in the event of the denial of city or state approval or failure to complete the Financial Statements and the agreement is terminated, in which case the 80% membership interests will be transferred back to the Sellers and the promissory note will automatically be terminated. As of the date hereof, the city and state approvals have been received and the formal closing of the purchase of the 80% of the membership interests in Canopy closed in June 2022.
The second purchase agreement (“PA #2”) between DEP and the one continuing Seller provides for the assignment of the remaining 20% of the membership interests of Canopy to DEP following the receipt of the city and state approval and completion of the Financial Statements under PA #1 in exchange for $1,000,000 to be paid in either shares of common stock of the Company (the “Consideration Shares”) or in cash at DEP’s sole option if such payment takes place within six (6) months following the execution of PA #1. If DEP elects to pay the purchase price in Consideration Shares, the amount of Consideration Shares shall be determined based on the 10 day volume weighted average price (“VWAP”) ending on 30 November 2021, which is US$0.3665 per share for a total of 2,728,156 shares (issued) (Note 16). In the event that six (6) months following the execution of PA #1, the value of the Consideration Shares have decreased such that total value of the Consideration Shares is less than ninety percent (90%) of its value, DEP agrees to cause the Company to issue an additional $100,000 worth of shares of common stock of the Company (the “Additional Shares”) to be issued to the one continuing Seller based on the ten day VWAP calculated as of six (6) months following the closing of PA #1. This was included as contingent consideration in the purchase price and $100,000 was recorded in accounts payable at 31 July 2022. PA #2 contains a working capital adjustment provision, which provides that if there is a working capital deficiency as of the closing date of PA #1, then the purchase price under PA #2 shall be reduced by the amount of the deficiency, and if there is a working capital surplus as of the closing date of PA #1, then the purchase price under PA #2 shall be increased by the amount of the surplus.
On or around 1 December 2021, 80% of the membership interests of Canopy were transferred to DEP for purposes of applying for city and state approvals of the change in ownership of Canopy, however, the purchase price consideration of (i) $2.5 million in cash, and (ii) a promissory note in the amount of $2.3 million to be paid by DEP, were placed in escrow and not to be released to the sellers of the 80% membership interests in Canopy until the city and state approvals have been received and the Financial Statements of Canopy are completed. If the city or state approvals are not received, or the Financial Statements of Canopy are not completed, then the Buyer may terminate the membership interest purchase agreement requiring the membership interests in Canopy to be transferred back to the sellers and the escrow agent to deliver back to DEP the cash consideration and the promissory note shall automatically be terminated. As of the date hereof, the city and state approvals have been received and the formal closing of the purchase of the 80% membership interests in Canopy closed in June 2022.
On 17 June 2022, the Company, through its wholly owned subsidiary, DEP Nevada, Inc., entered into the first amendment to PA #1 and PA #2 (the “First Amendment”) whereby the cash purchase price under PA #1 will be reduced from $2.5 million to $1.25 million and the Company will issue $1.25 million shares of common stock of the Company to the Sellers based on the 10 day volume weighted average price (“VWAP”) for the ten (10) consecutive trading days prior to the effective date of the First Amendment (the “Effective Date”) and subject to compliance with the policies of the Canadian Securities Exchange (the “CSE”), which equates to 9,328,358 shares of common stock. The Company will also issue additional shares to Cary Stiebel equal to the difference between the amount of the shares of common stock of the Company that were issued by the Company to Mr. Stiebel on December 3, 2021 (the “PA #2 Shares”) and the amount of shares that Mr. Stiebel would have received had the VWAP for the PA #2 Shares been calculated as of the Effective Date (the “Additional PA #2 Shares”) which equates to 4,734,530 shares of common stock. Additionally, on the date that is eighteen (18) months (548 days) following the Effective Date of this First Amendment (the “Additional Share Issuance Date”) the Company will issue $100,000 worth of shares to the Sellers based on the ten (10) day VWAP and subject to compliance with the policies of the CSE, calculated as of the Additional Share Issuance Date. This $100,000 was recorded as consulting fees for the year ended 31 July 2022. Furthermore, DEP shall cause the Company to issue to Mr. Stiebel $300,000 worth of shares of common stock of the Company within three (3) days following the Effective Date of this First Amendment, and subject to compliance with the policies of the CSE (the “Additional True up Shares”) which equates to 2,238,806 shares of common stock. Prior to the conclusion of the calculation of the actual working capital in accordance with PA #1 and PA #2, Sellers shall complete, execute and deliver to DEP Schedule D to the First Amendment, which shall set forth the amount of Additional True-up Shares each Seller is entitled to (as applicable) and such Additional True-up Shares shall be retitled in accordance with Schedule D to the First Amendment. In the event Schedule D to the First Amendment is not completed, executed and delivered to DEP prior to the conclusion of the calculation of the actual working capital, DEP shall have no obligation to retitle the shares and all Sellers hereby waive any claims against DEP and the Company in connection with such issuance made in accordance with Section 2(b)(v) of the First Amendment. Upon conclusion of the calculation of the actual working capital in accordance with PA #1 and PA #2, the parties agree as follows:
| (c) | If the actual working capital is less than the target working capital of $nil, the Purchase Price (as defined in PA #2) shall be reduced by an amount equal to the difference between the target working capital and the actual working capital and all of the Additional True-up Shares shall be forfeited and retuned to Company for cancellation; |
(b) If the actual working capital is greater than the target working capital of $nil and the Additional True-up Shares are sufficient to cover the difference between the actual working capital and the target working capital (the “DEP Deficit”), the parties agree that all or a portion of the Additional True-up Shares (valued at the ten (10) day VWAP calculated as of the Effective Date of the First Amendment and subject to compliance with the policies of the CSE) shall be issued to Sellers to satisfy the DEP Deficit owed by DEP to the Sellers in accordance with Section 2.02(b) of PA #2;
© If the actual working capital is greater than the target working capital and the Additional True-up Shares are insufficient to cover the DEP Deficit, all of the Additional True-up Shares shall be issued to Sellers and the parties agree that any additional amounts owed to the Sellers shall be paid by DEP to the Sellers via additional shares of common stock of the Company.
In addition to the terms of the First Amendment, the parties have agreed that the release of any Additional True-up Shares hereunder shall be subject to the Sellers providing written direction to DEP for the release of the Additional True-up Shares payable under the First Amendment.
The acquisition was accounted for as a business combination in accordance with ASC 805, Business Combinations. For accounting purposes, the acquisition date is the date that the Company obtained full control over the operations, although not all conditions for closing the acquisition had occurred as of 1 December 2021. The following table summarizes the fair value of the assets acquired and the liabilities assumed, which were recorded as of the acquisition date, as well as the aggregate consideration for the acquisition of Canopy made by the Company:
Purchase consideration | | | |
Cash | | | 1,250,000 | |
Promissory note | | | 2,300,000 | |
Shares of common stock (Note 16) | | | 2,189,544 | |
Contingent consideration | | | 100,000 | |
| | | 5,839,544 | |
Assets acquired: | | | | |
Cash | | | 378,503 | |
Prepaid expenses | | | 241,449 | |
Inventory | | | 630,039 | |
Liabilities assumed: | | | | |
Trade payable and accrued liabilities | | | (266,307 | ) |
Income taxes payable | | | (1,229,213 | ) |
| | | | |
Net liabilities acquired | | | (245,529 | ) |
Brand and licenses | | | 1,240,000 | |
Goodwill | | | 4,845,073 | |
TOTAL | | $ | 5,839,544 | |
During the year ended 31 July 2022, the Company also recorded a loss on settlement of contingent consideration of $503,179 resulting from the fair value adjustment of the Company’s shares of common stock that have not been issued at 31 July 2022 and also recorded a consulting fee of $100,000 to be paid to the sellers in shares that was not included in the purchase consideration.
Pro Forma
The following table summarizes the results of operations of Canopy since the acquisition dates included in the Company’s consolidated results of operations for the year ended 31 July 2022:
| | Canopy | |
Revenue | | $ | 4,793,369 | |
Net income | | $ | 313,128 | |
The following table summarizes our consolidated results of operations for the years ended 31 July 2022 and 2021 as though the acquisitions of The Clubhouse Dispensary, Showgrow LB and Canopy had occurred on 1 August 2020.
| | Year ended 31 July 2022 | |
| | As Reported | | | Pro Forma (unaudited) | |
Revenue | | | 31,638,163 | | | 34,927,334 | |
Net loss | | | (28,228,104 | ) | | (28,212,341 | ) |
| | Year ended 31 July 2021 | |
| | As Reported | | | Pro Forma (unaudited) | |
Revenue | | | 26,900,869 | | | 37,718,572 | |
Net income | | | (1,976,461 | ) | | (1,127,012 | ) |
The unaudited pro forma information set forth above is for informational purposes only and include all adjustments necessary for the fair presentation, in all material respects, of the Company’s combined operations including the Clubhouse Dispensary, Showgrow LB and Canopy as if the business combinations occurred on 1 August 2020. No adjustments have been made to reflect potential cost savings that may occur subsequent to completion of the transactions. The unaudited pro forma financial information is not intended to reflect the results of operations of the Company which would have actually resulted had the proposed transaction been effected on the date indicated above. Further, the unaudited pro forma financial information is not necessarily indicative of the results of operations that may be obtained in the future. The actual pro forma adjustments will depend on a number of factors, and could result in a change to the unaudited pro forma financial information.
12. | Goodwill and Intangible Assets, Net |
The following table displays the changes in the gross carrying amount of goodwill:
Balance at 31 July 2021 | | $ | 5,168,902 | |
Increase due to acquisitions – Canopy | | | 4,845,073 | |
Impairment | | | (10,013,975 | ) |
Balance at 31 July 2022 | | $ | - | |
During the year ended 31 July 2022, the Company recorded an impairment loss of $10,013,975 related to the goodwill acquired previously. The Company’s two reporting units are wholesale and retail. Impairment of $2,635,721 was recorded for the wholesale reporting unit’s goodwill to a carrying amount of $Nil. Impairment of $7,378,254 was recorded for the retail reporting unit’s goodwill to a carrying amount of $Nil.
Intangible assets consisted of the following:
| | | | | | | | As of 31 July 2022 | |
| | Gross carrying amount | | | Weighted average life (years) | | | Accumulated amortization | | | Net carrying amount | |
Intangible assets: | | | | | | | | | | | | |
Brand | | $ | 425,000 | | | | - | | | $ | - | | | $ | 425,000 | |
Licenses | | | 13,813,508 | | | | 10.0 | | | | (2,432,938 | ) | | | 11,380,570 | |
Customer relationships | | | 90,000 | | | | 5.0 | | | | (34,255 | ) | | | 55,745 | |
| | | | | | | | | | | | | | | | |
Total intangible assets | | $ | 14,328,508 | | | | | | | $ | (2,467,193 | ) | | $ | 11,861,315 | |
| | | | | | | | As of 31 July 2021 | |
| | Gross carrying amount | | | Weighted average life (years) | | | Accumulated amortization | | | Net carrying amount | |
Intangible assets: | | | | | | | | | | | | |
Brand | | $ | 247,000 | | | | - | | | $ | - | | | $ | 247,000 | |
Licenses | | | 20,718,508 | | | | 10.0 | | | | (1,184,175 | ) | | | 19,534,333 | |
Customer relationships | | | 90,000 | | | | 5.0 | | | | (16,265 | ) | | | 73,735 | |
| | | | | | | | | | | | | | | | |
Total intangible assets | | $ | 21,055,508 | | | | | | | $ | (1,200,440 | ) | | $ | 19,855,068 | |
During the year ended 31 July 2022, the Company recorded an impairment loss of $42,000 and $7,925,000 related to NMG’s brand and licenses, respectively.
Amortization expense for intangible assets was $266,753 and $1,122,145 for the years ended 31 July 2022 and 2021, respectively.
The expected amortization of the intangible assets, as of 31 July 2022, for each of the next five years and thereafter is as follows:
2023 | | $ | 1,301,106 | |
2024 | | | 1,304,671 | |
2025 | | | 1,301,106 | |
2026 | | | 1,284,841 | |
2027 | | | 1,283,116 | |
Thereafter | | | 4,961,475 | |
| | $ | 11,436,315 | |
13. | Related Party Balances and Transactions |
In addition to those disclosed elsewhere in these consolidated financial statements, related party transactions paid/accrued for the years ended 31 July 2022 and 2021 are as follows:
| | For the year ended 31 July 2022 | | | For the year ended 31 July 2021 | |
A company controlled by the President, Chief Executive Officer and a director Management fees | | $ | 284,533 | | | $ | 159,657 | |
A company controlled by the Chief Financial Officer and a director Management fees | | | 134,693 | | | | 109,487 | |
A company controlled by a former director and former President of NMG Management fees | | | - | | | | 65,000 | |
A company controlled by the Corporate Secretary Management fees | | | 87,748 | | | | 70,990 | |
| | $ | 506,974 | | | $ | 405,134 | |
Amounts owing to related parties at 31 July 2022 and 2021 are as follows:
| a) | As of 31 July 2022, the Company owed $102,480 (2021 - $26,841) to the Chief Executive Officer of the Company and a company controlled by him. |
| | |
| b) | As of 31 July 2022, the Company owed $31,704 (2021 - $Nil) to the Chief Operating Officer. |
| | |
| c) | As of 31 July 2022, the Company owed $10,780 (2021 - $18,914) to the Chief Financial Officer of the Company and a company controlled by him. |
| | |
| d) | As of 31 July 2022, the Company owed $18,898 (2021 - $6,319) to the Corporate Secretary of the Company and a company controlled by him. |
The above amounts owing to related parties are unsecured, non-interest bearing and are due on demand.
On 19 July 2021, the Company entered into and closed a loan agreement (the “Loan Agreement”) with FG Agency Lending LLC (the “Agent”) and Bomind Holdings LLC (the “Lender”). Upon entering into the Loan Agreement, the Lender provided the initial term loan (the “Initial Term Loan”) in the face amount of $6,666,667 of which $6,000,000 was advanced to the Company with the 10% representing an origination discount as consideration for the use or forbearance of money. The Company may draw upon the remaining face amount of $4,444,444 (the “Delayed Draw Term Loan”) upon providing a 30-day request to the Agent by 1 December 2021, whereby $4,000,000 will be advanced to the Company after applying the 10% origination discount. The Initial Term Loan and the Delayed Draw Term Loan mature on 19 July 2025 and bear interest at a rate of 13% per annum payable on the first day of each month hereafter.
Pursuant to the Loan Agreement, the Company issued an aggregate of 8,000,000 common stock purchase warrants (each, a “Warrant”) to the Agent of which (i) 4,800,000 Warrants will entitle the holder to acquire shares of common stock (each, a “Warrant Share”) at an exercise price of $0.40 per Warrant Share until July 19, 2025, and (ii) 3,200,000 Warrants will be held in escrow by us and released to the Agent at the time the Company draws on the Delayed Draw Term Loan, or cancelled if we do not draw on the Delayed Draw Term Loan, which will entitle the holder to acquire a Warrant Share at an exercise price of $0.45 per Warrant Share until July 19, 2025.
The 4,800,000 Warrants were valued at $1,037,146 using the Black Scholes Option Pricing Model using the following assumptions:
Expected life of the options | | 4.00 years | |
Expected volatility | | | 139 | % |
Expected dividend yield | | | 0 | % |
Risk-free interest rate | | | 0.55 | % |
The Company also paid agent fee, legal fees and other fees in the amount of $175,758.
The Initial Term Loan is secured by certain of the Company’s assets, equity interest in subsidiaries and various agreements, under the Security Agreement, the Pledge Agreement and the Omnibus Collateral Assignment.
On 15 June 2022, the Company entered into a second amendment to the Loan Agreement (“Amendment No. 2 to Loan Agreement”) (Note 14) to extend the maturity date by one year to 19 July 2026. Additionally, Amendment No. 2 to Loan Agreement allows the outside date for the Company to draw on the delayed draw term loan of US$4.44 million to be extended from June 1, 2022 to March 31, 2023, whereby US$4 million in funds will be advanced to the Company. The ability of the Company to draw on the delayed draw term loan is subject to compliance with certain provisions in Loan Agreement including provision of a satisfactory budget approved at the sole discretion of the Lender. The Amendment No. 2 to Loan Agreement increases the interest rate on the advanced funds from 13% to 15% per annum, which additional 2% interest may be paid in kind, with the interest being payable on the first day of each month. Amendment No. 2 to Loan Agreement provides for an exit fee equal to 1.5% of the principal balance, which is due and payable upon any payment, in part or in full, of the initial term loan and the delayed draw term loan. As partial consideration for Amendment No. 2 to Loan Agreement, the Company has issued 1,000,000 common stock purchase warrants (each, a “Warrant”) to the Lender. Each Warrant entitles the holder to acquire one share of common stock (each, a “Warrant Share”) at an exercise price of US$0.16 per Warrant Share until June 14, 2027.
The Amendment No. 2 to Loan Agreement was accounted for as a modification consistent with ASC 470-50, Debt Modification, where the lender fees, including 1,000,000 additional common stock purchase warrants and the exit fee of $100,000, are capitalized and amortized as par to the effective yield. The fair value of the 1,000,000 Warrants were valued at $79,585 using the Black Scholes Option Pricing Model using the following assumptions:
Expected life of the options | | 2.50 years | |
Expected volatility | | | 102 | % |
Expected dividend yield | | | 0 | % |
Risk-free interest rate | | | 3.39 | % |
During the year ended 31 July 2022, the Company recorded $474,350 related to the amortization of debt discount and $893,901 related to the interest expense. As of 31 July 2022, the remaining debt discount was $1,573,031.
Long Beach loan
The loan payable at 31 July 2022 in the amount of $12,535 assumed from NMG LB (Note 11) is unsecured, non-interest bearing and has no set terms of repayment.
Canopy loan
On 30 November 2021, the Company completed PA #1 related to the Company’s acquisition of initial 80% interest in Canopy (Note 11). In connection with PA #1, DEP entered into secured promissory note (the “Promissory Note”) promising to pay $2,300,000 to the Sellers bearing interest at a rate of 10% per annum compounded annually and having a maturity date of 30 November 2026. The Promissory Note was delivered as partial consideration for DEP’s agreement to purchase 80% of the issued and outstanding membership interests (the “Purchased Interests) of Canopy from the Sellers. See Note 11.
| a) | On 10 November 2017, Nevada Medical Group, LLC entered a ten-year lease agreement with Resort Holdings 5, LLC, a Nevada limited liability company, for the property located at 3375 Pepper Lane, Las Vegas, NV, containing approximately 18,000 square feet. We have four options to extend the lease agreement and each option is for five years. In July 2018, Resort Holdings 5, LLC, the landlord, sold the property to a third party and assigned the lease to Minor Street Properties, LLC. All lease terms remained the same. On 9 May 2022, we amended the lease agreement which exercised our first option to extend the lease for an additional five years with rent during the option term subject to a 3% increase on each anniversary date of the lease. The monthly rent was $13,659 + common area expenses and increased to $14,068 + common area expenses on 1 January 2022. Currently, the guaranteed minimum monthly rent is subject to a 2% increase on each anniversary date of the lease. |
| | |
| b) | On 7 May 2019, Nevada Medical Group, LLC entered into a five-year lease agreement with Haigaz and Nora Atamian, commercial property owners, for the property located at 6420 Sunset Corporate Drive, Las Vegas, NV, containing approximately 7,700 square feet. We have two options to extend the lease for an additional three-year term and an option to purchase the property at any point during the initial term. The monthly rent was $6,478 + common area expenses and increased to $6,704 + common area expenses on 1 May 2022. The guaranteed minimum monthly rent is subject to a $0.03 per square foot, per month, increase on each anniversary date of the lease for years one through three of the term and $0.04 per square foot, per month, increase on each anniversary date of the lease for years four through five of the term. |
| | |
| c) | On 1 December 2018, SGSD, LLC entered into a five-year lease agreement with Green Road, LLC, a California limited liability company, for the property located at 7625 Carroll Road, San Diego, California, containing approximately 4,600 square feet. On June 13, 2019, SGSD, LLC assigned the lease to NMG San Diego, LLC. Under the terms of the assignment and first amendment to the original lease agreement dated 13 June 2019, we have three options to extend the lease and each option is for five years. The monthly base rent was $15,913 + common area expenses and increased to $16,390 + common area expenses on 1 December 2021. The guaranteed monthly rent is subject to a 6% increase on each anniversary date of the lease, based on increases in the Consumer Price Index for San Diego County. The lease contains a sale bonus provision of $1,000,000 or 10% of the purchase price of the entire business, whichever is greater, in the event of sale or assignment of the lease. |
| | |
| d) | On 2 August 2018, NMG Ohio, LLC entered into a three-year lease agreement with MMCA Development, LLC, an Ohio limited liability company, for the property located at 709 Sugar Lane, Elyria, Ohio 44035, containing approximately 4,100 square feet. The Company has three options to extend the lease and each option is for three years. On 14 August 2020, NMG Ohio, LLC assigned the lease agreement to NMG OH 1, LLC. On 11 May 2021, we exercised our option to extend the lease agreement for an additional three years. The rent was $4,000 per month and increased to $4,200 per month on 1 July 2021. The minimum monthly rent is subject to a 5% increase for each option period. |
| | |
| e) | On 10 January 2017, SJK Services, LLC entered into a five-year lease agreement with Meng Lin Zhang, a commercial property owner, for the property located at 3411 E. Anaheim St., Long Beach, California, containing approximately 1,856 square feet. On 7 September 2018, SJK Services, LLC amended its lease agreement with Meng Lin Zhang. On 14 December 2018, SJK Services, LLC assigned the amended lease agreement to The Airport Collective, Inc., a California corporation. On 8 March 2019, The Airport Collective, Inc. assigned the amended lease agreement to NMG Long Beach, LLC. On 14 June 2021, we exercised our option to extend the lease agreement for one additional term of five years. On 1 March 2022, we amended the lease agreement to include two additional options to extend the lease agreement for five years each and expanded the lease agreement to include 3413 E. Anaheim St., Long Beach, California, containing approximately 816 square feet. The guaranteed minimum monthly base rent was $7,316 + common area expenses for unit 3411 and increased to $7,682 + common area expenses, totaling $9,340 every month, and is subject to a 5% increase on each anniversary date of the lease. The guaranteed monthly base rent for unit 3413 is $1,632 + common area expenses and is subject to a 3% increase on each anniversary date of the lease agreement. |
| | |
| f) | On 1 October 2019, NMG Ohio, LLC entered into a three-year lease agreement with MMCA Development, LLC, an Ohio limited liability company, for the property located at 719 Sugar Lane, Elyria, Ohio 44035, containing approximately 4,000 square feet. We have three options to extend the lease agreement for an additional three-year term. The guaranteed minimum monthly rent is subject to 5% increase for each option period. On 1 September 2021, the lease agreement was assigned to NMG OH P1, LLC with the same terms. On 18 October 2022, NMG OH P1, LLC extended the lease agreement with MMCA Development, LLC for one additional term of three years. The base rent is $4,200 plus common area expenses. |
| | |
| g) | On 23 April 23, 2021, NMG MI 1, Inc. entered into a five-year lease agreement with Kendal Properties, LLC, a Michigan limited liability company, for the property located at 885 E. Apple Ave., Muskegon, Michigan 49442, containing approximately 2,500 square feet. The base rent is $5,000 during the operational period, which began after the rent abatement and reduced rent periods. The lease agreement includes 2% annual base rent increases and three options to extend for five-years each. |
| Upon NMG MI 1 receiving one or more licenses, NMG MI 1 agrees to cause the Company to issue common shares having a value of up to $150,000 to Kendal, with portions of the common shares to be issued upon the achievement of certain milestones as follows: |
| | |
| i. | 25% of the common shares to be issued within 30 days following NMG MI 1’s receipt of a local commercial medical marihuana retail license from the city of Muskegon, MI and a state commercial medical marihuana retail license from the state of Michigan; |
| | |
| ii. | 25% of the common shares to be issued within 30 days following NMG MI 1 passing final inspections at the Leased premises regarding the commercial medical marihuana retail license and receiving its local operating permit allowing NMG MI 1 to begin medical marihuana operations at the premises; |
| | |
| iii. | 25% of the common shares to be issued within 30 days following NMG MI 1’s receipt of a local commercial adult-use marihuana retail license from the city of Muskegon, MI and a state commercial adult-use marihuana retail license from the state of Michigan; |
| | |
| iv. | 25% of the common shares to be issued within 30 days following NMG MI 1 passing final inspections at the Leased premises regarding the commercial adult-use marihuana retail license and receiving its local operating permit allowing NMG MI 1 to begin adult-use marihuana operations at the premises; |
| | |
| During the year ended 31 July 2022, the Company accrued $151,480 as all milestones were met and later issued the necessary common shares to settle $75,000 of this liability (Note 16). On 3 March 2022, the Company’s subsidiary, NMG MI 1, Inc. entered into an Amendment No. 1 to Lease Agreement with Kendal Properties, LLC with respect to the premises located at 885 E. Apple Ave., Muskegon, Michigan, whereby the parties amended the original Lease Agreement to provide that two of the milestone payments that were to be made in the form of the Company’s shares are to now be made in the form of cash. At 31 July 2022, the accrued liabilities for the above milestones are fully settled. |
| h) | On 10 February 2021, NMG MI C1, Inc. entered into a five-year lease agreement with 254 River Street, LLC, a Michigan limited liability company, for the property located at 254 River St., Manistee, Michigan 49660, containing approximately 30,000 square feet. The base rent is $22,500 during the operational period, beginning after the rent abatement and reduced rent periods. The lease agreement includes 2% annual base rent increases and three options to extend for five-years each. The license(s) would allow NMG MI C1 to operate a cultivation facility for adult-use and/or medical marihuana and all activities permissible under the Michigan and Manistee Marihuana Laws. The license(s) would allow NMG MI C1 to operate a cultivation facility for adult use and/or medical marihuana and all activities permissible under the Michigan and Manistee Marihuana Laws. Upon NMG MI C1 receiving one or more Licenses, NMG MI C1 agrees to cause the Company to issue common shares having a value of up to $600,000 to River Street, with portions of the Common Shares to be issued upon the achievement of certain milestones as follows: |
| i. | US$200,000 of common shares to be issued within 30 days of NMG MI C1 receiving local and state commercial marihuana cultivation licenses; |
| | |
| ii. | US$200,000 of common shares to be issued within 30 days of passing final inspections at the premises with respect to cultivation and receiving local operating permit to begin commercial marihuana cultivation operations at the premises; |
| | |
| iii. | US$100,000 of common shares to be issued within 30 days of NMG MI C1 receiving local and state commercial marihuana retail licenses; and |
| | |
| iv. | US$100,000 of common shares to be issued within 30 days of passing final inspections at the premises with respect to retail operations and receiving local operating permit to begin commercial marihuana retail operations at the premises. |
| i) | On 10 February 2021, NMG MI P1, Inc. entered into a five-year lease agreement with 254 River Street, LLC, a Michigan limited liability company, for the property located at 254 River St., Manistee, Michigan 49660, containing approximately 30,000 square feet. The base rent is $7,500 during the operational period, beginning after the rent abatement and reduced rent periods. The lease agreement includes 2% annual base rent increases and three options to extend for five-years each. The license(s) would allow NMG MI P1 to operate a production facility for adult-use and/or medical marihuana and all activities permissible under the Michigan and Manistee Marihuana Laws. Upon NMG MI P1 receiving one or more Licenses, NMG MI P1 agrees to cause the Company to issue common shares having a value of up to $400,000 to River Street, with portions of the Common Shares to be issued upon the achievement of certain milestones as follows:= |
| i. | US$200,000 of common shares to be issued within 30 days of NMG MI P1 receiving local and state commercial marihuana processing licenses; and |
| | |
| ii. | US$200,000 of common shares to be issued within 30 days of passing final inspections at the premises with respect to processing and receiving local operating permit to begin commercial marihuana processing operations at the premises. |
| | |
| | During the year ended 31 July 2022, a total deposit $470,546 for prior year shares were reclassified and incorporated into the right-of-use asset and lease liabilities related to the Company’s leases for the River Street. |
| | |
| | The value of the common shares will be calculated based on the lesser of: (1) the closing market price on the respective milestone achievement date and (2) a ten percent discount to the twenty-day volume weighted average price for the twenty days immediately prior to the respective milestone achievement date(s). |
| | |
| | Leases for 254 River St., Manistee, Michigan 49660 and 885 E. Apple Ave., Muskegon, Michigan 49442 were subject to the Company subsidiaries receiving approval by the State of Michigan and could be cancelled by the Company if licences were not awarded. The licenses for NMG MI P1 and NMG MI C1 were issued on 19 July 2021 and license for NMG MI 1 was issued on 3 August 2021. |
| j) | On 1 July 2021, the Company’s subsidiary Canopy Monterey Bay, LLC assumed and entered into a three-and-a-half-year lease agreement for the property located at 1900 Fremont Blvd., Seaside, California 93955. On 1 December 2021, Canopy Monterey Bay, LLC entered into a second amendment that includes three options to extend the lease agreement for five years each with 3% annual base rent increases. The base rent is now $9,270 per month until June 2023. Canopy Monterey Bay, LLC agreed to pay the landlord a maintenance fee equal to 1.5% of gross sales each month. |
| | |
| k) | On 7 April 2022, DEP Nevada, Inc. entered into a three-year lease agreement with 2625 GV, LLC, a Nevada limited liability company, for the property located at 2625 N. Green Valley Pkwy., Ste 150, Henderson, Nevada 89014, containing approximately 5,059 square feet. The base rent is $4,482 per month plus common area expenses. The lease agreement includes 4% annual base rent increases and two options to extend for three years each. |
| l) | On 4 December 2020, NMG CA P1, LLC entered into a five-year lease agreement with Cat City 2, LLC, a California limited liability company, for the property located at 68945 Perez Rd., Suite 1, Cathedral City, California 92234, containing approximately 5,840 square feet. The lease agreement includes 3% annual base rent increases and two options to extend for five-years each. We amended the lease agreement on 27 January 2022, which extended the term to 31 December 2026 and rent commencement date. The base rent is $6,028 plus common area expenses for the first six months and increases to $9,590 plus common area expenses on the seventh month. |
During the year ended 31 July 2022, the Company recorded a total lease expense of $1,103,849 related to the accretion of lease liabilities and the depreciation of right-of-use assets of which $856,697 was included in General and Administrative Expenses and $247,152 was included in Cost of Sales.
Supplemental cash flow information related to leases was as follows:
Cash paid for amounts included in the measurement of lease liabilities: | | | |
Operating cash flows from operating leases | | $ | 862,294 | |
Right-of-use assets obtained in exchange for lease obligations: | | | | |
Operating leases | | $ | 4,568,672 | |
| | | | |
Weighted-average remaining lease term – operating leases | | 7.32 years | |
Weighted-average discount rate – operating leases | | | 12 | % |
The discount rate of 12% was determined by the Company as the rate of interest that the Company would have to pay to borrow on a collateralized basis over a similar term an amount equal to the lease payments in a similar economic environment.
Maturities of lease liabilities were as follows:
Year Ending 31 July | | Operating Leases | |
2023 | | $ | 1,309,292 | |
2024 | | | 1,280,541 | |
2025 | | | 1,308,943 | |
2026 | | | 1,248,160 | |
2027 | | | 1,110,515 | |
Thereafter | | | 3,172,662 | |
Total lease payments | | $ | 9,430,113 | |
Less imputed interest | | | (3,310,740 | ) |
Total | | $ | 6,119,373 | |
Less current portion | | | (604,445 | ) |
Long term portion | | | 5,514,928 | |
The Company has entered into two lease agreements for operations with terms similar to current lease agreements that are not yet effective, as certain conditions required have not yet occurred. The Company paid a deposit of $113,828 during the year ended 31 July 2022 recorded in Deposits on the balance sheet.
During the year ended 31 July 2022, the Company recorded an impairment loss of $2,296,383 related to the two right-of-use assets in Michigan for NMG MI C1 and NMG MI P1 as the Company is re-evaluating these two projects.
The Company’s authorized share capital comprises 900,000,000 Common Shares, with a $0.0001 par value per share.
On 21 October 2020, the Company issued 793,466 common shares valued at $297,042 in relation to acquiring the remaining 70% interest in NMG Ohio (Notes 8 and 11).
On 14 November 2020, the Company issued 70,500 previously escrowed shares with a fair value of $19,703 to Toro Pacific Management Inc. in connection with the acquisition of NMG.
During the year ended July 31, 2021, the Company issued 700,000 common shares upon exercise of 700,000 stock option awards with an exercise price of CAD$0.57 per common share for proceeds of $317,045 (CAD$399,000).
On 21 September 2021, the Company issued 238,929 common shares and 1,304,601 common shares based on the terms and conditions of the two lease agreements for the Manistee, Michigan premises (Notes 15 and 18).
Pursuant to the ShowGrow Long Beach Purchase Agreement (Note 9), the Company issued 2,681,006 common shares in escrow. The share consideration remains subject to reduction with reference to the liabilities of the business that will be outstanding on the closing date, which is expected to occur in the near future (Notes 11 and 19).
Pursuant to the PA #2 for the acquisition of Canopy’s membership interest, the Company issued 2,728,156 common shares on 3 December 2021 in escrow (Notes 11 and 18).
On 15 July 2022, the Company issued 319,149 common shares to one entity based on the terms and conditions of the certain lease agreement for the Muskegon, Michigan premises.
Stock options
The Company previously approved an incentive stock option plan, pursuant to which the Company may grant stock options up to an aggregate of 10% of the issued and outstanding common shares in the capital of the Company from time to time.
| | Number of options | | | Weighted average exercise price | | | Weighted average contractual term remaining (in years) | | | | | Aggregate intrinsic value | |
Outstanding at 31 July 2020 | | | 9,155,000 | | | CAD$ | | | 0.70 | | | | 3.48 | | | CAD$ | | | - | |
Granted | | | 1,500,000 | | | CAD$ | | | 0.61 | | | | | | | | | | | |
Cancelled | | | (100,000 | ) | | CAD$ | | | 0.66 | | | | | | | | | | | |
Exercised | | | (700,000 | ) | | CAD$ | | | 0.57 | | | | | | | | | | | |
Outstanding at 31 July 2021 | | | 9,855,000 | | | CAD$ | | | 0.71 | | | | 2.76 | | | CAD$ | | | 3,750 | |
Granted | | | 848,000 | | | CAD$ | | | 0.37 | | | | | | | | | | | |
Cancelled | | | (1,250,000 | ) | | CAD$ | | | 0.70 | | | | | | | | | | | |
Outstanding at 31 July 2022 | | | 9,453,000 | | | CAD$ | | | 0.67 | | | | 2.11 | | | CAD$ | | | - | |
Vested and fully exercisable at 31 July 2022 | | | 8,492,000 | | | CAD$ | | | 0.67 | | | | | | | | | | | |
On 30 November 2021, the Company issued 448,000 stock options with an exercise price of CAD$0.44 per share for a term of five years expiring on 30 November 2026. The options were granted to current directors and officers of the Company. The options are subject to vesting provisions such that 25% of the options vest 6 months from the date of grant, 25% of the options vest 12 months from the date of grant, 25% of the options vest 18 months from the date of grant and 25% of the options vest 24 months from the date of grant. The total fair value of the stock options granted was calculated to be $99,241 (CAD$125,925). During the year ended 31 July 2022, the Company recorded a stock-based compensation of $60,792 (CAD$77,137) (2021 - $Nil) related to these options.
On 30 November 2021, the Company issued 200,000 stock options with an exercise price of CAD$0.44 per share for a term of three years expiring on November 30, 2024. The total fair value of the stock options granted was calculated to be $33,484 (CAD$42,487). During the year ended 31 July 2022, the Company recorded a stock-based compensation of $33,484 (CAD$42,487) (2021 - $Nil) related to these options.
On 8 July 2022, the Company issued 200,000 stock options with an exercise price of CAD$0.15 per share for a term of five years expiring on July 8, 2027. The total fair value of the stock options granted was calculated to be $13,247 (CAD$16,809). During the year ended 31 July 2022, the Company recorded a consulting fee of $13,247 (CAD$16,809) (2021 - $Nil) related to these options.
The assumptions used in the Black-Scholes Option Pricing Model are as follows:
| | 31 July 2022 | | | 31 July 2021 | |
Expected life of the options | | 1.81 – 3.125 years | | | 1.81 – 3.125 years | |
Expected volatility | | 94% - 102 | % | | 101% - 195 | % |
Expected dividend yield | | | 0 | % | | | 0 | % |
Risk-free interest rate | | 0.97% - 3.09 | % | | 0.25% - 1.43 | % |
Grant Dates | | Fair Value on Grant Date | | Unrecognized stock-based compensation – beginning | | Stock-based compensation recognized during the year | | Unrecognized stock-based compensation – ending |
21 August 2019 | | CAD$ | 1,818,232 | | CAD$ | 13,277 | | $ | 10,464 (CAD$13,277) | | CAD$ | - |
1 October 2019 | | CAD$ | 191,960 | | CAD$ | 4,139 | | $ | 3,262 (CAD$4,139) | | CAD$ | - |
23 January 2020 | | CAD$ | 90,608 | | CAD$ | 5,271 | | $ | 4,154 (CAD$5,271) | | CAD$ | - |
1 March 2020 | | CAD$ | 75,331 | | CAD$ | 6,539 | | $ | 5,153 (CAD$6,539) | | CAD$ | - |
30 April 2020 | | CAD$ | 701,863 | | CAD$ | 94,475 | | $ | 74,456 (CAD$94,475) | | CAD$ | - |
6 March 2021 | | CAD$ | 577,928 | | CAD$ | 327,091 | | $ | 218,243 (CAD$276,924) | | CAD$ | 50,167 |
5 April 2021 | | CAD$ | 82,409 | | CAD$ | 32,048 | | $ | 25,257 (CAD$32,048) | | CAD$ | - |
30 November 2021 | | CAD$ | 125,925 | | CAD$ | 125,925 | | $ | 60,792 (CAD$77,137) | | CAD$ | 48,788 |
30 November 2021 | | CAD$ | 42,487 | | CAD$ | 42,487 | | $ | 33,484 (CAD$42,487) | | CAD$ | - |
8 July 2022 | | CAD$ | 16,809 | | CAD$ | 16,809 | | $ | 13,246 (CAD16,809) | | CAD$ | - |
TOTAL | | CAD$ | 3,724,552 | | CAD$ | 668,061 | | $ | 448,512 (CAD$569,106)(1) | | CAD$ | 98,955 |
(1) | $13,246 related to options granted on 8 July 2022 was recorded as consulting fees. |
Share purchase warrants and brokers’ warrants
| | Number of warrants | | | Weighted average exercise price | |
Outstanding at 31 July 2020 | | | 12,415,284 | | | CAD$1.49 | |
Issued | | | 4,800,000 | | | USD$0.40 | |
Outstanding at 31 July 2021(1) | | | 17,215,284 | | | CAD$1.21 | |
Issued | | | 1,000,000 | | | USD$0.16 | |
Outstanding at 31 July 2022(1) | | | 18,215,284 | | | CAD$1.13 | |
(1) | This figure does not include 3,200,000 warrants issued to the Agent pursuant to the Loan Agreement, which warrants are held in escrow by us and are to be released to the Agent if we draw on the Delayed Draw Term Loan by March 31, 2023, or cancelled if we do not draw on the Delayed Draw Term Loan. Each warrant, if released to the Agent, will entitle the holder to acquire one share of common stock at an exercise price of US$0.45 per share until July 19, 2025. |
As of 31 July 2022, the following warrants are outstanding:
Number of warrants outstanding and exercisable | | | Exercise price | | Expiry dates |
| 11,780,134 | | CAD$ | 1.50 | | 17 May 2023 |
| 635,150 | | CAD$ | 1.25 | | 16 May 2023 |
| 4,800,000 | | USD$ | 0.40 | | 19 July 2025 |
| 1,000,000 | | USD$ | 0.16 | | 14 June 2027 |
| 18,215,284 | | CAD$ | 1.16 | | |
During the year ended 31 July 2022, the Company issued 1,000,000 warrants in connection with Amendment No. 2 to Loan Agreement (Note 14).
During the year ended 31 July 2021, the Company issued 4,800,000 warrants related to the Initial Term Loan (Note 14).
17. | Segment Information and Major Customers |
In its operation of the business, management, including our chief operating decision marker, who is also our Chief Executive Officer, reviews certain financial information, including segmented internal profit and loss statements prepared on a basis not consistent with GAAP. During the periods presented, the Company reported its financial performance based on the following segments:
· | Wholesale; |
· | Retail; and |
· | All others. |
Revenue and costs are generally directly attributed to our segments. However, due to the integrated structure of our business, certain costs incurred by one segment may benefit other segments. In addition, certain costs incurred at a corporate level are not allocated to our segments.
Segment revenue and operating income were as follows during the years ended 31 July 2022:
Year Ended July 31, | | 2022 | |
| | | |
Revenue | | | |
Wholesale | | $ | 5,324,804 | |
Retail | | | 26,313,359 | |
All others | | | - | |
Total | | $ | 31,638,163 | |
Year Ended July 31, | | 2022 | |
| | | |
Net loss | | | |
Wholesale | | $ | (13,718,691 | ) |
Retail | | | (5,321,066 | ) |
All others | | | (9,188,347 | ) |
Total | | $ | (28,228,104 | ) |
Segment revenue and operating income were as follows during the years ended 31 July 2021:
Year Ended July 31, | | 2021 | |
| | | |
Revenue | | | |
Wholesale | | $ | 8,103,674 | |
Retail | | | 18,797,195 | |
All others | | | - | |
Total | | $ | 26,900,869 | |
Year Ended July 31, | | 2021 | |
| | | |
Net loss | | | |
Wholesale | | $ | 2,999,697 | |
Retail | | | 2,551,396 | |
All others | | | (7,527,554 | ) |
Total | | $ | (1,976,461 | ) |
During the years ended 31 July 2022 and 2021, the Company had no major customer over 10% of its revenues.
18. | Supplemental Disclosures with Respect to Cash Flows |
| | Year Ended 31 July | |
| | 2022 | | | 2021 | |
Cash paid during the year for interest | | $ | 876,364 | | | $ | - | |
Cash paid during the year for income taxes | | $ | 3,436,572 | | | $ | 582,152 | |
On closing of the acquisition of NMG Ohio, the balance of $955,877 was reclassified from loans receivable to respective net assets acquired (Note 8), including $887,495 of property and equipment.
Pursuant to certain licensing milestones being achieved under a lease agreement for a premises in Muskegon, Michigan and certain licensing and operational milestones being achieved under two lease agreements for a premises in Manistee, Michigan, on 21 September 2021, the Company issued 238,929 shares of common stock to one entity based on the terms and conditions of the certain lease agreement for the Muskegon, Michigan premises and issued an aggregate of 1,304,601 shares of common stock to another entity based on the terms and conditions of the two lease agreements for the Manistee, Michigan premises (Notes 15 and 16). These shares had an aggregate fair value of $547,026.
On 15 July 2022, the Company issued 319,149 common shares to one entity with a fair value of $31,822 based on the terms and conditions of the certain lease agreement for the Muskegon, Michigan premises.
On the assumption of an additional leases in Ohio and Michigan and lease amendments in Nevada and Long Beach (Note 15), the Company recognized right-of-use assets, and a corresponding increase in lease liabilities, in the amount of $4,462,370 which represented the present value of future lease payments using a discount rate of 12% per annum.
Pursuant to the PA #2 for the acquisition of Canopy’s membership interest, the Company issued 2,728,156 common shares in escrow (Notes 11 and 16).
Pursuant to the Amendment No. 2 to Loan Agreement, the Company paid the lender fees, including 1,000,000 common stock purchase warrants and accrued the exit fee of $100,000. The fair value of the 1,000,000 Warrants were valued at $79,585 using the Black Scholes Option Pricing Model.
During the year ended 31 July 2022, pursuant to the ShowGrow Long Beach Purchase Agreement (Note 9), the Company issued 2,681,006 common shares in escrow. The share consideration remains subject to reduction with reference to the liabilities of the business that will be outstanding on the closing date, which is expected to occur in the near future. Any final settlement that is different than liabilities’ balances currently recorded will be allocated to other income or expense.
On 6 August 2021, the Company entered into management agreements with each of NMG IL 1, LLC (“NMG IL 1”) and NMG IL 4, LLC (“NMG IL 4”) along with an option to indirectly acquire all of the membership interests in each of NMG IL 1 and NMG IL 4 pursuant to a convertible credit facility between our subsidiary, DEP and each of NMG IL 1 and NMG IL 4, and membership interest purchase agreements between DEP and the members of NMG IL 1 and NMG IL 4, subject to obtaining all required local and state regulatory authorization. Each of NMG IL 1 and NMG IL 4 have been identified in the Illinois Department of Financial and Professional Regulation (IDFPR) results of the Social Equity Justice Involved Lottery for 55 Conditional Adult-Use Cannabis Dispensary Licenses (Conditional Licenses) across the state. The certified results are from a lottery with a pool of applicants who scored 85 % or greater in their applications. NMG IL 1 and NMG IL 4 were drawn in BLS Region #5 (Chicago-Naperville-Elgin) where 36 conditional licenses are available. The applications are not tied to specified locations.
A reconciliation of income taxes at statutory rates with the reported taxes for the years ended 31 July 2022 and 2021 is as follows:
The (benefit) expense for income taxes consists of the following:
| | 2022 | | | 2021 | |
| | | | | | |
Current: | | | | | | |
Federal | | $ | 2,277,868 | | | $ | 2,281,497 | |
State | | | 85,867 | | | | 99,322 | |
| | | 2,363,735 | | | | 2,380,819 | |
| | | | | | | | |
Deferred: | | | | | | | | |
Federal | | | 6,598 | | | | (214,352 | ) |
State | | | 222,832 | | | | 242 | |
| | | 229,430 | | | | (214,110 | ) |
| | | | | | | | |
Total expense for income taxes | | $ | 2,593,165 | | | $ | 2,166,709 | |
Section 280E of the Internal Revenue Code (“IRC”) prohibits businesses engaged in the trafficking of Schedule I or Schedule II controlled substances from deducting normal business expenses, such as payroll and rent, from gross income (revenue less cost of goods sold). Section 280E was originally intended to penalize criminal market operators, but because cannabis remains a Schedule I controlled substance for U.S. Federal purposes, the Internal Revenue Service (the “IRS”) has subsequently applied Section 280E to state-legal cannabis businesses. Cannabis businesses operating in states that align their tax codes with the IRC are also unable to deduct normal business expenses from their state taxes. The nondeductible expenses shown in the effective rate reconciliation above is comprised primarily of the impact of applying Section 280E to the Company’s businesses that are involved in selling cannabis, along with other typical non-deductible expenses such as lobbying expenses.
| | 2022 | | | 2021 | |
| | | | | | |
Net loss for the year before income tax | | $ | (25,634,939 | ) | | $ | 190,248 | |
Federal and state income tax rates | | | 21.00 | % | | | 21.00 | % |
| | | | | | | | |
Expected income tax recovery | | | (5,383,335 | ) | | | 39,951 | |
IRC 280E disallowance | | | 8,208,764 | | | | 1,935,581 | |
Stock options | | | 118,816 | | | | 243,829 | |
Impairment of consolidated investment | | | - | | | | 176,816 | |
Other permanent differences | | | (78,052 | ) | | | (82,301 | ) |
Opening deferred tax adjustments | | | (602,555 | ) | | | (284,621 | ) |
State taxes | | | (394,760 | ) | | | 7,598 | |
Change in benefit not recognized | | | 724,287 | | | | 129,856 | |
| | | | | | | | |
Total income tax expense | | $ | 2,593,165 | | | $ | 2,166,709 | |
The impact of the loss on impairment of goodwill, intangible assets, ROU assets, and loans receivable in the aggregate amount of $20,517,192 is included in the IRC 280E disallowance for 2022. Approximately $4.3 million was included in the IRC 280E disallowance for the year ended 31 July 2022 related to the impairment losses.
The significant components of the Company’s deferred income tax assets and liabilities are as follows:
| | As at 31 July 2022 | | | As at 31 July 2021 | |
| | | | | | |
Deferred income tax asset | | | | | | |
Lease liabilities | | $ | 342,437 | | | $ | 123,208 | |
Net income tax operating loss carry forward | | | 276,739 | | | | - | |
Brand and license | | | 559,032 | | | | - | |
Inventory | | | (541,689 | ) | | | - | |
Investments | | | 126,395 | | | | 6,648 | |
Deferred tax allowance | | | (854,143 | ) | | | (129,856 | ) |
Deferred income tax liability | | | | | | | | |
Property and equipment – Non right-of-use | | | (103,601 | ) | | | (39,603 | ) |
Property and equipment – Right-of-use | | | (232,940 | ) | | | (101,404 | ) |
Brand and license | | | - | | | | (57,332 | ) |
| | | | | | | | |
Net deferred income tax liability | | $ | (427,770 | ) | | $ | (198,339 | ) |
Management assesses the available positive and negative evidence to estimate whether sufficient future taxable income will be generated to permit use of the existing deferred tax assets. A significant piece of objective negative evidence evaluated was the cumulative loss incurred over the three-year period ended 31 July 2022. Such objective evidence limits the ability to consider other subjective evidence, such as our projections for future growth. On the basis of this evaluation, as of 31 July 2022, a valuation allowance of $854,143 and as of 31 July 2022 (2021 - $129,856), has been recorded to recognize only the portion of the deferred tax asset that is more likely than not to be realized. The amount of the deferred tax asset considered realizable, however, could be adjusted if estimates of future taxable income during the carryforward period are reduced or increased or if objective negative evidence in the form of cumulative losses is no longer present and additional weight is given to subjective evidence such as our projections for growth.
As a result of an “ownership change” within the meaning of Section 382(g) of the Internal Revenue Code of 1986, as amended, which occurred in the 31 July 2016 fiscal year, we are limited in our ability to utilize our net operating loss carryforwards and certain other built-in deductions in computing our taxable income beginning with the ownership change date. As a result, $2,450,364 of our net operating loss is limited. We have state tax loss carryforwards of $3.1 million, which expire at various times through July 31, 2042.
Following is a reconciliation of gross unrecognized tax benefits from uncertain tax positions, excluding the impact of penalties and interest. The tax accounting method was changed to the Farm Price method which allows a more granular assessment of each expense, for the cultivation and manufacturing operations only, to be applied and expensed as cost of goods, to determine net taxable income
| | As at 31 July 2022 | | | As at 31 July 2021 | |
| | | | | | |
Beginning year balance | | $ | 966,992 | | | $ | 966,992 | |
Increase related to prior year tax positions | | | - | | | | - | |
Increase related to current year tax positions | | | - | | | | - | |
| | | | | | | | |
Ending year balance | | $ | 996,992 | | | $ | 966,992 | |
Of the $966,992 of gross unrecognized tax benefits from uncertain tax positions outstanding as of 31 July 2022, $Nil would affect our effective tax rate if recognized.
Interest related to uncertain tax positions are required to be calculated, if applicable, and would be classified as “interest expense” in the two statements of operations. Penalties would be recognized as a component of “general and administrative expenses”. As of 31 July 2022, $48,959 of interest and $Nil penalties were reported and as of 31 July 2022 (2021 - $24,750 and $Nil, respectively).
Our U.S. federal income tax returns for 31 July 2018 through 2020 are open to review by the U.S. Internal Revenue Service. Our state income tax returns for 31 July 2018 through 2020 are open to review, depending on the respective statute of limitation in each state.
As of 31 July 2022, we believe it is reasonably likely that, within the next twelve months, $Nil of the previously unrecognized tax benefits related to certain non-U.S. filing positions may be recognized due to the expirations of the statutes of limitations.
Acquisition of Canopy Monterey Bay, LLC
On December 7, 2022, pursuant to the previously announced (i) membership interest purchase agreement (“MIPA #1”), dated November 30, 2021, as amended on June 17, 2022, entered into between the Company’s wholly-owned subsidiary, DEP Nevada, Inc. (“DEP”), Canopy Monterey Bay, LLC (“Canopy”) and the membership interest owners of Canopy, Carey Stiebel (the “Continuing Owner”), Jana Stiebel, Jayme Rivard, Adrian Dermicek and Laurie Johnson (collectively, the “Sellers”) to purchase eighty percent (80%) of the issued and outstanding membership interests of Canopy, and (ii) membership interest purchase agreement (“MIPA #2”), dated November 30, 2021, as amended on June 17, 2022, entered into between DEP and the Continuing Owner to purchase the remaining twenty percent (20%) of the issued and outstanding membership interests of Canopy, the Company through DEP completed the acquisition of all of the membership interests of Canopy from the Sellers and closed MIPA #1, as amended, and MIPA #2, as amended.
Pursuant to the closing of MIPA #1, as amended, and MIPA #2, as amended, the Company issued an aggregate of 16,301,694 shares of common stock to the Sellers in accordance with their instructions at a deemed price of US$0.134 per share. 2,238,806 of the 16,301,694 shares are being held in escrow ending the results of a working capital adjustment in accordance with MIPA #1 and MIPA #2.
Limited Waiver and Amendment to Loan Agreement
On December 12, 2022, the Company, the Guarantors (collectively, the “Loan Parties”) the Agent and the Lender entered into a Limited Waiver and Amendment to Loan Agreement (the “Limited Waiver and Amendment to Loan Agreement”) to deal with certain events of default that occurred under the Loan Agreement, as amended, with respect to (i) the Company’s failure to deliver to Agent the audited annual financial statements of the Company and its subsidiaries for the fiscal year ended July 31, 2022, on or before ninety (90) days after the end of such fiscal year in accordance with Section 7.2(c) of the Loan Agreement (the “First Specified Default”) and (ii) the Agent being informed that the Company anticipates that it will fail to deliver the quarterly financial statements of the Company and its subsidiaries for the fiscal quarter ending October 31, 2022, in form and substance acceptable to Agent, on or before forty-five (45) days after the end of such fiscal quarter, in accordance with Section 7.2(b) (the “Second Specified Default”, and together with the First Specified Default, the “Specified Defaults”).
Pursuant to the Limited Waiver and Amendment to Loan Agreement, the Agent and the Lender each waive the Specified Defaults on a limited one-time basis subject to the terms and conditions thereof until (i) with respect to the First Specified Default, 5:00 PM EST on December 30, 2022, and (ii) with respect to the Second Specified Default, 5:00 PM EST on January 13, 2023 (the “Waiver Period”); provided that if the Loan Parties do not deliver each of the Amended Deliverables (as defined below) on or before expiration of their respective Waiver Period; the waiver shall no longer be of any effect, and the Lender shall be entitled to enforce all remedies set forth in the Loan Agreement as of the date each Specified Default first occurred.
Subsequent to entering into the Limited Waiver and Amendment to Loan Agreement, the parties verbally agreed and confirmed via email on December 20, 2022, that Waiver Period for the First Specified Default shall be extended from December 30, 2022 to January 17, 2023, and the Waiver Period for the Second Specified Default shall be extended from January 13, 2023 to January 27, 2023; and that the corresponding amendments shall be made to sections 7.2(b) and 7.2(c) of the Loan Agreement as set forth above.
Convertible Debenture Financing
On December 19, 2022, the Company entered into Securities Purchase Agreements (“SPAs”) with each of BAM I, A Series of Bengal Catalyst Fund SPV, LP, a Delaware limited partnership, Mindset Value Fund LP, a Delaware limited partnership, and Mindset Value Wellness Fund LP, a Delaware limited partnership (collectively, the “Investors”) pursuant to which the Company issued to the Investors unsecured five-year convertible debentures in the aggregate principal amount of US$3,000,000 (the “Debentures”) bearing interest at 8% per annum, compounded annually, and common stock purchase warrants (the “Warrants”) to acquire 15,000,000 shares of common stock of the Company (each, a “Warrant Share”). The proceeds from the sale of the Debentures and the Warrants will be used for business development purposes.
In addition, pursuant to the SPAs, following the closing and until the later of (a) the repayment or conversion of the Debentures, and (b) Bengal Impact Partners, LLC (“Bengal Capital”) (or any of its affiliates) ceasing to own at least 10% of the issued and outstanding shares of common stock on an as-converted basis in the aggregate, Bengal Capital shall be entitled to nominate one (1) director to the Company’s Board and one (1) Board observer, provided that the nominee director must meet the requirements of applicable corporate, securities and other applicable laws, and the policies of the Canadian Securities Exchange.
Agreement and Plan of Merger
On December 21, 2022, the Company, its wholly-owned subsidiary, DEP, BaM Body and Mind Dispensary NJ Inc., a New Jersey corporation and wholly owned subsidiary of DEP (the “Merger Sub”), CraftedPlants NJ Corp., a New Jersey corporation (the “CraftedPlants”) and certain shareholders of CraftedPlants (the “Sellers”) entered into an Agreement and Plan of Merger (the “Merger Agreement”) whereby Merger Sub merged with and into CraftedPlants as the surviving entity (in such capacity, the “Surviving Entity”), and following the consummation of the merger, which occurred on December 21, 2022, the Surviving Entity became a wholly-owned subsidiary of DEP and changed its name to BaM Body and Mind Dispensary NJ, Inc.
Bengal Catalyst Funds and CraftedPlants NJ Corp were both owned or managed by the principals of the Bengal Capital Group. As Joshua Rosen is a managing principal of the Bengal Capital Group, he was involved in both transactions of the convertible note investment and the merger acquisition of the NJ license.
Pursuant to the terms of the Merger Agreement, on the closing DEP delivered a cash payment of US$50,000 to the Sellers, with a delayed payment of US$120,000 to be paid to the Sellers upon funding of the project buildout.
Further, pursuant to the terms of the Merger Agreement, on December 21, 2022, the Company issued to the Sellers an aggregate of 16,666,667 shares of its common stock (the “Merger Consideration Shares”) at a deemed price of CAD$0.08 per share. The Merger Consideration Shares will be held in escrow and will not be released to the Sellers until the Surviving Entity achieves certain milestones, however, the Sellers will still maintain the voting and participation rights with respect to the Merger Consideration Shares while being held in escrow. The post-closing milestones are as follows:
| 1. | If, within two (2) years of the closing date, the Surviving Entity’s application is approved and is granted pending license approval from the New Jersey Cannabis Regulatory Commission (the “CRC”), 70% of the Merger Consideration Shares will be release from escrow. |
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| 2. | If, within three (3) years of the closing date, the Surviving Entity opens for business as a recreational cannabis dispensary, 30% of the Merger Consideration Shares will be released from escrow. |
If either or both of the milestones are not achieved within the time periods after the closing date (the “Milestone Dates”), the Company shall have the option to cancel the Merger Consideration Shares attributable to the failed milestone by delivering written notice to Sellers and in the event of such cancellation, the portion of the Merger Consideration Shares attributable to the failed milestone shall be surrendered and cancelled without any further action required by the parties. Notwithstanding the foregoing, if either or both of the milestones are not achieved (or if it becomes obvious that they will not be achieved) by their respective Milestone Dates because of delays that are not caused by the Sellers, the Sellers may, before the applicable Milestone Dates, provide notice to the Company, and the applicable Milestone Date will be extended to such date as is reasonably necessary for the milestone to be achieved. The parties will work together in mutual good faith to determine the dates by when the milestones can be reasonably achieved.