UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
|
For the quarterly period ended October 31, 2022
or
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from ______________ to _______________
Commission File Number: 000-55940
BODY AND MIND INC. |
(Exact name of registrant as specified in its charter) |
Nevada |
| 98-1319227 |
(State or other jurisdiction of organization) |
| (I.R.S. employer identification no.) |
750 – 1095 West Pender Street Vancouver, British Columbia, Canada | V6E 2M6 | |
(Address of principal executive offices) | (Zip code) |
(800) 361-6312
(Registrant’s telephone number, including area code)
None
(Former name, former address, and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class |
| Trading Symbol(s) |
| Name of each exchange on which registered |
N/A |
| N/A |
| N/A |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒☐ No ☐☒
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒☐ No ☐☒
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer | ☐ | Accelerated filer | ☐ |
Non-accelerated filer | ☒ | Smaller reporting company | ☒ |
Emerging growth company | ☒ |
If an emerging growth company, indicate by checkmark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☒
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☒
Indicate the number of shares outstanding of each of the issuer’s classes of common stock as of the latest practicable date: 113,349,464146,636,974 shares of common stock outstanding as of December 14, 2021.January 24, 2023.
BODY AND MIND INC.
FORM 10-Q
TABLE OF CONTENTS
2 |
Table of Contents |
PART I - FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
|
|
Condensed Consolidated Interim Balance Sheets | ||||||||
| ||||||||
(U.S. Dollars) | ||||||||
ASSETS |
| As of 31 October 2021 |
|
| As of 31 July 2021 |
| ||
|
|
|
|
|
|
| ||
Current |
|
|
|
|
|
| ||
Cash |
| $ | 7,433,086 |
|
| $ | 7,374,194 |
|
Amounts receivable |
|
| 1,445,876 |
|
|
| 1,544,957 |
|
Interest receivable on convertible loan (Note 6) |
|
| 168,000 |
|
|
| 150,000 |
|
Prepaids |
|
| 545,044 |
|
|
| 413,246 |
|
Inventory (Note 5) |
|
| 3,374,911 |
|
|
| 2,936,156 |
|
Convertible loan receivable (Note 6) |
|
| 1,810,827 |
|
|
| 1,648,816 |
|
Loan receivable (Note 7) |
|
| 239,834 |
|
|
| 239,834 |
|
Total Current Assets |
|
| 15,017,578 |
|
|
| 14,307,203 |
|
|
|
|
|
|
|
|
|
|
Deposit (Note 19) |
|
| 470,546 |
|
|
| 470,546 |
|
Loan receivable from NMG Ohio LLC (Note 8) |
|
| 0 |
|
|
| 891,279 |
|
Property and equipment, net (Note 10) |
|
| 5,594,541 |
|
|
| 4,893,790 |
|
Operating lease right-of-use assets (Note 15) |
|
| 3,179,713 |
|
|
| 2,539,023 |
|
Brand and licenses, net (Note 12) |
|
| 19,552,813 |
|
|
| 19,855,068 |
|
Goodwill (Note 12) |
|
| 5,168,902 |
|
|
| 5,168,902 |
|
TOTAL ASSETS |
| $ | 48,984,093 |
|
| $ | 48,125,811 |
|
|
|
|
|
|
|
|
|
|
LIABILITIES |
|
|
|
|
|
|
|
|
Current |
|
|
|
|
|
|
|
|
Accounts payable |
| $ | 1,546,481 |
|
| $ | 1,686,376 |
|
Accrued liabilities |
|
| 130,000 |
|
|
| 105,538 |
|
Income taxes payable |
|
| 4,501,689 |
|
|
| 3,832,078 |
|
Due to related parties (Note 13) |
|
| 54,166 |
|
|
| 52,074 |
|
Loan payable (Note 14) |
|
| 15,050 |
|
|
| 16,874 |
|
Current portion of operating lease liabilities (Note 15) |
|
| 407,446 |
|
|
| 761,415 |
|
Total Current Liabilities |
|
| 6,654,832 |
|
|
| 6,454,355 |
|
|
|
|
|
|
|
|
|
|
Long-term operating lease liabilities (Note 15) |
|
| 2,781,617 |
|
|
| 2,323,525 |
|
Loan payable (Note 14) |
|
| 4,916,615 |
|
|
| 4,798,871 |
|
Deferred tax liability |
|
| 229,080 |
|
|
| 198,339 |
|
TOTAL LIABILITIES |
|
| 14,582,144 |
|
|
| 13,775,090 |
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS’ EQUITY |
|
|
|
|
|
|
|
|
Capital Stock– Statement 3 (Note 16) |
|
|
|
|
|
|
|
|
Authorized: |
|
|
|
|
|
|
|
|
900,000,000 Common Shares – Par Value $0.0001 |
|
|
|
|
|
|
|
|
Issued and Outstanding: |
|
|
|
|
|
|
|
|
110,621,308 31 July 2021 – 109,077,778) Common Shares |
|
| 11,061 |
|
|
| 10,907 |
|
Additional paid-in capital |
|
| 51,004,060 |
|
|
| 50,312,013 |
|
Other comprehensive income |
|
| 1,163,994 |
|
|
| 1,127,713 |
|
Deficit |
|
| (17,915,599 | ) |
|
| (17,126,510 | ) |
TOTAL STOCKHOLDERS’ EQUITY ATTRIBUTABLE TO BAM |
|
| 34,236,516 |
|
|
| 34,324,123 |
|
NON-CONTROLLING INTEREST |
|
| 138,433 |
|
|
| 26,598 |
|
TOTAL EQUITY |
|
| 34,401,949 |
|
|
| 34,350,721 |
|
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY |
| $ | 48,984,093 |
|
| $ | 48,125,811 |
|
Body and Mind Inc. |
|
|
|
|
| Statement 1 |
| |||
|
|
|
|
|
|
|
| |||
Condensed Consolidated Interim Balance Sheets |
|
|
|
|
|
|
| |||
(U.S. Dollars) |
|
|
|
|
| |||||
ASSETS |
|
| As of 31 October 2022 |
|
| As of 31 July 2022 |
| |||
|
|
| (unaudited) |
|
|
| ||||
Current |
|
|
|
|
|
|
| |||
Cash |
|
| $ | 1,302,124 |
|
| $ | 1,854,277 |
| |
Amounts receivable, net |
|
|
| 538,785 |
|
|
| 475,578 |
| |
Interest receivable on convertible loan (Note 6) |
|
|
| 240,000 |
|
|
| 222,000 |
| |
Prepaids |
|
|
| 683,770 |
|
|
| 775,701 |
| |
Inventory (Note 5) |
|
|
| 3,255,412 |
|
|
| 3,880,000 |
| |
Loan receivable (Note 7) |
|
|
| 674,675 |
|
|
| 789,984 |
| |
Total Current Assets |
|
|
| 6,694,766 |
|
|
| 7,997,540 |
| |
|
|
|
|
|
|
|
|
|
| |
Deposit |
|
|
| 113,828 |
|
|
| 113,828 |
| |
Convertible loan receivable (Note 6) |
|
|
| 1,250,000 |
|
|
| 1,250,000 |
| |
Property and equipment, net (Note 8) |
|
|
| 5,380,001 |
|
|
| 5,640,534 |
| |
Operating lease right-of-use assets (Note 13) |
|
|
| 4,024,470 |
|
|
| 4,162,647 |
| |
Brand and licenses, net (Note 10) |
|
|
| 11,533,365 |
|
|
| 11,861,315 |
| |
TOTAL ASSETS |
|
| $ | 28,996,430 |
|
| $ | 31,025,864 |
| |
|
|
|
|
|
|
|
|
|
| |
LIABILITIES |
|
|
|
|
|
|
|
|
| |
Current |
|
|
|
|
|
|
|
|
| |
Accounts payable |
|
| $ | 2,879,200 |
|
| $ | 2,489,353 |
| |
Accrued liabilities |
|
|
| 317,812 |
|
|
| 325,385 |
| |
Income taxes payable |
|
|
| 3,668,366 |
|
|
| 3,021,539 |
| |
Due to related parties (Note 11) |
|
|
| 104,826 |
|
|
| 163,862 |
| |
Loans payable (Note 12) |
|
|
| 12,527 |
|
|
| 12,535 |
| |
Current portion of operating lease liabilities (Note 13) |
|
|
| 649,957 |
|
|
| 604,445 |
| |
Total Current Liabilities |
|
|
| 7,632,688 |
|
|
| 6,617,119 |
| |
|
|
|
|
|
|
|
|
|
| |
Long-term operating lease liabilities (Note 13) |
|
|
| 5,361,484 |
|
|
| 5,514,928 |
| |
Loans payable (Note 12) |
|
|
| 7,517,847 |
|
|
| 7,393,636 |
| |
Income taxes payable |
|
|
| 966,992 |
|
|
| 966,992 |
| |
Deferred tax liability |
|
|
| 402,397 |
|
|
| 427,770 |
| |
TOTAL LIABILITIES |
|
|
| 21,881,408 |
|
|
| 20,920,445 |
| |
|
|
|
|
|
|
|
|
|
| |
STOCKHOLDERS’ EQUITY |
|
|
|
|
|
|
|
|
| |
Capital Stock– Statement 3 (Note 14) |
|
|
|
|
|
|
|
|
| |
Authorized: |
|
|
|
|
|
|
|
|
| |
900,000,000 Common Shares – Par Value $0.0001 |
|
|
|
|
|
|
|
|
| |
Issued and Outstanding: |
|
|
|
|
|
|
|
|
| |
113,668,613 (31 July 2022–113,668,613) Common Shares |
|
| 11,366 |
|
|
| 11,366 |
| ||
Additional paid-in capital |
|
|
| 52,377,031 |
|
|
| 52,344,573 |
| |
Shares to be issued |
|
|
| 1,853,403 |
|
|
| 1,853,403 |
| |
Accumulated other comprehensive income |
|
|
| 1,154,033 |
|
|
| 1,224,093 |
| |
Accumulated Deficit |
|
|
| (48,857,867) |
|
| (45,803,026) | |||
TOTAL STOCKHOLDERS’ EQUITY ATTRIBUTABLE TO BAM STOCKHOLDERS |
|
|
| 6,537,966 |
|
|
| 9,630,409 |
| |
NON-CONTROLLING INTEREST |
|
|
| 577,056 |
|
|
| 475,010 |
| |
TOTAL STOCKHOLDERS’ EQUITY |
|
|
| 7,115,022 |
|
|
| 10,105,419 |
| |
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY |
|
| $ | 28,996,430 |
|
| $ | 31,025,864 |
|
The accompanying notes are an integral part of these condensed consolidated interim financial statements.
3 |
Table of Contents |
Body and Mind Inc. |
| Statement 2 | ||||
|
|
| ||||
Condensed Consolidated Interim Statements of Operations and Comprehensive Loss (unaudited) | ||||||
(U.S. Dollars) |
|
|
|
|
|
|
|
| Three Month Period Ended 31 October |
|
| Three Month Period Ended 31 October |
| ||||||||||
|
| 2021 |
|
| 2020 |
|
| 2022 |
|
| 2021 |
| ||||
|
|
|
|
|
|
|
|
|
|
| ||||||
Sales |
| $ | 7,570,816 |
| $ | 5,294,358 |
|
| $ | 7,831,695 |
| $ | 7,570,816 |
| ||
Cost of sales |
|
| (4,080,600 | ) |
|
| (3,494,304 | ) |
|
| (6,192,489 | ) |
|
| (4,416,703 | ) |
Gross Profit |
|
| 1,639,206 |
|
|
| 3,154,113 |
| ||||||||
|
|
| 3,490,216 |
|
|
| 1,800,054 |
|
|
|
|
|
| |||
|
|
|
|
|
| |||||||||||
General and Administrative Expenses |
|
|
|
|
| |||||||||||
Operating Expenses |
|
|
|
|
| |||||||||||
Accounting and legal |
| 259,144 |
| 167,077 |
|
| 223,291 |
| 259,144 |
| ||||||
Business development |
| 94,759 |
| 1,409 |
|
| 171,160 |
| 94,759 |
| ||||||
Consulting fees |
| 143,235 |
| 85,731 |
|
| 240,476 |
| 143,235 |
| ||||||
Depreciation |
| 331,544 |
| 245,337 |
| |||||||||||
Insurance |
| 70,761 |
| 72,720 |
| |||||||||||
Depreciation and amortization |
| 362,115 |
| 331,544 |
| |||||||||||
Lease expense |
| 126,339 |
| 88,603 |
|
| 255,871 |
| 102,033 |
| ||||||
Licenses, utilities and office administration |
| 781,614 |
| 575,245 |
|
| 1,280,405 |
| 845,747 |
| ||||||
Management fees |
| 168,379 |
| 132,226 |
|
| 71,705 |
| 168,379 |
| ||||||
Regulatory, filing and transfer agent fees |
| 0 |
| 6,576 |
| |||||||||||
Rent |
| 32,082 |
| 38,351 |
| |||||||||||
Salaries and wages |
| 991,717 |
| 782,618 |
|
|
| 1,012,248 |
|
|
| 893,963 |
| |||
Stock-based compensation |
| 145,175 |
| 287,631 |
| |||||||||||
Travel |
|
| 30,158 |
|
|
| 11,839 |
| ||||||||
|
|
| (3,174,907 | ) |
|
| (2,495,363 | ) | ||||||||
Net Operating Income (Loss) Before Other Income (Expenses) |
| 315,309 |
| (695,309 | ) | |||||||||||
|
|
|
|
|
| |||||||||||
Total Operating Expenses |
|
| (3,617,271 | ) |
|
| (2,838,804 | ) | ||||||||
Net Operating Income (Loss) |
| (1,978,065 | ) |
| 315,309 |
| ||||||||||
Other Income (Expenses) |
|
|
|
|
|
|
|
|
|
| ||||||
Foreign exchange, net |
| (13 | ) |
| 39 |
|
| 1,967 |
| (13 | ) | |||||
Interest expense |
| (338,764 | ) |
| (735 | ) |
| (381,423 | ) |
| (338,764 | ) | ||||
Interest income |
| 18,000 |
| 106,143 |
|
| 18,000 |
| 18,000 |
| ||||||
Other income |
| 30,386 |
| 88,422 |
| |||||||||||
Gain on bargain purchase |
| 0 |
| 208,176 |
| |||||||||||
Equity-method investment change from earnings |
|
| 0 |
|
|
| 24,872 |
| ||||||||
|
|
|
|
|
| |||||||||||
Other income (expense) |
|
| 12,800 |
|
|
| 30,386 |
| ||||||||
Net Income (Loss) for the Period Before Income Tax |
| $ | 24,918 |
| $ | (268,392 | ) |
| $ | (2,326,721 | ) |
| $ | 24,918 |
| |
Income tax expense |
|
| (702,172 | ) |
|
| (509,975 | ) |
|
| (626,074 | ) |
|
| (702,172 | ) |
|
|
|
|
|
| |||||||||||
Net Loss for the Period |
| (677,254 | ) |
| (778,367 | ) |
| (2,952,795 | ) |
| (677,254 | ) | ||||
|
|
|
|
|
| |||||||||||
Other Comprehensive Income |
|
|
|
|
|
|
|
|
|
| ||||||
Foreign currency translation adjustment |
|
| 36,281 |
|
|
| 268,097 |
|
|
| (70,060 | ) |
|
| 36,281 |
|
|
|
|
|
|
| |||||||||||
Comprehensive Loss for the Period |
| $ | (640,973 | ) |
| $ | (510,270 | ) |
| $ | (3,022,855 | ) |
| $ | (640,973 | ) |
|
|
|
|
|
| |||||||||||
Net income (loss) attributable to: |
|
|
|
|
|
|
|
|
|
| ||||||
Body and Mind Inc. |
| (789,089 | ) |
| (792,545 | ) |
| (3,054,841 | ) |
| (789,089 | ) | ||||
Non-controlling interest |
|
| 111,835 |
|
|
| 14,178 |
|
|
| 102,046 |
|
|
| 111,835 |
|
|
|
|
|
|
| |||||||||||
Comprehensive loss attributable to: |
|
|
|
|
| |||||||||||
Comprehensive income (loss) attributable to: |
|
|
|
|
| |||||||||||
Body and Mind Inc. |
| (752,808 | ) |
| (524,448 | ) |
| (3,124,901 | ) |
| (752,808 | ) | ||||
Non-controlling interest |
|
| 111,835 |
|
|
| 14,178 |
|
|
| 102,046 |
|
|
| 111,835 |
|
|
|
|
|
|
| |||||||||||
Loss per Share – Basic and Diluted |
| $ | (0.01 | ) |
| $ | (0.01 | ) |
| $ | (0.03 | ) |
| $ | (0.01 | ) |
|
|
|
|
|
| |||||||||||
Weighted Average Number of Shares Outstanding – Basic and Diluted |
|
| 109,748,878 |
|
|
| 107,600,058 |
| ||||||||
Weighted Average Number of Common Shares Outstanding |
|
| 113,668,613 |
|
|
| 109,748,878 |
|
The accompanying notes are an integral part of these condensed consolidated interim financial statements.
4 |
Table of Contents |
Body and Mind Inc. |
|
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|
|
|
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|
|
| Statement 3 |
| ||||||||||||||||||||||||||||||||||
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|
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|
|
|
|
|
|
|
|
| |||||||||||||||||||||||
Condensed Consolidated Interim Statements of Changes in Stockholders’ Equity | |||||||||||||||||||||||||||||||||||||||||||||||
(U.S. Dollars) | |||||||||||||||||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||||
|
| Share Capital |
|
| Additional |
|
| Shares |
|
| Other |
|
|
|
|
| Non- |
|
|
|
| ||||||||||||||||||||||||||
|
| Common Shares |
|
| paid-in |
|
| to be |
|
| comprehensive |
|
|
|
|
| controlling |
|
|
|
| ||||||||||||||||||||||||||
|
| Number of shares |
|
| Amount |
|
| capital |
|
| issued |
|
| income |
|
| Deficit |
|
| interest |
|
| Total |
| |||||||||||||||||||||||
Balance – 31 July 2021 |
|
| 109,077,778 |
|
| $ | 10,907 |
|
| $ | 50,312,013 |
|
| $ | 0 |
|
| $ | 1,127,713 |
|
| $ | (17,126,510 | ) |
| $ | 26,598 |
|
| $ | 34,350,721 |
| |||||||||||||||
Common stock issued for operating leases |
|
| 1,543,530 |
|
|
| 154 |
|
|
| 546,872 |
|
|
| 0 |
|
|
| 0 |
|
|
| 0 |
|
|
| 0 |
|
|
| 547,026 |
| |||||||||||||||
Stock-based compensation (Note 16) |
|
| - |
|
|
| 0 |
|
|
| 145,175 |
|
|
| 0 |
|
|
| 0 |
|
|
| 0 |
|
|
| 0 |
|
|
| 145,175 |
| |||||||||||||||
Foreign currency translation adjustment |
|
| - |
|
|
| 0 |
|
|
| 0 |
|
|
| 0 |
|
|
| 36,281 |
|
|
| 0 |
|
|
| 0 |
|
|
| 36,281 |
| |||||||||||||||
Loss for the period |
|
| - |
|
|
| - |
|
|
| 0 |
|
|
| 0 |
|
|
| 0 |
|
|
| (789,089 | ) |
|
| 111,835 |
|
|
| (677,254 | ) | |||||||||||||||
Balance – 31 October 2021 |
|
| 110,621,308 |
|
| $ | 11,061 |
|
| $ | 51,004,060 |
|
| $ | 0 |
|
| $ | 1,163,994 |
|
| $ | (17,915,599 | ) |
| $ | 138,433 |
|
| $ | 34,401,949 |
| |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||
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 16) |
|
| 793,466 |
|
|
| 79 |
|
|
| 296,963 |
|
|
| 0 |
|
|
| 0 |
|
|
| 0 |
|
|
| 0 |
|
|
| 297,042 |
| |||||||||||||||
Stock-based compensation (Note 16) |
|
| - |
|
|
| 0 |
|
|
| 287,631 |
|
|
| 0 |
|
|
| 0 |
|
|
| 0 |
|
|
| 0 |
|
|
| 287,631 |
| |||||||||||||||
Foreign currency translation adjustment |
|
| - |
|
|
| 0 |
|
|
| 0 |
|
|
| 0 |
|
|
| 268,097 |
|
|
| 0 |
|
|
| 0 |
|
|
| 268,097 |
| |||||||||||||||
Loss for the period |
|
| - |
|
|
| 0 |
|
|
| 0 |
|
|
| 0 |
|
|
| 0 |
|
|
| (792,545 | ) |
|
| 14,178 |
|
|
| (778,367 | ) | |||||||||||||||
Balance – 31 October 2020 |
|
| 108,307,278 |
|
| $ | 10,830 |
|
| $ | 48,250,272 |
|
| $ | 19,703 |
|
| $ | 999,865 |
|
| $ | (15,658,153 | ) |
| $ | (243,665 | ) |
| $ | 33,378,852 |
|
Body and Mind Inc. |
|
|
|
|
|
|
|
| Statement 3 |
| ||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
Condensed Consolidated Interim Statements of Changes in Stockholders’ Equity (unaudited) | ||||||||||||||||||||||||||||||||
(U.S. Dollars) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
|
| Share Capital |
|
| Additional |
|
|
|
|
| Accumulated other |
|
|
|
| |||||||||||||||||
|
|
| Common Shares |
|
| paid-in |
|
| Shares to be |
|
| comprehensive |
|
| Accumulated |
|
| Non -controlling |
|
| ||||||||||||
|
| Number |
|
| Amount |
|
| capital |
|
| issued |
|
| income |
|
| Deficit |
|
| interest |
|
| Total |
| ||||||||
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 |
|
Stock-based compensation (Note 14) |
|
| - |
|
|
| - |
|
|
| 32,458 |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 32,458 |
|
Foreign currency translation adjustment |
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| (70,060 | ) |
|
| - |
|
|
| - |
|
|
| (70,060 | ) |
Loss (income) for the period |
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| (3,054,841 | ) |
|
| 102,046 |
|
|
| (2,952,795 | ) |
Balance – 31 October 2022 |
|
| 113,668,613 |
|
| $ | 11,366 |
|
| $ | 52,377,031 |
|
| $ | 1,853,403 |
|
| $ | 1,154,033 |
|
| $ | (48,857,867 | ) |
| $ | 577,056 |
|
| $ | 7,115,022 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 for lease liabilities |
|
| 1,543,530 |
|
|
| 154 |
|
|
| 546,872 |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 547,026 |
|
Stock-based compensation (Note 14) |
|
| - |
|
|
| - |
|
|
| 145,175 |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 145,175 |
|
Foreign currency translation adjustment |
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 36,281 |
|
|
| - |
|
|
| - |
|
|
| 36,281 |
|
Loss (income) for the period |
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| (789,089 | ) |
|
| 111,835 |
|
|
| (677,254 | ) |
Balance – 31 October 2021 |
|
| 110,621,308 |
|
| $ | 11,061 |
|
| $ | 51,004,060 |
|
| $ | - |
|
| $ | 1,163,994 |
|
| $ | (17,915,599 | ) |
| $ | 138,433 |
|
| $ | 34,401,949 |
|
The accompanying notes are an integral part of these condensed consolidated interim financial statements.
5 |
Table of Contents |
Body and Mind Inc. |
| Statement 4 |
|
| Statement 4 |
| ||||||||||
|
|
|
|
| ||||||||||||
Condensed Consolidated Interim Statements of Cash Flows | ||||||||||||||||
Condensed Consolidated Interim Statements of Cash Flows (unaudited) | Condensed Consolidated Interim Statements of Cash Flows (unaudited) | |||||||||||||||
(U.S. Dollars) | (U.S. Dollars) | (U.S. Dollars) | ||||||||||||||
|
| Three Month Period Ended 31 October |
|
| Three Month Period Ended 31 October |
| ||||||||||
Cash Resources Provided By (Used In) |
| 2021 |
|
| 2020 |
|
| 2022 |
|
| 2021 |
| ||||
Operating Activities |
|
|
|
|
|
|
|
|
|
| ||||||
Net loss for the period |
| $ | (677,254 | ) |
| $ | (778,367 | ) |
| $ | (2,952,795 | ) |
| $ | (677,254 | ) |
Items not affecting cash: |
|
|
|
|
|
|
|
|
|
| ||||||
Amortization of debt discounts |
| 117,744 |
| 74,435 |
| |||||||||||
Amortization of debt discount |
| 114,221 |
| 117,744 |
| |||||||||||
Accrued interest income |
| (18,000 | ) |
| (106,143 | ) |
| (18,000 | ) |
| (18,000 | ) | ||||
Amortization of licenses |
| 302,255 |
| 225,508 |
| |||||||||||
Non-cash costs – operating leases |
| 77,037 |
| 52,959 |
| |||||||||||
Amortization of intangible assets |
| 327,950 |
| 302,255 |
| |||||||||||
Amortization of operating lease ROU assets |
| 320,719 |
| 77,037 |
| |||||||||||
Depreciation |
| 202,394 |
| 125,727 |
|
| 268,853 |
| 202,394 |
| ||||||
Foreign exchange |
| 0 |
| (112,139 | ) | |||||||||||
Equity-method investment change from earnings |
| 0 |
| (24,872 | ) | |||||||||||
Gain on bargain purchase |
| 0 |
| (208,176 | ) | |||||||||||
Stock-based compensation |
| 145,175 |
| 287,631 |
|
| 32,458 |
| 145,175 |
| ||||||
|
|
|
|
|
| |||||||||||
Amounts receivable and prepaids |
| 6,294 |
| (152,046 | ) |
| 28,724 |
| 6,294 |
| ||||||
Inventory |
| (416,118 | ) |
| 259,435 |
|
| 624,588 |
| (416,118 | ) | |||||
Trade payables and accrued liabilities |
| (118,882 | ) |
| 34,962 |
|
| 382,274 |
| (118,882 | ) | |||||
Income taxes payable |
| 700,352 |
| 508,850 |
| |||||||||||
Income taxes payable and deferred taxes |
| 621,454 |
| 700,352 |
| |||||||||||
Due to related parties |
| 2,092 |
| (8,807 | ) |
| (59,036 | ) |
| 2,092 |
| |||||
Operating lease liabilities |
| (66,578 | ) |
| (117,656 | ) |
|
| (290,474 | ) |
|
| (66,578 | ) | ||
Loan to NMG Ohio LLC |
|
| 0 |
|
|
| (228,736 | ) | ||||||||
Cash provided by (used in) operating activities |
|
| 256,511 |
|
|
| (167,435 | ) | ||||||||
Cash used in operating activities |
|
| (589,074 | ) |
|
| 256,511 |
| ||||||||
|
|
|
|
|
|
|
|
|
|
| ||||||
Investing Activities |
|
|
|
|
|
|
|
|
|
| ||||||
Investment in NMG Ohio, LLC , net of cash received |
| (54,415 | ) |
| (136,326 | ) |
| - |
| (54,415 | ) | |||||
Investment in GLDH |
| 0 |
| 251,189 |
| |||||||||||
Purchase of property and equipment |
| (15,650 | ) |
| (99,619 | ) |
| (8,320 | ) |
| (15,650 | ) | ||||
Convertible loan receivable |
|
| (162,011 | ) |
|
| (134,729 | ) | ||||||||
Loan receivable |
|
| 115,309 |
|
|
| (162,011 | ) | ||||||||
Cash used in investing activities |
|
| (232,076 | ) |
|
| (119,485 | ) |
|
| 106,989 |
|
|
| (232,076 | ) |
|
|
|
|
|
|
|
|
|
|
| ||||||
Financing Activities |
|
|
|
|
|
|
|
|
|
| ||||||
Loan repaid |
|
| (1,824 | ) |
|
| (4,460 | ) | ||||||||
Cash used in financing activities |
|
| (1,824 | ) |
|
| (4,460 | ) | ||||||||
Loans repaid |
|
| (8 | ) |
|
| (1,824 | ) | ||||||||
Cash provided by financing activities |
|
| (8 | ) |
|
| (1,824 | ) | ||||||||
|
|
|
|
|
|
|
|
|
|
| ||||||
Effect of exchange rate changes on cash |
|
| 36,281 |
|
|
| 268,097 |
|
|
| (70,060 | ) |
|
| 36,281 |
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Net Decrease in Cash |
| 58,892 |
| (23,283 | ) |
| (552,153 | ) |
| 58,892 |
| |||||
Cash– Beginning of Period |
|
| 7,374,194 |
|
|
| 1,352,130 |
|
|
| 1,854,277 |
|
|
| 7,374,194 |
|
Cash– End of Period |
| $ | 7,433,086 |
|
| $ | 1,328,847 |
|
| $ | 1,302,124 |
|
| $ | 7,433,086 |
|
Supplemental Disclosures with Respect to Cash Flows (Note 18)16)
The accompanying notes are an integral part of these condensed consolidated interim financial statements.
6 |
Table of Contents |
Body and Mind Inc. |
|
Notes to Condensed Consolidated Interim Financial Statements |
For the Three Months |
(U.S. |
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 September 15, 2010, the Company incorporated a wholly-owned subsidiary, Deploy Acquisition Corp. (“Deploy”) under the laws of the State of Nevada, USA. On September 17, 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 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% |
|
| |||
NMG OH P1, LLC (“NMG OH P1”) |
| Ohio, USA |
| 100% |
| 29 January 2020 | |||
NMG MI 1, Inc. (“NMG MI 1”) |
| Michigan, USA |
| 100% |
| 24 June 2021 | |||
NMG MI C1 Inc. |
| Michigan, USA |
| 100% |
| 24 June 2021 | |||
NMG MI P1 Inc. |
| Michigan, USA |
| 100% |
| 24 June 2021 | |||
Canopy Monterey Bay, LLC (“Canopy”) | California, USA | 100% | 1 December 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 |
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. 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. |
|
|
7 |
Table of Contents |
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. Basis of presentation These condensed consolidated interim 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. In the opinion of management, the unaudited consolidated interim financial statements reflect all adjustments of a normal recurring nature that are necessary for a fair presentation of the results for the interim periods presented. Interim results are not necessarily indicative of results for a full year. The information included in this Form 10-Q should be read in conjunction with information included in the Company’s fiscal year 2022 Form 10-K filed with the U.S. Securities and Exchange Commission (“SEC”) on 17 January 2023. 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 October 2022 and 31 July 2022, 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 15 for revenue disaggregation table. |
|
|
8 |
Table of Contents |
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 October 2022 and 31 July 2022, 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 stated 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. |
9 |
Table of Contents |
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 during its fourth quarter on 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 October 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 31 March 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.
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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 October 2022 and 31 July 2022, 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 0.7327 for monetary assets and liabilities and 0.7524 as an average rate for transactions occurred during the period ended 31 October 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:
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| Level 1 – inputs are based upon unadjusted quoted prices for identical instruments in active markets. | |
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| 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. |
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| 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. |
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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 convertible loan receivable was valued using Level 3 inputs.
Other current financial assets and current financial liabilities have fair values that approximate their carrying values.
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Use of estimates and assumptions |
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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, if any, 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. 4. Financial Instruments The following table represents the Company’s assets that are measured at fair value as of 31 October 2022 and 31 July 2022:
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| As of 31 October 2021 |
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| As of 31 July 2021 |
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Financial assets at fair value |
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Cash |
| $ | 7,433,086 |
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| $ | 7,374,194 |
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Convertible loan receivable |
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| 1,810,827 |
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| 1,648,816 |
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Total financial assets at fair value |
| $ | 9,243,913 |
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| $ | 9,023,010 |
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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. |
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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 deficiency of $937,922 at 31 October 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 for a period of one year from the issuance of these financial statements. Subsequent to October 31, 2022, 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. 5. 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.
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| 31 October 2021 |
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| 31 July 2021 |
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Work in progress |
| $ | 615,899 |
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| $ | 503,215 |
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Finished goods |
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| 1,843,717 |
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| 1,547,493 |
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Consumables |
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| 915,295 |
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| 885,448 |
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Total |
| $ | 3,374,911 |
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| $ | 2,936,156 |
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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.
7. Loan receivable In addition to the convertible loan receivable (Note 6), the Company provides operating loans to CCG that are non-interest bearing, unsecured and due on demand. During the three months ended 31 October 2022, the Company advanced $303,716 (2021 - $372,011) to CCG and received repayments totalling $419,025 (2021 - $210,000) for a net decrease in loan receivable of $115,309 (2021 – net increase of $162,011). At 31 October 2022, the amount receivable from CCG was $674,675 (31 July 2022 - $789,984). 8. Property and Equipment
For the three months ended 31 October 2022, a total depreciation of $34,165 (2021 - $27,826) was included in General and Administrative Expenses and a total depreciation of $234,688 (2021 - $174,568) was included in Cost of Sales.
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
(a) 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; (c) 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. Subsequent to October 31, 2022, the Company completed the acquisition of all of the membership interests of Canopy and issued an aggregate of 16,301,694 shares of common stock to the Sellers. 2,238,806 of the 16,301,694 shares are being held in escrow pending the results of a working capital adjustment.
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.
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.
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The above amounts owing to related parties are unsecured, non-interest bearing and are due on demand. |
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Table of Contents |
12. Loans Payable |
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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. |
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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.
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The 4,800,000 Warrants were valued at $1,037,146 using the Black Scholes Option Pricing Model using the following assumptions:
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”) 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.
Expected life of the options |
| 4.00 years |
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Expected volatility |
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| 139 | % |
Expected dividend yield |
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| 0 | % |
Risk-free interest rate |
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| 0.55 | % |
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Table of Contents |
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:
During the three months ended 31 October 2022, the Company recorded $124,211 related to the amortization of debt discount and $256,058 related to the interest expense.
Long Beach loan
The loan payable at 31 October 2022 in the amount of $12,527 (31 July 2022 - $12,535) assumed from NMG LB 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 9). 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.
Expected life of the options |
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| 102 | % | ||
Expected dividend yield | 0 | % | ||
Risk-free interest | 3.39 | % |
| 13. Operating Leases |
| a) | On 10 November 2017, |
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| b) | On |
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Table of Contents |
| c) | On |
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| d) | On 2 August |
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| e) | On |
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| f) | On |
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| g) | On 23 April 23, 2021, |
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:
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Cash paid for amounts included in the measurement of lease liabilities: |
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Operating cash flows from operating leases |
| $ | 152,340 |
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Right-of-use assets obtained in exchange for lease obligations: |
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Operating leases |
| $ | 717,727 |
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Weighted-average remaining lease term – operating leases |
| 6.47 years |
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Weighted-average discount rate – operating leases |
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| 12 | % |
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 14).
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Year Ending 31 July |
| Operating Leases |
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2022 (remaining) |
| $ | 589,079 |
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2023 |
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| 704,273 |
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2024 |
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| 715,262 |
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2025 |
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| 725,942 |
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2026 and thereafter |
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| 1,877,632 |
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Total lease payments |
| $ | 4,619,688 |
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Less imputed interest |
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| (1,430,625 | ) |
Total |
| $ | 3,189,063 |
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Less current portion |
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| (407,446 | ) |
Long term portion |
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| 2,781,617 |
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For operating lease commitmentsOn 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 have not yet commenced, see Note 19, Commitments.
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| Number of options |
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| Weighted average exercise price |
| Weighted average contractual term remaining (in years) |
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| Aggregate intrinsic value | |||
Outstanding at 31 July 2021 and 31 October 2021 |
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| 9,855,000 |
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| CAD$0.70 |
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| 2.51 |
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| CAD$ 3,750 | |
Vested and fully exercisable at 31 October 2021 |
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| 8,336,250 |
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| CAD$0.67 |
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| 2.25 |
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| CAD$ 19,438 |
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| 31 October 2021 |
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Revenue |
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Wholesale |
| $ | 1,755,799 |
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Retail |
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| 5,815,017 |
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All others |
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| 0 |
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Total |
| $ | 7,570,816 |
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Operating income (loss) |
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Wholesale |
| $ | 803,782 |
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Retail |
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| 866,230 |
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All others |
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| (2,347,266 | ) |
Total |
| $ | (677,254 | ) |
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| Three Months Ended 31 October |
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| 2021 |
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| 2020 |
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Cash paid during the period for interest |
| $ | 219,074 |
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| $ | 0 |
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Cash paid during the period for income taxes |
| $ | 1,896 |
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| $ | 0 |
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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
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h) | On 10 February
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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; |
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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. |
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On 21 September 2021, the Company issued the necessary common shares to settle milestone (i) above (Note 14). During the year ended 31 July 2022, the Company accrued an additional $231,374 and were included in the related operating lease liability for milestone (ii) above. Milestones (iii) and (iv) have not yet been achieved as of 31 October 2022.
| i) | |
|
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. |
On 21 September 2021, the Company issued the necessary common shares to settle milestone (i) above (Note 14). During the year ended 31 July 2022, the Company accrued an additional $239,173 and were included in the related operating lease liability for milestone (ii) above. Milestones (iii) and (iv) have not yet been achieved as of 31 October 2022.
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.
|
| On 1 July 2021, the |
Canopy Monterey Bay, LLC agreed to pay the | ||
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 |
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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 |
During the three months ended 31 October 2022, the Company recorded a total lease expense of $320,718 related to the accretion of lease liabilities and the amortization of right-of-use assets of which $255,871 was included in General and Administrative Expenses and $64,847 was included in Cost of Sales for the three months ended 31 October 2022.
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 |
| $ | 290,474 |
|
|
|
|
|
|
Weighted-average remaining lease term – operating leases |
| 7.13 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 (remaining) |
| $ | 1,018,818 |
|
2024 |
|
| 1,280,541 |
|
2025 |
|
| 1,308,943 |
|
2026 |
|
| 1,248,160 |
|
2027 |
|
| 1,110,515 |
|
2028 and thereafter |
|
| 3,172,662 |
|
Total lease payments |
| $ | 9,139,639 |
|
Less imputed interest |
|
| (3,128,198 | ) |
Total |
| $ | 6,011,441 |
|
Less current portion |
|
| (649,957 | ) |
Long term portion |
| $ | 5,361,484 |
|
14. Capital Stock
The Company’s authorized share capital comprises 900,000,000 Common Shares, with a $0.0001 par value per share.
On 21 September 2021, the Company issued 238,929 common shares 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 common shares to another entity based on the terms and conditions of the two lease agreements for the Manistee, Michigan premises (Notes 13 and 16).
Pursuant to the ShowGrow Long Beach Purchase Agreement, 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 (Note 17).
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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 (Note 9).
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 2021 |
|
| 9,855,000 |
|
| CAD$0.71 |
|
| 2.76 |
|
| CAD$ - | |
Granted |
|
| 848,000 |
|
| CAD$0.37 |
|
|
|
|
| CAD$ - | |
Cancelled |
|
| (1,250,000 | ) |
| CAD$0.70 |
|
|
|
|
| CAD$ - | |
Outstanding at 31 July 2022 |
|
| 9,453,000 |
|
| CAD$0.67 |
|
| 2.11 |
|
| CAD$ - | |
Outstanding at 31 October 2022 |
|
| 9,453,000 |
|
| CAD$0.67 |
|
| 1.86 |
|
| CAD$ - | |
Vested and fully exercisable at 31 October 2022 |
|
| 8,804,500 |
|
| CAD$0.68 |
|
| 1.72 |
|
| CAD$ - |
The Company recorded total stock-based compensation expense of $32,458 (2021 - $145,175) for the three months ended 31 October 2022 and 2021, respectively, in connection with prior issuances of options to purchase common stock. Stock-based compensation expense is included in general and administrative expenses on the accompanying statements of operations.
Share Purchase Warrants
As of 31 October 2022 and 31 July 2022, the following warrants are outstanding:
Number of warrants outstanding and | Exercise price | Expiry dates | ||||
11,780,134 | CAD$1.50 | 16 May 2023 | ||||
635,150 | CAD$1.26 | 17 May 2023 | ||||
4,800,000 | USD$0.40 | 19 July | ||||
1,000,000 | USD$0.16 | 14 June 2027 | ||||
18,215,284 | (1) | CAD$1.16 |
(1) | This figure does not include 3,200,000 warrants issued to the |
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15.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:
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).
|
| 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 net loss were as follows during the three months ended 31 October 2022:
|
| 31 October 2022 |
| |
Revenue |
|
|
| |
Wholesale |
| $ | 1,305,981 |
|
Retail |
|
| 6,525,714 |
|
Total |
| $ | 7,831,695 |
|
|
|
|
|
|
Net loss |
|
|
|
|
Wholesale |
| $ | (1,238,870 | ) |
Retail |
| �� | 523,885 |
|
All others |
|
| (2,237,810 | ) |
Total |
| $ | (2,952,795 | ) |
During the three months ended 31 October 2022, the Company had no major customer over 10% of its revenues.
16. Supplemental Disclosures with Respect to Cash Flows
|
| Three Months Ended 31 October |
| |||||
|
| 2022 |
|
| 2021 |
| ||
Cash paid during the period for interest |
| $ | 222,451 |
|
| $ | 219,074 |
|
Cash paid during the period for income taxes |
| $ | 4,620 |
|
| $ | 1,896 |
|
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 13 and 14).
17. Commitments
On July 3, 2019, the Company entered into various agreements with GLDH and other third parties to acquire 100% ownership interest in GLDH’s Long Beach, California dispensary ("ShowGrow Long Beach"). The purchase price was $6,700,000, of which $1,500,000 was 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”) 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 2,681,006 common shares were issued on 12 August 2019. The Share Payment is 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. The Share Payment reduction is pending and, as a result, the related shares have not been released from escrow. Any final settlement that is different than 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.
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|
|
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18. Other Agreements |
|
|
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. 19. Subsequent Events 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$0.1340 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. |
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|
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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 Nevada, Inc. (“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 “Surviving Entity”) and those certain shareholders of the Surviving Entity (the “Sellers”) entered into an Agreement and Plan of Merger (the “Merger Agreement”) whereby Merger Sub merged with and into 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: |
|
|
| If, within |
2. | If, within three (3) years of the closing date, |
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.
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ITEM 2 – MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The terms “BAM”, “Company”, “we”, “our”, and “us” refer to Body and Mind Inc. unless the context suggests otherwise.
FORWARD-LOOKING STATEMENTS
The following management’s discussion and analysis of the Company’s financial condition and results of operations (the “MD&A”) contains forward-looking statements that involve risks and uncertainties. All statements, other than statements of historical facts, included in this Form 10-Q that address activities, events or developments that we expect, believe or anticipate will or may occur in the future are forward-looking statements. These forward-looking statements are based on assumptions which we believe are reasonable based on current expectations and projections about future events and industry conditions and trends affecting our business. However, whether actual results and developments will conform to our expectations and predictions is subject to a number of risks and uncertainties that, among other things, could cause actual results to differ materially from those contained in the forward-looking statements, including, without limitation, the Risk Factors set forth in our Annual Report on Form 10-K for the fiscal year ended July 31, 2021,2022, including the consolidated financial statements and related notes contained therein. These factors, or any one of them, may cause our actual results or actions in the future to differ materially from any forward-looking statement made in this document. Refer to “Forward-looking Statements” as disclosed in our Annual Report on Form 10-K for the fiscal year ended July 31, 2021.2022.
Introduction
This MD&A is focused on material changes in our financial condition from July 31, 2021,2022, our most recently completed year end, to October 31, 2021,2022, and our results of operations for the three months ended October 31, 2021,2022, and should be read in conjunction with Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations as contained in our Annual Report on Form 10-K for the fiscal year ended July 31, 2021.2022.
Company Overview
Body and Mind is a multi-state cannabis operator, which has retail, distribution, cultivation, and/or processing operations in Nevada, California, Arkansas, Michigan and Ohio.
Our platform approach to expansion focuses on limited license states and jurisdictions, entering new markets through lower cost license applications and opportunistic/targeted acquisitions.
We have developed the marquis lifestyle “Body and Mind” brand in Nevada with strong penetration into dispensaries and have recently expanded our brand and products to dispensaries in California. The Body and Mind brand appeals to a wide range of cannabis consumers with products including flower, oils, extracts (wax, live resin, ambrosia) and edibles.
We have a long track record of producing award-winning cannabis products and we have success with licensing to manufacture for brands. We completed constructionwinning licenses in new states and commenced production operations at the new Nevada production facility in August of 2020.jurisdictions.
We are a Nevada corporation that, through our wholly-owned subsidiary, Nevada Medical Group, LLC (“NMG”), are engaged in the cultivation and production of medical and adult-use recreational marijuana products. NMG produces cannabis flower, oil extracts and edibles under license in the state of Nevada, which are available for sale under the brand name “Body and Mind” in dispensaries in Nevada.
In April 2020, we closed the San Diego ShowGrow dispensary transaction, which is owned 60% by our wholly-owned subsidiary, NMG San Diego, LLC (“NMG SD”), and has received all licenses, permits and authorizations required to conduct medical and adult-use commercial cannabis retail operations. The San Diego ShowGrow dispensary opened in early July 2020. We, through our wholly-owned subsidiary, NMG Long Beach, LLC (“NMG LB”), have been managing the ShowGrow Long Beach dispensary operations, for over a year, received all approvals and final license transfer for the dispensary, which was transferred to NMG LB at the end of August 2020 and is expected to close in the near future.
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On July 11, 2021, we announced receipt of local approval for a cannabis manufacturing facility in Cathedral City, California and execution of a lease for the facility. We have applications in process with the California Bureau of Cannabis Control (BCC) for a type “N” manufacturing license, and with the California Department of Public Health (CDPH) for a distribution license, which is anticipated to allow us to manufacture and distribute our BaM branded flower products, extracts, oils and edibles. The company has received state and local approvals to advance the manufacturing facility and is evaluating the expansion opportunity.
On November 30, 2021, we, through our wholly owned subsidiary, DEP Nevada, Inc., a Nevada corporation (“DEP”) entered into two membership interest purchase agreements with Canopy Monterey Bay, LLC (“Canopy”) and the membership interest owners of Canopy to acquire an aggregate of 100% of Canopy, which owns a retail dispensary in the limited license jurisdiction of Seaside, California, called “The Reef.” The Company through DEP completed the acquisition of all of the membership interests of Canopy on December 7, 2022.
In Ohio, we, through NMG, were managing the fully operational The Clubhouse dispensary located in Elyria, Ohio, which iswas owned by NMG Ohio LLC, of which we ownowned 30% through our subsidiary NMG, and havehad an agreement to acquire the remaining 70% of NMG Ohio LLC. We received all approvals and final license and name transfer from the Ohio Department of Pharmacy in early September 2020 and transferred the dispensary license and all assets and liabilities associated with such dispensary from NMG Ohio LLC to a 100% owned subsidiary of Body and Mind; however, the transfer of the remaining 70% interest in NMG Ohio LLC to NMG willdid not occur until NMG Ohio LLC receives a production license. On September 17, 2021, the final award of the production license was transferred to our wholly owned subsidiary, NMG OH P1 LLC, and the transaction closed resulting in NMG now owning 100% of NMG Ohio.
In Arkansas, we, through NMG, manage the “Body and Mind” branded medical marijuana dispensary including cultivation in West Memphis, Arkansas, whichArkansas. The dispensary opened on April 27, 2020.2020 and the cultivation commenced operations on April 6, 2021 On Octpber 28, 2020, the dispensary was awarded best dispensary in Arkansas by Ark420.com.
In Michigan we, through NMG MI 1, Inc. opened a retail location in Muskegon Michigan on February 2, 2022 and operate the dispensary as a Body and Mind branded dispensary. On September 21, 2021 we announced the Company has leased a commercial building in Manistee, MI with the intent of developing a cultivation facility with 50,000 square feet of canopy as well as a production facility. On April 7, 2022 the Company announced it would pause development of the cultivation and production developments. The Company continues to evaluate the projects.
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 ( “CraftedPlants”) and certain shareholders of the CraftedPlants entered into an Agreement and Plan of Merger whereby Merger Sub merged with and into CraftedPlants, and following the consummation of the merger, which occurred on December 21, 2022, CraftedPlants, as the surviving entity of the merger, became a wholly-owned subsidiary of DEP and changed its name to BaM Body and Mind Dispensary NJ, Inc. BaM Body and Mind Dispensary NJ, Inc. leases a New Jersey retail location with local cannabis-use approval, and is currently working on attaining final state licensure in New Jersey.
Our common stock is listed on the Canadian Securities Exchange under the symbol “BAMM” and our common stock is posted for trading on the OTCQB Venture Market under the symbol “BMMJ.”
Our head office located at 750 – 1095 West Pender Street, Vancouver, British Columbia, Canada V6E 2M6.
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Intercorporate Relationships
The following is a list of all of our subsidiaries and the corresponding date of jurisdiction of incorporation or organization and the ownership interest of each. All of our subsidiaries are directly or indirectly owned by us:
Name of Entity | Place of Incorporation/Formation | Ownership Interest | Date of Acquisition or formation |
DEP Nevada Inc.(1) | Nevada, USA | 100% | August 10, 2017 |
Nevada Medical Group, LLC(2) | Nevada, USA | 100% | November 14, 2017 |
NMG Long Beach, LLC(3) | California, USA | 100% | December 18, 2018 |
NMG Cathedral City, LLC(4) | California, USA | 100% | January 4, 2019 |
NMG San Diego, LLC(5) | California, USA | 60% | January 30, 2019 |
NMG Ohio LLC(6) | Ohio, USA | 100% | April 27, 2017 |
NMG OH 1, LLC(7) | Ohio, USA | 100% | January 30, 2020 |
NMG OH P1, LLC(8) | Ohio, USA | 100% | January |
NMG MI 1, Inc.(9) | Michigan, USA | 100% | June 24, 2021 |
NMG MI P1 Inc. (10) | Michigan, USA | 100% | June 24, 2021 |
NMG MI C1 Inc. (11) | Michigan, USA | 100% | June 24, 2021 |
Canopy Monterey Bay, LLC (12) | California, USA | 100% | November 30, 2021 |
NMG CA P1, LLC(13) | California, USA | 100% | January 7, 2020 |
NMG CA C1, LLC(14) | California, USA | 100% | October 7, 2020 |
BaM Body and Mind Dispensary NJ, Inc.(15) | New Jersey, USA | 100% | December 21, 2022 |
Notes: |
| (1) | DEP Nevada Inc. is a wholly-owned subsidiary of Body and Mind Inc. |
| (2) | Nevada Medical Group, LLC is a wholly-owned subsidiary of DEP Nevada Inc. |
| (3) | NMG Long Beach, LLC is a wholly-owned subsidiary of DEP Nevada Inc.. |
| (4) | NMG Cathedral City, LLC is a wholly-owned subsidiary of DEP Nevada Inc. and was dissolved on March 8, 2022. |
| (5) | NMG San Diego, LLC is a 60% owned subsidiary of DEP Nevada Inc.. |
| (6) | NMG Ohio LLC is a wholly-owned subsidiary of Nevada Medical Group LLC |
| (7) | NMG OH 1, LLC is a wholly-owned subsidiary of DEP Nevada Inc. |
| (8) | NMG OH P1, LLC is a wholly-owned subsidiary of DEP Nevada Inc. |
| (9) | NMG MI 1, Inc. is a wholly-owned subsidiary of DEP Nevada, Inc. |
| (10) | NMG MI P1 Inc. is a wholly-owned subsidiary of DEP Nevada, Inc. |
| (11) | NMG MI C1 Inc. is a wholly-owned subsidiary of DEP Nevada, Inc. |
(12) | ||
Canopy Monterey Bay, LLC is a wholly-owned subsidiary of DEP Nevada, Inc. | ||
(13) | NMG CA P1, LLC is a wholly-owned subsidiary of DEP Nevada, Inc. | |
(14) | NMG CA C1, LLC is a wholly-owned subsidiary of | |
(15) | BaM Body and Mind Dispensary NJ, Inc. (formerly, CraftedPlants NJ Corp.) is a wholly-owned subsidiary of DEP Nevada, Inc. |
Business Operations
Development of Our Business
Incorporation and Early Corporate History
We were incorporated on November 5, 1998 in the State of Delaware under the name Concept Development Group, Inc. In May 2004, we acquired 100% of Kaleidoscope Venture Capital, Inc. (formerly Vocalscape Networks, Inc.) and changed our name to Vocalscape, Inc. In November 2005, we changed our name to Nevstar Precious Metals Inc. In September 2008, we changed our name to Deploy Technologies Inc. (“Deploy Tech”) and effective November 14, 2017, we changed our name to Body and Mind, Inc. (“Body and Mind”).
On September 15, 2010, we incorporated a wholly-owned subsidiary, Deploy Acquisition Corp. (“Deploy”) under the laws of the State of Nevada, USA. On September 17, 2010, Deploy completed a merger with Deploy Tech, its former parent company, pursuant to which Deploy was the surviving corporation and assumed all the assets, obligations and commitments of Deploy Tech. 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 – that is, our Company’s issued and outstanding common stock.
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On May 10, 2011, we registered as an extra-provincial company in British Columbia, and on September 30, 2011, we filed a certificate of amendment with the Nevada Secretary of State to designate 2,900,000 shares of our authorized capital stock as Class A Preferred Shares (the “Preferred Shares”). On September 2, 2014, we filed a certificate of amendment with the Nevada Secretary of State increasing the authorized Preferred Shares from 2,900,000 shares to 20,000,000 shares.
On November 11, 2014, we filed a certificate of change with the Nevada Secretary of State whereby we reverse split our authorized as well as the issued and outstanding shares of common stock (the “Common Shares”) on the basis of one (1) new share for ten (10) old shares. This resulted in a reduction of our authorized capital from 100,000,000 Common Shares to 10,000,000 Common Shares, and a reduction of our issued and outstanding Common Shares from 23,130,209 Common Shares to approximately 2,313,021 Common Shares. On April 11, 2017, we filed a certificate of amendment with the Nevada Secretary of State to increase the authorized capital from 10,000,000 Common Shares to 900,000,000 Common Shares.
Acquisition of Nevada Medical Group, LLC
On September 14, 2017, we, with DEP, Nevada Inc (“DEP”), entered into a definitive agreement (the “Share Exchange Agreement”) with Nevada Medical Group, LLC (“NMG”), whereby DEP acquired all of the issued and outstanding securities of NMG in exchange for (a) 16,000,000 post reverse-split Common Shares, (b) $2,000,000 cash, and (b) promissory notes (the “Promissory Notes”) in the aggregate principal amount of $2,000,000, to the NMG securityholders on a pro rata basis in accordance with their respective ownership interest in NMG. The Promissory Notes were secured by a senior priority security interest in all of our assets, and were due to be repaid at the earlier of fifteen (15) months from the closing date of the Share Exchange Agreement, or, if an equity or debt financing subsequent to the Concurrent Financing (as defined below) were to be closed in an aggregate amount of not less than $5,000,000, then within 30 days of the closing date of such subsequent financing. The Share Exchange Agreement closed on November 14, 2017.
Pursuant to the Share Exchange Agreement, we changed our name to “Body and Mind, Inc.”, effective on November 14, 2017, by filing a certificate of amendment with the Nevada Secretary of State; at the same time, we cancelled our entire authorized class of Preferred Shares. In addition, on November 14, 2017, we filed a certificate of change with the Nevada Secretary of State whereby we reverse split our issued and outstanding Common Shares on the basis of one (1) new share for three (3) old shares (the “Consolidation”) which resulted in there being 28,239,876 Common Shares issued and outstanding post-Consolidation. Subsequent to completion of the Share Exchange Agreement, we filed articles of exchange with the Nevada Secretary of State.
Concurrent with the Share Exchange Agreement, we completed an equity financing to raise aggregate gross proceeds of CAD$6,007,430 through the issuance of subscription receipts (the “Subscription Receipts”), at a pre-Consolidation price of CAD$0.22 per Subscription Receipt (the “Concurrent Financing”). On November 14, 2017, each Subscription Receipt was exchanged in accordance with its terms, for no additional consideration, for one pre-Consolidation Common Share and one common share purchase warrant (each a “Warrant”) of the Company. Each Warrant was exercisable by the holder at a price of CAD$0.90 for a period of 24 months from the date of issuance.
On completion of the Share Exchange Agreement, we assumed the business of NMG, being the cultivation and production of medical marijuana products.
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Convertible Loan and Management Agreements with Comprehensive Care Group LLC
On March 19, 2018, we, through our wholly-owned subsidiaries DEP and NMG, entered into a convertible loan agreement (the “Convertible Loan Agreement”) and a management agreement (the “Management Agreement”), respectively, with Comprehensive Care Group LLC (“CCG”), an Arkansas limited liability company, with respect to the development of a medical marijuana dispensary including a 50 flowering plant cultivation facility in West Memphis, Arkansas which agreements were effective as of March 15, 2019.
Pursuant to the Convertible Loan Agreement, DEP agreed to make loan advances to CCG from time to time in the aggregate principal amount of up to $1,250,000 and as of OctoberJuly 31, 2021,2020, DEP has loaned $1,810,827$1,353,373 to CCG. The loan proceeds were used to fund the construction of the medical marijuana dispensary facility, and to provide working capital to cover initial operating expenses. The construction was completed and all permits and licenses were received for the dispensary in late April 2020, which opened for operations on April 27, 2020.
The interest on the outstanding principal amount is currently set at $6,000 per month, payable monthly in arrears on or before the first calendar day of each month. CCG is not obligated to repay any principal outstanding under the loan until March 30, 2021. Either CCG or DEP may unilaterally extend the maturity date by one year, and may thereafter continue to extend the maturity date on a yearly basis by increments of one year (each, an “Extension Option”) by providing written notice of the exercise of the Extension Option by the party seeking an extension to the other party; provided, however, that under no circumstances shall any extended maturity date extend beyond the expiration of the term of the Management Agreement entered into between NMG and CCG. The Company extended the loan maturity date by one year resulting in a new maturity date of March 30, 2022.2023. The Management Agreement has an expiration of March 15, 2024 and can be mutually extendable.
Upon the latter of: (a) one year after granting of a medical marijuana dispensary license by the Arkansas Medical Marijuana Commission to CCG, or (b) one year after entering into the Convertible Loan Agreement, DEP may, in its sole discretion, subject to DEP providing all reasonable assistance to obtain all necessary approvals from the applicable government authorities to engage in the medical marijuana dispensary business, elect to convert all of the outstanding indebtedness into preferred units of CCG equal to 40% of the overall member units of CCG, subject to approval of the Arkansas Medical Marijuana Commission, with the following preferred rights: (i) the right to an allocative share of 66.67% of the net profits of CCG (as defined in the Convertible Loan Agreement) and the right to distributions equal to 66.67% of the net profits on a monthly basis; (ii) the right to a 66.67% share of CCG’s assets upon dissolution of CCG; and (iii) the right to 66.67% of all voting rights of members of CCG. DEP is waiting for regulatory clearance from the State regulators before proceeding with the conversion
Pursuant to the Management Agreement, NMG provides operations and management services to CCG (including management, staffing, operations administration, oversight and other related services) for the medical marijuana dispensary. In consideration for such services CCG pays NMG a monthly management fee in the amount equal to 66.67% of the Monthly Net Profits (as defined below) of CCG for the immediately-preceding month. Notwithstanding the foregoing, in the event that DEP exercises its conversion right under the Convertible Loan Agreement, then NMG’s monthly management fee shall be fixed at $6,000 per month, unless otherwise agreed by the parties in writing. For purposes of the Management Agreement, “Monthly Net Profits” means, for each calendar month, an amount equal to CCG’s gross revenue for such calendar month less CCG’s operating expenses (including cost of goods sold, interest, and tax for said month), as reasonably determined in accordance with generally accepted accounting principles.
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Acquisition of NMG Ohio LLC
We, through NMG, until September 2021 owned a 30% interest incurrently own NMG Ohio, LLC (“NMG Ohio”), which hashad a cannabis dispensary carrying on business as “The Clubhouse” in Elyria, Loraine County, Ohio. On January 31, 2019, we, through NMG, entered into a definitive agreement to acquire the remaining 70% interest in NMG Ohio. The consideration for the remaining 70% interest in NMG Ohio consists of cash payments totaling $1,575,000 and 3,173,864 common shares of the Company. As at the date hereof, we have issued 3,173,864 common shares, with a fair value of $1,188,168, and paid $1,575,000. All share and cash payments for the transactions have been paid in full and closing of the acquisition was subject to receipt of regulatory approval, which all approvals and final license and name transfer approvals from the Ohio Department of Pharmacy were received in early September 2020 but the remaining 70% was not closed as of July 31, 2021. As such, the dispensary license for The Clubhouse dispensary, as well as the assets and liabilities associated with the dispensary, were transferred to the Company’s wholly-owned subsidiary, NMG OH 1 LLC. On September 17, 2021, the final award of the production license was transferred to our wholly owned subsidiary, NMG OH P1 LLC, and the transaction closed resulting in NMG now owning 100% of NMG Ohio.
Strategic Investment and Commercial Advisory Agreements with Australis Capital Inc.
Pursuant to an investment agreement (the “Investment Agreement”) entered into with Australis Capital Inc. (“Australis”) on October 30, 2018, whereby Australis acquired (a) 16,000,000 units of the Company, with each unit being comprised of one share of our common stock and one common share purchase warrant at a purchase price of CAD$0.40 per unit, for gross proceeds of CAD$6,400,000 and (b) CAD$1,600,000 principal amount 8% unsecured convertible debentures (the “Debentures”) of the Company, we entered into a commercial advisory agreement (the “Commercial Advisory Agreement”) with Australis Capital (Nevada) Inc. (“Australis Nevada”), a wholly-owned subsidiary of Australis, pursuant to which Australis Nevada has agreed to provide advisory and consulting services to us for a fee of $10,000 per month payable on the first day of each month for a term ending on the date that is the earlier of (i) five years following the closing of the transactions contemplated by the Investment Agreement, and (ii) the date Australis no longer holds 10% or more of our Company’s issued and outstanding common shares. The foregoing is more fully disclosed in our Current Report on Form 8-K filed with the SEC on November 5, 2018. On July 1, 2019, we entered into a conversion agreement with Australis, whereby Australis has agreed to convert the Debentures on July 1, 2020. Upon execution of the conversion agreement, we remitted CAD$148,340 to Australis as an advanced interest payment for the period from November 2, 2018 to July 1, 2020. On July 1, 2020, we issued 2,909,091 Common Shares to Australis at a deemed value of CAD$0.55 per Common Shares and the Debentures were fully converted to Common Shares.
In addition, pursuant to the terms of the Investment Agreement and subject to certain exceptions, Australis will be entitled to maintain its pro rata ownership interest of the Company until such time as it no longer holds 10% or more of our issued and outstanding common shares.
Furthermore, pursuant to the terms of the Investment Agreement and subject to applicable laws and the rules of the CSE, for as long as Australis owns at least 10% of our issued and outstanding common shares, Australis will be entitled to nominate one director for election to our Board of Directors of the Company. If Australis exercises all of its warrants and converts all of its debentures, Australis will be entitled to nominate a second director for election to our Board of Directors. Further, for as long as Australis maintains ownership of at least 25% of our issued and outstanding common shares, Australis will be entitled to maintain two directors on our Board of Directors, provided that each director nominee must meet the requirements of applicable corporate, securities and other laws and rules of the CSE. As of July 31, 2020, Australis has exercised all of its warrants and the Debentures have all been converted, however, Australis no longer maintains ownership of at least 25% of our outstanding Common Shares. Australis’ current nominee director on our Board of Directors is Brent Reuter.
On September 2, 2021, Australis ownership of Body and Mind fell below 10% which resulted in the termination of the parties obligations under the Investment Agreement and Commercial Advisory Agreement.
Transaction and Settlement with Green Light District Holdings Inc. – ShowGrow Long Beach and San Diego
Prior Agreement with Green Light District Holdings Inc.
On November 28, 2018, we entered into an interim agreement (the “Prior GLDH Agreement”) with Green Light District Holdings Inc. (“GLDH”), a private company incorporated under the laws of Delaware, and David Barakett, whereby our Company agreed to acquire up to 100% of the issued and outstanding common shares of GLDH. We concurrently made a strategic investment in a senior secured convertible note issued by GLDH in the principal amount of $5,200,000 (the “Prior GLDH Note”), bearing interest at the rate of 20% per annum and maturing on November 28, 2020.
At the time, GLDH was the owner of the ShowGrow dispensary brand, and owner of:
| (a) | the ShowGrow Long Beach dispensary, |
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| (b) | 43% of the equity interest and 60% of the voting rights in the ShowGrow San Diego dispensary, and |
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| (c) | 30% of the equity interest in the ShowGrow Las Vegas dispensary. |
GLDH is also the owner of the ShowGrow app. The dispensaries were in various stages of licensing.
In order to fund our original investment in GLDH, Australis advanced a $4,000,000 loan which was evidenced by a senior secured note dated November 28, 2018, bearing an interest rate of 15% per annum and maturing in two years. The terms required semi-annual interest payments unless we elected to accrue the interest by adding it to the principal amount of the debt facility. We may prepay the loan at any time, in any amount, subject to a 5% prepayment penalty on any amount repaid within the first year of the loan. Additionally, Australis exercised $1.2 million in warrants they held in our Company at an exercise price of CAD$0.50, which equated to 3,206,160 common shares.
We paid a financing fee to Australis in the approximate amount of CAD$795,660, by issuing 1,105,083 Common Shares at a deemed price of CAD$0.72 per share.
Original Settlement and Release Agreement
On June 19, 2019, our Company, our indirect wholly-owned subsidiary NMG LB, and our 60% owned subsidiary NMG SD, entered into a settlement agreement (the “Original GLDH Settlement Agreement”) with GLDH, The Airport Collective, Inc. (“Airport Collective”), Mr. Barakett, and SGSD, LLC (“SGSD”). SGSD was the commercial tenant at 7625 Carroll Road, San Diego, California 92121 (the “San Diego Location”).
Pursuant to the Original GLDH Settlement Agreement, we, GLDH, and Mr. Barakett agreed to restructure the Prior GLDH Agreement, and enter into a mutual release of all claims related to the Prior GLDH Agreement.
In connection with the settlement, (a) SGSD agreed to assign its lease for the San Diego Location to NMG SD, and (b) GLDH, Airport Collective and NMG LB entered into an asset purchase agreement dated June 19, 2019 (the “Asset Purchase Agreement”), pursuant to which NMG LB agreed to purchase all of the assets of GLDH and Airport Collective utilized in the medical and adult-use commercial cannabis retail business at 3411 E. Anaheim St., Long Beach, CA 90804 (the “Long Beach Location”).
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Amended and Restated Settlement and Release Agreement
On June 28, 2019, we, NMG LB, NMG SD, GLDH, Airport Collective, Mr. Barakett, and SGSD entered into an amended and restated settlement and release agreement (the “Amended GLDH Settlement Agreement”) which supersedes and replaces the Original GLDH Settlement Agreement. Pursuant to the Amended GLDH Settlement Agreement, the parties agreed as follows:
| i. | GLDH, Airport Collective, and Mr. Barakett agreed to release us from all claims related to the Prior GLDH Agreement upon closing of the Asset Purchase Agreement in consideration of the following: |
| A. | the Company issuing to Mr. Barakett or his designee up to 1,340,502 Common Shares at a deemed price of CAD$0.7439 per share, subject to NMG SD receiving all licenses, permits, and authorizations required for NMG SD to conduct medical commercial cannabis retail operations at the San Diego Location (the “SD Medical Licenses”) (issued); | |
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| B. | the Company issuing to Mr. Barakett or his designee up to 1,340,502 Common Shares at a deemed price of CAD$0.7439 per share, subject to NMG SD receiving all licenses, permits, and authorizations required for NMG SD to conduct adult-use commercial cannabis retail operations at the San Diego Location (the “SD Adult-use Licenses”) (issued); and | |
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| C. | the Company paying certain legal and consulting expenses incurred by GLDH, Airport Collective and Barakett in an aggregate amount of US$90,500 (paid); and | |
| ii. | SGSD agreed to assign its lease for the San Diego Location to NMG SD, and to release our Company, NMG LB and NMG SD from any and all claims, in consideration of the payment by us of a total of USD$500,000 to SGSD’s members, to be paid and satisfied by the issuance of Common Shares to them at the maximum discount allowed by the CSE (issued). |
NMG SD is owned 60% by the our subsidiary, DEP, and 40% by SJJR, LLC (“SJJR”). Mr. Barakett agreed to cover SJJR’s portion of all start-up costs associated with NMG SD establishing commercial cannabis operations at the San Diego Location, inclusive of: (i) the costs associated with becoming a tenant at the San Diego Location; and (ii) all construction costs associated with building out the San Diego Location for NMG SD’s operations. The share consideration payable to Mr. Barakett under the Amended GLDH Settlement Agreement is subject to reduction if Mr. Barakett fails to meet this obligation on a timely basis.
NMG SD, which has assumed the lease on the ShowGrow San Diego premises, has been awarded its own medical commercial cannabis retail license and adult-use commercial retail license and commenced operations on April 15, 2020. In consideration for the landlord, Green Road, LLC, agreeing to consent to the assignment of the original lease with SGSD to NGM SD, we agreed to provide the following consideration to the landlord:
| i. | $700,000 in Common Shares of the Company calculated upon execution of the assignment and first amendment to commercial lease (the “Assignment and First Amendment”), dated June 13, 2019, at the maximum discount allowed by the CSE to be issued to the landlord immediately following execution of the Assignment and First Amendment (1,031,725 shares issued on August 12, 2019); |
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| ii. | $783,765.26 in cash to be paid to the landlord via bank draft within five (5) business days of execution of the Assignment and First Amendment (paid); and |
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| iii. | $750,000 in cash, plus interest at the rate of five percent (5%) simple per annum accruing from the effective date to be paid no later than five (5) business days of the landlord’s receipt from the City of San Diego of a Conditional Use Permit allowing adult-use commercial cannabis storefront retail operations at the San Diego Location (paid). |
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Pursuant to the Assignment and First Amendment, the parties agreed to amend the original lease to permit NMG SD to have three (3) five (5) year renewal options as opposed to two (2) renewal options. In addition, the parties agreed to reduce the amount of the sale bonus provision in the original lease to $1,000,000 from $2,000,000, which shall only be payable in connection with the first two assignments triggering this obligation, and thereafter, assignments will not require payment of a sale bonus. Furthermore, the parties also amended certain provisions of the original lease to ensure that any change in members representing less than fifty percent (50%) of the existing membership interests of NMG SD shall be an excluded transaction and not trigger the sale bonus or be deemed an assignment requiring consent of the landlord.
Amended and Restated Convertible Note and General Security Agreement
As contemplated by the Original GLDH Settlement Agreement, we entered into a loan agreement with GLDH dated June 19, 2019 (the “2019 GLDH Loan Agreement”), pursuant to which the Prior GLDH Note has been superseded and replaced with an amended and restated senior secured convertible note payable to us by GLDH in the principal amount of $5,200,000 (the “Amended and Restated GLDH Note”). The Amended and Restated GLDH Note bears interest at the rate of 20% per annum, compounded annually, and will mature and becomewas repayable on June 19, 2022.2022 (see Asset Purchase Agreement below). GLDH’s obligations under 2019 GLDH Loan Agreement and the Amended and Restated GLDH Note have been guaranteed by Airport Collective, and are secured under a security agreement dated June 19, 2019 by all of GLDH’s and Airport Collective’s personal property, including but not limited to equipment, inventory, accounts receivable, cash or cash equivalents, and rights under contracts.
Asset Purchase Agreement
Pursuant to the Asset Purchase Agreement, NMG Long Beach has agreed to purchase all of GLDH’s and Airport Collective’s assets (the “Purchased Assets”) utilized in the retail cannabis business at the Long Beach Location for $6,700,000. Upon closing of the transaction, the outstanding principal amount under the Amended and Restated GLDH Note will bewas applied to the purchase price, and Airport Collective will be released from its obligations as a guarantor of the GLDH’s obligations under the Amended and Restated GLDH Note.
We will pay the balance of the purchase price for the Purchased Assets by issuing up to 2,681,006 Common shares at a deemed price of CAD$0.7439 per share (issued in escrow on August 12, 2019); the number of shares required to pay and satisfy the balance of the purchase price for the Purchased Assets in the amount of $1,500,000 was determined with reference to the Agreed Foreign Exchange Rate of CAD$1.3296:USD$1.00. NMG LB received all approvals and license transfer from local and state authorities to conduct medical and adult-use commercial cannabis retail operation at the Long Beach Location, which were transferred to NMG LB at the end of August 2020 and is expected to close in the near future. The purchase price is fixed and 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 currently estimated will be allocated to other income or expense.
Contemporaneous Loan
We entered into a contemporaneous loan (the “Contemporaneous Loan”) with GLDH in the amount of $726,720 to fund certain business improvements and expansion needs of GLDH’s business operations. We and NMG LB agreed to forgive the Contemporaneous Loan on the date of closing of the Asset Purchase Agreement.
Management Assignment and Assumption Agreement
On or around August 1, 2019, NMG LB began managing the ShowGrow Long Beach business pursuant to the management assignment and assumption agreement dated June 19, 2019, among NMG LB, GLDH and Airport Collective. Under the agreement, NMG LB is entitled to manage the business and recognize the profits from the business until NMG LB receives all approval and license transfer for operations at the Long Beach Location, which were received and transferred at the end of August 2020, and the Asset Purchase Agreement is expected to close in the near future.
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Acquisition of Canopy
Membership Interest Purchase Agreement #1
On November 30, 2021, DEP entered into a membership interest purchase agreement (the “MIPA #1”) to purchase eighty percent (80%) of the issued and outstanding membership interests (the “Purchased Interests”) of Canopy from Cary Stiebel (the “Continuing Owner”), Jana Stiebel, Jayme Rivard, Adrian Dermicek, and Laurie Johnson (collectively, the “Sellers”).
As consideration for DEP’s purchase of the Purchased Interests, DEP will pay to Sellers a total purchase price of $4,800,000.00 comprised of: (i) $2,500,000.00 to be paid in cash (the “Cash Purchase Price”); and (ii) $2,300,000.00 of debt to be evidenced by a secured promissory note (the “Promissory Note”).
Pursuant to MIPA #1, DEP is obligated to transfer the Cash Purchase Price in escrow to Secured Trust Escrow, Inc. (the “Escrow Agent”) and, following such transfer, the Sellers are to assign the Purchased Interests to DEP on either the first or the sixteenth day of the first calendar month following DEP’s transfer of the Cash Purchase Price to the Escrow Agent. As a closing condition, DEP is also required to deliver the Promissory Note to the Sellers. MIPA #1 specifically states that the Cash Purchase Price is not to be released from escrow by the Escrow Agent to the Sellers until receipt by DEP of approval of the transaction from the local and state regulators, and the completion of any required audited annual financial statements and unaudited interim financial statements of Canopy prepared in accordance with US GAAP.
As described below, contemporaneous with the execution of MIPA #1, DEP also entered into a second membership interest purchase agreement to purchase, subject to all approvals required by applicable laws and regulations, the remaining twenty percent (20%) of the issued and outstanding membership interests of Canopy from the Continuing Owner (“MIPA #2”). In MIPA #1, the parties have agreed that the target working capital for Canopy on the date that DEP is assigned the Purchased Interests shall be Zero Dollars ($0.00). The Sellers are obligated to deliver a statement of financial position for Canopy that provides, among other things, Canopy’s current working capital. DEP has up to one (1) year from the delivery of such statement to provide an adjusted statement based on DEP’s further financial due diligence. The Sellers will then have an opportunity to dispute and if no agreement is reached, a neutral third-party will determine the actual working capital of Canopy as of the date the Purchased Interests are assigned to DEP. The purchase price in MIPA #2 is subject to adjustments based on the actual working capital as determined by the calculations made pursuant to MIPA #1.
The foregoing description of MIPA #1 does not purport to be complete and is qualified in its entirety by the MIPA #1, which is filed as Exhibit 10.63 to our Annual Report on Form 10-K for the fiscal year ended July 31, 2022 filed with the SEC on January 17, 2023 and is incorporated by reference herein.
Secured Promissory Note
DEP issued the Promissory Note payable to the Sellers in the principal amount of $2,300,000.00 on November 30, 2021. The Promissory Note was delivered as partial consideration for DEP’s agreement to purchase the Purchased Interests (80% of the issued and outstanding membership interests of Canopy) from the Sellers.
The Promissory Note does not become effective by its terms unless and until the state regulators and local regulators approve DEP as the owner of the Purchased Interests (the date such approval is received being the “Effective Date”). In the event the MIPA #1 for DEP to purchase the Purchased Interests is terminated for any reason, the Promissory Note will terminate automatically.
Pursuant to the Promissory Note, interest will accrue on the principal amount from the Effective Date at the rate of ten percent (10%) compounded annually. DEP will be obligated to make monthly interest-only payments for the initial six (6) months following the Effective Date. Following the initial six (6) months, no payments shall be due until the maturity date, which is the date that is five (5) years following the Effective Date.
Following the transfer of the Purchased Interests to DEP, Canopy will sign a joinder to the Promissory Note and further enter into a security agreement granting a security interest to the Sellers in all of Canopy’s assets to secure DEP’s fulfillment of its obligations under the Promissory Note.
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The foregoing description of the Secured Promissory Note does not purport to be complete and is qualified in its entirety by the Secured Promissory Note, which is filed as Exhibit 10.64 to our Annual Report on Form 10-K for the fiscal year ended July 31, 2022 filed with the SEC on January 17, 2023 and is incorporated by reference herein.
Security Agreement
On November 30, 2021, Canopy entered into a security agreement, as grantor (in such capacity, the “Grantor”), granting a security interest in all of Grantor’s personal property, general intangibles, accounts receivable, real property, insurance proceeds, deposits and documents, investment property, instruments and letter of credit rights, proceeds and products, permits, licenses and entitlements. The secured interest granted pursuant to the security agreement is for the purposes of securing the payment obligations of DEP under the Promissory Note.
The foregoing description of the Security Agreement does not purport to be complete and is qualified in its entirety by the Security Agreement, which is filed as Exhibit 10.65 to our Annual Report on Form 10-K for the fiscal year ended July 31, 2022 filed with the SEC on January 17, 2023 and is incorporated by reference herein.
Escrow Agreement
On November 30, 2021, DEP, Canopy, the Sellers and the Escrow Agent entered into the Holding Escrow Instructions (the “Escrow Agreement”) in order to facilitate the sale of the Purchased Interests in Canopy by the Sellers to DEP. Pursuant to the Escrow Agreement, the Cash Purchase Price in the amount of $2,490,000 is to be deposited by DEP with the Escrow Agent, in escrow. The Escrow Agent shall disburse the funds as directed by the parties pursuant to written instructions. Escrow Agent shall receive specific instructions as to the release of funds, including but not limited to the amount of the funds to be released and detailed recipient information. Upon receipt of such request to release funds, the Escrow Agent shall prepare an amendment and/or authorization to release funds to be signed by the parties. The Escrow Agent shall only release funds when such amendment and/or authorization to release funds is executed by the parties.
The Escrow Agent shall receive, as compensation for services a fee in the amount of $6,000. Escrow fees shall be deducted out of the initial deposit into escrow and pre-paid by DEP. At closing, the escrow fees shall be split equally between DEP and the Sellers. In the event of cancellation of the escrow, DEP shall pay a $3,000 escrow fee and all other escrow funds shall be distributed as instructed to the Escrow Agent and under the terms of the Escrow Agreement.
The foregoing description of the Escrow Agreement does not purport to be complete and is qualified in its entirety by the Escrow Agreement, which is filed as Exhibit 10.66 to our Annual Report on Form 10-K for the fiscal year ended July 31, 2022 filed with the SEC on January 17, 2023 and is incorporated by reference herein.
Membership Interest Purchase Agreement #2
On November 30, 2021, DEP entered into a membership interest purchase agreement (“MIPA #2”) to purchase the remaining 20% of the issued and outstanding membership interests (the “Remaining Purchased Interests”) of Canopy from the Continuing Owner.
As consideration for DEP’s purchase of the Remaining Purchased Interests, DEP will pay to the Continuing Owner a total purchase price of $1,000,000.00 (the “Purchase Price”) to be paid via either: (i) shares of the Company’s common stock (the “Consideration Shares”); or (ii) in cash at DEP’s sole option if such payment takes place within six months following the date of MIPA #1 pursuant to which DEP acquired 80% of the issued and outstanding membership interest of Canopy. In the event DEP elects or is required to pay the Purchase Price via Consideration Shares, the amount of Consideration Shares shall be determined based on the 10-day volume weighted average price (“VWAP”) on the Canadian Securities Exchange (the “CSE”) as of the date of execution of MIPA #1. In the event that, six months following the execution date of MIPA #1, the value of the Consideration Shares have decreased such that total value of the Consideration Shares is less than 90% of its value, DEP agrees to cause the Company to issue an additional $100,000.00 worth of shares of the Company’s common stock (the “Additional Shares”) to the Continuing Owner based on the VWAP calculated as of six (6) months following the closing of MIPA #1.
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The Purchase Price is to be adjusted based on the actual working capital of Canopy as of the closing of MIPA #1.
Within seven business days from the date that DEP receives notification from the city and state regulators that it is approved as the sole owner of Canopy and all adjustment calculations for determining the working capital are completed, DEP shall be obligated to pay to Continuing Owner the Purchase Price subject to applicable adjustments.
The foregoing description of the MIPA #2 does not purport to be complete and is qualified in its entirety by the MIPA #2, which is filed as Exhibit 10.68 to our Annual Report on Form 10-K for the fiscal year ended July 31, 2022 filed with the SEC on January 17, 2023 and is incorporated by reference herein.
Amendment to MIPA #1 and MIPA #2
On June 17, 2022, the Company, through its wholly owned subsidiary, DEP, entered into the first amendment to MIPA #1 and MIPA #2 (the “First Amendment”) whereby the cash purchase price under MIPA #1 was reduced from 2,500,000 to $1,250,000 and the Company agreed to issue the following shares of common stock of the Company, subject to compliance with the policies of the CSE:
(a) | The Company agreed to issue to the Sellers shares with an aggregate value of $1,250,000 based on the VWAP for the 10 consecutive trading days prior to the effective date of the First Amendment being June 17, 2022 (the “Effective Date”) (9,328,358 shares); | |
(b) | The Company agreed to issue additional shares to the Continuing Owner equal to the difference between the amount of the shares of common stock of the Company that were issued by the Company to the Continuing Owner on December 3, 2021 (the “MIPA #2 Shares”) and the amount of shares that the Continuing Owner would have received had the VWAP for the MIPA #2 Shares been calculated as of the Effective Date (the “Additional PA #2 Shares”) (4,734,530 shares); | |
(c) | On the date that is 18 months (548 days) following the Effective Date of the First Amendment (the “Additional Share Issuance Date”) the Company will issue $100,000 worth of shares to the Sellers based on the 10-day VWAP calculated as of the Additional Share Issuance Date; and | |
(d) | The Company agreed to issue to the Continuing Owner $300,000.00 worth of shares (the “Additional True-up Shares”) within three days following the Effective Date of the First Amendment, which shall be priced at the 10-day VWAP calculated as of the Effective Date of the First Amendment (2,238,806 shares). |
Prior to the conclusion of the calculation of the actual working capital in accordance with MIPA #1 and MIPA #2, the Sellers must 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 will 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 MIPA #1 and MIPA #2, the parties have further agreed as follows:
(a) | 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 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; | |
(c) | 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 the 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. |
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In addition to the terms of the First Amendment, the parties have agreed that the release of any Additional True-up Shares 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.
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 $0.134 per share. 2,238,806 of the 16,301,694 shares are being held in escrow pending the results of the working capital adjustment in accordance with MIPA #1 and MIPA #2.
The foregoing description of the First Amendment does not purport to be complete and is qualified in its entirety by the First Amendment, which is filed as Exhibit 10.72 to our Annual Report on Form 10-K for the fiscal year ended July 31, 2022 filed with the SEC on January 17, 2023 and is incorporated by reference herein.
Landlord Consent to Change of Control of Tenant
Canopy’s retail dispensary in Seaside, California, is located in leased premises which is subject to a lease agreement dated July 1, 2028, as amended on July 19, 2021 (the “Lease”), between Ann Marie Bevins and Carol Gay Lavin, the Successor Co-Trustees of the Peter Ralph Lavin Trust U/A DTD August 7, 2006, as amended (the “Landlord”), and Canopy, as tenant (in such capacity, the “Tenant”). Under the Lease, the Tenant is required to obtain the Landlord’s consent for a change of control transaction. DEP’s purchase of the Purchased Interests qualifies as a change of control transaction for such purposes.
On November 30, 2021, the Landlord, the Tenant and the Company entered into a Landlord Consent to Change of Control of Tenant (the “Landlord Consent”), whereby the Landlord has consented to the purchase by DEP of the Purchased Interests in two transactions contemplated by MIPA #1 and MIPA #2, subject to certain conditions as outlined below.
The Landlord Consent is subject to the following conditions: (1) Tenant must pay the Landlord a transfer fee equal to $290,000.00; (2) Tenant must pay the Landlord $229.60 in liquidated damages; (3) Tenant must reimburse Landlord for legal fees associated with the change of control transaction, subject to a cap of $6,500.00; and (4) a renewal of the current guaranty of the lease is delivered to the Landlord. The Consent became effective following the assignment of the Purchased Interests to DEP.
The foregoing description of the Landlord Consent does not purport to be complete and is qualified in its entirety by the Landlord Consent, which is filed as Exhibit 10.67 to our Annual Report on Form 10-K for the fiscal year ended July 31, 2022 filed with the SEC on January 17, 2023 and is incorporated by reference herein.
The Lease
The Lease provides for a five-year term that includes three five-year extension periods (each, an “Option Term”) (collectively, the “Lease Term”). The monthly rent under the Lease for the first four months is $0.00 per month; for months five through 12, the monthly rent is $6,190.00 per month; and for months 13 through 24, the monthly rent is $7,200.00 per month.
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The monthly rent is subject to an annual increase of three percent per year, but in no event less than the amount of the increase in the Consumer Price Index, as of the first day of July every year during the term of the lease (the “Adjustment Date”), in each fiscal year (July 1 through June 30) of the Lease Term, which Lease Term shall include the Option Term and any extensions of Lease that may hereinafter be granted, beginning in the year as follows: July 1, 2020 and on the first of July in each fiscal year (July 1 through June 30) of any extensions of Lease Term thereafter, the monthly rental shall be increased at least three percent, but in no case less than the amount calculated by multiplying the amount of the then monthly rental, and as thereafter adjusted from time to time in accordance with the provisions of Article 5.2 of the Lease, by a fraction of which the denominator is the cost of living for the calendar month February, 17 months previous to the Adjustment Date, as reflected in the Consumer Price Index, or, at Landlord’s option, the same Index for the United States as a whole (as determined by the United States Department of Labor, Bureau of Labor Statistics, or any successor Index), and the numerator is the cost of living as reflected in the same Index for the calendar month of February, five months previous to each such Adjustment Date. The annual rent in any fiscal year (July 1 through June 30) will not be less than 103% of the annual rent for the then immediately preceding fiscal year.
The monthly rent for the first year of each Option Term shall be the fair market value monthly rent for the premises as determined by the Landlord as of the effective date of the Tenant’s exercise of an Option Term. In the event there is a dispute between the Landlord and the Tenant regarding the monthly rent for the first year of an Option Term as of the date of Tenant’s exercise of an Option Term, and the Landlord and Tenant cannot mutually agree on a monthly rent for an Option Term 90 days before the expiration of the Lease, third-party appraisers will set the Option Term monthly rent.
In addition to monthly rent, the Tenant is required to pay certain maintenance fees based on Tenant’s gross sales for each year during the term of the Lease. These fees are modified and replaced in the Second Amendment.
The Second Amendment to Lease
On November 30, 2021, the Landlord and the Tenant entered into a Second Amendment to Lease Agreement (the “Second Amendment”). The Second Amendment modifies the monthly rent fees payable under the Lease, such that the monthly rent fee for December 1, 2021 through June 30, 2022 will be $9,000.00 per month. On July 1, 2022, the monthly rent will be subject to the normal annual increases set forth in the Lease.
The maintenance fees in the Lease are superseded and replaced with the a new monthly maintenance fee equal to One and One Half Percent (1.5%) of the Tenant’s gross sales, which shall be computed each calendar month and, on or before the fifteenth (15th) day of the calendar month immediately following the close of such period, the Tenant shall pay to the Landlord the maintenance fee for the immediately preceding calendar month.
The Second Amendment includes a waiver and release of all claims against the Landlord up to and including the date of the Second Amendment.
Agreement and Plan of Merger – New Jersey
On December 21, 2022, the Company, its wholly owned subsidiary, DEP Nevada, Inc. (“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 “Surviving Entity”) and those certain shareholders of the Surviving Entity (the “Sellers”) entered into an Agreement and Plan of Merger (the “Merger Agreement”) whereby Merger Sub merged with and into 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.
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.
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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. | |
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.
The foregoing description of the Merger Agreement does not purport to be complete and is qualified in its entirety by the Merger Agreement, which is filed as Exhibit 2.3 to our Annual Report on Form 10-K for the fiscal year ended July 31, 2022 filed with the SEC on January 17, 2023 and is incorporated by reference herein.
New Nevada Production Facility
On June 20, 2019, we announced the receipt of a conditional use permit from Clark County, Nevada, for a new production facility located within one mile of NMG’s existing cultivation facility located at 3375 Pepper Lane, in Las Vegas. The facility is approximately 7,500 square feet, and tenant improvement of the building holding the facility was completed in February 2020. The facility includes high-volume extraction equipment, which we expect will dramatically increase our manufacturing capacity and efficiency for our extraction products, including oils, wax, live resin and ambrosia. The facility also expands the kitchen area and creates an opportunity for the Company to white label for brands seeking an entry to the Nevada market. After passing all inspections, receiving all permits, and finalizing license transfer approvals, the new production facility began operations in March 2020.
Material Contracts
Other than already disclosed above under the subsection titled “Description of Our Business”, we have the following material contracts:
Loan Agreement
On July 19, 2021, we (also referred to as the “Borrower”), along with our subsidiaries, DEP Nevada Inc., Nevada Medical Group, LLC, NMG OH 1, LLC, NMG OH P1, LLC, NMG Long Beach, LLC, NMG Cathedral City, LLC, NMGNGM CA 1, LLC, NMG CA C1, LLC, NMG MI 1, Inc., NMG MI P1, Inc., and NMG MI C1, Inc. (each, a “Guarantor” and collectively, the “Guarantors”) entered into and closed a loan agreement (the “Loan Agreement”) with FG Agency Lending LLC (the “Agent”) and Bomind Holdings LLC (the “Lender”), dated July 19, 2021. Upon entering into the Loan Agreement and the associated loan documents and agreements described below, the Lender provided the initial term loan (the “Initial Term Loan”) in the face amount of US$6,666,667 of which US$6,000,000 was advanced to the Company with the 10% representing an origination discount (the “Origination Discount”) as consideration for the use or forbearance of money. We may draw upon the remaining face amount of US$4,444,444 (the “Delayed Draw Term Loan”) upon providing a 30-day request to the Agent by JuneDecember 1, 2022,2021, whereby US$4,000,000 will be advanced to the Company after applying the Origination Discount. The Initial Term Loan and the Delayed Draw Term Loan mature on July 19, 2025 and bear interest at a rate of 13% per annum payable on the first day of each month hereafter.
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Pursuant to the Loan Agreement, we have 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 US$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 US$0.45 per Warrant Share until July 19, 2025.
The Initial Term Loan is evidenced by a Term Note (a “Term Note”), which is attached as Exhibit C to the Loan Agreement. If the Delayed Draw Term Loan is drawn upon by us, it will also be evidenced by a separate Term Note.
The following table sets forth additional terms of the Loan Agreement and the other loan documents entered into on July 19, 2021, as amended on November 30, 2021 to extend the delayed draw request period from December 1, 2021 to June 1, 2022:2021:
Loan Term | Four years |
Face Amount | US$11,111,111 (the “Face Amount”) funded in two (2) draws: (i) Initial Term Loan of US$6,666,667 issued on closing; and (ii) Delayed Draw Term Loan of US$4,444,444 issued upon 30 day request of the Company, which request must be made to the Agent by |
Interest Rate |
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Default Interest Rate | 20% per annum (inclusive of the 13% rate noted above) |
Origination Discount | 10% of the Face Amount treated as consideration for the use or forbearance of money |
Agent Fee | The Borrower paid the Agent a US$66,666.67 fee upon execution of the Loan Agreement, which was withheld from the initial advance of the Initial Term Loan made by the Lender. A further Agent Fee of $44,444.44 will be withheld from the advance of the Delayed Draw Term Loan made by the Lender, if drawn upon by the Company. |
Lender Expenses | The Borrower is required to pay the Lender’s reasonable costs, fees and expenses, including attorney’s fees, in connection with entering into the Loan Agreement and the other loan documents, subject to a cap of US$125,000. |
Voluntary Prepayment | The Borrower may not prepay within one year of the closing date (“No Call Period”). Provided that no event of default has occurred following the No Call Period, Borrower may prepay the principle balance, in a minimum amount of US$1,000,000, at the following rates: (1) Following the No Call Period through two-year anniversary of the Closing Date: 107%; (2) Following the two-year anniversary of the Closing Date through the three-year anniversary of the Closing Date: 103%; and (3) following the three year anniversary of the Closing Date and prior to the Maturity Date: 100%. |
Mandatory Prepayment | Under certain circumstances, if the Borrower or any Guarantor incurs insurance claims or condemnation proceedings, then Borrower or the Guarantor must either reinvest such proceeds in assets useful to the Borrower’s or Guarantor’s business, as applicable, or use the resulting net cash proceeds to prepay the loan. There are mandatory prepayment provisions for some change of control scenarios. |
Financial Covenants | The Borrower and its subsidiaries taken as a whole are required to have at least $1,500,00 in liquidity at all times reported monthly. The Borrower and Guarantors on a consolidated basis must maintain a leverage ratio of at least 3:1 for acquisitions. |
Other Covenants | The Borrower and its subsidiaries are subject to additional covenants customary for this type of transaction, including without limitation, covenants related to notices of certain events and reporting, and covenants restricting the Borrower’s and its subsidiaries’ business activities, other debt, fundamental transactions, acquisitions and dispositions, investments, dividend payments and affiliate transactions, in each case subject to mutually agreed upon qualifications and exceptions. |
Events of Default | The Loan Agreement contains events of defaults customary for this type of transaction, some of which are subject to mutually agreed upon cure periods and notice requirements. |
Remedies | The Loan Agreement and the other loan documents contain remedies customary for this type of transaction, including, without limitation, giving the Lender the ability to declare the loan and all amounts owed under the Loan Agreement due and payable upon the occurrence of an event of default and to operate or sell collateral and use the proceeds to repay the loan. |
Other Provisions | The Loan Agreement and the other loan documents contain other provisions customary for this type of transaction, including, without limitation, representations and warranties, indemnities and confidentiality undertaking. |
Exit Fee | Amendment No. 2 to Loan Agreement (see below) 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. |
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On June 14, 2022, we, along with is subsidiaries, DEP Nevada Inc., Nevada Medical Group, LLC, NMG OH 1, LLC, NMG OH P1, LLC, NMG Long Beach, LLC, NMG Cathedral City, LLC, NGM CA 1, LLC, NMG CA C1, LLC, NMG MI 1, Inc., NMG MI P1, Inc., and NMG MI C1, Inc., as guarantors, entered into an amendment no. 2 to loan agreement (the “Amendment No. 2 to Loan Agreement”) with the Agent and the Lender, with respect to the Loan Agreement that was originally entered into by such parties on July 19, 2021, as amended on November 30, 2021.
Pursuant to the Amendment No. 2 to Loan Agreement, the maturity date was extended by one year from July 19, 2025 to July 19, 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$4,444,444 (the “Delayed Draw Term Loan”) to be extended from June 1, 2022 to March 31, 2023, whereby US$4,000,000 will be advanced to the Company if it draws on such Delayed Draw Term Loan, which ability of the Company to draw on the Delayed Draw Term Loan is subject to compliance with certain provisions in the 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. Furthermore, Amendment No. 2 to Loan Agreement provides that the Company shall pay the Agent a fee of US$10,000 per month for six months from June 14, 2022 and also provides that capital expenditures with respect to a certain project, purchase or acquisition shall not be more than $100,000 in the aggregate unless consented to in writing by the Agent.
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.
Security Agreement
On July 19, 2021 (the “Effective Date”), we and the Guarantors (collectively, the “Grantors”) entered into a security agreement (the “Security Agreement”) with the Agent (acting as the agent to the Lender) (the Agent and the Lender being referred to herein as, the “Secured Parties”) wherein Grantors have granted to Secured Parties a security interest in and to certain assets of the Grantors in order to secure our obligations pursuant to the Loan Agreement.
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Pursuant to the Security Agreement, the Grantors are granting to the Secured Parties a security interest in all personal property and other assets owned as of the Effective Date or acquired thereafter (the “Collateral”). Certain assets are excluded from the Collateral such as: (i) intent to use United States trademark applications; (ii) certain assets acquired with third-party financing (provided that such financing does not amortize prior to the maturity date of the Loan Agreement, matures at least 1 year after maturity of the Loan Agreement and the leverage ratio remains 3:1 following financing for such assets); and (iii) rights to licenses or contracts where granting liens is prohibited by law.
Upon a default under the Loan Agreement, the Secured Parties may enter upon the premises of the Grantors where any Collateral is located through self-help, without judicial process, without first obtaining a final judgment or giving the Grantors or any other Person notice and opportunity for a hearing on the Secured Parties’ claim or action and may collect, receive, assemble, process, appropriate and realize the Collateral, or any part thereof. In such event, the Grantors agree to assemble the Collateral and make it available to the Agent. Until the Agent is able to effect a disposition of the Collateral, the Agent shall have the right to hold or use the Collateral, or any part thereof, to the extent that it deems appropriate in its sole discretion for the purpose of preserving the Collateral or its value or for any other purpose deemed appropriate by the Agent. Agent shall not have any rights to take any action that would violate law.
To protect the Secured Parties’ interests in the Collateral, the Grantor’s have executed a power of attorney appointing Agent as the Grantors’ attorney in fact with such power and appointment only exercisable in the event of a default under the Loan Agreement and we have further agreed to file all UCC Financing Statements evidencing the granted security interests set forth in the Security Agreement.
Pledge Agreement
On July 19, 2021, we and our subsidiaries, DEP and NMG (collectively, the “Pledgors”) entered into a Pledge Agreement (the “Pledge Agreement”) with the Agent (acting as the collateral agent for the Lender) (the Lender and Agent are referred to herein as, the “Secured Parties”) wherein Pledgors have pledged certain of Pledgors’ equity interests in various subsidiaries in order to secure our obligations pursuant to the Loan Agreement.
Pursuant to the Pledge Agreement, Pledgors are pledging to the Secured Parties a lien on certain equity interests in Pledgors’ subsidiaries as follows (collectively, the “Pledged Collateral”):
| 1) | Company is pledging to the Secured Parties all rights, privileges and interests in Company’s equity securities in DEP, which comprises of one hundred percent (100%) of the issued and outstanding shares of DEP; |
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| 2) | NMG is pledging to the Secured Parties all rights, privileges and interests in NMG’s equity securities in NMG Ohio, which comprises of one hundred percent (100%) of the issued and outstanding membership interest of NMG Ohio; and |
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| 3) | DEP is pledging to the Secured Parties all rights, privileges and interests in DEP’s equity securities in NMG, NMG OH 1, LLC, NMG OH P1, LLC, NMG LONG BEACH, LLC, NMG MI C1, INC., NMG MI P1, INC., NMG MI 1, INC., NMG CA C1, LLC, NMG CA P1, LLC, NMG CA 1, LLC, and NMG CATHEDRAL CITY, LLC (collectively, the “DEP Pledged Subsidiaries”). DEP owns one hundred percent (100%) of the issued and outstanding equity interests in each of the DEP Pledged Subsidiaries (collectively, DEP, NMG Ohio, and the DEP Pledged Subsidiaries being, the “Pledged Entities”). |
The pledge, assignment and delivery of the Pledged Collateral pursuant to the Pledge Agreement creates a valid first priority lien. Without the prior written consent of the Agent, no Pledgor will sell, assign, transfer, pledge, or otherwise encumber any of its rights in or to the Pledged Collateral, or any unpaid dividends, interest or other distributions or payments with respect to the Pledged Collateral.
As long as no default under the Loan Agreement has occurred and is continuing, Pledgors shall have the right to vote and give consents with respect to the Pledged Collateral for all purposes not inconsistent with the provisions of the Pledge Agreement.
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Upon a default, the Agent, acting on behalf of the Secured Parties, is hereby authorized and empowered to (i) transfer the Pledged Collateral to the Secured Parties; (ii) transfer and register in its name the Pledged Collateral; (iii) exchange certificates representing Pledged Collateral for certificates of smaller or larger denominations, (iv) exercise the voting and all other rights; (v) collect and receive all cash dividends; (vi) notify the Pledged Entities to make payment to Agent of any amounts due in connection with the Pledged Collateral; (vii) endorse instruments in the name of the Pledgors to allow collection; (viii) enforce collection of any of the Pledged Collateral by suit or otherwise; (ix) sell, with notice and in accordance with applicable law, Pledged Collateral; (x) act with respect to the Pledged Collateral as though Agent was the outright owner; (xi) appoint a receiver (selected by Agent in its sole discretion) to administer the Pledged Collateral; and (xii) exercise any other rights or remedies the Secured Parties may have under the UCC or other applicable law.
Pledgors irrevocably appoint the Agent acting on behalf of the Secured Parties, as the proxy and attorney in fact with respect to the Pledged Collateral.
Omnibus Collateral Assignment
On July 19, 2021, we and our subsidiaries, DEP, NMG, NMG MI 1, Inc. (“NMG MI 1”), NMG MI C1, Inc. (“NMG C1”) and NMG MI P1, Inc. (“NMG MI P1”) (collectively, the “Assignors”) entered into an Omnibus Collateral Assignment (the “Collateral Assignment”) with the Agent wherein Assignors have granted to the Agent for the benefit of the Lender certain rights, interests and privileges of Assignors in and to certain contracts in order to secure our obligations pursuant to the Loan Agreement.
Pursuant to the Collateral Assignment, Assignors have granted to the Agent for the benefit of the Lender(s) a security interest in all the rights, interests and privileges which such Assignor has or may have in or under the following contracts (the “Assigned Contracts”):
| 1) | Management Agreement between NMG and Comprehensive Care Group, LLC dated March 15, 2019; |
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2) | Convertible Credit Facility Agreement from DEP to NMG MI 1, Inc. (formerly NMG MI 1, LLC) dated February 1, 2021; | |
| 3) | Convertible Credit Facility Agreement from DEP to NMG MI C1, Inc. (formerly NMG MI C1, LLC) dated February 1, 2021; and |
| 4) | Convertible Credit Facility Agreement from DEP to NMG MI P1, Inc. (formerly NMG MI P1, LLC) dated February 1, 2021. |
The rights of the Agent may only be exercised in the event of a default and the exercise of such rights must not violate any applicable law. Each Assignor, upon the occurrence and continuation of a default, authorizes the Agent on behalf of the Lender(s), at the Agent’s option and without notice, to directly receive any and all payments and other benefits owed to any Assignor under any Assigned Contract.
Intercompany Subordinated Demand Promissory Note
On July 19, 2021, we and our subsidiaries (DEP, NMG, NMG OH 1, LLC, NMG OH P1, LLC, NMG Long Beach, LLC, NMG MI C1, Inc., NMG MI P1, Inc., NMG MI 1, Inc., NMG CA C1, LLC, NMG CA P1, LLC, NMG CA 1, LLC and NMG Cathedral City, LLC) (collectively, the “Affiliate Obligors”) entered into a Intercompany Subordinated Demand Promissory Note wherein Affiliate Obligors agree and acknowledge that all debt, liabilities and obligations owing or due, or to become due, to any other of our subsidiaries will be subordinate, and junior (the “Subordinated Debt”) to the discharge of our obligations under the Loan Agreement.
So long as no default has occurred under the Loan Agreement, each Affiliate Obligor may make payments on account of the Subordinated Debt in the ordinary course of business, solely to the extent such payments are permitted under the Loan Agreement. Upon default, no Affiliate Obligor shall make, accept or receive, any payment of Subordinated Debt Payment.
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Until our satisfaction of all obligations under the loan, no subsidiary holding rights to be paid Subordinated Debt will (i) accelerate, make demand, or otherwise make due and payable prior to the original due date thereof any Subordinated Debt; (ii) exercise any rights under or with respect to guaranties of the Subordinated Debt; (iii) exercise any of its rights or remedies in connection with the Subordinated Debt; (iv) exercise any right to set-off or counterclaim in respect of any debt, contest, protest, or object to any exercise of secured creditor remedies by Agent or any Lender; (v) object to any forbearance by the Agent; (vi) commence, or cause to be commenced, and insolvency proceeding; or (vii) contest, protest, or object to any Affiliate Obligor obtaining debtor-in-possession financing.
The foregoing descriptions of the Loan Agreement, the Security Agreement, the Pledge Agreement, the Omnibus Collateral Assignment, the Intercompany Subordinated Demand Promissory Note, the Term Note and the Warrants do not purport to be complete and are qualified in their entirety by reference to the full text of those documents, copies of which were attached as Exhibits 10.1, 10.2, 10.3, 10.4, 10.5, 10.6, 4.1 and 4.2, respectively, to our Current Report on Form 8-K filed with the SEC on July 23, 2021 and are incorporated by reference herein.
Limited Waiver and Amendment No. 1 to Loan Agreement
On November 30, 2021, we andDecember 12, 2022, the Company, the Guarantors entered into Amendment No. 1 to (collectively, the “Loan Agreement (“Amendment No. 1 to Loan Agreement”Parties”) with, 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) amend the definitionCompany’s failure to deliver to Agent the audited annual financial statements of the term “Delayed Draw Request Period” to meanCompany and its subsidiaries for the period commencingfiscal year ended July 31, 2022, on the Closing Date and ending on the earlier of the Delayed Draw Effective date or June 1, 2022, and (ii) to amend Schedule 7.17 to include as follows:
“4. On or before the date that is sixty (60)ninety (90) days after the Closing Date (which date may be extendedend of such fiscal year in writing byaccordance with Section 7.2(c) of the Loan Agreement (the “First Specified Default”) and (ii) the Agent in its sole discretion),being informed that the Borrower shall use commercially reasonable effortsCompany anticipates that it will fail to deliver to the Agent,quarterly financial statements of the Company and its subsidiaries for the fiscal quarter ending October 31, 2022, in form and substance reasonably 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 waived the Specified Defaults on a fully executed Landlordlimited 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 fail to deliver each of the Amended Deliverables (as defined below) on or before expiration of their respective Waiver Period, the waiver would no longer be of any effect, and the Lender would 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 Consent, byAmendment to Loan Agreement, the parties verbally agreed and between NMG OH 1, LLCconfirmed via email on December 20, 2022, that the Waiver Period for the First Specified Default shall be extended from December 30, 2022 to January 17, 2023, and the applicable landlordWaiver Period for the Second Specified Default shall be extended from January 13, 2023 to January 27, 2023; and that certain lease property located at 709 Sugar Ln., Elyria, OH 44035.”the corresponding amendments shall be made to sections 7.2(b) and 7.2(c) of the Loan Agreement as set forth above.
The foregoing description of the Limited Waiver and Amendment No. 1 to Loan Agreement does not purport to be complete and is qualified in its entirety by reference to the full text of theLimited Waiver and Amendment No. 1 to Loan Agreement, which is attachedfiled as Exhibit 10.1 hereto10.73 to our Annual Report on Form 10-K for the fiscal year ended July 31, 2022 filed with the SEC on January 17, 2023 and is incorporated by reference herein.
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 $3,000,000 (the “Debentures”) , which bear interest at a rate of 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.
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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 director to the Company’s Board and one 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.
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.
Results of Operations for the three month periods ended October 31, 20212022 and 2020:2021:
The following table sets forth our results of operations for the three month periods ended October 31, 20212022 and 2020:2021:
|
| October 31, 2021 $ |
|
| October 31, 2020 $ |
|
| October 31, 2022 $ |
|
| October 31, 2021 $ |
| ||||
Sales, net of taxes |
| 7,570,816 |
| 5,294,358 |
| |||||||||||
Sales |
| 7,831,695 |
| 7,570,816 |
| |||||||||||
Cost of Sales |
| (4,080,600 | ) |
| (3,494,304 | ) |
| (6,192,489 | ) |
| (4,416,703 | ) | ||||
Gross Margin |
| 3,490,216 |
| 1,800,054 |
|
| 1,639,206 |
| 3,154,113 |
| ||||||
General and Administrative Expenses |
| (3,174,907 | ) |
| (2,495,363 | ) | ||||||||||
Operating Expenses |
| (3,617,271 | ) |
| (2,838,804 | ) | ||||||||||
Loss for the Period |
| (677,254 | ) |
| (778,367 | ) |
| (2,952,795 | ) |
| (677,254 | ) | ||||
Foreign Currency Translation Adjustment |
| 36,281 |
| 268,097 |
|
| (70,060 | ) |
| 36,281 |
| |||||
Comprehensive Loss |
| (640,973 | ) |
| (510,270 | ) |
| (3,022,855 | ) |
| (640,973 | ) | ||||
Basic and Diluted Earnings (Loss) Per Share |
| (0.01 | ) |
| (0.01 | ) |
| (0.03 | ) |
| (0.01 | ) |
Revenues
For the three month period ended October 31, 20212022 we had total sales of $7,831,695 and cost of sales of $6,192,489 for a gross margin of $1,639,206 compared to total sales of $7,570,816 and cost of sales of $4,080,600$4,416,703 for a gross margin of $3,490,216 compared to total sales of $5,294,358 and cost of sales of $3,494,304 for a gross margin of $1,800,054$3,154,113 in the three month period ended October 31, 2020. The significant increase in net sales2021. Gross margin decreased due to decreasing wholesale prices, increasing costs and cost of sales for the period endedlower inventory balance on hand at October 31, 2021 is largely due to steady growth at all dispensaries.2022.
During the three months ended October 31, 2020,2022, the Company recorded product sales as follows:
Revenues – By Segment |
| Three months October 31, 2021 |
|
| % |
|
| Three months ended October 31, 2022 $ |
|
| % |
| ||||
|
|
|
|
|
|
|
|
|
|
| ||||||
Wholesale |
| 1,755,799 |
| 23 | % |
| 1,305,981 |
| 17 | % | ||||||
Retail |
| 5,815,017 |
| 77 | % |
| 6,525,714 |
| 83 | % | ||||||
|
|
|
|
|
|
|
|
|
|
| ||||||
Total |
| 7,570,816 |
|
|
|
| 7,831,695 |
|
|
|
Operating Expenses
For the three month period ended October 31, 2021,2022, operating expenses totaled $3,174,907$3,617,271 compared with $2,495,363$2,838,804 for the three month period ended October 31, 2020.2021. A significant reason for the increase in operating expenses between the periods related to an increase in salarieslease expense from $102,033 and wages from $782,618 to $991,717,$255,871 as the Company continues to expand and an increase in licenses, utilities and office administration from $575,245$845,747 to $781,615, an increase in business development from $1,409 to $94,759, an increase in accounting and legal fees from $167,077 to $259,144.$1,280,405. The Company’s office administration and salaries and wages increased considerably as a result of various ongoing acquisitions and expansions and as a result of increased operations in Nevada as well as the total number of employees under payroll.expansions.
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The Company also had an increase in depreciation and amortization expense of $362,115 compared to $331,544 compared to $245,337 due to a larger balance of property and equipment and intangible assets that need to be depreciated/amortized. A large portion of the depreciation and amortization expense are also included in Cost of Sales resulting in an increase in Cost of Sales for the current period.
Other Items
During the three month period ended October 31, 2021,2022, our other items accounted for $290,391$348,656 of losses as compared to income of $426,917$290,391 for the three month period ended October 31, 2020.2021. The significant components in other items primarily relates to the Company’s interest income on the secured convertible note and interest expense on the long-term loan payable. In 2020, other items also consisted of the Company’s proportion of income on equity investee in NMG Ohio LLC of $24,872 and the bargain purchase price of the Ohio dispensary acquisition of $208,176.
Net Loss
Net loss for the quarter ended October 31, 20212022, totaled $677,254$2,952,795 compared with a net loss of $778,367$677,254 for the quarter ended October 31, 2020.2021. The decreaseincrease in net loss is largely due to the increase in gross profit, partially offset by ancost of sales, and increase in general and administrative expenses. The Company also reported an income tax expense of $702,172 (2020 - $509,975) for the period.expenses as discussed above.
Other Comprehensive Income (Loss)
We recorded a foreign currency translation adjustmentsadjustment loss of $70,060 and gain of $36,281 and $268,097 for the three monthsquarter ended October 31, 20212022 and 2020,2021, respectively. The amounts are included in the statement of operations as other comprehensive gainincome for the respective periods.
Liquidity and Capital Resources
The following table sets out our cash and working capital as of October 31, 2021:2022:
|
| As of October 31, 2021 |
|
| As of October 31, 2022 |
| ||
|
| (unaudited) |
|
| (unaudited) |
| ||
Cash reserves |
| $ | 7,433,086 |
|
| $ | 1,302,124 |
|
Working capital |
| $ | 8,362,746 |
| ||||
Working capital deficiency |
| $ | 937,922 |
|
At October 31, 2021,2022, we had cash of $7,433,086$1,302,124 as compared to cash of $7,374,194$1,854,277 at July 31, 2021.2022. The Company has minimal committed capital expenditures.
Statement of Cash flows
During the three month period ended October 31, 2021,2022, our net cash increased by $58,892 (2020 – decreased by $23,283)$552,153 (2021 – increase by $58,892), which included net cash provided byused in operating activities of $256,511 (2020$589,074 (2021 – used $167,435)provided $256,511), net cash used inprovided by investing activities of $232,076 (2020 - $119,485)$106,989 (2021 – used $232,076), net cash used in financing activities of $1,824 (2020$8 (2021 – $4,460)used $1,824) and effect of exchange rate changes on cash and cash equivalents having a loss of $36,281 (2020 - $268,097)$70,060 (2021 – gain of $36,281).
Cash Flow used inprovided by (used in) Operating Activities
Cash flow provided by operating activities totaled $256,511 and ($167,435) during the three months ended October 31, 2021 and 2020, respectively. Significant changes in cash used in operating activities are outlined as follows:
| · | The Company incurred a net loss from operations of |
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The following non-cash items further adjusted the loss for the three months ended October 31, 20212022 and 2020:2021:
| · | Decrease in amounts receivable and prepaid of |
Cash Flow used in Investing Activities
During the three month period ended October 31, 2021, investing activities used cash of $232,076 compared to $119,485 during the three month period ended October 31, 2020. The change in cash used infrom investing activities from the three month period ended October 31, 20212022 relates primarily to a convertiblethe purchased equipment of $8,320 (2021 - $15,650), loan of $162,011 (2020 - $134,729) provided torepaid by CCG in Arkansas additional property and equipment of $15,650 (2020$115,309 (2021 - $99,619) and cash provided to NMG Ohio, net of cash received on acquisition, was $54,415 (2020 –$136,326)$162,011).
Cash Flow provided by Financing Activities
During the three month period ended October 31, 2021,2022, financing activities used cash of $1,824$8 compared to $4,460$1,824 during the three month period ended October 31, 2020. During the three month period ended October 31, 2021, the Company repaidall related to a loanrepayment of $1,824 (2020 - $4,460).loan.
Trends and Uncertainties
Potential Impact of the COVID-19 Pandemic
In December 2019, a strain of novel coronavirus (now commonly known as COVID-19) was reported to have surfaced in Wuhan, China. COVID-19 has since spread rapidly throughout many countries, and, on March 11, 2020, the World Health Organization declared COVID-19 to be a pandemic. In an effort to contain and mitigate the spread of COVID-19, many countries, including the United States, Canada and China, have imposed unprecedented restrictions on travel, and there have been business closures and a substantial reduction in economic activity in countries that have had significant outbreaks of COVID-19. Although certain restrictions have been relaxed, COVID-19 may have a future material impact on our results of operation with respect to retail sales at our dispensary locations as well as wholesales of our products in Nevada to dispensaries in Nevada. Significant uncertainty remains as to the potential impact of the COVID-19 pandemic on our operations, and on the global economy as a whole. It is currently not possible to predict how long the pandemic will last or the time that it will take for economic activity to return to prior levels. We do not yet know the full extent of any impact on our business or our operations, however, we will continue to monitor the COVID-19 situation closely, and intend to follow health and safety guidelines as they evolve.
Off-balance sheet arrangements
There are no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors.
Subsequent Events
On November 12, 2021, our Compensation Committee and Board of Directors approved an Executive Bonus Program for FY2022 for the CEO, COO and CFO. The Board of Directors approved an incentive-based cash bonus program for CEO’s consulting company and for the COO of up to a maximum of $200,000 per CEO or COO based on our consolidated revenue performance for each quarter of the fiscal year ended July 31, 2022 compared to the prior quarter. Each of the CEO and COO could earn (i) $5,000 in cash for each 1% revenue growth over the prior quarter, and/or (ii) $10,000 in cash for each 1% Adjusted EBITDA growth over the prior quarter, all subject to a $50,000 maximum amount per executive that could be earned for each quarter of the fiscal year ended July 31, 2022. In addition, our Compensation Committee and Board of Directors approved that they will consider a further discretionary cash bonus to the CEO’s consulting company and the COO at the fiscal year ended July 31, 2022, based on our performance metrics over the course of the fiscal year ended July 31, 2022.
Furthermore, on November 12, 2021, our Compensation Committee and Board of Directors approved a cash bonus to be paid to the CFO’s consulting company up to a maximum of $40,000 based on the timing of the filing of our periodic reports for the fiscal year ended July 31, 2022. The bonus consists of a quarterly bonus of $10,000 per quarter based on filing of our Form 10-Q’s and 10-K by the filing deadline, not including any extensions pursuant to Rule 12b-25 under the Exchange Act.
On November 30, 2021, the independent members of our Compensation Committee and Board of Directors approved an executive bonus for FY2021 for the CEO, COO. Our Compensation Committee and Board of Directors approved an aggregate of 448,000 stock options (the “Options”) in accordance with our stock option plan at an exercise price of CAD$0.44 per share for a term of five years expiring on November 30, 2026. The Options are subject to vesting provisions such that 25% of the Options vest six (6) months from the date of grant, 25% of the Options vest twelve (12) months from the date of grant, 25% of the Options vest eighteen (18) months from the date of grant and 25% of the Options vest twenty-four (24) months from the date of grant.
In addition, on November 30, 2021, we and Focus Growth Agency Lending LLC amended the Loan Agreement to extend the deadline for the delayed draw request period from December 1, 2021 to June 1, 2022. The amendment provides us with flexibility to request funds later than the original draw date which will allow more efficient use of capital for development projects.
Furthermore, on November 30, 2021, we signed a consulting agreement with Skanderbeg Capital Advisors Inc. to provide capital market advisory services, including introductions to prospective investors and merger and acquisition transactions and advising on capital structuring and other financial aspects of financings or strategic transactions. We agreed to pay the consultant a monthly fee of CAD$7,500 and issue the consultant 200,000 stock options having an exercise price of CAD$0.44 per share for a period of three years expiring on November 3, 2024.
On December 1, 2021, we announced the entering into of 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.
The first purchase agreement (“PA #1”) between BaM’s subsidiary, DEP Nevada, Inc. (“DEP”), 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 US$4.8 million comprised of US$2.5 million in cash (the “Cash Purchase Price”) and a secured promissory note in the amount of $2.3 million 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, or returned to DEP in the event of the denial of city and state approval and the agreement is terminated, in which case the 80% membership interests will be transferred back to the Sellers and the promissory note will be terminated.
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 under PA #1 in exchange for US$1 million to be paid in either shares of common stock of BaM (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 November 30, 2021, which is US$0.3665 per share for a total of 2,728,156 shares. 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 BaM to issue an additional One Hundred Thousand Dollars ($100,000.00) worth of shares of common stock of BaM (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. 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.
Critical Accounting Policies
Our financial statements and accompanying notes have been prepared in accordance with United States generally accepted accounting principles applied on a consistent basis. The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods.
We regularly evaluate the accounting policies and estimates that we use to prepare our financial statements. In general, management’s estimates are based on historical experience, on information from third party professionals, and on various other assumptions that are believed to be reasonable under the facts and circumstances. Actual results could differ from those estimates made by management.
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We believe the following critical accounting policies require us to make significant judgments and estimates in the preparation of our consolidated financial statements.
· | Income taxes |
The determination of deferred income tax assets or liabilities requires subjective assumptions regarding future income tax rates and the likelihood of utilizing tax carry-forwards. Changes in these assumptions could materially affect the recorded amounts, and therefore do not necessarily provide certainty as to their recorded values. |
| · | Foreign currency |
The Company determines the functional currency through an analysis of several indicators such as expenses and cash flows, financing activities, retention of operating cash flows, and frequency of transactions with the reporting entity. |
| · | Fair value of financial instruments |
Management uses valuation techniques, in measuring the fair value of financial instruments, where active market quotes are not available.
In applying the valuation techniques, management makes maximum use of market inputs wherever possible, and uses estimates and assumptions that are, as far as possible, consistent with observable data that market participants would use in pricing the instrument. Where applicable data is not observable, management uses its best estimate about the assumptions that market participants would make. Such estimates include liquidity risk, credit risk and volatility may vary from the actual results that would be achieved in an arm’s length transaction at the reporting date.
The assessment of the timing and extent of impairment of intangible assets involves both significant judgements by management about the current and future prospects for the intangible assets as well as estimates about the factors used to quantify the extent of any impairment that is recognized.
| · | Long-lived assets and goodwill |
Long-lived assets and goodwill are reviewed for indicators of impairment at least annually. When there are indications of impairment, the Company calculates the fair value of reporting units for goodwill and the fair value of the asset groups for long-lived assets using various valuation techniques, which require the input of highly subjective assumptions that can materially affect the fair value estimate.
| · | Intellectual property |
The recoverability of the carrying value of the intellectual property is dependent on numerous factors. The carrying value of these assets is reviewed by management when events or circumstances indicate that its carrying value may not be recovered. If impairment is determined to exist, an impairment loss is recognized to the extent that the carrying amount exceeds the recoverable amount.
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· | Stock-based compensation |
The option pricing models require the input of highly subjective assumptions, particularly the expected stock price volatility. Changes in the subjective input assumptions can materially affect the fair value estimate, and therefore the existing models do not necessarily provide a reliable single measure of the fair value of the Company’s stock options.
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| Business Combination |
The results of businesses acquired in a business combination are included in our consolidated financial statements from the date of the acquisition. Purchase accounting results in assets and liabilities of an acquired business being recorded at their estimated fair values on the acquisition date. Any excess consideration over the fair value of assets acquired and liabilities assumed is recognized as goodwill. We perform valuations of assets acquired and liabilities assumed on each acquisition accounted for as a business combination in order to record the tangible and intangible assets acquired and liabilities assumed based on our best estimate of fair value. Determining the fair value of assets acquired and liabilities assumed requires management to use significant judgment and estimates including the selection of valuation methodologies, estimates of future revenue and cash flows, discount rates and selection of comparable companies. Significant estimation is required in determining the fair value of the customer relationship intangible assets, deferred revenue and contingent consideration liabilities. The significant estimation is primarily due to the judgmental nature of the inputs to the valuation models used to measure the fair value of these intangible assets, deferred revenue and contingent consideration liabilities, as well as the sensitivity of the respective fair values to the underlying significant assumptions. We use the income approach to measure the fair value of these intangible assets. The significant assumptions used to estimate the fair value of the intangible assets included forecasted revenues from existing customers and existing customer attrition rates. When estimating the significant assumptions to be used in the valuation we include a consideration of current industry information, market and economic trends, historical results of the acquired business and other relevant factors. These significant assumptions are forward-looking and could be affected by future economic and market conditions. We engage the assistance of valuation specialists in concluding on fair value measurements in connection with determining fair values of assets acquired and liabilities assumed in a business combination. | |
Recent Accounting Pronouncements
In June 2016, the FASB issued ASU No. 2016-13 “Financial"Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments”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 December 15, 2022. The Company does not anticipate this amendment to have a significant impact on the consolidated financial statements.
In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740) – Simplifying the Accounting for Income Taxes. ASU 2019-12 removes certain exceptions for investments, intraperiod allocations and interim calculations, and adds guidance to reduce complexity in accounting for income taxes. ASU 2019-12 is effective for annual and interim periods beginning after December 15, 2020. Early adoption is permitted. The Company is currently evaluating the effect of adopting this ASU on the Company’s 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 is currently assessing the impact this standard will have on the Company’s condensed consolidated financial statements.
Management of financial risks
The financial risk arising from the Company’s operations are 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. The Company is not currently exposed to any significant credit risk associated with its trade receivable.
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK We are a smaller reporting company as defined by Rule 12b-2 of the Exchange Act and are not required to provide the information required under this item.
ITEM 4 – CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
We have established disclosure controls and procedures to ensure that material information relating to us is made known to the officers who certify our financial reports and the Board.
Based on their evaluation as of October 31,
In our assessment of the effectiveness of our internal control over financial reporting as at October 31,
The Company added more experienced personnel in the accounting department to remediate this material weaknesses. However, the Company’s management will not consider this remediated until the control procedures operate for a period of time and the control procedures are tested to ensure they are operating effectively.
It should be noted that any system of controls is based in part upon certain assumptions designed to obtain reasonable (and not absolute) assurance as to its effectiveness, and there can be no assurance that any design will succeed in achieving its stated goals.
Change in Internal Control over Financial Reporting
There were no changes to our internal control over financial reporting that occurred during the quarter ended October 31,
PART II – OTHER INFORMATION ITEM 1 – LEGAL PROCEEDINGS
We are not, and were not during our most recently completed fiscal quarter, engaged in any legal proceedings and none of our property is or was during that period the subject of any legal proceedings. We do not know of any such legal proceedings which are contemplated.
ITEM 1A. RISK FACTORS
We are a smaller reporting company as defined by Rule 12b-2 of the Exchange Act and are not required to provide the information required under this item.
ITEM 2 – UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
ITEM 3 – DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4 – MINE SAFETY DISCLOSURES
Not applicable
ITEM 5 – OTHER INFORMATION
ITEM 6 – EXHIBITS
The following exhibits are included with this Quarterly Report:
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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