UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 20-F/A
(Amendment No. 1)
☐ | REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
OR | ||
☒ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
For fiscal year ended January 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 ______ | ||
OR | ||
☐ | SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
Date of event requiring this shell company report: |
Commission file number 000-55982 |
C21 Investments Inc.
(Exact name of Registrant as specified in its charter)
British Columbia, Canada
(Jurisdiction of incorporation or organization)
19th Floor, 885 West Georgia Street
Vancouver, British Columbia V6E 3H4
Canada
(Address of principal executive offices)
Michael Kidd
C21 Investments Inc.
19th Floor, 885 West Georgia Street
Vancouver, British Columbia V6E 3H4
Canada
Tel: 833-289-2994
(Name, Telephone, E-mail and/or Facsimile number and Address of Company Contact Person)
1
Securities registered pursuant to Section 12(b) of the Act: Not applicable.
Securities registered pursuant to Section 12(g) of the Act: Common shares, no par value
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act: None
Indicate the number of outstanding shares of each of the issuer's classes of capital or common stock as of the close of the period covered by the annual report: As at January 31, 2022, 120,047,814 common shares of the Registrant were issued and outstanding.
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes ☐ No ☒
If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. Yes ☐ No ☒
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, or an emerging growth company. See definition of "large accelerated filer, "accelerated filer," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer ☐ | Accelerated filer ☐ | Non-accelerated filer ☒ | Emerging growth company ☒ |
If an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, indicate by check mark 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. ☐
† | The term "new or revised financial accounting standard" refers to any update issued by the Financial Accounting Standards Board to its Accounting Standards Codification after April 5, 2012. |
Indicate by check mark whether the registrant has filed a report on and attestation to its management's assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☐
Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:
U.S. GAAP ☒ | International Financial Reporting Standards as issued ☐ Other ☐ |
by the International Accounting Standards Board |
If "Other" has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow:
Item 17 ☐ Item 18 ☐
2
If this is an annual report, indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No☒
Explanatory Note
This Amendment No. 1 on Form 20-F/A (the "Amendment") amends C21 Investment Inc.'s (the "Company") Annual Report on Form 20-F for the fiscal year ended January 31, 2022 (the "Form 20-F"), as filed with the Securities and Exchange Commission on August 15, 2022, and is being filed solely to furnish the Company's financial statements for the fiscal year ended January 31, 2021 formatted in inline eXtensible Business Reporting Language ("iXBRL").
Pursuant to Rule 12b-15 promulgated under the United States Securities Exchange Act of 1934, as amended, we have repeated the entire text of Item 18 and Item 19 from the Form 20-F in this Amendment. However, there have been no changes to the text of either item other than the change stated in the immediately preceding paragraph.
This Amendment includes new certifications by our Principal Executive Officer and Principal Financial Officer pursuant to Sections 302 and 906 of the Sarbanes-Oxley Act of 2002 as Exhibits 12.1, 12.2, 13.1 and 13.2 hereto.
Except as expressly set forth above, this Amendment does not, and does not purport to, amend, update or restate the information in any other item of the Form 20-F or reflect any events that have occurred after the filing of the original Form 20-F.
3
Item 18. Financial Statements
The following financial statements pertaining to the Company are filed as part of this Annual Report:
Audited Financial Statements of the Company for the years ended January 31, 2022, and 2021 audited in accordance with U.S. GAAP.
Audited Financial Statements of the Company for the years ended January 31, 2021, and 2020 audited in accordance with IFRS.
4
C21 INVESTMENTS INC.
Consolidated Financial Statements For the years ended January 31, 2022 and 2021 (Expressed in U.S. Dollars) |
C21 INVESTMENTS INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Baker Tilly US, LLP 18500 Von Karman Ave; 10th Fl. Irvine, CA 92612 United States of America T: +1 (949) 222 2999 F: +1 (949) 222 2989 bakertilly.com |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and the Board of Directors
C21 Investments Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of C21 Investments Inc. (the "Company") as of January 31, 2022 and 2021, the related consolidated statements of comprehensive income (loss), changes in shareholders' equity, and cashflows for the years then ended, and related notes (collectively referred to as the "consolidated financial statements"). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of January 31, 2022 and 2021, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
We have served as the Company's auditor since 2020.
/s/ Baker Tilly US, LLP
Irvine, CA
August 15, 2022
Baker Tilly US, LLP, trading as Baker Tilly, is a member of the global network of Baker Tilly International Ltd., the members of which are separate and independent legal entities. © 2020 Baker Tilly US, LLP
CONSOLIDATED BALANCE SHEETS
AS AT JANUARY 31, 2022 AND 2021
(Expressed in U.S. dollars)
January 31, 2022 | January 31, 2021 | |||||
$ | $ | |||||
ASSETS | ||||||
Current assets | ||||||
Cash | 3,067,983 | 6,237,182 | ||||
Receivables | 210,423 | 116,017 | ||||
Inventory | 4,054,473 | 2,692,647 | ||||
Prepaid expenses and deposits | 773,450 | 778,037 | ||||
Current portion of assets classified as held for sale | 2,178,145 | 1,492,826 | ||||
10,284,474 | 11,316,709 | |||||
Non-current assets | ||||||
Property and equipment | 4,869,593 | 2,748,636 | ||||
Right-of-use assets | 8,875,884 | 9,337,248 | ||||
Intangible assets | 9,224,165 | 10,957,961 | ||||
Goodwill | 28,541,323 | 28,541,323 | ||||
Security deposit | 49,011 | 47,739 | ||||
Deferred tax asset | 9,024 | 556,514 | ||||
Assets classified as held for sale | - | 3,313,334 | ||||
TOTAL ASSETS | 61,853,474 | 66,819,464 | ||||
LIABILITIES | ||||||
Current liabilities | ||||||
Accounts payable and accrued liabilities | 2,508,869 | 2,680,996 | ||||
Promissory note payable - current portion | 6,080,000 | 6,080,000 | ||||
Convertible promissory note - current portion | 1,281,442 | 2,202,646 | ||||
Income taxes payable | 3,658,162 | 3,378,299 | ||||
Lease liabilities - current portion | 325,698 | 260,621 | ||||
Current portion of liabilities classified as held for sale | 874,379 | 628,171 | ||||
14,728,550 | 15,230,733 | |||||
Non-current liabilities | ||||||
Lease liabilities | 8,953,425 | 9,279,123 | ||||
Deposit liability | 100,000 | - | ||||
Promissory note payable | 2,026,667 | 8,106,667 | ||||
Derivative liabilities | 1,006,368 | 9,759,127 | ||||
Reclamation obligation | 55,272 | 55,008 | ||||
Liabilities classified as held for sale | - | 1,132,658 | ||||
TOTAL LIABILITIES | 26,870,282 | 43,563,316 | ||||
SHAREHOLDERS' EQUITY | ||||||
Common stock, no par value; unlimited shares authorized; 120,047,814 and 117,057,860 shares issued and outstanding as at January 31, 2022 and 2021, respectively | 105,236,351 | 103,636,830 | ||||
Commitment to issue shares | 628,141 | 649,928 | ||||
Accumulated other comprehensive loss | (2,370,967 | ) | (1,604,126 | ) | ||
Deficit | (68,510,333 | ) | (79,426,484 | ) | ||
TOTAL SHAREHOLDERS' EQUITY | 34,983,192 | 23,256,148 | ||||
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY | 61,853,474 | 66,819,464 |
See accompanying notes to the consolidated financial statements
p. 1
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
FOR THE YEARS ENDED JANUARY 31, 2022 AND 2021
(Expressed in U.S. dollars)
January 31, 2022 | January 31, 2021 | |||||
$ | $ | |||||
Revenue | 32,982,976 | 33,466,063 | ||||
Cost of sales | 14,172,991 | 15,418,717 | ||||
Gross Profit | 18,809,985 | 18,047,346 | ||||
Selling, general and administrative expense | 9,055,174 | 8,807,399 | ||||
Income from operations | 9,754,811 | 9,239,947 | ||||
Interest expense | (1,077,068 | ) | (3,931,570 | ) | ||
Accretion expense | (230,462 | ) | (1,220,896 | ) | ||
Other income | 108,470 | 35,275 | ||||
Gain (loss) on change in fair value of derivative liabilities | 8,576,290 | (5,756,195 | ) | |||
Net income (loss) from continuing operations before income taxes | 17,132,041 | (1,633,439 | ) | |||
Income tax expense | (3,973,246 | ) | (2,968,133 | ) | ||
Net income (loss) from continuing operations after income taxes | 13,158,795 | (4,601,572 | ) | |||
Net loss from discontinued operations after income taxes | (2,242,644 | ) | (3,228,056 | ) | ||
NET INCOME (LOSS) | 10,916,151 | (7,829,628 | ) | |||
Other comprehensive loss | ||||||
Cumulative translation adjustment | (766,841 | ) | (613,609 | ) | ||
COMPREHENSIVE INCOME (LOSS) | 10,149,310 | (8,443,237 | ) | |||
Basic income (loss) per share from continuing operations | 0.11 | (0.04 | ) | |||
Diluted income (loss) per share from continuing operations | 0.11 | (0.04 | ) | |||
Basic and diluted loss per share from discontinued operations | (0.02 | ) | (0.03 | ) | ||
Basic income (loss) per share | 0.09 | (0.07 | ) | |||
Diluted income (loss) per share | 0.09 | (0.07 | ) | |||
Weighted average number of common shares outstanding - basic | 118,308,584 | 104,841,540 | ||||
Weighted average number of common shares outstanding - diluted | 121,141,677 | 104,841,540 |
See accompanying notes to the consolidated financial statements
p. 2
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
FOR THE YEARS ENDED JANUARY 31, 2022 AND 2021
(Expressed in U.S. dollars)
Number of shares | Common stock | Commitment to issue shares | Accumulated other comprehensive loss | Deficit | Total shareholders' equity | |||||||||||||
$ | $ | $ | $ | $ | ||||||||||||||
Balance at January 31, 2020 | 89,388,639 | 85,096,509 | 1,100,881 | (990,517 | ) | (71,596,856 | ) | 13,610,017 | ||||||||||
Purchase of Phantom real estate | 7,132,042 | 2,582,903 | - | - | - | 2,582,903 | ||||||||||||
Amendment of Megawood consideration | 95,849 | 38,415 | - | - | - | 38,415 | ||||||||||||
Shares issued on exercise of options | 200,000 | 98,950 | - | - | - | 98,950 | ||||||||||||
Shares issued on exercise of convertible debentures | 19,764,694 | 12,758,473 | - | - | - | 12,758,473 | ||||||||||||
Commitment to issue shares on purchase of Swell Companies | 456,862 | 429,582 | (429,582 | ) | - | - | - | |||||||||||
Payment of EFF share payment note | 19,774 | 21,371 | (21,371 | ) | - | - | - | |||||||||||
Standby warrants issued | - | 2,116,192 | - | - | - | 2,116,192 | ||||||||||||
Share-based compensation | - | 494,435 | - | - | - | 494,435 | ||||||||||||
Net loss and comprehensive loss for the year | - | - | - | (613,609 | ) | (7,829,628 | ) | (8,443,237 | ) | |||||||||
Balance at January 31, 2021 | 117,057,860 | 103,636,830 | 649,928 | (1,604,126 | ) | (79,426,484 | ) | 23,256,148 | ||||||||||
Commitment to issue shares on purchase of EFF | 19,774 | 21,787 | (21,787 | ) | - | - | - | |||||||||||
Shares issued on exercise of PF warrants | 456,100 | 533,326 | - | - | - | 533,326 | ||||||||||||
Shares issued on exercise of guaranteed warrants | 1,214,080 | - | - | - | - | - | ||||||||||||
Shares issued - Settlement of Earn out shares | 1,300,000 | 677,939 | - | - | - | 677,939 | ||||||||||||
Share-based compensation | - | 366,469 | - | - | - | 366,469 | ||||||||||||
Net income and other comprehensive loss for the year | - | - | - | (766,841 | ) | 10,916,151 | 10,149,310 | |||||||||||
Balance at January 31, 2022 | 120,047,814 | 105,236,351 | 628,141 | (2,370,967 | ) | (68,510,333 | ) | 34,983,192 |
See accompanying notes to the consolidated financial statements
p. 3
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JANUARY 31, 2022 AND 2021
(Expressed in U.S. dollars)
January 31, 2022 | January 31, 2021 | |||||
$ | $ | |||||
OPERATING ACTIVITIES | ||||||
Net income (loss) from continuing operations | 13,158,795 | (4,601,572 | ) | |||
Adjustments to reconcile net income (loss) to net cash provided by operating activities: | ||||||
Depreciation and amortization | 1,818,325 | 2,270,526 | ||||
Share-based compensation | 366,469 | 494,435 | ||||
Interest expense | 83,058 | 3,573,101 | ||||
Accretion expense | 230,462 | 1,220,896 | ||||
Deferred income tax | 589,914 | 602,087 | ||||
Foreign exchange gain | 500,462 | 284,401 | ||||
(Gain) loss on change in fair value of derivative liabilities | (8,576,290 | ) | 5,756,195 | |||
Gain on disposal of assets | - | (135,564 | ) | |||
Changes in operating assets and liabilities | ||||||
Inventory | (1,361,826 | ) | 1,700,987 | |||
Prepaid expenses and deposits | 4,587 | (368,678 | ) | |||
Receivables | (94,406 | ) | 154,900 | |||
Assets classified as held for sale | 748,404 | - | ||||
Accounts payable and accrued liabilities | 1,568,932 | (1,431,130 | ) | |||
Income tax payable | 279,863 | (336,367 | ) | |||
Lease liabilities | (72,734 | ) | (701,115 | ) | ||
Liabilities classified as held for sale | (805,406 | ) | - | |||
Cash provided by operating activities of continuing operations | 8,438,609 | 8,483,102 | ||||
Cash (used in) provided by operating activities of discontinued operations | (1,602,478 | ) | 241,753 | |||
INVESTING ACTIVITIES | ||||||
Purchases of property and equipment | (2,562,304 | ) | (227,777 | ) | ||
Payment of Megawood consideration payable | - | (130,000 | ) | |||
Payment of Swell consideration payable | - | (846,256 | ) | |||
Cash used in investing activities of continuing operations | (2,562,304 | ) | (1,204,033 | ) | ||
Cash provided by investing activities of discontinued operations | 1,168,349 | 100,000 | ||||
FINANCING ACTIVITIES | ||||||
Principal repayments on promissory note payable | (6,080,000 | ) | (7,013,333 | ) | ||
Repayment of convertible promissory notes | (1,210,000 | ) | - | |||
Cash proceeds from warrants | 533,326 | - | ||||
Cash proceeds from options | - | 98,950 | ||||
Issuance of convertible debentures on exercise of warrants | - | 5,688,442 | ||||
Interest paid in cash | (1,082,500 | ) | (2,500,669 | ) | ||
Lease payments received | 100,000 | - | ||||
Cash used in financing activities of continuing operations | (7,739,174 | ) | (3,726,610 | ) | ||
Cash used in financing activities of discontinued operations | (105,360 | ) | (119,914 | ) | ||
Effect of foreign exchange on cash | (766,841 | ) | (613,609 | ) | ||
(Decrease) increase in cash during the year | (3,169,199 | ) | 3,160,689 | |||
Cash, beginning of year | 6,237,182 | 3,076,493 | ||||
Cash, end of year | 3,067,983 | 6,237,182 | ||||
Supplemental disclosure of cash flow information | ||||||
Interest paid in cash | 2,322,855 | 2,515,446 | ||||
Income taxes paid in cash | 3,145,893 | 2,832,676 | ||||
Non-cash investing activities | ||||||
Right-of-use asset additions resulting from lease renewals | - | 7,236,663 | ||||
Non-cash financing activities | ||||||
Common shares issued on exercise of convertible debentures | - | 12,758,473 | ||||
Common shares issued in settlement of Phantom Farms earn out shares | 677,939 | - | ||||
Common shares issued as partial settlement of commitment to issue shares | 21,787 | 450,953 | ||||
Common shares issued to complete purchase of land | - | 2,582,903 | ||||
Common shares issued as partial repayment of promissory note | - | 38,415 |
See accompanying notes to the consolidated financial statements
p. 4
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JANUARY 31, 2022 AND 2021
(Expressed in U.S. dollars, except as noted)
1. NATURE OF OPERATIONS
C21 Investments Inc. (the "Company" or "C21") was incorporated January 15, 1987, under the Company Act of British Columbia. The Company is a publicly traded company with its registered office is 1900-885 West Georgia Street, Vancouver, BC, V6C 3H4.
Pursuant to a change of business announced on January 29, 2018 to the Cannabis industry, the Company commenced acquiring and operating revenue-producing cannabis operations in the USA.
On June 15, 2018, the Company's common shares were delisted from the TSX Venture Exchange ("TSX-V") at the Company's request and on June 18, 2018 the Company commenced trading on the Canadian Securities Exchange ("CSE"), completed its change of business to the cannabis industry and commenced trading under the symbol CXXI. The Company registered its common shares in the United States and on May 6, 2019, its shares were cleared by the Financial Industry Regulatory Authority for trading on the OTC Markets platform under the U.S. trading symbol CXXIF. On September 28, 2020, the Company began trading on the OTCQB® Venture Market.
For the year ended January 31, 2021, the Company operated in two segments: recreational cannabis in Oregon, USA and recreational and medical cannabis in Nevada, USA (note 17). During the year ended January 31, 2022, the Company made the strategic decision to exit operations in Oregon. The comparative results of operations have been re-stated to present the operating results of the Oregon segment as discontinued operations. The Nevada segment remains engaged in the cultivation of and manufacturing of cannabis flower products, vape products and extract products for wholesale and retail sales.
At January 31, 2022, the Company had cash of $3,067,983, a working capital deficit of $4,444,076, and an accumulated deficit of $68,510,333. However, for the year ended January 31, 2022, the Company generated net income and positive cash flows from operations.
Management has taken several actions to ensure that the Company will continue as a going concern through January 31, 2023, including the closing of its operations in Oregon (note 4), selling the assets in Oregon, reducing headcount, and reducing discretionary expenditures. The Company is seeking additional financing in the form of debt which could consolidate existing debt on its balance sheet on more favorable terms. Management believes that these actions will enable the Company to continue as a going concern through August 15, 2023, one year from the date these consolidated financial statements were issued.
In the United States, 36 states, the District of Columbia, and four out of five U.S. territories allow the use of medical cannabis. The recreational adult-use of cannabis is legalized in 17 states, including Alaska, Arizona, California, Colorado, Illinois, Maine, Massachusetts, Michigan, Montana, Nevada, New Jersey, New Mexico, New York, Oregon, Vermont, Virginia, Washington, and the District of Columbia. At the federal level, however, cannabis currently remains a Schedule I controlled substance under the Federal Controlled Substances Act of 1970. Under U.S. federal law, a Schedule I drug or substance has a high potential for abuse, no accepted medical use in the United States, and a lack of accepted safety for the use of the drug under medical supervision. As such, even in those states in which marijuana is legalized under state law, the manufacture, importation, possession, use or distribution of cannabis remains illegal under U.S. federal law. This has created a dichotomy between state and federal law, whereby many states have elected to regulate and remove state-level penalties regarding a substance which is still illegal at the federal level. There remains uncertainty about the US federal government's position on cannabis with respect to cannabis-legal status. A change in its enforcement policies could impact the ability of the Company to continue as a going concern.
p. 5
C21 INVESTMENTS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JANUARY 31, 2022 AND 2021
(Expressed in U.S. dollars, except as noted)
2. BASIS OF PREPARATION
Basis of presentation
These consolidated financial statements as at and for the years ended January 31, 2022 and 2021 ("consolidated financial statements") are prepared in accordance with accounting principles generally accepted in the United States of America ("U.S. GAAP"). These consolidated financial statements have been prepared on an accrual basis and are based on historical costs, except for certain financial instruments classified as fair value through profit or loss.
Functional and reporting currency
The functional currency of C21 Investments Inc. is Canadian dollars, and the functional currency of the Company's subsidiaries is U.S. dollars. C21 has determined that the U.S. dollar is the most relevant and appropriate reporting currency as the Company's operations are conducted in U.S. dollars and its financial results are prepared and reviewed internally by management in U.S. dollars. The consolidated financial statements are presented in U.S. dollars unless otherwise noted.
Basis of consolidation
The consolidated financial statements incorporate the accounts of the Company and all the entities in which the Company has a controlling voting interest and is deemed to be the primary beneficiary. All consolidated entities were under common control during the entirety of the periods for which their respective results of operations were included in the consolidated statements (i.e. from the date of acquisition). All intercompany balances and transactions are eliminated upon consolidation.
The following are the Company's subsidiaries that are included in these consolidated financial statements as at and for the year ended January 31, 2022:
Name of Subsidiary | Country of | Percentage | Functional | Principal Activity |
320204 US Holdings Corp. | USA | 100% | USD | Holding Company |
320204 Oregon Holdings Corp. | USA | 100% | USD | Holding Company |
320204 Nevada Holdings Corp. | USA | 100% | USD | Holding Company |
320204 Re Holdings, LLC | USA | 100% | USD | Holding Company |
Eco Firma Farms LLC | USA | 100% | USD | Cannabis producer |
Silver State Cultivation LLC | USA | 100% | USD | Cannabis producer |
Silver State Relief LLC | USA | 100% | USD | Cannabis retailer |
Swell Companies LTD | USA | 100% | USD | Cannabis processor, distributor |
Megawood Enterprises Inc. | USA | 100% | USD | Cannabis retailer |
Phantom Venture Group, LLC | USA | 100% | USD | Holding Company |
Phantom Brands, LLC | USA | 100% | USD | Holding Company |
Phantom Distribution, LLC | USA | 100% | USD | Cannabis distributor |
63353 Bend, LLC | USA | 100% | USD | Cannabis producer |
20727-4 Bend, LLC | USA | 100% | USD | Cannabis processor |
4964 BFH, LLC | USA | 100% | USD | Cannabis producer |
Workforce Concepts 21, Inc. | USA | 100% | USD | Payroll and benefits services |
p. 6
C21 INVESTMENTS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JANUARY 31, 2022 AND 2021
(Expressed in U.S. dollars, except as noted)
3. SIGNIFICANT ACCOUNTING POLICIES
Significant accounting estimates and assumptions
The preparation of the Company's financial statements in conformity with U.S. GAAP requires management to make judgments, estimates and assumptions that affect the reported amounts of assets, liabilities and contingent liabilities at the date of the financial statements and reported amounts of revenues and expenses during the reporting period. Estimates and assumptions are continuously evaluated and are based on management's experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. Actual results may differ from those estimates and judgments.
Areas requiring a significant degree of estimation and judgment relate to the determination of fair values of assets acquired and liabilities assumed in business combinations, impairment of long-lived assets and inventory, fair value measurements, useful lives, depreciation and amortization of property, equipment and intangible assets, the recoverability and measurement of deferred tax assets and liabilities, share-based compensation, and fair value of derivative liabilities.
Cash
Cash held in financial institutions and cash held at retail locations, have carrying values that approximate fair value.
Foreign currency translation
Foreign currency transactions are translated into U.S. dollars at exchange rates in effect on the date of the transactions. Monetary assets and liabilities denominated in foreign currencies are translated at the functional currency spot rate at the reporting date. All differences are recorded in the consolidated statements of income and comprehensive income (loss). Non-monetary items that are measured in terms of historical cost in a foreign currency are translated using the exchange rate at the date of the initial transaction. Non-monetary items measured at fair value in a foreign currency are translated using the exchange rates at the date when the fair value is determined.
Assets and liabilities of foreign operations are translated into U.S. dollars at year-end exchange rates and any revenue and expenses are translated at the average exchange rate for the year. The resulting exchange differences are recognized in other comprehensive income (loss).
Inventory
Inventory consists of raw materials, consumables and packaging supplies used in the process to prepare inventory for sale; work in process consisting of pre-harvested cannabis plants, by-products to be extracted, oils and terpenes; and finished goods.
Inventory is valued at the lower of cost and net realizable value, with cost determined using the weighted average cost method. Net realizable value is calculated as the estimated selling price in the ordinary course of business, less any estimated costs to complete and sell the goods. Costs are capitalized to inventory, until substantially ready for sale. Costs include direct and indirect labor, raw materials, consumables, packaging supplies, utilities, facility costs, quality and testing costs, production related depreciation and other overhead costs. The Company records inventory reserves for obsolete and slow-moving inventory. Inventory reserves are based on inventory obsolescence trends, and the historical and professional experience of management. The Company classifies cannabis inventory as a current asset, although, due to the duration of the cultivation, drying, and conversion process, certain inventory items may not be realized in cost of sales within one year.
p. 7
C21 INVESTMENTS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JANUARY 31, 2022 AND 2021
(Expressed in U.S. dollars, except as noted)
3. SIGNIFICANT ACCOUNTING POLICIES (Continued)
Property and equipment
Property and equipment is measured at cost less accumulated depreciation and losses on impairment.
Depreciation is provided on the straight-line basis over the estimated useful lives of the assets as follows:
Buildings 45 years
Leasehold improvements shorter of the life of the improvement or the remaining life of the lease
Furniture & fixtures 5 years
Computer equipment 3 years
Machinery & equipment 2-7 years
Intangible assets
Intangible assets with finite useful lives are amortized on a straight-line basis over their estimated useful lives. Amortization of intangible assets begins when the asset becomes available for use. Brands, licenses, and customer relationships are amortized over 10 years, which reflect the estimated useful lives of the intangible assets.
Goodwill and indefinite lived Intangible assets
Intangible assets are recorded at cost less accumulated amortization and accumulated impairment losses, if any. Intangible assets acquired in a business combination are measured at fair value at the acquisition date.
Goodwill represents the excess of the purchase price paid for the acquisition of subsidiaries over the fair value of the net intangible and tangible assets acquired. Following the initial recognition, goodwill is measured at cost less any accumulated impairment losses. Goodwill is allocated to the reporting unit in which the business that created the goodwill resides. A reporting unit is an operating segment, or a business unit one level below that operating segment, for which discrete financial information is prepared and regularly reviewed by segment management. The Company's goodwill is part of the Nevada reporting unit.
Goodwill is tested annually for any impairment, or more frequently in the case that events or circumstances indicate that the carrying amount of a reporting unit may not be recoverable. The Company may elect to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If factors indicate this is the case, then a quantitative test is performed and an impairment is recorded for any excess carrying value above the reporting unit's fair value, not to exceed the amount of goodwill.
For the years ended January 31, 2022 and 2021, the recoverable amount of goodwill allocated to the Nevada reporting unit exceeded its carrying amount and as such, no impairment was noted.
Impairment of long-lived assets
Long-lived assets include property and equipment, right-of-use assets, and intangible assets with finite useful lives.
At the end of each fiscal year, the Company reviews the intangible assets' estimated useful lives and amortization methods, with the effect of any changes in estimates accounted for on a prospective basis.
p. 8
C21 INVESTMENTS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JANUARY 31, 2022 AND 2021
(Expressed in U.S. dollars, except as noted)
3. SIGNIFICANT ACCOUNTING POLICIES (Continued)
Long-lived assets are reviewed for indicators of impairment at each statement of balance sheet date or whenever events or changes in circumstances indicate that a potential impairment has occurred. The Company groups assets at the lowest level for which cash flows are separately identifiable, referred to as an asset group. When indicators of potential impairment are present the Company prepares a projected undiscounted cash flow analysis to determine the recoverable amount for the respective asset or asset group. An impairment loss is recognized whenever the carrying amount of the asset exceeds its recoverable amount and is recorded as in profit or loss equal to the amount by which the carrying amount exceeds the fair value.
Assets and liabilities held for sale
Non-current assets, or disposal groups comprising assets and liabilities, are classified as held for sale if it is highly probable that they will be recovered primarily through sale rather than through continuing use. Such assets, or disposal groups, are measured at the lower of their carrying amount and fair value less costs to sell. The comparative consolidated balance sheet is re-presented to classify assets as held for sale in the period that the respective assets are classified as held for sale.
Business combinations
Acquisitions are accounted for in accordance with ASC 805 - Business Combinations, with the assets and liabilities acquired recorded at their fair values at the acquisition date.
The Company is required to allocate the purchase price to tangible and identifiable intangible assets acquired and liabilities assumed based on their fair values. The excess of the purchase price over those fair values of the net assets acquired is recorded as goodwill. Any excess of the fair value of the net assets acquired over the consideration, is a gain on business acquisition and would be recognized as a gain in the consolidated statement of loss and comprehensive loss.
Convertible instruments
In August 2020, the Financial Accounting Standards Board ("FASB") issued Accounting standards update 2020-06-debt-debt with conversion and other options (subtopic 470-20) and derivatives and hedging-contracts in entity's own equity (subtopic 815-40): accounting for convertible instruments and contracts in an entity's own equity, an update to simplify the accounting for convertible debt and other equity-linked instruments. The new guidance simplifies the accounting for convertible instruments by eliminating the cash conversion and beneficial conversion feature models used to separately account for embedded conversion features as a component of equity. Instead, the Company will account for the convertible debt as a single unit of account, unless the conversion feature requires bifurcation and recognition as a derivative. Additionally, the guidance requires the Company to use the if-converted method for all convertible instruments in the diluted earnings per share calculation and include the effect of potential share settlement for instruments that may be settled in cash or shares. The Company early adopted this new guidance using the full retrospective method as of February 1, 2020. The adoption of this new guidance did not have a material impact on the Company's consolidated financial statements and there was no impact to the number of potentially dilutive shares in each of the periods presented.
p. 9
C21 INVESTMENTS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JANUARY 31, 2022 AND 2021
(Expressed in U.S. dollars, except as noted)
3. SIGNIFICANT ACCOUNTING POLICIES (Continued)
Leases
In February 2016, the FASB issued ASU 2016-02, Leases ("ASC 842"), a standard that requires lessees to increase transparency and comparability among organizations by requiring the recognition of right-of-use assets and lease liabilities on the balance sheet. The requirements of this standard include a significant increase in required disclosures to meet the objective of enabling users of financial statements to assess the amount, timing, and uncertainty of cash flows arising from leases. The FASB has issued several amendments and practical expedients to the standard, including clarifying guidance, transition relief on comparative reporting at adoption, a practical expedient, which allows lessees to elect as an accounting policy not to apply the provisions of ASC 842 to short term leases, and codification improvements to clarify that lessees and lessors are exempt from certain interim disclosure requirement associated with adopting the new leases standard. The standard was adopted by the Company beginning February 1, 2020 and the standard was adopted using the modified retrospective transition approach, which allows the Company to recognize a cumulative effect adjustment to the opening balance of accumulated deficit in the period of adoption rather than restate comparative prior year periods. The cumulative effect adjustment to the opening balance of accumulated deficit was $nil. The Company has elected not to recognize right-of-use assets and liabilities for short-term leases that have a term of 12 months or less.
Upon commencement of a contract containing a lease, the Company classifies leases other than short-term leases as either an operating lease or a finance lease according to the criteria prescribed by ASC 842. The lease classification is reassessed only when: (a) the contract is modified and the modification is not accounted for as a separate contract, and (b) there is a change in the lease term or the assessment of whether the lessee is reasonably certain to exercise an option to purchase the underlying asset.
For both finance leases and operating leases, right-of-use assets and lease liabilities are initially measured as the present value of future lease payments and initial direct costs discounted at the interest rate implicit in the lease, or if that rate is not readily determinable, the Company's incremental borrowing rate. Subsequent measurement of lease liabilities classified as finance leases is at amortized cost using the effective interest rate method. Subsequent measurement of right-of-use assets classified as finance leases is at carrying amount less accumulated amortization, where amortization is recorded straight-line over the lease term. Subsequent measurement of lease liabilities classified as operating leases is at the present value of the unpaid lease payments discounted at the discount rate for the lease established at the commencement date. Subsequent measurement of right-of-use assets classified as operating leases is carrying amount less accumulated amortization where amortization is calculated as the difference between straight-line lease cost for the period, including amortization of initial direct costs, and the periodic accretion of the lease liability.
Financial instruments
Financial instruments are contracts that give rise to a financial asset of one party and a financial liability or equity instrument of another party. Financial instruments are recorded initially at fair value, which is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Subsequent measurement depends on how the financial instrument has been classified and may be at fair value or amortized cost. For financial instruments subsequently measured at fair value, the Company calculates the estimated fair value of financial instruments using quoted market prices whenever available. When quoted market prices are not available, the Company uses standard pricing models including the Black-Scholes option pricing model.
p. 10
C21 INVESTMENTS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JANUARY 31, 2022 AND 2021
(Expressed in U.S. dollars, except as noted)
3. SIGNIFICANT ACCOUNTING POLICIES (Continued)
Financial instruments measured at fair value are classified into one of three levels in the fair value hierarchy according to the relative reliability of the inputs used to estimate the fair values. The three levels of the fair value hierarchy are:
Level 1 - Unadjusted quoted prices in active markets for identical assets or liabilities;
Level 2 - Inputs other than quoted prices that are observable for the asset or liability either directly (i.e. as prices) or indirectly (i.e. derived from prices); and
Level 3 - Inputs that are not based on observable market data.
There have been no transfers between fair value hierarchy levels during the years ended January 31, 2022 and 2021.
The Company's measures the derivative liability at fair value using Level 3 inputs.
The Company's cash, receivables, accounts payable and accrued liabilities, and income taxes payable are recorded at cost. The carrying values of these financial instruments approximate their fair value due to their short-term maturities. Unless otherwise noted, it is management's opinion that the Company is not exposed to significant interest or credit risks arising from these financial instruments.
Financial instruments subsequently measured at amortized cost include promissory note payable, and reclamation obligation.
Share-based compensation
The Company measures equity settled share-based payments based on their fair value at their grant date and recognizes share-based compensation expense over the vesting period based on the Company's estimate of equity instruments that will eventually vest. Consideration paid to the Company on the exercise of stock options is recorded as common stock.
Income taxes
The Company uses the asset and liability method to account for income taxes. Deferred income tax assets and liabilities are determined based on enacted tax rates and laws for the years in which the differences are expected to reverse.
Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized.
As the Company operates in the cannabis industry, it is subject to the limits of IRC Section 280E under which the Company is only allowed to deduct expenses directly related to the cost of producing the products or cost of production.
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 not 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 comprehensive income (loss).
p. 11
C21 INVESTMENTS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JANUARY 31, 2022 AND 2021
(Expressed in U.S. dollars, except as noted)
3. SIGNIFICANT ACCOUNTING POLICIES (Continued)
Earnings (loss) per share
The Company presents basic and diluted loss per share data for its common shares. Basic loss per share is calculated using the weighted average number of shares outstanding during the respective years. Diluted loss per share is computed by dividing net loss by the weighted average shares outstanding adjusted for additional shares from the assumed exercise of stock options, restricted share units, or warrants, if dilutive.
The number of additional shares is calculated by assuming the outstanding dilutive convertible instruments, options, and warrants are exercised and that the assumed proceeds are used to acquire common shares at the average market price during the year. Diluted loss per share figures for the years presented are equal to those of basic loss per share for the years since the effects of convertible instruments, stock options and warrants are anti-dilutive.
Revenue recognition
Revenue is recognized by the Company in accordance with ASC 606. Through application of the standard, the Company recognizes revenue to depict the transfer of promised goods or services to the customer in an amount that reflects the consideration to which the Company expects to be entitled in exchange for those goods or services.
In order to recognize revenue under ASC 606, the Company applies the following five steps:
1. Identify a customer along with a corresponding contract
2. Identify the performance obligation(s) in the contract to transfer goods or provide distinct services to a customer
3. Determine the transaction price that the Company expects to be entitled to in exchange for transferring promised goods or services to a customer
4. Allocate the transaction price to the performance obligation(s) in the contract
5. Recognize revenue when or as the Company satisfies the performance obligation(s) in the contract
The Company's contracts with customers for the sale of dried cannabis and other products derived from cannabis consist of one performance obligation, being the transfer of control of the goods to the customer at the point of sale. The Company transfers control and satisfies its performance obligation when collection has taken place, compliant documentation has been signed, and the product was accepted by the buyer. The Company does not have performance obligations subsequent to delivery on the sale of goods to customers and revenues from sale of goods are recognized at a "point in time", which is upon passing of control to the customer.
Transaction costs associated with a business combination, (i.e., other than those associated with the issuance of debt or equity), are expensed as incurred as a line item in the consolidated statement of loss and comprehensive loss.
p. 12
C21 INVESTMENTS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JANUARY 31, 2022 AND 2021
(Expressed in U.S. dollars, except as noted)
3. SIGNIFICANT ACCOUNTING POLICIES (Continued)
Reclamation obligation
The Company recognizes the fair value of a legal or constructive liability for a reclamation obligation in the year in which it is incurred and when a reasonable estimate of fair value can be made. The carrying amount of the related long-lived asset is increased by the same amount as the liability. Changes in the liability for a reclamation obligation due to the passage of time will be recognized within accretion expense. The amount will be recognized as an increase in the liability and an accretion expense in the consolidated statements comprehensive income (loss) . Changes resulting from revisions to the timing or the amount of the original estimate of undiscounted cash flows are recognized as an increase or a decrease to the carrying amount of the liability and the related long-lived asset.
Recently issued accounting pronouncements
Recent accounting pronouncements, other than those below, issued by the FASB, the American Institute of Certified Public Accountants("AICPA") and the U.S. Securities and Exchange Commission ("SEC") did not or are not believed by management to have a material effect on the Company's present or future financial statements.
Debt
In August 2020, the FASB issued ASU 2020-06, Debt - Debt with Conversion and Other Options ("ASU 2020-06"), (Subtopic 470-20) and Derivatives and Hedging - Contracts in Entity's Own Equity (Subtopic 815-40). ASU 2020-06 simplifies the accounting for certain financial instruments with characteristics of liabilities and equity. The FASB reduced the number of accounting models for convertible debt and convertible preferred stock instruments and made certain disclosure amendments to improve the information provided to users. In addition, the FASB amended the derivative guidance for the own stock scope exception and certain aspects of the earnings-per-share guidance. The amendments are effective for interim and annual periods beginning after December 15, 2021, with early adoption permitted for after December 15, 2020. The Company early adopted this new guidance using the full retrospective method as of February 1, 2020.
Leases
In February 2016, the FASB issued new guidance on the recognition and measurement of leases, ASC 842 - Leases. Under this guidance, a lessee recognizes assets and liabilities on its balance sheet for most leases. Lease expense continues to be consistent with previous guidance. Additionally, this guidance requires enhanced disclosures regarding the amount, timing, and uncertainty of cash flows arising from leasing arrangements. The Company adopted this guidance effective February 1, 2020 using the modified retrospective transition method and comparative year ended January 31, 2021.
The adoption of this guidance resulted in the recognition of operating lease right-of-use assets of $5,001,360, and $5,001,360 of lease liabilities, with a $nil impact on deficit. The transition to ASC 842 did not have a material impact on the Company's results of operations or liquidity. When measuring lease liabilities, the Company used its incremental borrowing rate, estimated at 10%.
Revenue
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers ("ASU 2014-09"), which provides a single comprehensive model for accounting for revenue from contracts with customers and supersedes nearly all previously existing revenue recognition guidance. The core principle of ASU 2014-09 is that an entity should recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The Company adopted the standard as of February 1, 2020. There was no impact of adopting ASU 2014-09 on the consolidated financial statements.
p. 13
C21 INVESTMENTS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JANUARY 31, 2022 AND 2021
(Expressed in U.S. dollars, except as noted)
3. SIGNIFICANT ACCOUNTING POLICIES (Continued)
Financial instruments
In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. ASU 2016-13 requires the measurement of current expected credit losses for financial assets held at the reporting date based on historical experience, current conditions and reasonable and supportable forecasts. Adoption of ASU 2016-13 will require financial institutions and other organizations to use forward-looking information to better formulate their credit loss estimates. In addition, the ASU amends the accounting for credit losses on available for sale debt securities and purchased financial assets with credit deterioration.
This update is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. The Company adopted ASU 2016-13 on February 1, 2020 and adoption did not have a material impact on the Company's consolidated financial statements.
Fair value measurement
In August 2018, the FASB issued ASU 2018-13, Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement (Topic 820). ASU 2018-13 adds, modifies, and removes certain fair value measurement disclosure requirements. ASU 2018-13 is effective for annual and interim periods beginning after December 15, 2019. Early adoption is permitted. The Company adopted ASU 2018-13 on February 1, 2020 and the adoption did not have a material impact on the Company's consolidated financial statements.
Income taxes
In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740) - Simplifying the Accounting for Income Taxes, which is intended to simplify various aspects related to accounting for income taxes. ASU 2019-12 removes certain exceptions to the general principles in Topic 740 and also clarifies and amends existing guidance to improve consistent application. ASU 2019-12 is effective for fiscal years beginning after December 15, 2020 and was adopted on February 1, 2021 and the adoption did not have a material impact on the Company's consolidated financial statements.
4. DISCONTINUED OPERATIONS
In January 2022, the Company entered into to a lease-to-own arrangement with a lessee for certain licenses, land and equipment in Oregon, USA, representing its outdoor growing operation. The lease-to-own arrangement concludes in January 2027 with total undiscounted payments over the term amounting to $2,514,805. The Company determined that the arrangement should be accounted for as a sales-type lease and concluded that it is not probable that all required payments will be made such that title will transfer at the end of the term. As such, in accordance with ASC 842, the land and equipment have not been derecognized and payments received will be recorded as a deposit liability until such time that collectability becomes probable. As at January 31, 2022, $100,000 has been received under the arrangement and has been recorded as a deposit liability.
As a result of non-profitable operations in the Oregon reporting unit, the Company began to wind down operations in Oregon beginning in the year ended January 31, 2021. At January 31, 2021, the Company classified the assets and liabilities in Swell and Megawood as held for sale and completed the sale of these assets in April 2021. By January 31, 2022, the Company made the decision to cease all growing, manufacturing, and processing activities in Bend, Oregon. As the Oregon reporting unit comprises the assets of multiple components in distinct geographic locations, management anticipates completing the sale on a piecemeal basis. Management is engaged in an active program to seek buyers for the major classes of assets and liabilities in Oregon in order to complete a sale in the next twelve months.
p. 14
C21 INVESTMENTS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JANUARY 31, 2022 AND 2021
(Expressed in U.S. dollars, except as noted)
4. DISCONTINUED OPERATIONS (Continued)
Remaining inventory on hand at January 31, 2022 had an estimated aggregate net realizable value of approximately $363,391. For the year ended January 31, 2022, net loss from discontinued operations included impairment of inventory in Oregon in the amount of $1,093,308 (2021 - $1,384,922) in order to report inventory at its net realizable value. Subsequent to January 31, 2022, the Company sold the remaining Oregon inventory on July 20, 2022.
Prepaid expenses classified as held for sale primarily relates to the renewal of licenses that may be transferred in the event of a sale. Otherwise, prepaid expenses will be expensed within loss from discontinued operations over the next twelve months.
For the year ended January 31, 2022, the Company recorded a provision for expected credit losses on previously recorded management fees receivable of $111,616 (2021 - $nil).
Long-term debt consists of vehicle loans and a building mortgage. The mortgage began on February 1, 2015 and matures on January 1, 2035 (20 years). The mortgage bears interest at a fixed rate of 4.5% with payments made monthly. The equipment and vehicle loans consist of three loans with maturity dates ranging from June 1, 2021 through May 15, 2023 and interest rates ranging from 5.59% to 19.9% with payments made monthly.
The following table summarizes the major classes of assets and liabilities of the discontinued Oregon operation that have been classified as held-for-sale in the consolidated balance sheets:
January 31, 2022 | January 31, 2021 | |||||
$ | $ | |||||
Carrying amounts of the major classes of assets included in discontinued operations: | ||||||
Receivables | 64,456 | 93,855 | ||||
Inventory | 363,391 | 1,296,009 | ||||
Prepaid expenses and deposits | 111,617 | 153,904 | ||||
Deferred tax asset | 152,177 | 109,753 | ||||
Property and equipment | 1,139,517 | 1,895,572 | ||||
Right-of-use assets | 346,987 | 1,074,930 | ||||
Intangible assets | - | 182,137 | ||||
Total assets classified as held for sale | 2,178,145 | 4,806,160 | ||||
Current portion of assets classified as held for sale | (2,178,145 | ) | (1,492,826 | ) | ||
Non-current portion of assets classified as held for sale | - | 3,313,334 | ||||
Carrying amounts of the major classes of liabilities included in discontinued operations: | ||||||
Lease liabilities | 412,093 | 1,217,499 | ||||
Long-term debt | 462,286 | 543,330 | ||||
Total liabilities classified as held for sale | 874,379 | 1,760,829 | ||||
Current portion of liabilities classified as held for sale | (874,379 | ) | (628,171 | ) | ||
Non-current portion of liabilities classified as held for sale | - | 1,132,658 |
In connection with the wind-down of operations, the Company concluded that the customer relationship intangible asset held in the Oregon reporting unit had no value and recognized $363,510 of impairment (2021 - $nil). Other income for the year ended January 31, 2022 contains a gain on the sale of assets that were held for sale at January 31, 2021 of $324,694, and other income of $79,274, offset by interest expense of $8,227. Other expenses for the year ended January 31, 2021 included interest expense of $183,404, acquisition re-organization costs of $1,204,740, and impairment on capital assets of $116,881, offset by other income of $231,212.
p. 15
C21 INVESTMENTS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JANUARY 31, 2022 AND 2021
(Expressed in U.S. dollars, except as noted)
4. DISCONTINUED OPERATIONS (Continued)
The following table provides the major classes of line items constituting pre-tax loss from discontinued operations:
January 31, 2022 | January 31, 2021 | |||||
$ | $ | |||||
Revenue | 1,128,403 | 2,661,223 | ||||
Cost of sales | 1,602,257 | 2,393,417 | ||||
Gross margin | (473,854 | ) | 267,806 | |||
Expenses (income) | ||||||
General and administration | 361,028 | 630,691 | ||||
Provision for expected credit losses | 111,616 | - | ||||
Sales, marketing, and promotion | 68,941 | 27,933 | ||||
Operating lease cost | 1,233 | 56,650 | ||||
Depreciation and amortization | 207,319 | 378,113 | ||||
Impairment of inventory | 1,093,308 | 1,384,922 | ||||
Impairment of intangible asset | 363,510 | - | ||||
Other (income) expenses | (395,741 | ) | 1,273,813 | |||
Net loss from discontinued operations before income taxes | (2,285,068 | ) | (3,484,316 | ) | ||
Income tax expense | 42,424 | 256,260 | ||||
Net loss from discontinued operations after income taxes | (2,242,644 | ) | (3,228,056 | ) |
The following table summarizes the cash flows from discontinued operations:
January 31, 2022 | January 31, 2021 | |||||
$ | $ | |||||
Net cash (used in) provided by operating activities of discontinued operations | (1,602,478 | ) | 241,753 | |||
Net cash provided by investing activities of discontinued operations | 1,168,349 | 100,000 | ||||
Net cash used in financing activities of discontinued operations | (105,360 | ) | (119,914 | ) |
5. SECURITY DEPOSIT
The Company has a security deposit with the Alberta Energy Regulator ("AER") under the AER's Liability Management programs to cover potential liabilities relating to its wells. The required security deposit with the AER is determined based on a monthly licensee management rating assessment. At January 31, 2022, the security deposit had a balance of $49,011 (January 31, 2021 - $47,739).
6. RECEIVABLES
January 31, 2022 | January 31, 2021 | |||||
$ | $ | |||||
Sales taxes receivable | 11,945 | 14,809 | ||||
Trade receivables, net | 198,478 | 101,208 | ||||
210,423 | 116,017 |
At January 31, 2022, trade receivables are presented net of a provision for expected credit losses of $nil (January 31, 2021 - $nil).
p. 16
C21 INVESTMENTS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JANUARY 31, 2022 AND 2021
(Expressed in U.S. dollars, except as noted)
7. INVENTORY
January 31, 2022 | January 31, 2021 | |||||
$ | $ | |||||
Finished goods | 1,848,392 | 1,946,638 | ||||
Work in process | 2,029,133 | 582,655 | ||||
Raw materials | 176,948 | 163,354 | ||||
4,054,473 | 2,692,647 |
8. PROPERTY AND EQUIPMENT AND RIGHT-OF-USE ASSETS
Property and equipment
The following table summarizes the Company's property and equipment:
January 31, 2022 | January 31, 2021 | |||||
$ | $ | |||||
Land | 1,330,000 | 1,330,000 | ||||
Leasehold improvements | 1,758,229 | 244,472 | ||||
Furniture & fixtures | 460,890 | 376,207 | ||||
Computer equipment | 46,484 | 94,846 | ||||
Machinery & equipment | 2,305,217 | 1,261,340 | ||||
5,900,820 | 3,306,865 | |||||
Less: accumulated depreciation and amortization | (1,031,227 | ) | (558,229 | ) | ||
4,869,593 | 2,748,636 |
Total depreciation and amortization expense for the year ended January 31, 2022 was $472,998 (year ended January 31, 2021 - $630,818). Of the total expense, $260,006 was allocated to inventory (2021 - $135,950).
At January 31, 2022, the Company reclassified buildings with a cost of $1,370,212 and accumulated depreciation of $230,695 to assets classified as held for sale. The prior period comparative amounts of cost of $1,370,212 and accumulated depreciation of $202,072 were also re-classified.
During the year ended January 31, 2021, the Company recorded a loss of $116,881 related to the disposal of various items of leasehold improvements, furniture and fixtures, computer equipment and machinery and equipment related to the Oregon operations. The cost of the property and equipment disposed of was $318,314 and accumulated depreciation was $201,433. There was $nil gross proceeds and the loss has been recorded as other expenses within net loss from discontinued operations.
During the year ended January 31, 2021, the Company transferred lights and equipment with a cost of $324,371 and accumulated depreciation of $128,319 between operating units resulting in a classification change from leasehold improvements to machinery and equipment.
At January 31, 2021, the Company reclassified property and equipment with a cost of $1,479,014 and accumulated depreciation of $751,582 to assets classified as to held for sale. The assets consisted primarily of redundant processing and extraction equipment as well as leasehold improvements and fixtures in a right-of-use asset. Management estimated the fair value less costs to sell exceeds the carrying value and therefore the assets are measured at their carrying values.
p. 17
C21 INVESTMENTS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JANUARY 31, 2022 AND 2021
(Expressed in U.S. dollars, except as noted)
8. PROPERTY AND EQUIPMENT AND RIGHT-OF-USE ASSETS (Continued)
Right-of-use assets
The Company's right-of-use assets result from its operating leases (note 11) and consist of land and buildings used in the cultivation, processing, and warehousing of its products.
During the year ended January 31, 2021, the Company amended lease agreements on three leases to extend their term. This resulted in right-of-use asset additions of $7,236,663.
For the year ended January 31, 2022, operating lease costs include right-of-use asset amortization of $461,364 (2021 - $800,269). Of this, $265,788 was allocated to inventory (2021 - $450,413).
At January 31, 2021, the Company reclassified right-of-use assets with a carrying amount of $583,257 to held for sale following an assessment that the Swell and Pure Green properties were redundant to the Company's operation. In addition, the Company reclassified the associated lease liabilities of $628,171 to be classified as held for sale. Management estimated the fair value less costs to sell exceeds the carrying value and therefore the assets are measured at their carrying values.
At January 31, 2022, the Company reclassified right-of-use assets with a carrying amount of $346,987 (2021 - $491,672) to held for sale. Management estimated the fair value less costs to sell exceeds the carrying value and therefore the assets are measured at their carrying values.
9. INTANGIBLE ASSETS AND GOODWILL
Intangible assets
The following table summarizes the Company's intangible assets:
January 31, 2022 | January 31, 2021 | |||||
$ | $ | |||||
Licenses | 12,141,476 | 12,141,476 | ||||
Brands | 868,982 | 868,982 | ||||
Customer relationships | 1,758,553 | 2,122,063 | ||||
14,769,011 | 15,132,521 | |||||
Less: accumulated amortization | (5,544,846 | ) | (4,174,560 | ) | ||
9,224,165 | 10,957,961 |
Total amortization expense from intangible assets for the year ended January 31, 2022 was $1,370,286 (2021 - $1,464,528).
During the year ended January 31, 2022, the Company recognized impairment charges of $363,510 on customer relationships allocated to the Oregon reporting unit (note 4).
During the year ended January 31, 2021, the Company sold a brand for $100,000. At the time of the sale, the brand had a carrying amount of $100,000 comprised of cost of $117,737 and accumulated amortization of $17,737.
p. 18
C21 INVESTMENTS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JANUARY 31, 2022 AND 2021
(Expressed in U.S. dollars, except as noted)
9. INTANGIBLE ASSETS AND GOODWILL (Continued)
At January 31, 2021, the Company reclassified intangible assets with a cost of $400,009 and accumulated amortization of $217,872 to held for sale. The intangible assets classified as held for sale consist of licenses, customer lists, and startup costs associated with a right-of-use asset that has also been classified as held for sale. Management estimated the fair value less costs to sell exceeds the carrying value and therefore the assets are measured at their carrying values.
Goodwill
As at January 31, 2022, the Company had goodwill of $28,541,323 (2021 - $28,541,323) which was allocated to the Nevada reporting unit.
10. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
The following table summarizes the Company's accounts payable and accrued liabilities:
January 31, 2022 | January 31, 2021 | |||||
$ | $ | |||||
Accounts payable | 1,402,546 | 1,382,519 | ||||
Accrued liabilities | 1,040,914 | 1,183,259 | ||||
Interest payable | 65,409 | 115,218 | ||||
2,508,869 | 2,680,996 |
11. LEASES
On February 1, 2020 the Company adopted ASC 842 using the modified retrospective transition approach which requires the recognition of lease assets and liabilities for operating and finance leases. Beginning on February 1, 2020, the Company's financial statements are presented in accordance with the revised policy.
The Company's accounting policy is described in note 3. As a result of the adoption of ASC 842, the Company recorded operating right-of-use assets of $5,001,360, and operating lease liabilities of $5,001,360.
The Company's leases consist of land and buildings used in the cultivation, processing, and warehousing of its products. All leases were found to be operating leases in accordance with ASC 842.
The following table presents the Company's active leases and total lease term under contract:
Entity Name/Lessee | Asset | Useful life (years) | Type |
Swell Companies, LTD | Land/Building | 5 | Operating lease |
Silver State Cultivation LLC | Land/Building | 12 | Operating lease |
Silver State Relief LLC (Sparks) | Land/Building | 12 | Operating lease |
Silver State Relief LLC (Fernley) | Land/Building | 12 | Operating lease |
Megawood Enterprises Inc. | Land/Building | 5 | Operating lease |
Phantom Distribution, LLC | Land/Building | 5 | Operating lease |
63353 Bend, LLC | Land/Building | 5 | Operating lease |
20727-4 Bend, LLC | Land/Building | 5 | Operating lease |
4964 BFH, LLC | Land/Building | 5 | Operating lease |
For the years ended January 31, 2022 and 2021, the Company incurred operating lease costs of $1,403,743 and $1,249,422, respectively. Of these amounts, $812,368 and $700,185, were allocated to inventory, respectively.
p. 19
C21 INVESTMENTS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JANUARY 31, 2022 AND 2021
(Expressed in U.S. dollars, except as noted)
11. LEASES (Continued)
The following table displays the weighted average discount rate used in calculating lease liabilities and weighted average remaining lease term:
| January 31, 2022 | January 31, 2021 | ||||
Weighted average discount rate | 10% | 10% | ||||
Weighted average remaining lease term (years) | 10.46 | 11.32 |
The maturity of the contractual undiscounted lease liabilities of the Company's operating leases as of January 31, 2022 is as follows:
Year ending January, | $ | ||
2023 | 1,239,090 | ||
2024 | 1,276,263 | ||
2025 | 1,314,551 | ||
2026 | 1,353,987 | ||
2027 | 1,394,607 | ||
Thereafter | 9,148,938 | ||
Total undiscounted lease liabilities | 15,727,436 | ||
Interest on lease liabilities | (6,448,313 | ) | |
Total present value of minimum lease payments | 9,279,123 | ||
Current portion of lease liability | 325,698 | ||
Lease liability | 8,953,425 |
As at January 31, 2022, liabilities classified as held for sale includes lease liabilities of $412,093 (2021 - 1,217,499). The Company has total undiscounted lease liabilities with related parties of $16,792,993 (note 18). Of the total undiscounted lease liabilities, $1,065,557 are classified as held for sale.
12. CONVERTIBLE DEBENTURES AND PROMISSORY NOTES
The Company early adopted ASU 2020-06 on February 1, 2021 using the full retrospective method. The adoption eliminates the cash conversion and beneficial conversion feature models used to separately account for embedded conversion features as a component of equity.
Transaction costs related to the issuance of convertible promissory notes are apportioned to their respective financial liability and equity components (if applicable) in proportion to the allocation of proceeds as a reduction to the carrying amount of each component.
When valuing the financial liability component of the convertible debentures and promissory notes, the Company used specific interest rates assuming no conversion features existed. The resulting liability component is accreted to its face value over the convertible note's term until its maturity date.
p. 20
C21 INVESTMENTS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JANUARY 31, 2022 AND 2021
(Expressed in U.S. dollars, except as noted)
12. CONVERTIBLE DEBENTURES AND PROMISSORY NOTES (Continued)
Convertible debentures
The following is the continuity of the Company's convertible debentures issued in Canadian dollars. All below disclosure is denominated in U.S. dollars:
December 31, 2018 issuance | January 30, 2019 issuance | Total | |||||||
$ | $ | $ | |||||||
Balance, January 31, 2020 | 2,066,976 | 4,179,094 | 6,246,070 | ||||||
New issuances on exercise of warrants | 1,749,065 | 3,939,377 | 5,688,442 | ||||||
Conversions | (4,075,959 | ) | (8,682,514 | ) | (12,758,473 | ) | |||
Interest | 190,003 | 409,237 | 599,240 | ||||||
Accretion expense | 251,990 | 473,248 | 725,238 | ||||||
Interest paid - cash | (250,879 | ) | (534,039 | ) | (784,918 | ) | |||
Foreign exchange loss | 68,804 | 215,597 | 284,401 | ||||||
Balance, January 31, 2021 and January 2022 | - | - | - |
The following transactions occurred during the year ended January 31, 2021:
(a) 262 convertible debentures were issued for gross proceeds of $195,734 (C$262,000). A total of $2,508,068 (C$3,209,000) in principal of the December 31, 2018 convertible debentures were converted into 4,011,250 common shares of the Company. The remaining balance outstanding is $nil.
(b) 497 convertible debentures were issued for gross proceeds of $371,297 (C$497,000). A total of $5,204,120 (C$6,673,000) in principal of the January 30, 2019 convertible debentures were converted into 8,341,250 common shares of the Company. The remaining balance outstanding is $nil.
(c) 1,988 warrants were exercised in connection with the convertible debentures issued on December 31, 2018, resulting in gross proceeds of $1,485,188 (C$1,988,000). 2,087 warrant debentures with a carrying amount of $1,632,114 (C$2,087,000) were converted into 2,313,322 common shares of the Company. At January 31, 2021, all warrants had been exercised or expired.
(d) 4,572 warrants were exercised in connection with the convertible debentures issued on January 30, 2019, resulting in gross proceeds of $3,415,633 (C$4,572,000). 4,587 warrant debentures issued under the January 30, 2019 issuance with a carrying amount of $3,595,099 (C$4,587,000) were converted into 5,098,872 common shares of the Company. At January 31, 2021, all warrants had been exercised or expired.
The following is a continuity of the Company's convertible promissory notes denominated in U.S. dollars:
June 13, 2018 | January 23, 2019 | May 24, 2019 | ||||||||||
issuance | issuance | issuance | Total | |||||||||
$ | $ | $ | $ | |||||||||
Balance, January 31, 2020 | 639,665 | 175,000 | 918,316 | 1,732,981 | ||||||||
Payment | - | (175,000 | ) | - | (175,000 | ) | ||||||
Interest | 48,733 | - | 100,274 | 149,007 | ||||||||
Accretion expense | 384,192 | - | 111,466 | 495,658 | ||||||||
Balance, January 31, 2021 | 1,072,590 | - | 1,130,056 | 2,202,646 | ||||||||
Payment | - | - | (1,210,000 | ) | (1,210,000 | ) | ||||||
Interest | 17,649 | - | 40,685 | 58,334 | ||||||||
Accretion expense | 191,203 | - | 39,259 | 230,462 | ||||||||
Balance, January 31, 2022 | 1,281,442 | - | - | 1,281,442 |
p. 21
C21 INVESTMENTS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JANUARY 31, 2022 AND 2021
(Expressed in U.S. dollars, except as noted)
12. CONVERTIBLE DEBENTURES AND PROMISSORY NOTES (Continued)
On June 13, 2018, the Company issued convertible promissory notes to the vendors that sold Eco Firma Farms, LLC to the Company in the aggregate principal amount of $2,000,000. The convertible promissory notes were convertible at $1.00 per share. The convertible promissory notes accrue interest at a rate of 4% per annum, compounded annually, and were fully due and payable on June 13, 2021. The Company is in an ongoing dispute with the vendors over repayment (note 22).
On issuance, the Company determined the conversion feature was a derivative liability as the convertible promissory notes are exercisable in USD while the functional currency of the Company is Canadian dollars. The fair value of the conversion feature as at January 31, 2022 was $nil (January 31, 2021 - $409,007).
On January 23, 2019, the Company issued a convertible promissory note to the vendor that sold Megawood Enterprises, Inc. to the Company in the principal amount of $175,000. The convertible note is convertible into 35,000 common shares of the Company at a conversion price of C$5.00 per conversion share and may be converted at any time between October 24, 2019 and January 24, 2020. On issuance, the Company determined the conversion feature was a derivative liability as the convertible promissory notes are exercisable in USD while the functional currency of the Company is Canadian dollars. The fair value of the conversion feature as at January 31, 2022 was $nil (January 31, 2021 - $nil). On February 21, 2020, the Company repaid the convertible promissory note with a cash payment of $130,000 and the issuance of 95,849 common shares (note 15).
On May 24, 2019, the Company issued a two-year unsecured convertible promissory note to a debtor of Swell Companies in the principal amount of $1,000,000. The convertible note accrues interest at 10% per annum compounded annually and payable at maturity. The note is convertible into common shares of the Company at a conversion price of $1.56 per share and may be converted at the maturity date. On issuance, the Company determined the conversion feature was a derivative liability as the convertible promissory notes are exercisable in USD while the functional currency of the Company is Canadian dollars. The fair value of the conversion feature as at January 31, 2022 was $nil (January 31, 2021 - $76,150).
On May 24, 2021 the note was fully repaid.
Promissory notes
The following is a continuity of the Company's promissory notes denominated in U.S. dollars:
January 1, 2019 | |||
issuance | |||
$ | |||
Balance, January 31, 2020 | 21,200,000 | ||
Payments | (7,013,333 | ) | |
Balance, January 31, 2021 | 14,186,667 | ||
Payments | (6,080,000 | ) | |
Balance, January 31, 2022 | 8,106,667 | ||
Current portion | 6,080,000 | ||
Non-current portion | 2,026,667 |
On January 1, 2019, the Company issued a promissory note to Mr. Newman, who sold Silver State to the Company in the principal amount of $30,000,000. The note is payable in the following principal instalments: $3,000,000 on April 1, 2019, $6,000,000 on each of July 1, 2019, October 1, 2019, January 1, 2020, and April 1, 2020, and $3,000,000 on July 1, 2020. The note accrues interest at a rate of 10% per annum. The note is secured by all of the outstanding membership interests, and a security interest in all of the assets, of Silver State.
p. 22
C21 INVESTMENTS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JANUARY 31, 2022 AND 2021
(Expressed in U.S. dollars, except as noted)
12. CONVERTIBLE DEBENTURES AND PROMISSORY NOTES (Continued)
On July 1, 2019, the terms of the promissory note payable for the acquisition of Silver State were amended to call for immediate payment of $2,000,000 plus accrued interest on July 1, 2019 followed by payments of $800,000 plus accrued interest on the first of each of August, September, October, November, and December 2019.
Effective November 21, 2019 and June 25, 2020, Mr. Newman and the Company agreed to further amend the terms of the secured promissory note due to Mr. Newman. The December 1, 2019 principal payment of $800,000 was cancelled and the monthly principal payments thereafter were reduced to $600,000 per month. Further, the annual interest rate on the note was reduced from 10% to 9.5%. The remaining balance on the note is due and payable on January 1, 2021. This modification resulted in a gain of $nil.
On November 19, 2020, the Company announced agreement with Mr. Newman that the remaining $15,200,000 principal outstanding on his senior secured Note, due to mature on January 1, 2021, has been amended with lower monthly payments amortized over a 30-month period. Commencing December 1, 2020, the monthly payments will be $506,667 plus interest. The interest rate at 9.5% is unchanged.
For the year ended January 31, 2022, interest expense was $1,032,691 (year ended January 31, 2021 - $1,643,363). Interest paid during the year ended January 31, 2022 was $1,082,500 (year ended January 31, 2021 - $1,715,750).
13. RECLAMATION OBLIGATION
The Company has recorded a decommissioning provision in connection with estimated reclamation costs on a previously written off property. The obligation is recognized based on the estimated future reclamation costs. The Company had two wells in Alberta which were determined to be uneconomic and costs have been incurred to plug these wells. Reclamation and remediation work is still required to bring the site back to its natural state.
14. DERIVATIVE LIABILITIES
The following reflects the continuity of derivative liabilities:
Conversion features of convertible promissory notes | Earn out shares | Total | |||||||
$ | $ | $ | |||||||
Balance, January 31, 2020 | 151,242 | 3,699,154 | 3,850,396 | ||||||
Fair value adjustment on derivative liabilities | 333,915 | 5,422,280 | 5,756,195 | ||||||
Effect of foreign exchange | - | 152,536 | 152,536 | ||||||
Balance, January 31, 2021 | 485,157 | 9,273,970 | 9,759,127 | ||||||
Fair value adjustment on derivative liabilities | (485,157 | ) | (8,091,133 | ) | (8,576,290 | ) | |||
Settlement of Phantom earn out | - | (677,939 | ) | (677,939 | ) | ||||
Effect of foreign exchange | - | 501,470 | 501,470 | ||||||
Balance, January 31, 2022 | - | 1,006,368 | 1,006,368 |
Upon the February 4, 2019 acquisition of Phantom Farms the vendors can earn up to 4,500,000 'earn out' shares over a period of seven years. The conditions were based on the Company's common shares exceeding certain share prices during the period. The liability was derived using a Monte Carlo simulation. On January 24, 2022, the Company issued 1,300,000 common shares for full settlement of the Phantom earn out shares.
p. 23
C21 INVESTMENTS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JANUARY 31, 2022 AND 2021
(Expressed in U.S. dollars, except as noted)
14. DERIVATIVE LIABILITIES (CONTINUED)
Upon the May 24, 2019 acquisition of Swell Companies the vendors can earn up to 6,000,000 'earn out' shares over a period of seven years. The conditions are based on C21 common shares exceeding certain share prices during the period. Additionally, the 50% of the earn out shares are earned upon a change of control of the Company. The liability is derived using a Monte Carlo simulation.
Significant inputs into the Monte Carlo simulation used to determine the fair value of earn of earn out shares were as follows:
Earn out shares | Earn out shares | |
January 31, 2022 | January 31, 2021 | |
Discount rate | 1.24% | 0.30% |
Expected life in years | 4.33 | 5.34 |
Expected stock volatility | 80% | 80% |
Expected volatility of foreign exchange | 6.52% | 5.29% |
The fair value of the conversion features of the convertible promissory notes is determined using a Black-Scholes option pricing model. Significant inputs into the calculation were as follows:
Conversion feature of June 13, 2018 issuance issuance of convertible promissory notes | Conversion feature of May 24, 2019 issuance of convertible promissory notes | |
January 31, 2021 | January 31, 2021 | |
Discount rate | 0.18% | 0.18% |
Expected life in years | 0.36 | 0.31 |
Expected stock volatility | 85% | 86% |
Stock price (CAD) | $1.54 | $1.54 |
Exercise price (CAD) | $1.28 | $2.00 |
The conversion features of the June 13, 2018 and May 24, 2019 convertible promissory notes expired on June 13, 2021 and May 24, 2021, respectively. As such, the fair value of each at January 31, 2022 was $nil.
p. 24
C21 INVESTMENTS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JANUARY 31, 2022 AND 2021
(Expressed in U.S. dollars, except as noted)
15. SHAREHOLDERS' EQUITY
Common stock consists of one class of fully paid common shares, with no par value. The Company is authorized to issue an unlimited number of common shares. All shares are equally eligible to receive dividends and repayment of capital and represent one vote at the Company's shareholders' meetings.
The following table reflects the continuity of common stock for the years ended January 31, 2022 and 2021:
Number of Shares | Common stock | |||||
$ | ||||||
Balance, January 31, 2020 | 89,388,639 | 85,096,509 | ||||
Shares issued - acquisition of Phantom Farms (i) | 7,132,042 | 2,582,903 | ||||
Shares issued - Megawood (ii) | 95,849 | 38,415 | ||||
Shares issued - option exercises (iii) | 200,000 | 98,950 | ||||
Shares issued - conversion of debentures (iv) | 19,764,694 | 12,758,473 | ||||
Shares issued - Swell commitment (v) | 456,862 | 429,582 | ||||
Shares issued - EFF commitment (vi) | 19,774 | 21,371 | ||||
Standby warrants issued | - | 2,116,192 | ||||
Share-based compensation | - | 494,435 | ||||
Balance, January 31, 2021 | 117,057,860 | 103,636,830 | ||||
Shares issued - PF warrants exercises (vii) | 456,100 | 533,326 | ||||
Shares issued - EFF commitment (viii) | 19,774 | 21,787 | ||||
Shares issued - Guaranteed warrants (ix) | 1,214,080 | - | ||||
Shares issued - Settlement of Earn out shares (x) | 1,300,000 | 677,939 | ||||
Share-based compensation | - | 366,469 | ||||
Balance, January 31, 2022 | 120,047,814 | 105,236,351 |
(i) On February 19, 2020, the Company amended the terms of the purchase of Phantom Farms, including SDP. The amended terms of the purchase agreement regarding the real estate assets of SDP group resulted in the Company electing to purchase the real estate of the Phantom Farms outdoor grow (two parcels), and SDP receiving 7,132,042 shares of C21 with a fair value of $2,582,903.
(ii) On February 21, 2020, the Company repaid the convertible promissory note with a cash payment of $130,000 and the issuance of 95,849 common shares with a fair value of $38,415 (note 12).
(iii) On October 15, 2020, the Company issued 200,000 shares upon the exercise of stock options.
(iv) During the year ended January 31, 2021 the Company issued 19,764,694 shares upon the conversion of debentures.
(v) On November 23, 2020, the Company issued 456,862 common shares to Swell as part of the purchase agreement dated May 23, 2019 as final settlement of the Company's commitment to issue shares.
(vi) On December 30, 2020, the Company issued 19,774 common shares to the vendors of EFF for a partial settlement of the Company's commitment to issue shares.
(vii) On February 4, 2021 the Company issued 456,100 shares upon the exercise of Phantom Farm warrants.
p. 25
C21 INVESTMENTS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JANUARY 31, 2022 AND 2021
(Expressed in U.S. dollars, except as noted)
15. SHAREHOLDERS' EQUITY (CONTINUED)
(viii) On April 5, 2021, the Company issued 19,774 common shares to the vendors of EFF for a partial settlement of the Company's commitment to issue shares.
(ix) On June 17, 2021, the Company issued 1,214,080 common shares pursuant to the cashless exercise of 4,160,000 warrants.
(x) On January 24, 2022, the Company issued 1,300,000 common shares for the settlement of Phantom earn out shares.
Commitment to issue shares
The Company issued a promissory note payable to deliver 2,142,000 shares to the vendors of EFF in the amount of $1,905,635, without interest, any time after October 15, 2018. As at January 31, 2022 the Company has a remaining commitment to deliver 793,093 shares.
Warrants
The following summarizes the Company's warrant activity:
Warrants outstanding | Weighted average exercise price | Weighted average remaining life | |||||||
# | C$ | Years | |||||||
Balance January 31, 2020 | 5,694,746 | 1.66 | 0.74 | ||||||
Issued | 6,200,000 | 1.00 | |||||||
Balance, January 31, 2021 | 11,894,746 | 1.32 | 1.96 | ||||||
Exercised | (4,616,100 | ) | 1.05 | ||||||
Expired | (4,038,646 | ) | 1.73 | ||||||
Balance, January 31, 2022 | 3,240,000 | 1.18 | 2.10 |
As at January 31, 2022, the following warrants were outstanding and exercisable:
Expiry Date | Exercise Price | Number of Warrants | ||||
C$ | # | |||||
December 31, 2023 | 1.00 | 632,400 | ||||
January 30, 2024 | 1.00 | 1,407,600 | ||||
May 24, 2024 | 1.50 | 1,200,000 | ||||
3,240,000 |
On May 28, 2020, the Company extended the expiry date of 2,794,746 warrants with an exercise price of C$1.83, from May 29, 2020 to May 29, 2021, with all other terms the same. These warrants expired unexercised on May 29, 2021.
On February 4, 2021, 456,100 warrants with an exercise price of $1.17 (C$1.50) were exercised to purchase 456,100 common shares of the Company for proceeds of $533,326. Of the warrants exercised, 426,100 were exercised by a Director of the Company. On the same date, 1,243,900 warrants expired unexercised.
p. 26
C21 INVESTMENTS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JANUARY 31, 2022 AND 2021
(Expressed in U.S. dollars, except as noted)
15. SHAREHOLDERS' EQUITY (Continued)
On June 17, 2021, 4,160,000 warrants were exercised on a cashless basis for 1,214,080 common shares of the Company.
Stock options
The Company is authorized to grant options to executive officers and directors, employees and consultants, enabling them to acquire up to 10% of the issued and outstanding common shares of the Company. The exercise price of each option is set by the Board of Directors and shall not be less than the market price of the Company's shares on the date of grant. The options can be granted for a maximum term of 10 years. Vesting is determined by the Board of Directors.
Details of the Company's stock option activity are as follows:
Options outstanding and exercisable | Weighted average exercise price | Weighted average remaining life | |||||||
# | C$ | Years | |||||||
Balance January 31, 2020 | 3,255,000 | 1.78 | 2.18 | ||||||
Granted | 4,055,000 | 0.73 | |||||||
Exercised | (200,000 | ) | 0.65 | ||||||
Expired/Cancelled | (145,000 | ) | 0.71 | ||||||
Balance, January 31, 2021 | 6,965,000 | 1.22 | 2.05 | ||||||
Expired | (1,350,000 | ) | 2.80 | ||||||
Balance January 31, 2022 | 5,615,000 | 0.84 | 1.45 |
As at January 31, 2022, the following stock options were outstanding and exercisable:
Expiry Date | Exercise Price | Outstanding | Exercisable | ||||||
C$ | # | # | |||||||
February 5, 2022 | 1.11 | 460,000 | 460,000 | ||||||
October 9, 2022 | 1.38 | 500,000 | 500,000 | ||||||
January 24, 2023 | 0.80 | 100,000 | 100,000 | ||||||
August 17, 2023 | 0.70 | 3,905,000 | 2,603,333 | ||||||
January 28, 2024 | 1.50 | 150,000 | 100,000 | ||||||
October 9, 2024 | 1.00 | 500,000 | 500,000 | ||||||
5,615,000 | 4,263,333 |
During the year ended January 31, 2022, the Company recorded a share-based compensation expense of $366,469 (2021 - $494,435). The fair value of stock options was calculated using the Black-Scholes Option Pricing Model using the following weighted average assumptions:
Expiry Date | 2022 | 2021 | ||||
Risk-free rate | - | 0.19% | ||||
Expected term of options | - | 3 years | ||||
Annualized volatility | - | 80% | ||||
Dividend rate | - | 0% |
p. 27
C21 INVESTMENTS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JANUARY 31, 2022 AND 2021
(Expressed in U.S. dollars, except as noted)
16. SELLING, GENERAL AND ADMINISTRATIVE EXPENSE
Selling, general and administrative expenses for the years ended January 31, 2022 and 2021 were comprised of the following:
2022 | 2021 | |||||
$ | $ | |||||
Accounting and legal | 665,248 | 501,854 | ||||
Depreciation and amortization | 1,280,446 | 1,321,686 | ||||
License fees, taxes and insurance | 1,807,645 | 1,705,539 | ||||
Office Facilities and administrative | 301,944 | 253,230 | ||||
Operating lease cost | 591,376 | 549,031 | ||||
Other | 340,224 | 372,307 | ||||
Professional Fees and consulting | 701,999 | 650,188 | ||||
Salaries and wages | 2,913,900 | 2,884,320 | ||||
Share-based compensation | 366,469 | 494,435 | ||||
Shareholder Communications | 26,781 | 15,834 | ||||
Travel and entertainment | 59,142 | 58,975 | ||||
9,055,174 | 8,807,399 |
17. SEGMENTED INFORMATION
The Company defines its major geographic operating segments as Oregon and Nevada. Due to the jurisdictional cannabis compliance issues ever-present in the industry, each state operation is by nature operationally segmented.
Key decision makers primarily review revenue, cost of sales expense, and gross margin as the primary indicators of segment performance. As the Company continues to expand via acquisition, the segmented information will expand based on management's agreed upon allocation of costs beyond gross margin.
Segmented operational activity and balances are as follows:
January 31, 2022 | Discontinued operations | Nevada | Corporate | Consolidated | ||||||||
$ | $ | $ | $ | |||||||||
Total revenue | 1,128,403 | 32,982,976 | - | 34,111,379 | ||||||||
Gross profit | (473,854 | ) | 18,809,985 | - | 18,336,131 | |||||||
Operating expenses: | ||||||||||||
Selling, general and administrative | (429,969 | ) | (3,880,871 | ) | (2,936,012 | ) | (7,246,852 | ) | ||||
Operating lease cost | (1,233 | ) | (591,376 | ) | - | (592,609 | ) | |||||
Depreciation and amortization | (207,319 | ) | (1,276,640 | ) | (3,806 | ) | (1,487,765 | ) | ||||
Share-based compensation | - | - | (366,469 | ) | (366,469 | ) | ||||||
Impairment of inventory | (1,093,308 | ) | - | - | (1,093,308 | ) | ||||||
Impairment of intangible asset | (363,510 | ) | - | - | (363,510 | ) | ||||||
Interest, accretion, and other | 284,125 | 22,171 | 7,355,059 | 7,661,355 | ||||||||
Net income (loss) before taxes | (2,285,068 | ) | 13,083,269 | 4,048,772 | 14,846,973 |
Entity-wide disclosures
All revenue for the years ended January 31, 2022 and January 31, 2021 was earned in the United States.
For the years ended January 31, 2022 and January 31, 2021, no customer represented more than 10% of the Company's net revenue.
p. 28
C21 INVESTMENTS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JANUARY 31, 2022 AND 2021
(Expressed in U.S. dollars, except as noted)
17. SEGMENTED INFORMATION (Continued)
The following table displays the disaggregation of long-lived assets by geographic area:
January 31, 2022 | January 31, 2021 | |||||
$ | $ | |||||
Nevada | 11,903,430 | 10,110,806 | ||||
Discontinued operations (Oregon) | 1,817,633 | 1,946,961 | ||||
Other | 24,414 | 28,117 | ||||
Total | 13,745,477 | 12,085,884 |
18. COMMITMENTS
The Company and its subsidiaries are committed under lease agreements with related parties, for land, office space, and equipment in Nevada and Oregon as well as for mortgage payments on a building held for sale. At January 31, 2022, the Company has the following future minimum payments:
Mortgage | Leases with related parties | Total | |||||||
$ | $ | $ | |||||||
2023 | 55,465 | 1,467,282 | 1,522,747 | ||||||
2024 | 48,855 | 1,504,455 | 1,553,310 | ||||||
2025 | 45,551 | 1,314,551 | 1,360,102 | ||||||
2026 | 45,551 | 1,353,987 | 1,399,538 | ||||||
2027 | 45,551 | 1,394,607 | 1,440,158 | ||||||
Thereafter | 368,201 | 9,148,937 | 9,517,138 | ||||||
609,174 | 16,183,819 | 16,792,993 |
Leases with related parties includes $456,383 of undiscounted lease payments for lease liabilities held for sale.
19. INCOME TAXES
The Company is a Canadian resident company, as defined in the Income Tax Act (Canada) (the "ITA"), for Canadian income tax purposes. However, it has subsidiaries that are treated as United States corporations for US federal income tax purposes per the Internal Revenue Code (US) ("IRC") and are thereby subject to federal income tax on their worldwide income. As a result, the Company is subject to taxation both in Canada and the United States.
The components of the income tax provision for the years ended January 31, 2022 and 2021 include:
January 31, 2022 | January 31, 2021 | |||||
$ | $ | |||||
Current | ||||||
Canadian | - | - | ||||
US Federal | 3,425,756 | 2,366,046 | ||||
Total current income tax expense | 3,425,756 | 2,366,046 | ||||
Deferred | ||||||
Canadian | - | - | ||||
US Federal | 547,490 | 602,087 | ||||
Total deferred income tax recovery | 547,490 | 602,087 | ||||
Total income tax expense | 3,973,246 | 2,968,133 |
p. 29
C21 INVESTMENTS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JANUARY 31, 2022 AND 2021
(Expressed in U.S. dollars, except as noted)
19. INCOME TAXES (Continued)
The domestic and foreign components of Income (loss) before provision for income taxes consisted of the following:
January 31, 2022 | January 31, 2021 | |||||
$ | $ | |||||
Canadian | 6,985,670 | (11,678,406 | ) | |||
US Federal | 10,146,371 | 10,044,967 | ||||
Income (loss) before income taxes | 17,132,041 | (1,633,439 | ) |
A reconciliation of the statutory income tax rate percentage to the effective tax rate for the years ended January 31, 2022 and 2021 is as follows:
January 31, 2022 | January 31, 2021 | |||||
$ | $ | |||||
Income (loss) for the year | 17,132,041 | (1,633,439 | ) | |||
Statutory rate | 27% | 27% | ||||
Income tax expense (recovery) at statutory rate | 4,625,652 | (441,029 | ) | |||
Non-deductible expenditures and non-taxable revenues | 1,530,604 | 1,842,777 | ||||
Foreign tax rate differential | (608,783 | ) | (602,698 | ) | ||
Change in valuation allowance | (654,621 | ) | 737,667 | |||
Adjustment to provision versus statutory tax returns | (919,606 | ) | 1,431,416 | |||
3,973,246 | 2,968,133 |
The significant components of the Company's deferred tax assets as follows at January 31, 2022 and 2021:
January 31, 2022 | January 31, 2021 | |||||
$ | $ | |||||
Deferred tax assets | ||||||
Share issuance costs and financing fees | 254,662 | 505,035 | ||||
Allowable capital losses | 140,224 | 138,421 | ||||
Non-capital losses | 4,409,825 | 3,834,262 | ||||
Intangible assets | 940,967 | 816,736 | ||||
Mineral resource properties | - | 983,977 | ||||
Right of use assets and lease liabilities, net | 98,352 | 63,032 | ||||
Goodwill | - | - | ||||
Reclamation obligation | 14,923 | 14,852 | ||||
Total deferred tax assets | 5,858,953 | 6,356,315 | ||||
Valuation allowance | (4,919,214 | ) | (5,573,835 | ) | ||
Total net deferred tax assets | 939,739 | 782,480 | ||||
Deferred tax liabilities | ||||||
Property and equipment | (930,715 | ) | (225,966 | ) | ||
Net deferred tax asset | 9,024 | 556,514 |
p. 30
C21 INVESTMENTS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JANUARY 31, 2022 AND 2021
(Expressed in U.S. dollars, except as noted)
19. INCOME TAXES (Continued)
Realization of deferred tax assets associated with the net operating loss carryforwards is dependent upon generating sufficient taxable income prior to their expiration. A valuation allowance to reflect management's estimate of the net operating loss carryforwards that may expire prior to their utilization has been recorded at January 31, 2022.
As of January 31, 2022, the Company has $16.3 million of Canadian non-capital loses which expire between 2026 and 2042, and Canadian capital losses of $1 million with no expiry date. The Company determined a valuation allowance was applicable for the full amount of the available Canadian losses and for the other Canadian deferred tax assets.
As the Company operates in the cannabis industry, the Company is subject to the limits of Internal Revenue Code ("IRC") Section 280E for US federal income tax purposes as well as state income tax purposes for all states except for California and Colorado. Under IRC Section 280E, the Company is only allowed to deduct expenses directly related to costs of goods sold. This results in permanent differences between ordinary and necessary business expenses deemed non-allowable under IRC Section 280E.
Management assesses the available positive and negative evidence to estimate whether sufficient future taxable income will be generated to permit use of the existing deferred tax assets. A significant piece of objective negative evidence evaluated was the cumulative loss incurred by the Canadian entity over the three-year period ended January 31, 2022. Such objective evidence limits the ability to consider other subjective evidence, such as our projections for future growth.
On the basis of this evaluation, as of January 31, 2022, a valuation allowance of $4,919,214 ($5,573,835 in 2021) has been recorded to recognize only the portion of the deferred tax asset that is more likely than not to be realized. The amount of the deferred tax asset considered realizable, however, could be adjusted if estimates of future taxable income during the carryforward period are reduced or increased or if objective negative evidence in the form of cumulative losses is no longer present and additional weight is given to subjective evidence such as our projections for growth.
The Company recognizes benefits from uncertain tax positions based on the cumulative probability method whereby the largest benefit with a cumulative probability of greater than 50% is recorded. An uncertain tax position is not recognized if it has less than a 50% likelihood of being sustained. As of January 31, 2022, and January 31, 2021, the Company has not recorded any uncertain tax assets or liabilities.
The Company does not expect that uncertain tax benefits will materially change in the next 12 months. The Company is subject to taxation in Canada and the United States. As of January 31, 2022, tax years for 2019, 2020, and 2021 are subject to examination by the tax authorities. The 2018 tax year is also subject to investigation in Canada.
20. RELATED PARTY TRANSACTIONS
Balances due to related parties included in accounts payable, accrued liabilities, and promissory note payable at January 31, 2022 and 2021:
January 31, 2022 | January 31, 2021 | |||||
$ | $ | |||||
Due to the President and CEO | 8,172,075 | 14,369,004 | ||||
Lease liabilities due to a company controlled by the CEO | 9,279,123 | 9,539,744 | ||||
Lease liabilities due to SDP Development | 412,093 | 589,328 | ||||
Due to the CFO of the Company | 360 | 527 | ||||
17,863,651 | 24,498,603 |
p. 31
C21 INVESTMENTS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JANUARY 31, 2022 AND 2021
(Expressed in U.S. dollars, except as noted)
20. RELATED PARTY TRANSACTIONS (continued)
Due to the President and CEO consists of promissory note principal and interest and reimbursable expenses incurred in the normal course of business.
The Company had the following transactions with related parties including key management personnel during the year ended January 31, 2022 and 2021:
January 31, 2022 | January 31, 2021 | |||||
$ | $ | |||||
Consulting fees paid to a director | 240,000 | - | ||||
Amounts paid to CEO or companies controlled by CEO | 8,632,619 | 10,368,616 | ||||
Salary paid to directors and officers | 496,807 | 499,710 | ||||
Share compensation for directors and officers | 251,333 | 360,610 | ||||
Convertible debenture interest paid to directors and officers | - | 18,346 | ||||
Lease payments made to SDP Development | 209,176 | 228,192 | ||||
9,829,935 | 11,475,474 |
Amounts paid to CEO or companies controlled by CEO consists of salary, lease payments, and promissory note principal and interest.
On February 12, 2020, the Company amended the purchase agreement with SDP Development, of which a director of the Company is a principal owner. The Company had agreed on February 4, 2019 to purchase SDP Development on October 15, 2020, which owned six real estate properties that were leased in connection with Phantom Farms' cannabis cultivation, processing and wholesale distribution operations. The aggregate purchase price was $8,010,000 payable in cash, or, at the election of the vendors, in whole or in part by the issue of 2,670,000 shares at $3.00 per common share.
On February 12, 2020 the parties agreed to the following modified terms: the Company purchased the two Southern Oregon farms from SDP Development constituting over 60 acres of real property housing the two outdoor cannabis cultivation facilities totaling 80,000 square feet of canopy, rent reduction on the three Phantom properties in Central Oregon, and a release from the obligation to purchase the sixth property in Southern Oregon. In exchange, the SDP vendors received 7,132,041 common shares of the Company with a fair value of $2,582,903. The consideration exceeded the fair market value of the land acquired and as a result, the Company recorded transaction costs of $1,204,740. The Company has three remaining leases with SDP Development. The undiscounted future cash flows for the three remaining leases total $456,384.
On November 16, 2020, the Company amended the terms of the three Nevada leases with Double G Holdings (a Company controlled by the Company's President and CEO). The term of the two dispensary leases and the warehouse lease was extended to November 30, 2027 with a right to extend for a further five years and with an annual increase to the base rent of 3% commencing January 1, 2022. The undiscounted future cash flows for all three leases including the five-year extension total $16,930,437.
p. 32
C21 INVESTMENTS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JANUARY 31, 2022 AND 2021
(Expressed in U.S. dollars, except as noted)
21. EARNINGS PER SHARE
The following is a reconciliation for the calculation of basic and diluted earnings per share for the years ended January 31, 2022 and 2021:
January 31, 2022 | January 31, 2021 | |||||
Net income (loss) from continuing operations after income taxes | $ | 13,158,795 | $ | (4,601,572 | ) | |
Net loss from discontinued operations after income taxes | $ | (2,242,644 | ) | $ | (3,228,056 | ) |
Net income (loss) | $ | 10,916,151 | $ | (7,829,628 | ) | |
Weighted average number of common shares outstanding | 118,308,584 | 104,841,540 | ||||
Dilutive effect of warrants and stock options outstanding | 2,833,093 | - | ||||
Diluted weighted average number of common shares outstanding | 121,141,677 | 104,841,540 | ||||
Basic earnings (loss) per share, continuing operations | $ | 0.11 | $ | (0.04 | ) | |
Diluted earnings (loss) per share, continuing operations | $ | 0.11 | $ | (0.04 | ) | |
Basic loss per share, discontinued operations | $ | (0.02 | ) | $ | (0.03 | ) |
Diluted loss per share, discontinued operations | $ | (0.02 | ) | $ | (0.03 | ) |
Basic earnings (loss) per share | $ | 0.09 | $ | (0.07 | ) | |
Diluted earnings (loss) per share | $ | 0.09 | $ | (0.07 | ) |
The computation of diluted earnings per share excludes the effect of the potential exercise of warrants and stock options when the average market price of the common stock is lower than the exercise price of the respective warrant or stock option and when inclusion of these amounts would be anti-dilutive. For the years ended January 31, 2022 and 2021, the number of warrants and stock options excluded from the computation was 5,463,333 and 16,156,413, respectively.
22. CONTINGENCIES
From time to time, the Company is involved in various litigation matters arising in the ordinary course of its business. Management is of the opinion that disposition of any current matter will not have a material adverse impact on the Company's balance sheet, results of operations, or the ability to carry on any of its business activities.
Legal proceedings
Oregon Action: A complaint was filed in the Oregon State Circuit Court for Clackamas County, on April 29, 2019, by two current owners of Proudest Monkey Holdings, LLC (the former sole member of EFF) (the "Plaintiffs"), alleging contract, employment, and statutory claims, alleging $612,500 in damages (as amended), against the Company, its wholly-owned subsidiaries 320204 US Holdings Corp, EFF, Swell Companies Limited, and Phantom Brands LLC, in addition to three directors, two officers, and one former employee (the "Oregon Action"). The Company and the other defendants wholly denied the allegations and claims made in the lawsuit and is defending the lawsuit. On June 21, 2019, the Company filed Oregon Rule of Civil Procedure ("ORCP") 21 motions to dismiss all of the Plaintiffs' claims against it, its wholly-owned subsidiaries, and other defendants; on May 6, 2020, the court granted the Company's ORCP 21 motion in its entirety to dismiss all of Plaintiffs' claims. The judgment of dismissal was entered by the Clackamas County court on or about October 14, 2020. On November 12, 2020, Plaintiffs filed a notice of appeal of the judgement of dismissal.
p. 33
C21 INVESTMENTS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JANUARY 31, 2022 AND 2021
(Expressed in U.S. dollars, except as noted)
22. CONTINGENCIES (Continued)
On October 22, 2020, the Company submitted a petition to recover the costs and attorney fees incurred by the Company as the prevailing party in the Oregon Action. On January 20, 2021, the Court ruled in the Company's favor, awarding the Company and its subsidiaries $68,195 in attorney's fees, $1,252 in costs, and a statutory prevailing party fee of $640, through a supplemental judgment. On March 3, 2021, Plaintiffs filed an amended notice of appeal from the supplemental judgement awarding attorney fees.
The parties have since briefed the appeal to the Oregon Court of Appeals and await a determination from the Court. It is too early to predict the resolution of the appeal.
British Columbia Action: On or about September 13, 2019, the Company delivered a notice to the above-mentioned Plaintiffs of alleged breach and default under the EFF purchase and sale agreement, due to alleged unlawful, intentional acts and material misrepresentations by the Plaintiffs before and after the completion of the purchase. As a result of such breach, the Company denied the Plaintiffs' tender of their share payment notes in connection with the agreement. On or about October 14, 2019, Proudest Monkey Holdings, LLC and one of its current owners, sued the Company in the Supreme Court of British Columbia to compel the issuance and delivery of the subject shares, including interests and costs (the "British Columbia Action").
On November 8, 2019, the Company responded and counterclaimed for general, special and punitive damages, including interest and costs, related to breach of contract, repudiation of contract, breach of indemnity and fraudulent and negligent misrepresentation by the Plaintiffs. Plaintiffs filed a response to the Company's counterclaims on or about June 5, 2020, and the parties stipulated to a form of amended pleading which included the joinder of additional parties, an owner of Proudest Monkey Holdings, LLC and EFF, and additional contract and equitable claims and damages, partially duplicative to those alleged by the Plaintiffs in the Oregon lawsuit (breach of contract, indemnity, unjust enrichment and wrongful termination claims). Plaintiffs allege $2,774,176 in damages (as amended), plus unquantified additional damages, interest and costs, of which amounts are partially duplicative of the Oregon Action. This action remains in the discovery stage, but no trial date has been set. It is too early to predict the resolution of the claims and counterclaims.
Settled and Dismissed Action: On or about May 30, 2019, Wallace Hill Partners Ltd. ("Wallace Hill") filed a civil claim in the Supreme Court of British Columbia alleging breach of contract and entitlement to 1,800,000 common shares of the Company, fully vested by March 1, 2019, and damages due to the lost opportunity to sell those shares after such date for a profit. On June 23, 2019, the Company circulated a letter to Wallace Hill terminating the agreement and accepting Wallace Hill's repudiation of the agreement based on Wallace Hill's previously published defamatory comments and termination of the agreement. Also, on June 23, 2019, the Company filed its response to the civil claim denying all claims and filed counterclaims alleging breach of contract, a declaratory judgment of termination of the agreement, defamation and an injunction from further defamatory comments.
On March 23, 2022, the Company and Wallace Hill entered into a mutual release agreement, pursuant to which, among other things, all parties agreed to dismiss their respective claims and to release one another from any further causes of action in connection with the subject matter of the original claims. On April 23, 2022, the parties filed a Notice of Discontinuance in the Supreme Court of British Columbia formally dismissing the civil action.
p. 34
C21 INVESTMENTS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JANUARY 31, 2022 AND 2021
(Expressed in U.S. dollars, except as noted)
23. FINANCIAL INSTRUMENTS
The following tables present information about the Company's financial instruments and their classifications as of January 31, 2022 and 2021 and indicate the fair value hierarchy of the valuation inputs utilized to determine such fair value:
Fair value measurements at January 31, 2022 using:
Level 1 | Level 2 | Level 3 | Total | |||||||||
$ | $ | $ | $ | |||||||||
Financial liabilities: | ||||||||||||
Conversion features of convertible promissory notes (note 14) | - | - | - | - | ||||||||
Earn out shares (note 14) | - | - | 1,006,368 | 1,006,368 |
Fair value measurements at January 31, 2021 using:
Level 1 | Level 2 | Level 3 | Total | |||||||||
$ | $ | $ | $ | |||||||||
Financial liabilities: | ||||||||||||
Conversion features of convertible promissory notes (note 14) | - | - | 485,157 | 485,157 | ||||||||
Earn out shares (note 14) | - | - | 9,273,970 | 9,273,970 |
The fair value of the conversion feature of convertible promissory notes was determined using the Black-Scholes option pricing model. The assumptions in the model were based on the share price and other active market data that is observable as well as unobservable estimates and therefore represent a level 3 measurement.
The fair value of the derivative liability associated with the earn out shares was derived using a Monte Carlo simulation using non-observable inputs, and therefore represent a level 3 measurement.
24. SUBSEQUENT EVENTS
On February 5, 2022, the balance of 460,000 of options issued on February 5, 2019 expired unexercised.
On February 10, 2022, the Company granted incentive stock options to purchase an aggregate of 600,000 common shares at an exercise price of C$0.70 per share vesting over a two-year period, expiring at the close of business on February 10, 2025.
On April 23, 2022, both parties to the C21 and Wallace Hill dispute (note 22) filed a Notice of Discontinuance in the Supreme Court of British Columbia and signed a mutual release to end this dispute.
C21 INVESTMENTS INC.
For the years ended January 31, 2021 and 2020 (Expressed in U.S. Dollars) |
C21 INVESTMENTS INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Baker Tilly US, LLP Irvine, CA 92612 United States of America T: +1 (949) 222 2999 F: +1 (949) 222 2989 bakertilly.com 23 |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and the Board of Directors
C21 Investments Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated statement of financial position of C21 Investments Inc. and its subsidiaries (the “Company”) as of January 31, 2021, the related consolidated statements of loss and comprehensive loss, changes in shareholders’ equity, and cash flows for the year then ended, and the related notes to the consolidated financial statements (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of January 31, 2021, and the results of its operations and its cash flows for the year then ended in conformity with International Financial Reporting Standards issued by the International Accounting Standards Board.
The financial statements as of January 31, 2020, were audited by other auditors whose report dated July 13, 2020, on those statements included an explanatory paragraph that described a substantial doubt about the Company’s ability to continue as a going concern.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audit, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audit included performing procedures to assess the risks of material misstatements of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audit provides a reasonable basis for our opinion.
We have served as the Company’s auditor since 2020.
/s/ Baker Tilly US, LLP
Irvine, CA
May 31, 2021
Baker Tilly US, LLP, trading as Baker Tilly, is a member of the global network of Baker Tilly International Ltd., the members of which are separate and independent legal entities. © 2020 Baker Tilly US, LLP
1
January 31, 2021 | January 31, 2020 | ||||||||
Notes | - $ - | - $ - | |||||||
ASSETS | |||||||||
Current assets | |||||||||
Cash | 6,237,182 | 3,076,493 | |||||||
Biological assets | 7 | 1,340,782 | 1,408,271 | ||||||
Inventory | 8 | 5,417,726 | 6,191,843 | ||||||
Prepaid expenses and deposits | 931,942 | 543,482 | |||||||
Receivables | 6 | 209,872 | 443,122 | ||||||
Assets classified as held for sale | 9,11,12 | 1,442,617 | - | ||||||
Total current assets | 15,580,121 | 11,663,211 | |||||||
Property and equipment | 9 | 3,916,777 | 3,834,131 | ||||||
Right-of-use assets | 12 | 9,765,588 | 4,660,688 | ||||||
Intangible assets | 10 | 10,957,961 | 12,704,626 | ||||||
Goodwill | 10 | 28,541,323 | 28,541,323 | ||||||
Restricted cash | 5 | 47,739 | 46,106 | ||||||
TOTAL ASSETS | 68,809,509 | 61,450,085 | |||||||
LIABILITIES | |||||||||
Current liabilities | |||||||||
Accounts payable and accrued liabilities | 11,25 | 2,680,996 | 3,488,274 | ||||||
Promissory note payable - current portion | 14 | 6,080,000 | 21,200,000 | ||||||
Convertible promissory note - current portion | 14 | 2,437,465 | 1,244,041 | ||||||
Convertible debentures | 14 | - | 6,867,255 | ||||||
Income taxes payable | 23 | 3,378,299 | 3,714,666 | ||||||
Consideration payable | 15 | - | 846,256 | ||||||
Short-term debt | 15 | 81,044 | 126,119 | ||||||
Lease liabilities - current portion | 12 | 437,857 | 1,131,149 | ||||||
Liabilities classified as held for sale | 12 | 629,180 | - | ||||||
Total current liabilities | 15,724,841 | 38,617,760 | |||||||
Lease liabilities | 12 | 9,691,215 | 3,870,211 | ||||||
Promissory note payable | 14 | 8,106,667 | - | ||||||
Long-term debt | 13 | 462,286 | 494,217 | ||||||
Convertible promissory note | 14 | - | 1,136,065 | ||||||
Derivative liability | 17 | 9,430,991 | 3,699,152 | ||||||
Reclamation obligation | 16 | 55,008 | 53,126 | ||||||
TOTAL LIABILITIES | 43,471,008 | 47,870,531 | |||||||
SHAREHOLDERS' EQUITY | |||||||||
Share capital | 18 | 92,237,648 | 76,028,268 | ||||||
Commitment to issue shares | 18 | 649,928 | 1,100,881 | ||||||
Other reserves | 18 | 10,520,045 | 8,008,176 | ||||||
Foreign currency translation reserve | (1,452,719 | ) | (1,047,387 | ) | |||||
Deficit | (76,616,401 | ) | (70,510,384 | ) | |||||
TOTAL SHAREHOLDERS' EQUITY | 25,338,501 | 13,579,554 | |||||||
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY | 68,809,509 | 61,450,085 |
Nature of operations (Note 1)
Taxation (Note 23)
Contingencies (Note 26)
Subsequent events (Note 28)
On behalf of the Board: |
|
|
| |
“Bruce Macdonald” | Director | “Michael Kidd” | Director |
See accompanying notes to the consolidated financial statements | p. 1 |
CONSOLIDATED STATEMENTS OF LOSS AND COMPREHENSIVE LOSS
For the years ended January 31, 2021 and 2020
(Expressed in U.S. dollars)
Year ended January 31, | |||||||||
2021 | 2020 | ||||||||
Notes | -$- | -$- | |||||||
Revenue | 36,127,286 | 37,705,095 | |||||||
Cost of sales | 8 | 19,052,681 | 25,810,389 | ||||||
Gross margin before the undernoted | 17,074,605 | 11,894,706 | |||||||
Realized fair value amounts included in inventory sold | (8,365,616 | ) | (5,292,763 | ) | |||||
Unrealized fair value adjustment on biological assets | 8 | 9,943,166 | 6,536,103 | ||||||
Gross Profit | 18,652,155 | 13,138,046 | |||||||
Expenses | |||||||||
General and administration | 19,25 | 6,971,742 | 9,300,477 | ||||||
Sales, marketing, and promotion | 166,479 | 1,120,929 | |||||||
Depreciation and amortization | 9,10,12 | 2,112,264 | 3,405,116 | ||||||
Share-based compensation | 18 | 494,435 | 492,631 | ||||||
Impairment of inventory | 8 | 1,384,922 | - | ||||||
Total expenses | 11,129,842 | 14,319,153 | |||||||
Income (loss) from operations | 7,522,313 | (1,181,107 | ) | ||||||
Interest expense | 11,12,13,14,18 | (4,132,171 | ) | (3,866,420 | ) | ||||
Accretion expense | 14 | (355,952 | ) | (434,331 | ) | ||||
Transaction costs | - | (331,973 | ) | ||||||
Acquisition reorganization costs | 3,9,25 | (1,204,740 | ) | ||||||
Impairment of capital assets | 9 | (116,881 | ) | (4,139,522 | ) | ||||
Other Income | 279,299 | 244,178 | |||||||
Impairment of goodwill and intangible assets | 3,4,10 | - | (23,911,485 | ) | |||||
(Loss) gain on change in fair value of derivative liabilities | 17 | (5,731,839 | ) | 4,779,693 | |||||
Loss before income taxes | (3,739,971 | ) | (28,840,967 | ) | |||||
Current income tax expense | 23 | (2,366,046 | ) | (3,714,666 | ) | ||||
NET LOSS | (6,106,017 | ) | (32,555,633 | ) | |||||
Other comprehensive loss | |||||||||
Items that may be reclassified subsequently to profit or loss | |||||||||
Cumulative translation adjustment | (405,332 | ) | (684,336 | ) | |||||
LOSS AND COMPREHENSIVE LOSS | (6,511,349 | ) | (33,239,969 | ) | |||||
Basic and diluted loss per share | (0.06 | ) | (0.43 | ) | |||||
Weighted average number of common shares outstanding - basic and diluted | 104,841,540 | 76,683,895 |
See accompanying notes to the consolidated financial statements | p. 2 |
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY |
Share capital | Other Reserves | ||||||||||||||||||||
Number of shares | Amount | Share-based compensation | Commitment to issue shares | Foreign | Deficit | Total | |||||||||||||||
Balance at January 31, 2019 | 58,505,255 | $ | 52,923,983 | $ | 5,435,551 | $ | 1,044,881 | $ | (363,051 | ) | $ | (37,954,751 | ) | $ | 21,086,613 | ||||||
Shares issued on purchase of Phantom Farms | 2,670,000 | 2,507,138 | - | - | - | - | 2,507,138 | ||||||||||||||
Warrants issued on purchase of Phantom Farms | - | - | 793,745 | - | - | - | 793,745 | ||||||||||||||
Share-based compensation - option issuance | - | - | 492,631 | - | - | - | 492,631 | ||||||||||||||
Shares issued on purchase of Swell Companies | 1,266,667 | 1,130,363 | - | - | - | - | 1,130,363 | ||||||||||||||
Commitment to issue shares on purchase of Swell Companies | - | - | - | 4,221,503 | - | - | 4,221,503 | ||||||||||||||
Subsequent shares issued on purchase of Swell Companies | 7,015,238 | 3,796,815 | - | (3,796,815 | ) | - | - | - | |||||||||||||
Warrants issued on purchase of Swell Companies | - | - | 786,284 | - | - | - | 786,284 | ||||||||||||||
Shares issued for real estate | 3,983,886 | 4,136,646 | - | - | - | - | 4,136,646 | ||||||||||||||
Units issued for cash, net | 5,589,493 | 4,895,379 | 828,076 | - | - | - | 5,723,455 | ||||||||||||||
Payment of EFF share payment note | 368,688 | 368,688 | - | (368,688 | ) | - | - | - | |||||||||||||
Shares issued on exercise of warrants | 915,545 | 1,018,748 | (289,159 | ) | - | - | - | 729,589 | |||||||||||||
Shares issued on exercise of EFF convertible note | 977,479 | 660,647 | - | - | - | - | 660,647 | ||||||||||||||
Shares issued on exercise of options | 80,000 | 77,980 | (38,952 | ) | - | - | - | 39,028 | |||||||||||||
Shares issued on exercise of convertible debentures | 8,016,388 | 4,539,991 | - | - | - | - | 4,539,991 | ||||||||||||||
Share issue costs | - | (28,110 | ) | - | - | - | - | (28,110 | ) | ||||||||||||
Net loss and comprehensive loss for the year | - | - | - | - | (684,336 | ) | (32,555,633 | ) | (33,239,969 | ) | |||||||||||
Balance at January 31, 2020 | 89,388,639 | $ | 76,028,268 | $ | 8,008,176 | $ | 1,100,881 | $ | (1,047,387 | ) | $ | (70,510,384 | ) | $ | 13,579,554 | ||||||
Purchase of Phantom real estate | 7,132,042 | 2,582,903 | - | - | - | - | 2,582,903 | ||||||||||||||
Amendment of Megawood consideration | 95,849 | 38,415 | - | - | - | - | 38,415 | ||||||||||||||
Shares issued on exercise of options | 200,000 | 197,708 | (98,758 | ) | - | - | - | 98,950 | |||||||||||||
Shares issued on exercise of convertible debentures | 19,764,694 | 12,939,401 | - | - | - | - | 12,939,401 | ||||||||||||||
Commitment to issue shares on purchase of Swell Companies | 456,862 | 429,582 | - | (429,582 | ) | - | - | - | |||||||||||||
Payment of EFF share payment note | 19,774 | 21,371 | - | (21,371 | ) | - | - | - | |||||||||||||
Standby warrants issued | - | - | 2,116,192 | - | - | - | 2,116,192 | ||||||||||||||
Share-based compensation | - | - | 494,435 | - | - | - | 494,435 | ||||||||||||||
Net loss and comprehensive loss for the year | - | - | - | - | (405,332 | ) | (6,106,017 | ) | (6,511,349 | ) | |||||||||||
Balance at January 31, 2021 | 117,057,860 | $ | 92,237,648 | $ | 10,520,045 | $ | 649,928 | $ | (1,452,719 | ) | $ | (76,616,401 | ) | $ | 25,338,501 |
See accompanying notes to the consolidated financial statements | p. 3 |
CONSOLIDATED STATEMENTS OF CASH FLOWS |
Year ended January 31, | |||||||||
2021 | 2020 | ||||||||
Notes | -$- | -$- | |||||||
OPERATING ACTIVITIES | |||||||||
Net loss before income taxes | (3,739,971 | ) | (28,840,967 | ) | |||||
Depreciation and amortization | 9,10,12 | 3,375,999 | 4,981,575 | ||||||
Impairment of capital assets | 9 | 116,881 | 4,139,522 | ||||||
Impairment of inventory | 8 | 1,384,922 | |||||||
Net effect of fair value changes in biological assets | 7 | (1,577,550 | ) | (1,243,340 | ) | ||||
Share-based compensation | 18 | 494,435 | 492,631 | ||||||
Impairment of goodwill and intangible assets | - | 23,911,485 | |||||||
Acquisition reorganization costs | 3,9,25 | 1,204,740 | - | ||||||
Interest expense | 11,12,13,14 | 4,132,171 | 3,742,194 | ||||||
Accretion expense | 14 | 355,952 | 434,331 | ||||||
Foreign exchange gain | 14 | 529,412 | 75,721 | ||||||
Loss (gain) on change in fair value of derivative liabilities | 17 | 5,731,839 | (4,779,693 | ) | |||||
(Gain) loss on disposal of assets | 12 | (56,194 | ) | 4,000,000 | |||||
Changes in working capital items | |||||||||
Biological assets | 1,645,039 | - | |||||||
Inventory | (387,058 | ) | 1,401,762 | ||||||
Prepaid expenses and deposits | (388,460 | ) | 62,708 | ||||||
Receivables | 233,250 | (36,022 | ) | ||||||
Accounts payable and accrued liabilities | (429,269 | ) | (2,832,043 | ) | |||||
Income tax payable | (2,702,413 | ) | - | ||||||
Cash provided by operating activities | 9,923,725 | 5,509,864 | |||||||
INVESTING ACTIVITIES | |||||||||
Purchases of property and equipment | 9 | (227,777 | ) | (509,624 | ) | ||||
Proceeds on sale of intangible asset | 10 | 100,000 | - | ||||||
Payment of Megawood consideration payable | 14 | (130,000 | ) | (231,395 | ) | ||||
Payment of liabilities assumed on Swell acquisition | - | (1,070,907 | ) | ||||||
Payment of Swell consideration payable | 15 | (846,256 | ) | - | |||||
Payment of Silver State consideration payable | - | (1,143,873 | ) | ||||||
Net cash outflow on acquisition of subsidiaries | 3,4 | - | (1,586,942 | ) | |||||
Cash used in investing activities | (1,104,033 | ) | (4,542,741 | ) | |||||
FINANCING ACTIVITIES | |||||||||
Issuance of common shares | 18 | - | 5,695,345 | ||||||
Issuance of convertible debentures | 18 | 5,467,852 | 653,632 | ||||||
Payments of long-term debt | 13 | (119,914 | ) | (79,421 | ) | ||||
Payments on promissory notes payable | 14 | (7,013,333 | ) | (9,090,000 | ) | ||||
Cash proceeds from exercise of warrants | 14 | - | 729,589 | ||||||
Cash proceeds from exercise of options | 18 | 98,950 | 39,028 | ||||||
Interest paid in cash | 14 | (2,515,446 | ) | (3,291,295 | ) | ||||
Lease payments made | 12 | (1,613,173 | ) | (1,758,391 | ) | ||||
Cash used in financing activities | (5,695,064 | ) | (7,101,513 | ) | |||||
Effect of foreign exchange on cash | 36,061 | 143,788 | |||||||
Increase (decrease) in cash during the year | 3,160,689 | (5,990,602 | ) | ||||||
Cash, beginning of year | 3,076,493 | 9,067,095 | |||||||
Cash, end of year | 6,237,182 | 3,076,493 |
Supplementary disclosure with respect to cash flows (Note 22)
See accompanying notes to the consolidated financial statements | p. 4 |
C21 INVESTMENTS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS For the years ended January 31, 2021 and 2020 (Expressed in U.S. dollars) |
1. | NATURE OF OPERATIONS |
C21 Investments Inc. (the "Company" or "C21") was incorporated January 15, 1987, under the Company Act of British Columbia. The Company is a publicly traded company with its registered office is 1900-885 West Georgia Street, Vancouver, BC, V6C 3H4. | |
Pursuant to a change of business announced on January 29, 2018 to the Cannabis industry, the Company commenced acquiring and operating revenue-producing cannabis operations in the USA. | |
On June 15, 2018, the Company's common shares were delisted from the TSX Venture Exchange ("TSX-V") at the Company's request and on June 18, 2018 the Company commenced trading on the Canadian Securities Exchange ("CSE"), completed its change of business to the cannabis industry and commenced trading under the symbol CXXI. The Company registered its common shares in the United States and on May 6, 2019, its shares were cleared by the Financial Industry Regulatory Authority for trading on the OTC Markets platform under the U.S. trading symbol CXXIF. On September 28, 2020, the Company was upgraded and began trading on the OTCQB® Venture Market. | |
As at January 31, 2021, the Company operates in two segments, recreational cannabis in Oregon, USA and recreational and medical cannabis in Nevada, USA (Note 20). Both segments are engaged in the cultivation of and manufacturing of cannabis flower products, vape products and extract products for wholesale distribution, while the Nevada segment also has retail sales. | |
In the United States, 36 states, the District of Columbia, and four out of five U.S. territories allow the use of medical cannabis. The recreational adult-use of cannabis is legalized in 17 states, including Alaska, Arizona, California, Colorado, Illinois, Maine, Massachusetts, Michigan, Montana, Nevada, New Jersey, New Mexico, New York, Oregon, Vermont, Virginia, Washington, and the District of Columbia. At the federal level, however, cannabis currently remains a Schedule I controlled substance under the Federal Controlled Substances Act of 1970. Under U.S. federal law, a Schedule I drug or substance has a high potential for abuse, no accepted medical use in the United States, and a lack of accepted safety for the use of the drug under medical supervision. As such, even in those states in which marijuana is legalized under state law, the manufacture, importation, possession, use or distribution of cannabis remains illegal under U.S. federal law. |
This has created a dichotomy between state and federal law, whereby many states have elected to regulate and remove state-level penalties regarding a substance which is still illegal at the federal level. | |
There remains uncertainty about the US federal government's position on cannabis with respect to cannabis-legal status. A change in its enforcement policies could impact the ability of the Company to continue as a going concern. | |
In March 2020, the World Health Organization declared coronavirus COVID-19 a global pandemic. This contagious disease outbreak and any related adverse public health developments may adversely affect workforces, economies, and financial markets globally, potentially leading to an economic downturn. It is not possible for the Company to predict the duration or magnitude of the adverse results of the outbreak and its effects on the Company's business or results of operations at this time. | |
The consolidated financial statements were authorized for issuance on May 31, 2021 by the directors of the Company. |
p. 5 |
C21 INVESTMENTS INC. |
2. SIGNIFICANT ACCOUNTING POLICIES AND BASIS OF PREPARATION
Basis of consolidation | |
These consolidated financial statements as at and for the years ended January 31, 2021 and 2020 ("consolidated financial statements"), incorporate the accounts of the Company and its wholly-owned subsidiaries as defined in IFRS 10 - Consolidated Financial Statements ("IFRS 10"). All consolidated entities were under common control during the entirety of the periods for which their respective results of operations were included in the consolidated statements (i.e., from the date of their acquisition). All intercompany balances and transactions are eliminated upon consolidation. | |
The following are the Company's wholly owned subsidiaries that are included in these consolidated financial statements as at and for the year ended January 31, 2021: |
Country of | Percentage | |||
Name of Subsidiary | Incorporation | Ownership | Functional Currency | Principal Activity |
320204 US Holdings Corp. | USA | 100% | USD | Holding Company |
320204 Oregon Holdings Corp. | USA | 100% | USD | Holding Company |
320204 Nevada Holdings Corp. | USA | 100% | USD | Holding Company |
320204 Re Holdings, LLC | USA | 100% | USD | Holding Company |
Eco Firma Farms LLC | USA | 100% | USD | Cannabis producer |
Silver State Cultivation LLC | USA | 100% | USD | Cannabis producer |
Silver State Relief LLC | USA | 100% | USD | Cannabis retailer |
Swell Companies LTD | USA | 100% | USD | Cannabis processor, distributor |
Megawood Enterprises Inc. | USA | 100% | USD | Cannabis retailer |
Phantom Venture Group, LLC | USA | 100% | USD | Holding Company |
Phantom Brands, LLC | USA | 100% | USD | Holding Company |
Phantom Distribution, LLC | USA | 100% | USD | Cannabis distributor |
63353 Bend, LLC | USA | 100% | USD | Cannabis producer |
20727-4 Bend, LLC | USA | 100% | USD | Cannabis processor |
4964 BFH, LLC | USA | 100% | USD | Cannabis producer |
Workforce Concepts 21, Inc. | USA | 100% | USD | Payroll and benefits services |
Basis of preparation | |
These consolidated financial statements have been prepared on an accrual basis and are based on historical costs, except for certain financial instruments and biological assets classified as fair value through profit or loss. The consolidated financial statements are presented in U.S. dollars unless otherwise noted. |
Statement of compliance | |
These consolidated financial statements are prepared in accordance with International Financial Reporting Standards ("IFRS") issued by the International Accounting Standards Board ("IASB") and Interpretations of the IFRS Interpretations Committee. |
Functional and presentation currency | |
These consolidated financial statements are presented in U.S. dollars, the Company's presentation currency. The functional currency of the Company's subsidiaries is U.S. dollars. The parent company's functional currency is the Canadian dollar. All amounts presented are in U.S. dollars unless otherwise noted. |
p. 6 |
C21 INVESTMENTS INC. |
2. SIGNIFICANT ACCOUNTING POLICIES AND BASIS OF PREPARATION (continued)
Foreign currency translation | |
Foreign currency transactions are translated into U.S. dollars at exchange rates in effect on the date of the transactions. Monetary assets and liabilities denominated in foreign currencies are translated at the functional currency spot rate at the reporting date. All differences are recorded in the consolidated statement of loss and comprehensive loss. Non-monetary items that are measured in terms of historical cost in a foreign currency are translated using the exchange rate at the date of the initial transaction. Non-monetary items measured at fair value in a foreign currency are translated using the exchange rates at the date when the fair value is determined. | |
Assets and liabilities of foreign operations are translated into U.S. dollars at year-end exchange rates and any revenue and expenses are translated at the average exchange rate for the year. The resulting exchange differences are recognized in other comprehensive income (loss). |
Biological assets | |
While the Company’s biological assets are within the scope of IAS 41 – Agriculture, the direct and indirect costs of biological assets are determined using an approach similar to the capitalization criteria outlined in IAS 2 Inventories. Direct costs include the cost of growing materials and cultivation labour while indirect costs include items such as utilities and supplies used in the growing process. Indirect labour for individuals involved in the quality control process is also included, as well as depreciation on production equipment and overhead costs such as rent to the extent it is associated with the growing space. All direct and indirect costs of biological assets are capitalized as they are incurred, and they are all subsequently recorded within the line item ‘cost of sales’ on the consolidated statement of loss and comprehensive loss in the period that the related product is sold. Unrealized fair value gains/losses on growth of biological assets are recorded in a separate line on the face of the consolidated statement of loss and comprehensive loss. Biological assets are measured at their fair value less costs to sell on the balance sheet. |
Inventories | |
Raw materials, work in process, and finished goods inventories are valued at the lower of cost and net realizable value. Harvested raw material cannabis inventories are transferred from biological assets at their fair value less cost to sell at harvests, which becomes the initial deemed cost. Any subsequent post-harvest costs are capitalized to inventory insofar as cost is less than net realizable value. Inventories for resale, in addition to supplies and consumables, are valued at the lower of cost and net realizable value, with standard costing used to determine cost. | |
Inventories are measured at the lower of cost and net realizable value. Net realizable value is calculated as the estimated selling price in the ordinary course of business, less any estimated costs to complete and sell the goods. The cost of inventory includes expenditures incurred in acquiring raw materials, production and conversion costs, depreciation and other costs incurred in bringing inventory to its existing location and condition. The Company uses the standard costing method to track and cost inventory items. The Company maintains three categories of inventory: raw materials, work in process and finished goods. | |
Property and equipment | |
Property and equipment are measured at cost less accumulated depreciation and losses on impairment. Depreciation of property and equipment begins when an asset is in the location and condition necessary to operate as management intended. Upon the sale or disposition of the asset, cost and accumulated depreciation are removed from property and equipment, with any resulting gain or loss recognized in the consolidated statement of loss and comprehensive loss, as determined by comparing the proceeds from disposal with the carrying amount of the item. |
p. 7 |
C21 INVESTMENTS INC. |
2. SIGNIFICANT ACCOUNTING POLICIES AND BASIS OF PREPARATION (continued)
Depreciation is provided on the straight-line basis over the useful lives of the assets as follows:
Each part of an item of property and equipment with a significant cost in relation to the total cost of the asset, are depreciated separately, except when the significant part has a similar useful life and depreciation method as another part of that same asset. Insignificant parts of the same asset are depreciated together in the remainder of the asset.
During each financial year, the Company reviews the residual value, useful life and depreciation method for property and equipment, and makes any adjustment prospectively, if applicable.
Intangible assets and goodwill
Intangible assets are recorded at cost less accumulated amortization and accumulated impairment losses, if any. Intangible assets acquired in a business combination are measured at fair value at the acquisition date.
Intangible assets with finite useful lives are amortized on a straight-line basis over their estimated useful lives. Amortization of intangible assets begins when the asset becomes available for use. Brands, licenses, and customer relationships are amortized over 10 years, which reflect the useful lives of the intangible assets.
At the end of each fiscal year, the Company reviews the intangible assets' estimated useful lives and amortization methods, with the effect of any changes in estimates accounted for on a prospective basis.
Goodwill represents the excess of the purchase price paid for the acquisition of subsidiaries over the fair value of the net intangible and tangible assets acquired. Following the initial recognition, goodwill is measured at cost less any accumulated impairment losses. The Company has grouped the Goodwill and intangibles into cash generating units ("CGU"), specifically Oregon and Nevada.
Goodwill has an indefinite useful life, is not subject to amortization and is tested annually for any impairment, or more frequently in the case that events or circumstances indicate that they may be impaired.
Assets and liabilities held for sale
Non-current assets, or disposal groups comprising assets and liabilities, are classified as held for sale if it is highly probable that they will be recovered primarily through sale rather than through continuing use. Such assets, or disposal groups, are measured at the lower of their carrying amount and fair value less costs to sell.
Business combinations
Acquisitions are accounted for using the acquisition method, in accordance with IFRS 3 - Business Combinations, with the assets and liabilities acquired recorded at their fair values at the acquisition date.
The Company is required to allocate the purchase price to tangible and identifiable intangible assets acquired and liabilities assumed based on their fair values. The excess of the purchase price over those fair values of the net assets acquired is recorded as goodwill Any excess of the fair value of the net assets acquired over the consideration, is a gain on business acquisition and would be recognized as a gain in the consolidated statement of loss and comprehensive loss.
p. 8 |
C21 INVESTMENTS INC. |
2. SIGNIFICANT ACCOUNTING POLICIES AND BASIS OF PREPARATION (continued)
Convertible Instruments
Convertible notes are compound financial instruments which are accounted for separately by their components: a financial liability and an equity instrument. The financial liability, which represents the obligation to pay coupon interest on the convertible notes in the future, is initially measured at its fair value and subsequently measured at amortized cost. The residual amount is accounted for as an equity instrument at issuance. The identification of convertible note components is based on interpretations of the substance of the contractual arrangement and therefore requires judgement from management. The separation of the components affects the initial recognition of the convertible debenture at issuance and the subsequent recognition of interest on the liability component.
Impairment of long-lived assets | |
Long-lived assets include intangible assets and property and equipment, which are reviewed for impairment at each statement of financial position date or whenever events or changes in circumstances indicate that an impairment has occurred. In assessing impairment, the Company compares the carrying amount of the long-lived asset to the recoverable amount. The recoverable amount is the higher of its fair value less costs of disposal and its value in use. An impairment loss is recognized whenever the carrying amount of the asset exceeds its recoverable amount and is recorded as in profit or loss equal to the amount by which the carrying amount exceeds the recoverable amount. In a subsequent period, if an impairment loss reverses, the carrying amount of the long-lived asset is increased to the lesser of the revised estimate of the recoverable amount, and the carrying amount that would have been recorded had no impairment loss been previously recognized. | |
Leases | |
The Company leases some items of property and equipment. Under IFRS 16 Leases ("IFRS 16"), the Company assesses whether a contract to rent an item of property and equipment is, or contains, a lease. For contracts that are, or contain, leases, the Company recognizes a right-of-use asset and lease liability at the commencement date. | |
Pursuant to IFRS 16 lessee accounting model, the right-of-use asset is initially measured at cost, which includes the initial amount of the liability adjusted for any lease payments made at or before the commencement date, plus any initial direct costs incurred and estimates of costs to remove or dismantle the underlying asset or to restore the underlying asset or site on which the asset is located, less any lease incentives received. The right-of-use asset is subsequently depreciated using the straight-line method over the term of the lease. The lease liability is initially measured at the present value of the lease payments that are not paid as of the lease commencement date, discounted using the rate implicit in the lease or, if the implicit rate cannot be readily determined, the Company's incremental borrowing rate. | |
The measurement of lease liabilities includes the following types of lease payments: |
1) | fixed payments, including in-substance fixed payments; | |
2) | variable lease payments that depend on an index or rate, initially measured using the index or rate as of the commencement date; | |
3) | amounts expected to be payable under any residual value guarantees; and | |
4) | exercise price for options that the Company is reasonably certain to exercise for an extension or option to buy, and penalties for early termination of a lease unless the Company is reasonably certain that it will not terminate the lease early. The lease liability is measured at amortized costs using the effective interest method. |
p. 9 |
C21 INVESTMENTS INC. |
2. SIGNIFICANT ACCOUNTING POLICIES AND BASIS OF PREPARATION (continued)
The lease liability is remeasured in the following circumstances:
1) | if there is a change in the future lease payments resulting from a change in index or rate; | |
2) | if there is a change in the Company's estimation of the amount expected to be payable under a residual value guarantee; and | |
3) | if the Company changes its assessment of whether it will exercise an option to purchase, extend or terminate. |
The Company has elected not to recognize right-of-use assets and liabilities for short-term leases that have a term of 12 months or less and for low-value assets.
Financial instruments | |
i. Financial assets | |
On initial recognition, financial assets are recognized at fair value and are subsequently classified and measured at: (i) amortized cost; (ii) fair value through other comprehensive income ("FVOCI"); or (iii) fair value through profit or loss ("FVTPL"). The classification of financial assets is generally based on the business model in which a financial asset is managed, and its contractual cash flow characteristics. A financial asset is measured at fair value net of transaction costs that are directly attributable to its acquisition except for financial assets at FVTPL, where transaction costs are expensed. All financial assets not classified and measured at amortized cost or FVOCI are measured at FVTPL. On initial recognition of an equity instrument that is not held for trading, the Company may irrevocably elect to present subsequent changes in the investment's fair value in other comprehensive income/loss. The classification determines the method by which the financial assets are carried on the statement of financial position subsequent to inception and how changes in fair value are recorded. Receivables and notes receivable are measured at amortized cost with subsequent impairments recognized in profit or loss. Cash and restricted cash are classified as FVTPL. | |
ii. Impairment | |
An 'expected credit loss' impairment model applies that requires a loss allowance to be recognized based on expected credit losses. The estimated present value of future cash flows associated with the asset is determined and an impairment loss is recognized for the difference between this amount and the carrying amount as follows: the carrying amount of the asset is reduced to estimated present value of the future cash flows associated with the asset, discounted at the financial asset's original effective interest rate, either directly or through the use of an allowance account, and the resulting loss is recognized in profit or loss for the period. In a subsequent period, if the amount of the impairment loss related to financial assets measured at amortized cost decreases, the previously recognized impairment loss is reversed through profit or loss to the extent that the carrying amount of the investment at the date the impairment is reversed does not exceed what the amortized cost would have been had the impairment not been recognized. |
p. 10 |
C21 INVESTMENTS INC. |
2. SIGNIFICANT ACCOUNTING POLICIES AND BASIS OF PREPARATION (continued)
iii. Financial liabilities
Financial liabilities are designated as either: (i) fair value through profit or loss; or (ii) other financial liabilities. All financial liabilities are classified and subsequently measured at amortized cost except for financial liabilities at FVTPL. The classification determines the method by which the financial liabilities are carried on the statement of financial position subsequent to inception and how changes in fair value are recorded. Accounts payable and accrued liabilities, promissory notes payable, consideration payable, convertible debentures, other debt, and convertible promissory notes, are classified as amortized cost and carried on the consolidated statement of financial position at amortized cost. Derivative liabilities are carried at FVTPL.
Share-based compensation | |
The Company measures equity settled share-based payments based on their fair value at their grant date and recognizes share-based compensation expense over the vesting period based on the Company's estimate of equity instruments that will eventually vest. Consideration paid to the Company on the exercise of stock options is recorded as share capital and the related share-based compensation is transferred from reserve to share capital. | |
Income taxes | |
Income tax expense is comprised of current and deferred tax. Current tax and deferred tax are recognized in net income except to the extent that it relates to a business combination or items recognized directly in equity in other comprehensive income (loss). | |
Current income taxes are recognized for the estimated income taxes payable or receivable on taxable income or loss for the current year and any adjustment to income taxes payable in respect to previous years. Current income taxes are determined using the applicable tax rates and tax laws. | |
Deferred tax assets and liabilities are recognized where the carrying amount of an asset or liability differs from its tax base, except for taxable temporary differences arising on the initial recognition of goodwill and temporary differences arising on the initial recognition of an asset or liability in a transaction that is not a business combination, and at the time of the transaction, affects neither accounting nor taxable profit or loss. | |
Recognition of deferred tax assets for unused tax losses, tax credits and deductible temporary differences is restricted to those instances where it is probable that future taxable profit will be available against which the deferred tax asset can be utilized. At the end of each reporting period, the Company reassess its unrecognized deferred tax asset to the extent that it has become probable that future taxable profit will allow the recovery of the Company's deferred tax asset. | |
Earnings (loss) per share | |
The Company presents basic and diluted loss per share data for its common shares. Basic loss per share is calculated using the weighted average number of shares outstanding during the respective years. Diluted loss per share is computed by dividing net loss by the weighted average shares outstanding adjusted for additional shares from the assumed exercise of stock options, restricted share units, or warrants, if dilutive. |
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C21 INVESTMENTS INC. |
The number of additional shares is calculated by assuming the outstanding dilutive convertible instruments, options, and warrants are exercised and that the assumed proceeds are used to acquire common shares at the average market price during the year. Diluted loss per share figures for the years presented are equal to those of basic loss per share for the years since the effects of convertible instruments, stock options and warrants are anti-dilutive.
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C21 INVESTMENTS INC. |
2. SIGNIFICANT ACCOUNTING POLICIES AND BASIS OF PREPARATION (continued)
Revenue recognition | |
Revenue comprises the fair value of consideration received or receivable, for the sale of goods in the ordinary course of the Company's activities. Revenue is shown net of returns and discounts. | |
Revenue is measured based on the consideration specified in a contract with a customer. The Company recognizes revenue when performance obligations under the terms of a contract with a customer are satisfied. | |
The Company does not have performance obligations subsequent to delivery on the sale of goods to customers and revenues from sale of goods are recognized at a “point in time”, which is upon passing of control to the customer. For product sales of cannabis and cannabis derivative products, the Company transfers control and satisfies its performance obligation when collection has taken place, compliant documentation has been signed, and the product was accepted by the buyer. |
Transaction costs | |
Transaction costs that are directly attributable to the acquisition of financial liabilities, other than those at FVTPL, are added to or deducted from the fair value of the financial liability on initial recognition, as appropriate. Transaction costs directly attributable to the acquisition of financial assets or financial liabilities at FVTPL are recognized immediately through profit or loss. | |
Transaction costs associated with a business combination, (i.e., other than those associated with the issuance of debt or equity), are expensed as incurred as a line item in the consolidated statement of loss and comprehensive loss. | |
Reclamation obligation | |
The Company recognizes the fair value of a legal or constructive liability for a reclamation obligation in the year in which it is incurred and when a reasonable estimate of fair value can be made. The carrying amount of the related long-lived asset is increased by the same amount as the liability. Changes in the liability for a rehabilitation obligation due to the passage of time will be recognized within accretion expense. The amount will be recognized as an increase in the liability and an accretion expense in the consolidated statement of loss and comprehensive loss. Changes resulting from revisions to the timing or the amount of the original estimate of undiscounted cash flows are recognized as an increase or a decrease to the carrying amount of the liability and the related long-lived asset. |
Adoption of new and revised standards and interpretations | |
The following IFRS standards have been recently issued by the IASB. The Company has assessed or is assessing the impact of these new standards on future consolidated financial statements. Pronouncements that are not applicable or where it has been determined do not have a significant impact to the Company have been excluded herein. | |
i. IAS 1 – Presentation of Financial Statements (“IAS 1”) and IAS 8 – Accounting Policies, Changes in Accounting Estimates and Errors (“IAS 8”) | |
IAS 1 and IAS 8 were amended in October 2018 to refine the definition of materiality and clarify its characteristics. The revised definition focuses on the idea that information is material if omitting, misstating or obscuring it could reasonably be expected to influence decisions that the primary users of general-purpose financial statements make on the basis of those financial statements. The amendments were effective for annual reporting periods beginning on or after January 1, 2020. The Company adopted IAS 1 and IAS 8 as of February 1, 2020. The adoption of IAS 1 and IAS 8 did not have a material impact on the consolidated financial statements. |
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C21 INVESTMENTS INC. |
ii. Amendment to IFRS 3: Definition of a Business | |
In October 2018, the IASB issued “Definition of a Business (Amendments to IFRS 3)” (the “IFRS 3 Amendment”). The IFRS 3 Amendment clarifies the definition of a business, with the objective of assisting entities to determine whether a transaction should be accounted for as a business combination or as an asset acquisition. The IFRS 3 Amendment provides an assessment framework to determine when a series of integrated activities is not a business. The IFRS 3 Amendment is effective for business combinations occurring on or after the beginning of the first annual reporting period beginning on or after January 1, 2020. The Company early adopted IFRS 3 as of February 1, 2020. The adoption did not have a material impact on the consolidated financial statements. | |
New and Revised Standards and Interpretations to be Adopted | |
The following is a summary of the new standards issued but not yet effective: | |
i. Amendments to IAS 1: Classification of Liabilities as Current or Non-Current | |
In January 2020, the IASB issued Classification of Liabilities as Current or Non-current (“Amendments to IAS 1”). The Amendments to IAS 1 aim to promote consistency in applying the requirements by helping companies determine whether, in the statement of financial position, debt and other liabilities with an uncertain settlement date should be classified as current (due or potentially due to be settled within one year) or non-current. The Amendments to IAS 1 include clarifying the classification requirements for debt a company might settle by converting it into equity. The Amendments to IAS 1 are effective for annual reporting periods beginning on or after January 1, 2022, with earlier application permitted. | |
ii. Amendments to IAS 37: Onerous Contracts – Cost of Fulfilling a Contract | |
In May 2020, the IASB issued Onerous Contracts – Cost of Fulfilling a Contract (“Amendments to IAS 37”) amending the standard regarding costs a company should include as the cost of fulfilling a contract when assessing whether a contract is onerous. The amendment is effective for annual reporting periods beginning on or after January 1, 2022. | |
|
Significant accounting judgments, estimates and assumptions | |
The preparation of the Company's financial statements in conformity with IFRS requires management to make judgments, estimates and assumptions that affect the reported amounts of assets, liabilities and contingent liabilities at the date of the financial statements and reported amounts of revenues and expenses during the reporting period. Estimates and assumptions are continuously evaluated and are based on management's experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. Actual results may differ from those estimates and judgments. |
Areas requiring a significant degree of estimation and judgment relate to the determination of business combinations, impairment of long-lived assets, biological assets and inventory, fair value measurements, useful lives, depreciation and amortization of property, equipment and intangible assets, the recoverability and measurement of deferred tax assets and liabilities and share-based compensation.
i. Business combinations
Judgment is used in determining whether the Company's acquisition is considered a business combination or an asset acquisition. Additionally, judgment is required to assess whether any amounts paid on the achievement of agreed upon milestones represents contingent consideration or compensation for post-acquisition services. Judgment is also required to assess whether contingent consideration arising from an acquisition should be classified as a liability or equity. Contingent consideration classified as equity is not remeasured at subsequent reporting dates and its subsequent settlement by the Company is accounted for within equity.
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C21 INVESTMENTS INC. |
2. SIGNIFICANT ACCOUNTING POLICIES AND BASIS OF PREPARATION (continued)
Contingent consideration classified as a liability is remeasured at subsequent reporting dates in accordance with IFRS 9 -Financial Instruments, or IAS 37 - Provisions, Contingent Liabilities and Contingent Assets.
ii. Impairment of long-lived assets | ||
When there are indications that an asset may be impaired, the Company is required to estimate the asset's recoverable amount. The recoverable amount is the greater of value-in-use and fair value less costs of disposal. Determining the value-in-use requires the Company to estimate expected future cash flows associated with the assets and a suitable discount rate in order to calculate present value. At January 31, 2020, as a result of this review, the Company's assessment of the goodwill associated with the Oregon CGU indicated an impairment in value. The goodwill and intangibles of the Oregon CGU has therefore been written down by $22,375,225 (goodwill) and $1,536,260 (intangible assets) see Note 10. There was no such impairment during the year ended January 31, 2021.
| ||
iii. Biological assets and inventories | ||
In calculating the value of the biological assets and inventory, management is required to make a number of estimates, including estimating the stage of growth of cannabis up to the point of harvest, harvesting costs, selling costs, sales price, wastage and expected yields for the cannabis plant. In calculating final inventory values, management is required to determine an estimate of spoiled or expired inventory and compare the inventory cost versus net realizable value. The Company's estimates are, by their nature, subject to change. Changes in the anticipated yield or quality will be reflected in future changes in the gain or loss on biological assets. | ||
| ||
Effective July 1, 2019 the Company has begun utilizing the Nevada Department of Taxation ("NDOT") determined wholesale fair market value for the period of future sales in order to calculate the expected selling price of its biological assets at its Nevada operations. Previously, the Company relied on observational inputs in the Nevada market, but the Company believes the NDOT observed values are more consistent and has observed peer issuers adopting the same valuation input.
| ||
iv. Fair value measurements | ||
Certain assets and liabilities held by the Company are measured at fair value. In estimating fair value, the Company uses market-observable data to the extent that such data is available. In certain situations where Level 1 inputs are not available, the Company makes an estimate or engages qualified, third-party valuators to perform the valuation. |
v. Estimated useful lives and depreciation and amortization of property, equipment and intangible assets
The Company's depreciation and amortization of property, equipment and intangible assets are dependent on the estimation of the assets' useful lives, which requires management to exercise judgment. The Company's assessment of any impairment of assets is dependent on its estimation of recoverable amounts that consider various factors, including market and economic conditions and the assets' useful lives.
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C21 INVESTMENTS INC. |
2. SIGNIFICANT ACCOUNTING POLICIES AND BASIS OF PREPARATION (continued)
vii. Share-based compensation
The Company uses the Black-Scholes option pricing model to measure share-based compensation. The Company's estimate of share-based compensation is dependent on measurement inputs including the share price on measurement date, exercise price of the option, volatility, risk-free rate, expected dividends, and the expected life.
viii. Convertible notes
The identification of convertible note components is based on interpretations of the substance of the contractual arrangement and therefore requires judgement from management.
3. ACQUISITION OF PHANTOM FARMS
On February 4, 2019, the Company acquired all membership units of Phantom Farms, which encompasses the following limited liability companies: Phantom Venture Group, LLC, Phantom Distribution, LLC, 63353 Bend, LLC, 20727-4 Bend, LLC, 4964 BFH, LLC, and Phantom Brands, LLC. Phantom Farms has outdoor cannabis cultivation facilities in southern Oregon and a wholesale distribution warehouse, an extraction laboratory and an indoor grow facility in central Oregon. The Company acquired Phantom Farms for total consideration of $10,539,260 comprised of cash deposits on closing of $3,200,000, a promissory note for $290,000, common shares issued in the amount of $2,507,138, share purchase warrants issued in the amount of $793,745, and an earnout valued at $3,748,377.
The purchase price and allocation of the purchase price is as follows:
- $ - | |||
Cash | 13,121 | ||
Receivables | 166,346 | ||
Inventory | 884,113 | ||
Biological assets | 75,499 | ||
Other assets | 52,234 | ||
Property and equipment | 92,501 | ||
Right-of-use asset | 2,251,451 | ||
Lease liability | (2,251,451 | ) | |
Brand | 622,308 | ||
Customer relationships | 581,616 | ||
Licenses | 156,750 | ||
Goodwill | 8,009,248 | ||
Accounts payable and accrued liabilities | (114,476 | ) | |
Total assets and liabilities acquired | 10,539,260 | ||
Cash deposits on closing date | 3,200,000 | ||
Common shares issued | 2,507,138 | ||
Stock warrants issued ** | 793,745 | ||
Consideration payable * | 3,748,377 | ||
Promissory note payable | 290,000 | ||
Total consideration | 10,539,260 |
*all of the consideration payable was recognized as derivative liability (Note 17)
**fair value based on acquisition date share price of $1.23, exercise price of $1.50, expected life of 2 years, volatility of 102.6%, risk free rate of 2.50%
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C21 INVESTMENTS INC. |
In an agreement signed contemporaneously, with the Phantom Farms acquisition, the Company committed to purchase SDP Development Group, LLC ("SDP") on October 15, 2020, which owned six real estate properties used in connection with Phantom Farms' cannabis cultivation, processing and distribution operations. On February 19, 2020, the Company amended the terms of the purchase of Phantom Farms and related companies, including SDP. The amended terms of the purchase agreement regarding the real estate assets of SDP group resulted in the Company electing to purchase the real estate of the Phantom Farms outdoor grow (two parcels), and SDP receiving 7,132,042 shares of C21 with a fair value of $2,582,903 (Note 18). The consideration exceeded the fair market value of land acquired of $1,378,163 and as a result, the Company recorded acquisition reorganization costs of $1,204,740.
At January 31, 2020, it was determined that the goodwill amounts for Phantom were impaired and should be written off. The Company has written off $8,009,248 of goodwill in relation to Phantom for the year ended January 31, 2020 (Note 10).
4. ACQUISITION OF SWELL COMPANIES
On May 24, 2019, the Company acquired all the common shares held in Swell Companies Limited ("Swell"). Swell operates an extraction laboratory, manufacturing, and wholesale facility in Oregon. The Company acquired Swell for total consideration of $18,812,683 comprised of cash deposits and notes receivable of $5,050,000, a convertible promissory note for $1,000,000, assumed liabilities of $1,070,907, common shares issued in the amount of $1,130,363, stock warrants issued in the amount of $786,284, and consideration payable of $9,775,129.
The purchase price and allocation of the purchase price is as follows:
- $ - | |||
Cash | 173,422 | ||
Receivables | 160,801 | ||
Inventory | 2,069,349 | ||
Other assets | 13,565 | ||
Property and equipment | 1,152,519 | ||
Right-of-use asset | 611,890 | ||
Lease liability | (611,890 | ) | |
Brand | 709,496 | ||
Customer relationships | 592,852 | ||
Licenses | 915,000 | ||
Goodwill | 13,676,649 | ||
Accounts payable and accrued liabilities | (650,970 | ) | |
Total assets and liabilities acquired | 18,812,683 | ||
Cash deposits and notes receivable | 5,050,000 | ||
Convertible promissory note | 1,000,000 | ||
Liabilities assumed | 1,070,907 | ||
Common shares issued | 1,130,363 | ||
Stock warrants issued** | 786,284 | ||
Consideration payable * | 9,775,129 | ||
Total consideration | 18,812,683 |
*consideration payable includes $4,707,370 of derivative liabilities (Note 17)
**fair value based on acquisition date share price of $1.20, exercise price of $1.50, expected life of 5 years, volatility of 102.6%, risk free rate of 2.16%
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C21 INVESTMENTS INC. |
4. ACQUISITION OF SWELL COMPANIES (continued)
During the year ended January 31, 2020, the Company finalized an agreement with the former owners Swell Companies Limited (the "Swell Vendors") to amend the terms of the Company's forward-cash obligations to the Swell Vendors. Pursuant to the terms of the amended agreement: (a) the cash sum due to the Swell Vendors through September 2019 under the original agreement, in the amount of $850,000 and interest of $91,369, was paid by the Company on January 4, 2021; and (b) the sum of $7,350,000 due to the Swell Vendors on May 24, 2021 under the original agreement, including the Swell Vendors' option to receive $5,000,000 of such sum in cash, will be satisfied in full by the issuance of 7,015,238 common shares of C21. The shares were issued into escrow on December 27, 2019 and will be released as follows: (a) twenty-five percent (25%) four-months-and-a-day from October 4, 2019; and (b) the remainder of the shares in three equal instalments of one-third every four months thereafter.
At the acquisition date, consideration payable included derivative liabilities of $4,707,370, cash consideration payable of $846,256 and commitment to issue shares of $4,221,503.
At January 31, 2020, it was determined that the goodwill and intangible amounts for Swell were impaired and should be written off. The Company has written off $13,676,649 of goodwill and $1,536,260 of intangibles for the year ended January 31, 2020 (Note 10).
5. RESTRICTED CASH
The Company has cash on deposit with the Alberta Energy Regulator ("AER") under the AER's Liability Management programs to cover potential liabilities relating to its wells. The required security deposit with the AER is determined based on a monthly licensee management rating assessment.
6. RECEIVABLES
January 31, 2021 | January 31, 2020 | |||||
Taxes receivable | $ | 27,995 | $ | 22,014 | ||
Trade receivables, net | 181,877 | 421,108 | ||||
$ | 209,872 | $ | 443,122 |
Accounts receivable more than 90 days past due totaled $1,975 at January 31, 2021 (January 31, 2020 - $40,911).
7. BIOLOGICAL ASSETS
The Company's biological assets consist of cannabis plants. The continuity for biological assets for the years ended January 31, 2021 and 2020 is as follows:
Balance, January 31, 2019 | $ | 1,870,540 | |
Acquired biological assets | 75,499 | ||
Increase in biological assets due to capitalized costs | 7,615,455 | ||
Fair value adjustment on biological assets | 1,243,340 | ||
Transferred to inventory upon harvest | (9,396,563 | ) | |
Balance, January 31, 2020 | 1,408,271 | ||
Increase in biological assets due to capitalized costs | 9,504,528 | ||
Fair value adjustment on biological assets | 1,618,306 | ||
Transferred to inventory upon harvest | (11,190,323 | ) | |
Balance, January 31, 2021 | $ | 1,340,782 |
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C21 INVESTMENTS INC. |
7. BIOLOGICAL ASSETS (continued)
Biological assets are valued in accordance with IAS 41 - Agriculture ("IAS 41") and are presented at their fair values less costs to sell up to the point of harvest. The Company's biological assets are primarily cannabis plants, and because there is no actively traded commodity market for plants or dried product, the valuation of these biological assets is obtained using valuation techniques where the inputs are based upon unobservable market data (Level 3, see Note 24).
The valuation of biological assets is based on a market approach where fair value at the point of harvest is estimated based on selling prices less the costs to sell at harvest. For in process biological assets, the fair value at point of harvest is adjusted based on the stage of growth. As at January 31, 2021, on average, the biological assets were 50% complete as to the next expected harvest date.
The significant unobservable inputs and their range of values are noted in the table below:
|
|
| Effect on Fair Value as of January 31: | |||
Significant Inputs and | Range of Inputs | Sensitivity |
| 2021 |
| 2020 |
Selling Price Per | $0.93 to $4.63 | Increase 5% | $ | 484,951 | $ | 71,297 |
Gram |
| Decrease 5% | $ | (484,951) | $ | (71,658) |
Estimated Yield Per | 80.4 to 194.6 grams | Increase 5% | $ | 484,951 | $ | 70,423 |
Cannabis Plant |
| Decrease 5% | $ | (484,951) | $ | (70,423) |
During the year ended January 31, 2021, the Company's biological assets produced 3,841,464 grams (year ended January 31, 2020 - 4,642,080 grams).
8. INVENTORY
January 31, 2021 | January 31, 2020 | |||||
Finished goods | $ | 2,166,616 | $ | 3,878,754 | ||
Work in progress | 3,251,110 | 2,313,089 | ||||
$ | 5,417,726 | $ | 6,191,843 |
Inventories expensed to cost of sales during the year ended January 31, 2021 was $19,052,681 (year ended January 31, 2020 - $25,810,389). In addition, during the year ended January 31, 2021, the company recognized a gain of $8,365,616 for the realized fair value adjustment on inventory sold (year ended January 31, 2020 - gain of $5,292,763).
Impairment of inventory of $1,384,922 was recorded for the year ended January 31, 2021 related to Swell inventories.
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C21 INVESTMENTS INC. |
9. PROPERTY AND EQUIPMENT
Land and building | Leasehold improvements | Furniture & fixtures | Computer equipment | Machinery & equipment | Total | |||||||||||||
Cost | ||||||||||||||||||
Balance, January 31, 2019 | $ | - | $ | 1,459,795 | $ | 478,864 | $ | 96,785 | $ | 429,664 | $ | 2,465,108 | ||||||
Assets from acquisition | - | 522,279 | 50,388 | 25,846 | 646,507 | 1,245,020 | ||||||||||||
Additions | 4,675,389 | 97,956 | 12,350 | - | 560,328 | 5,346,023 | ||||||||||||
Impairment | (3,305,176 | ) | (709,064 | ) | (125,282 | ) | - | - | (4,139,522 | ) | ||||||||
Balance, January 31, 2020 | $ | 1,370,213 | $ | 1,370,966 | $ | 416,320 | $ | 122,631 | $ | 1,636,499 | $ | 4,916,629 | ||||||
Additions | 1,330,000 | 8,338 | 53,836 | 28,687 | 136,916 | 1,557,777 | ||||||||||||
Category reclassification | - | (324,371 | ) | - | - | 324,371 | - | |||||||||||
Classified as held for sale | - | (792,467 | ) | (87,957 | ) | (40,708 | ) | (557,882 | ) | (1,479,014 | ) | |||||||
Disposals | - | (17,994 | ) | (5,992 | ) | (15,764 | ) | (278,564 | ) | (318,314 | ) | |||||||
Balance, January 31, 2021 | $ | 2,700,213 | $ | 244,472 | $ | 376,207 | $ | 94,846 | $ | 1,261,340 | 4,677,078 | |||||||
Accumulated Depreciation | ||||||||||||||||||
Balance, January 31, 2019 | - | $ | (301,583 | ) | $ | (65,074 | ) | $ | (7,619 | ) | $ | (8,822 | ) | $ | (383,098 | ) | ||
Depreciation expense | (128,225 | ) | (214,331 | ) | (88,667 | ) | (52,324 | ) | (215,853 | ) | (699,400 | ) | ||||||
Balance, January 31, 2020 | $ | (128,225 | ) | $ | (515,914 | ) | $ | (153,741 | ) | $ | (59,943 | ) | $ | (224,675 | ) | $ | (1,082,498 | ) |
Depreciation expense | (73,847 | ) | (129,976 | ) | (65,962 | ) | (19,777 | ) | (341,256 | ) | (630,818 | ) | ||||||
Category reclassification | - | 128,319 | - | - | (128,319 | ) | - | |||||||||||
Classified as held for sale | - | 427,528 | 57,125 | 26,378 | 240,551 | 751,582 | ||||||||||||
Disposals | - | 3,549 | 3,650 | 9,152 | 185,082 | 201,433 | ||||||||||||
Balance, January 31, 2021 | $ | (202,072 | ) | $ | (86,494 | ) | $ | (158,928 | ) | $ | (44,190 | ) | $ | (268,617 | ) | $ | (760,301 | ) |
Carrying amount, Jan. 31, 2020 | $ | 1,241,988 | $ | 855,052 | $ | 262,579 | $ | 62,688 | $ | 1,411,824 | $ | 3,834,131 | ||||||
Carrying amount, Jan. 31, 2021 | $ | 2,498,141 | $ | 157,978 | $ | 217,279 | $ | 50,656 | $ | 992,723 | $ | 3,916,777 |
Total depreciation expense for the year ended January 31, 2021 was $630,818 (year ended January 31, 2020 - $699,400). Of the total expense, $390,344 was allocated to inventory (2020 - $479,662).
During the year ended January 31, 2021, the Company recorded a loss of $116,881 related to the disposal of various items of leasehold improvements, furniture and fixtures, computer equipment and machinery and equipment related to the Oregon operations. The cost of the property and equipment disposed of was $318,314 and accumulated amortization was $201,433. There was $NaN gross proceeds and the loss has been recorded as impairment of capital assets.
During the year ended January 31, 2021, the Company transferred lights and equipment with a cost of $324,371 and accumulated depreciation of $128,319 between operating units resulting in a classification change from leasehold improvements to machinery and equipment.
At January 31, 2021, the Company reclassified property and equipment with a cost of $1,479,014 and accumulated depreciation of $751,582 to assets to held to sale. The assets consisted primarily of redundant processing and extraction equipment as well as leasehold improvements and fixtures in a right of use asset. Management estimated the fair value less costs to sell exceeds the carrying value and therefore the assets are measured at their carrying values.
On February 19, 2020, the Company amended the terms of the purchase of Phantom Farms and related companies, including SDP. The amended terms of the purchase agreement regarding the real estate assets of SDP group resulted in the Company electing to purchase the real estate of the Phantom Farms outdoor grow (two parcels), and SDP receiving 7,132,042 shares of C21 with a fair value of $2,582,903 (Note 18). The consideration exceeded the fair market value of land acquired and as a result, the Company recorded acquisition reorganization costs of $1,204,740.
During the year ended January 31, 2020, the Company recognized impairment charge of $4,139,522 related to the Oregon CGU as the estimated recoverable amount was less than the carrying amount. There were no such impairments for the year ended January 31, 2021.
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C21 INVESTMENTS INC. |
10. INTANGIBLE ASSETS AND GOODWILL
Licenses | Branding | Customer relationships | Start up costs | Total | |||||||||||
Cost | |||||||||||||||
Balance, January 31, 2019 | $ | 12,060,274 | $ | - | $ | 1,540,447 | $ | 7,783 | $ | 13,608,504 | |||||
Additions from acquisitions | 1,071,750 | 1,331,804 | 1,174,468 | - | 3,578,022 | ||||||||||
Impairment of intangibles | (428,626 | ) | (391,759 | ) | (715,875 | ) | - | (1,536,260 | ) | ||||||
Balance, January 31, 2020 | $ | 12,703,398 | $ | 940,045 | $ | 1,999,040 | $ | 7,783 | $ | 15,650,266 | |||||
Category reclassification | (337,082 | ) | 46,674 | 287,249 | 3,159 | - | |||||||||
Classified as held for sale | (224,840 | ) | - | (164,226 | ) | (10,942 | ) | (400,008 | ) | ||||||
Disposals | - | (117,737 | ) | - | - | (117,737 | ) | ||||||||
Balance, January 31, 2021 | $ | 12,141,476 | $ | 868,982 | $ | 2,122,063 | $ | - | $ | 15,132,521 | |||||
Accumulated Amortization | |||||||||||||||
Balance, January 31, 2019 | $ | (214,171 | ) | $ | - | $ | (25,674 | ) | $ | (79 | ) | $ | (239,924 | ) | |
Amortization expense | (2,228,051 | ) | (33,295 | ) | (443,641 | ) | (729 | ) | (2,705,716 | ) | |||||
Balance, January 31, 2020 | $ | (2,442,222 | ) | $ | (33,295 | ) | $ | (469,315 | ) | $ | (808 | ) | $ | (2,945,640 | ) |
Amortization expense | (1,154,808 | ) | (95,053 | ) | (213,939 | ) | (729 | ) | (1,464,529 | ) | |||||
Category reclassification | 76,557 | (46,674 | ) | (26,845 | ) | (3,038 | ) | - | |||||||
Classified as held for sale | 98,043 | - | 115,254 | 4,575 | 217,872 | ||||||||||
Disposals | - | 17,737 | - | - | 17,737 | ||||||||||
Balance, January 31, 2021 | $ | (3,422,430 | ) | $ | (157,285 | ) | $ | (594,845 | ) | $ | - | $ | (4,174,560 | ) | |
Carrying amount, January 31, 2020 | $ | 10,261,176 | $ | 906,750 | $ | 1,529,725 | $ | 6,975 | $ | 12,704,626 | |||||
Carrying amount, January 31, 2021 | $ | 8,719,046 | $ | 711,697 | $ | 1,527,218 | $ | - | $ | 10,957,961 |
Total amortization expense from intangible assets for the year ended January 31, 2021 was $1,464,528 (year ended January 31, 2020 - $2,705,716). Of the total expense, $47,160 was allocated to inventory (2020 - $119,310).
During the year ended January 31, 2021, the Company sold a brand for $100,000. At the time of the sale, the brand had a carrying amount of $100,000 comprised of cost of $117,747 and accumulated depreciation of $17,737. As the proceeds were consistent with the carrying amount there was no gain or loss recognized on the disposal.
At January 31, 2021, the Company reclassified intangible assets with a cost of $400,008 and accumulated depreciation of $217,872 to held for sale. The intangible assets classified as held for sale consist of licenses, customer lists, and startup costs associated with a right of use asset that has also been classified as held for sale. Management estimated the fair value less costs to sell exceeds the carrying value and therefore the assets are measured at their carrying values.
The continuity of goodwill for the years ended January 31, 2021, and 2020 is as follows:
Phantom Farms (Oregon) | Silver State Companies (Nevada) | Megawood Enterprises (Oregon) | Swell Companies (Oregon) | Total | |||||||||||
Balance, January 31, 2019 | $ | - | $ | 28,541,323 | $ | 689,328 | $ | - | $ | 29,230,651 | |||||
Additions from acquisitions | 8,009,248 | - | - | 13,676,649 | 21,685,897 | ||||||||||
Impairment of Goodwill | (8,009,248 | ) | - | (689,328 | ) | (13,676,649 | ) | (22,375,225 | ) | ||||||
Balance, January 31, 2020 and 2021 | $ | - | $ | 28,541,323 | $ | - | $ | - | $ | 28,541,323 |
The Company tested each of the CGUs for impairment at January 31, 2021 and 2020.
At January 31, 2020, the estimated recoverable amount of the Oregon geographic CGU was lower than the segment's carrying value. The Company recognized an impairment loss for the Oregon CGU totaling $22,375,225 of goodwill, and $1,536,260 of intangibles; this loss has been treated as Impairment of goodwill and intangible assets on the Consolidated Statement of Loss and Comprehensive Loss. There were no such impairments for the year ended January 31, 2021.
p. 21 |
C21 INVESTMENTS INC. |
11. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
January 31, 2021 | January 31, 2020 | |||||
Accounts payable | $ | 1,382,519 | $ | 1,136,955 | ||
Accrued liabilities | 1,183,259 | 1,449,286 | ||||
Interest payable | 115,218 | 902,033 | ||||
$ | 2,680,996 | $ | 3,488,274 |
During the year ended January 31, 2021, the Company reversed an interest accrual of $710,954. The recovery has been recorded as an offset to interest expense.
12. LEASE LIABILITIES AND RIGHT-OF-USE ASSETS
Under IFRS 16 - Leases, the Company assesses whether a contract is, or contains, a lease. For contracts that are, or contain, leases, the Company recognizes a right-of-use asset and lease liability at the commencement date. If the contract does not contain a lease, then the contract is classified as a service that is not reported on the statement of financial position.
The Company has identified ten contracts executed by the Company and its wholly owned subsidiaries that are leases as defined under IFRS 16. In analyzing the identified agreements, the Company applied the lessee accounting model pursuant to IFRS 16 and considered all of the facts and circumstances surrounding the inception of the contract (but not future events that are not likely to occur). Lease liabilities were calculated with discount rates ranging from 10-20%.
Based on all the facts and circumstances at the inception of the contract, the Company has determined that all identified agreements contain a lease as defined by IFRS 16, including:
Entity Name/Lessee | Asset | Contains a lease? | Useful life (years) |
Swell Companies, LTD | Land/Building | Yes | 5 |
Silver State Cultivation LLC | Land/Building | Yes | 12 |
Silver State Relief LLC (Sparks) | Land/Building | Yes | 12 |
Silver State Relief LLC (Fernley) | Land/Building | Yes | 12 |
Megawood Enterprises Inc. | Land/Building | Yes | 5 |
Phantom Distribution, LLC | Land/Building | Yes | 5 |
63353 Bend, LLC | Land/Building | Yes | 5 |
20727-4 Bend, LLC | Land/Building | Yes | 5 |
4964 BFH, LLC | Land/Building | Yes | 5 |
p. 22 |
C21 INVESTMENTS INC. |
12. LEASE LIABILITIES AND RIGHT-OF-USE ASSETS (continued)
The financial statement effects concerning lease liabilities are as follows:
Maturity Analysis - contractual undiscounted cash flows | ||
Less than one year | $ | 1,380,236 |
One to five years | 16,139,530 | |
Total undiscounted lease liabilities at January 31, 2021 | $ | 17,519,767 |
Lease liabilities included in the statement of financial position | ||
Current | $ | 437,857 |
Non-current | 9,691,215 | |
Balance, January 31, 2021 | $ | 10,129,072 |
Amounts recognized in profit or loss | ||
Interest on lease liabilities | $ | 513,423 |
Total cash outflow for leases | $ | 1,613,173 |
The financial statement effects concerning right-of-use assets are as follows:
Cost | |||
Balance, January 31, 2019 | $ | 7,861,107 | |
Right-of-use additions | 3,386,237 | ||
Adjustment* | (927,300 | ) | |
Disposal** | (4,197,087 | ) | |
Balance, January 31, 2020 | 6,122,957 | ||
Right-of-use additions | 7,263,368 | ||
Classified as held for sale | (832,736 | ) | |
Disposal*** | (899,398 | ) | |
Balance, January 31, 2021 | $ | 11,654,191 | |
Accumulated Amortization | |||
Balance, January 31, 2019 | (116,496 | ) | |
Disposal** | 230,686 | ||
Amortization expense | (1,576,459 | ) | |
Balance, January 31, 2020 | (1,462,269 | ) | |
Disposal*** | 554,631 | ||
Classified as held for sale | 299,687 | ||
Amortization expense | (1,280,652 | ) | |
Balance, January 31, 2021 | $ | (1,888,603 | ) |
Carrying Amount, January 31, 2020 | $ | 4,660,688 | |
Carrying Amount, January 31, 2021 | $ | 9,765,588 |
*During the year ended January 31, 2020, the Company entered into amending lease agreements on six leases resulting in adjustments to ROU assets and lease liabilities of $927,300. The incremental borrowing rate was lowered on all six leases.
**During the year ended January 31, 2020, the Company derecognized ROU assets and lease liabilities of $3,800,000 on acquisition of land and building that was subject to lease. The Company terminated another $397,087 in leases during the same year resulting in decreases in lease liabilities and ROU assets. Accumulated amortization in these lease disposals of $230,686 was adjusted on disposal.
***During the year ended January 31, 2021, the Company terminated a lease resulting in an adjustment on disposal to lease liabilities of $400,961 and ROU assets cost of $899,398 and accumulated amortization of $554,631. A gain on disposal of $56,194 was recognized representing the excess of the lease liability above the right of use asset. The gain has been recorded in other income on the consolidated statement of loss and comprehensive loss.
Total depreciation expense for the year ended January 31, 2021 was $1,280,652 (year ended January 31, 2020 - $1,576,459). Of the total expense, $826,231 was allocated to inventory (2020 - $977,487).
p. 23 |
C21 INVESTMENTS INC. |
12. LEASE LIABILITIES AND RIGHT-OF-USE ASSETS (continued)
During the year ended January 31, 2021, the Company amended lease agreements on three leases to extend their term (note 25). This resulted in right of use asset additions of $7,263,368.
At January 31, 2021, the Company reclassified right-of-use assets with a cost of $832,736 and accumulated depreciation of $299,687 to held for sale following an assessment that the Swell and Pure Green properties were redundant to the Company's operation. In addition, the Company reclassified the associated lease liabilities of $629,180 to be classified as held for sale. Management estimated the fair value less costs to sell exceeds the carrying value and therefore the assets are measured at their carrying values.
13. LONG TERM DEBT
Mortgage on building | Equipment and Vehicle loans | Total | |||||||
Balance, January 31, 2019 | $ | - | $ | - | $ | - | |||
Assumed in PPE acquisitions | 513,294 | 186,463 | 699,757 | ||||||
Payments | (16,910 | ) | (62,511 | ) | (79,421 | ) | |||
Balance, January 31, 2020 | 496,384 | 123,952 | 620,336 | ||||||
Interest | 21,933 | 20,975 | 42,908 | ||||||
Payments | (45,551 | ) | (74,363 | ) | (119,914 | ) | |||
Balance, January 31, 2021 | $ | 472,766 | $ | 70,564 | $ | 543,330 | |||
Current portion | $ | 24,703 | $ | 56,341 | $ | 81,044 | |||
Long-term portion | $ | 448,063 | $ | 14,223 | $ | 462,286 |
The mortgage on building is a 20-year mortgage that began on February 1, 2015 and matures on January 1, 2035. The mortgage bears interest at a fixed rate of 4.5% with payments made monthly. The equipment and vehicle loans consist of three loans with maturity dates ranging from June 1, 2021 through May 15, 2023 and interest rates ranging from 5.59% to 19.9% with payments made monthly.
14. | CONVERTIBLE DEBENTURES AND PROMISSORY NOTES |
Convertible debentures and convertible promissory notes are compound financial instruments that are accounted for based on their components of financial liability and equity. The financial liability component represents the Company's future obligation to pay coupon interest and principal. The liability component is initially measured at its fair value (net present value) and subsequently measured at its amortized cost. After the net present value of the financial liability is determined, any residual amount is reported as an equity instrument at the convertible debentures' issuance date. Transaction costs related to the issuance of convertible notes are apportioned to their respective financial liability and equity components in proportion to the allocation of proceeds as a reduction to the carrying amount of each component. When valuing the financial liability component of the convertible notes, the Company used specific interest rates assuming no conversion features existed. The resulting liability component is accreted to its face value over the convertible note’s term until its maturity date. |
p. 24 |
C21 INVESTMENTS INC. |
14. CONVERTIBLE DEBENTURES AND PROMISSORY NOTES (continued)
The following is the continuity of the Company's convertible debentures issued in Canadian dollars. All below disclosure is denominated in U.S. dollars:
Convertible debentures | |||||||||
December 31, 2018 | January 30, 2019 | Total | |||||||
issuance | Issuance | ||||||||
Balance, January 31, 2019 | $ | 3,181,800 | $ | 6,977,853 | $ | 10,159,653 | |||
New issuances | 265,146 | 388,486 | 653,632 | ||||||
Conversions | (1,546,384 | ) | (2,993,607 | ) | (4,539,991 | ) | |||
Interest | 322,348 | 559,398 | 881,746 | ||||||
Accretion expense | 186,664 | 170,385 | 357,049 | ||||||
Interest paid - cash | (268,503 | ) | (452,052 | ) | (720,555 | ) | |||
Foreign exchange loss | 8,318 | 67,403 | 75,721 | ||||||
Balance, January 31, 2020 | 2,149,389 | 4,717,866 | 6,867,255 | ||||||
New issuances | 1,680,922 | 3,786,930 | 5,467,852 | ||||||
Conversions | (4,140,182 | ) | (8,799,219 | ) | (12,939,401 | ) | |||
Interest | 191,223 | 410,755 | 601,978 | ||||||
Accretion expense | 142,632 | 129,968 | 272,600 | ||||||
Interest paid - cash | (255,658 | ) | (544,038 | ) | (799,696 | ) | |||
Foreign exchange loss | 231,674 | 297,738 | 529,412 | ||||||
Balance, January 31, 2021 | $ | - | $ | - | $ | - |
The following transactions occurred during the year ended January 31, 2021:
(a) | 262 convertible debentures were issued for gross proceeds of $195,734 (C$262,000). A total of $2,508,068 (C$3,209,000) in principal of the December 31, 2018 convertible debentures were converted into 4,011,250 common shares of the Company. The remaining balance outstanding is $nil. |
(b) | 497 convertible debentures were issued for gross proceeds of $371,297 (C$497,000). A total of $5,204,120 (C$6,673,000) in principal of the January 30, 2019 convertible debentures were converted into 8,341,250 common shares of the Company. The remaining balance outstanding is $nil. |
(c) | 1,988 warrants were exercised in connection with the convertible debentures issued on December 31, 2018, resulting in gross proceeds of $1,485,188 (C$1,988,000). 2,087 warrant debentures with a carrying amount of $1,632,114 (C$2,087,000) were converted into common shares of the Company. At January 31, 2021, all warrants had been exercised or expired. |
(d) | 4,572 warrants were exercised in connection with the convertible debentures issued on January 30, 2019, resulting in gross proceeds of $3,415,633 (C$4,572,000). 4,587 warrant debentures issued under the January 30, 2019 issuance with a carrying amount of $3,595,099 (C$4,587,000) were converted into common shares of the Company. At January 31, 2021, all warrants had been exercised or expired. |
The following transactions occurred during the year ended January 31, 2020: | |
(a) | 359 warrants were exercised in connection with the convertible debentures issued on December 31, 2018, resulting in gross proceeds of $265,146 (C$359,000) and of those, 250 warrant debentures were converted into common shares of the Company. At January 31, 2020, 2,315 warrants were available to be exercised. |
(b) | 526 warrants were exercised in connection with the convertible debentures issued on January 30, 2019, resulting in gross proceeds of $388,486 (C$526,000) and of those, 487 warrants debentures were converted into common shares of the Company. At January 31, 2020, 4,664 warrants were available to be exercised. |
p. 25 |
C21 INVESTMENTS INC. |
14. | CONVERTIBLE DEBENTURES AND PROMISSORY NOTES (continued) |
The following is a continuity of the Company's convertible promissory notes denominated in U.S. dollars:
Convertible promissory notes | ||||||||||||||
June 13, 2018 | January 23, 2019 | May 24, 2019 | Total | |||||||||||
issuance | issuance | issuance | ||||||||||||
Balance, January 31, 2019 | $ | 1,670,830 | $ | 175,000 | $ | - | $ | 1,845,830 | ||||||
Issued | - | - | 1,000,000 | 1,000,000 | ||||||||||
Conversion | (660,647 | ) | - | - | (660,647 | ) | ||||||||
Interest | 48,600 | - | 69,041 | 117,641 | ||||||||||
Accretion expense | 77,282 | - | - | 77,282 | ||||||||||
Balance, January 31, 2020 | 1,136,065 | 175,000 | 1,069,041 | 2,380,106 | ||||||||||
Payment | - | (175,000 | ) | - | (175,000 | ) | ||||||||
Interest | 48,732 | - | 100,275 | 149,007 | ||||||||||
Accretion expense | 83,352 | - | - | 83,352 | ||||||||||
Balance, January 31, 2021 | $ | 1,268,149 | $ | - | $ | 1,169,316 | $ | 2,437,465 |
On February 7, 2019, one vendor converted their portion of the convertible note of $660,647 to 977,479 common shares. On issuance, the Company determined the conversion feature was a derivative liability. The fair value of the conversion feature as at January 31, 2021 was $308,364 (January 31, 2020 - $nil).
On January 23, 2019, the Company issued a convertible promissory note to the vendor that sold Megawood Enterprises, Inc. to the Company in the principal amount of $175,000. The convertible note is convertible into 35,000 common shares of the Company at a conversion price of C$5.00 per conversion share and may be converted at any time between October 24, 2019 and January 24, 2020. On issuance, the Company determined the conversion feature was a derivative liability. The fair value of the conversion feature as at January 31, 2021 was $NaN (January 31, 2020 - $NaN). On February 21, 2020, the Company repaid the convertible promissory note with a cash payment of $130,000 and the issuance of 95,849 common shares (Note 18).
On May 24, 2019, the Company issued a two-year unsecured convertible promissory note to a debtor of Swell Companies in the principal amount of $1,000,000. The convertible note accrues interest at 10% per annum compounded annually and payable at maturity. The holder of the note can accelerate payment to the first anniversary date of the note and therefore this is classified as a current liability. The note is convertible into common shares of the Company at a conversion price of $1.56 per share and may be converted at the maturity date.
p. 26 |
C21 INVESTMENTS INC. |
14. CONVERTIBLE DEBENTURES AND PROMISSORY NOTES (continued)
The following is a continuity of the Company's promissory notes denominated in U.S. dollars:
Promissory notes payable | ||||||||||
January 1, 2019 | February 4, 2019 | Total | ||||||||
issuance | Issuance | |||||||||
Balance, January 31, 2019 | $ | 30,000,000 | $ | - | $ | 30,000,000 | ||||
Issued | - | 290,000 | 290,000 | |||||||
Payments | (8,800,000 | ) | (290,000 | ) | (9,090,000 | ) | ||||
Balance, January 31, 2020 | 21,200,000 | - | 21,200,000 | |||||||
Payments | (7,013,333 | ) |
| (7,013,333 | ) | |||||
Balance, January 31, 2021 | $ | 14,186,667 | $ | - | $ | 14,186,667 | ||||
Current portion | $ | 6,080,000 | $ | - | $ | 6,080,000 | ||||
Long-term portion | $ | 8,106,667 | $ | - | $ | 8,106,667 |
On January 1, 2019, the Company issued a promissory note to Mr. Newman, who sold Silver State to the Company in the principal amount of $30,000,000. The note is payable in the following principal instalments: $3,000,000 on April 1, 2019, $6,000,000 on each of July 1, 2019, October 1, 2019, January 1, 2020, and April 1, 2020, and $3,000,000 on July 1, 2020. The note accrues interest at a rate of 10% per annum. The note is secured by all of the outstanding membership interests, and a security interest in all of the assets, of Silver State. | |
On July 1, 2019, the terms of the promissory note payable for the acquisition of Silver State were amended to call for immediate payment of $2,000,000 plus accrued interest on July 1, 2019 followed by payments of $800,000 plus accrued interest on the first of each of August, September, October, November, and December 2019. | |
Effective November 21, 2019 and June 25, 2020, Mr. Newman and the Company agreed to further amend the terms of the secured promissory note due to Mr. Newman. The December 1, 2019 principal payment of $800,000 was cancelled and the monthly principal payments thereafter were reduced to $600,000 per month. Further, the annual interest rate on the note was reduced from 10% to 9.5%. The remaining balance on the note is due and payable on January 1, 2021. This modification resulted in a gain of $nil. | |
On November 19, 2020, the Company announced agreement with Mr. Newman that the remaining $15,200,000 principal outstanding on his senior secured Note, due to mature on January 1, 2021, has been amended with lower monthly payments amortized over a 30-month period. Commencing December 1, 2020, the monthly payments will be $506,667 plus interest. The interest rate at 9.5% is unchanged. | |
For the year ended January 31, 2021, interest expense was $1,643,363 (year ended January 31, 2020 - $2,511,770). Interest paid during the year ended January 31, 2021 was $1,715,750 (year ended January 31, 2020 - $2,391,562). |
15. CONSIDERATION PAYABLE
The following table reflects the continuity of consideration payable:
Balance, January 31, 2019 | $ | 1,375,268 | |
Swell Companies acquisition - May 25, 2019 (Note 4) | 846,256 | ||
Consideration paid - cash | (1,375,268 | ) | |
Balance, January 31, 2020 | 846,256 | ||
Consideration paid - cash | (846,256 | ) | |
Balance, January 31, 2021 | $ | - |
p. 27 |
C21 INVESTMENTS INC. |
16. RECLAMATION OBLIGATION
The Company has recorded a decommissioning provision in connection with estimated reclamation costs on a previously written off property. The obligation is recognized based on the estimated future reclamation costs. The Company had two wells in Alberta which were determined to be uneconomic and costs have been incurred to plug these wells. Reclamation and remediation work is still required to bring the site back to its natural state.
17. DERIVATIVE LIABILITY
The following reflects the continuity of derivative liability:
Balance, January 31, 2019 | $ | 23,097 | |
On acquisition February 4, 2019 | 3,748,377 | ||
On acquisition May 24, 2019 | 4,707,370 | ||
Fair value adjustment on derivative liabilities | (4,779,692 | ) | |
Balance, January 31, 2020 | 3,699,152 | ||
Fair value adjustment on derivative liabilities | 5,731,839 | ||
Balance, January 31, 2021 | $ | 9,430,991 |
Upon the February 4, 2019 acquisition of Phantom Farms the vendors can earn up to 4,500,000 'earn out' shares over a period of seven years. The conditions are based on the Company's common shares exceeding certain share prices during the period. The liability is derived using a Monte Carlo simulation.
Upon the May 24, 2019 acquisition of Swell Companies the vendors can earn up to 6,000,000 'earn out' shares over a period of seven years. The conditions are based on C21 common shares exceeding certain share prices during the period. The liability is derived using a Monte Carlo simulation.
Inputs into the calculation of fair value adjustment are as follows:
January 31, | January 31, | May 24, | February 4, | |||||||||
2021 | 2020 | 2019 | 2019 | |||||||||
Discount rate | 0.30% | 1.36% | 2.50% | 2.19% | ||||||||
Expected life in years | 5.34 | 6.14 | 7.00 | 7.00 | ||||||||
Expected stock volatility | 80% | 100% | 100% | 100% | ||||||||
Expected volatility of foreign exchange | 5.29% | 5.29% | 5.29% | 5.84% |
p. 28 |
C21 INVESTMENTS INC. |
18. SHARE CAPITAL AND RESERVES
Share capital consists of one class of fully paid common shares, with no par value. The Company is authorized to issue an unlimited number of common shares. All shares are equally eligible to receive dividends and repayment of capital and represent one vote at the Company's shareholders' meetings.
The following table reflects the continuity of share capital for the years ended January 31, 2021 and 2020:
Number of Shares | Amount | |||||
Balance, January 31, 2019 | 58,505,255 | $ | 52,923,983 | |||
Shares issued - acquisition of Phantom Farms (i) | 2,670,000 | 2,507,138 | ||||
Shares issued - conversion of promissory note (ii) | 977,479 | 660,647 | ||||
Shares issued - warrant exercises (iii) | 915,545 | 1,018,748 | ||||
Shares issued - option exercises (iv) | 80,000 | 77,980 | ||||
Shares issued - acquisition of Swell (v) | 8,281,905 | 4,927,178 | ||||
Shares issued - acquisition of EFF building (vi) | 3,983,886 | 4,136,646 | ||||
Shares issued - partial settlement of EFF share payment note (vii) | 368,688 | 368,688 | ||||
Shares issued - private placement (viii) | 5,589,493 | 4,895,379 | ||||
Shares issued - conversion of debentures (ix) | 8,016,388 | 4,539,991 | ||||
Share issue costs | - | (28,110 | ) | |||
Balance, January 31, 2020 | 89,388,639 | 76,028,268 | ||||
Shares issued - acquisition of Phantom Farms (x) | 7,132,042 | 2,582,903 | ||||
Shares issued - Megawood (xi) | 95,849 | 38,415 | ||||
Shares issued - option exercises (xii) | 200,000 | 197,708 | ||||
Shares issued - conversion of debentures (xiii) | 19,764,694 | 12,939,401 | ||||
Shares issued - Swell commitment (xiv) | 456,862 | 429,582 | ||||
Shares issued - EFF commitment (xv) | 19,774 | 21,371 | ||||
Balance, January 31, 2021 | 117,057,860 | $ | 92,237,648 |
(i) On February 4, 2019, the Company issued 2,670,000 shares as consideration for the purchase of Phantom Farms (Note 3).
(ii) On February 7, 2019, the Company issued 977,479 shares to a vendor of EFF upon conversion of a portion of the convertible promissory note payable.
(iii) During the year ended January 31, 2020, the Company issued 915,545 shares upon the exercise of warrants.
(iv) During the year ended January 31, 2020, the Company issued 80,000 shares upon the exercise of stock options.
(v) On May 24 and December 27, 2019, the Company issued 1,266,667 shares and 7,015,238 shares, respectively, as consideration for the purchase of Swell Companies (Note 4).
(vi) On May 10, 2019, the Company issued 3,983,886 shares as consideration for the purchase of the building and land that EFF was previously leasing.
(vii) On June 12, 2019, the Company issued 368,688 shares to a vendor of EFF for a partial payment of the Company's commitment to issue shares.
p. 29 |
C21 INVESTMENTS INC. |
18. SHARE CAPITAL AND RESERVES (continued)
(viii) On May 28, 2019, the Company completed a non-brokered private placement financing of 5,589,493 shares at C$1.38, for total gross proceeds of $5,847,135 (C$7,713,500). Each unit is comprised of one common share of the Company and one half of one common share purchase warrant. Each warrant is exercisable for one additional common share of the Company at an exercise price of C$1.83 per warrant for a period of one year.
(ix) During the year ended January 31, 2020 the Company issued 8,016,388 shares upon the conversion of debentures.
(x) On February 19, 2020, the Company amended the terms of the purchase of Phantom Farms, including SDP. The amended terms of the purchase agreement regarding the real estate assets of SDP group resulted in the Company electing to purchase the real estate of the Phantom Farms outdoor grow (two parcels), and SDP receiving 7,132,042 shares of C21 with a fair value of $2,582,903.
(xi) On February 21, 2020, the Company repaid the convertible promissory note with a cash payment of $130,000 and the issuance of 95,849 common shares with a fair value of $38,415 (Note 14).
(xii) On October 15, 2020, the Company issued 200,000 shares upon the exercise of stock options.
(xiii) During the year ended January 31, 2021 the Company issued 19,764,694 shares upon the conversion of debentures.
(xiv) On November 23, 2020, the Company issued 456,862 common shares to Swell as part of the purchase agreement dated May 23, 2019 as final settlement of the Company's commitment to issue shares.
(xv) On December 30, 2020, the Company issued 19,774 common shares to the vendors of EFF for a partial settlement of the Company's commitment to issue shares.
Commitment to issue shares
The Company issued a promissory note payable to deliver 2,142,000 shares to the vendors of EFF in the amount of $1,905,635, without interest, any time after October 15, 2018. As at January 31, 2021 shares issued pursuant to this commitment total 1,349,046 shares.
The Company committed to issue 7,015,238 shares valued at 3,796,815 to the vendors of Swell companies at December 27, 2019. These shares were issued during the year ended January 31, 2020.
The Company committed to issue 456,852 shares valued at $424,688 to the vendors of Swell Companies on November 24, 2020. These shares were issued on November 23, 2020.
p. 30 |
C21 INVESTMENTS INC. |
18. SHARE CAPITAL AND RESERVES (continued)
Warrants
The following summarizes the Company's warrant activity:
Warrants outstanding | |||||||||
Warrants outstanding | Weighted average exercise price - C$ - | Weighted average remaining life (years) | |||||||
Balance January 31, 2019 | 5,154,045 | 2.05 | 0.86 | ||||||
Issued - Phantom Farms (Note 3) | 1,700,000 | 1.50 | |||||||
Issued - Swell Companies (Note 4) | 1,200,000 | 1.50 | |||||||
Issued - Private Placement (xvii) | 2,794,746 | 1.83 | |||||||
Exercised | (915,045 | ) | 1.06 | ||||||
Expired | (4,239,000 | ) | 2.27 | ||||||
Balance, January 31, 2020 | 5,694,746 | 1.66 | 0.74 | ||||||
Issued | 6,200,000 | 1.00 | |||||||
Balance, January 31, 2021 | 11,894,746 | 1.32 | 1.96 |
As at January 31, 2021, the following warrants were outstanding and exercisable:
Expiry Date | Exercise Price - C$ - | Number of Warrants | ||||
February 4, 2021 | 1.50 | 1,700,000 | ||||
May 28, 2021 | 1.83 | 2,794,746 | ||||
December 31, 2023 | 1.00 | 1,922,000 | ||||
January 30, 2024 | 1.00 | 4,278,000 | ||||
May 24, 2024 | 1.50 | 1,200,000 | ||||
11,894,746 |
On May 28, 2020, the Company extended the expiry date of the C$1.83 warrants due to expire on May 29, 2020 to expire on May 29, 2021, all other terms remain the same.
On November 19, 2020, the Company announced that it had secured an equity commitment from three investment managers and Mr. Newman (the "Investors"), to guarantee the repayment of the 10% Convertible Debentures which remain outstanding at maturity, which is December 31, 2020 and January 30, 2021. Funds advanced by the Investors will be in exchange for common shares to be issued at a price equal to the existing debenture conversion terms of C$0.80 per common share. At November 19, 2020, $6,225,018 (C$8,212,000) was outstanding under these debentures which are convertible at maturity into common shares of the Company at a price of C$0.80 per common share.
In consideration of the equity commitment, the Company issued an aggregate of 1,941,084 warrants with respect to the debentures maturing December 31, 2020, and 4,258,916 warrants with respect to the debentures maturing January 30, 2021. In total 6,200,000 warrants were issued. Each warrant will be exercisable for one common share for three years at an exercise price of C$1.00. These warrants are subject to the statutory four month and one day hold period. Value at grant date determined with the following assumptions: life of 3 years, volatility of 80%, risk free rate of return 0.18% to 0.25%, dividend yield of 0%, and forfeiture rate of 0%. The Company recorded interest expense of $2,116,192 (C$2,764,382) with respect to the warrants issued (2020 - $nil).
p. 31 |
C21 INVESTMENTS INC. |
18. SHARE CAPITAL AND RESERVES (continued)
Stock options
The Company is authorized to grant options to executive officers and directors, employees and consultants, enabling them to acquire up to 10% of the issued and outstanding common shares of the Company. The exercise price of each option equals the market price of the Company's shares as calculated on the date of grant. The options can be granted for a maximum term of 10 years. Vesting is determined by the Board of Directors.
The Company adopted a Restricted Stock Unit plan (the "Plan") on July 17, 2018 but has not issued any units under the Plan. The Plan allows for up to 750,000 total units to be issued, adjustable upon approval by the compensation committee, but not to exceed 10% of common shares outstanding.
On January 28, 2021, the Company issued 150,000 stock options. Each stock option entitles the holder to purchase one common share of the Company at $1.50 per common share. The options vest over a two-year period and expire on January 28, 2024. Value at grant date determined with the following assumptions: life of 3 years, volatility of 80%, risk free rate of 0.19%, dividend yield of 0% and forfeiture rate of 0%.
On August 17, 2020, the Company issued 3,905,000 stock options. Each stock option entitles the holder to purchase one common share of the Company at $0.70 per common share. The options vest over a two-year period and expire on August 17, 2023. Value at grant date determined with the following assumptions: life of 3 years, volatility of 80%, risk free rate of return 0.29%, dividend yield of 0%, and forfeiture rate of 0%.
On January 24, 2020, the Company granted incentive stock options to purchase an aggregate of 100,000 common shares at an exercise prices of C$0.80 vesting over a 1-year period, expiring at close of business January 24, 2023. Value at grant date determined with the following assumptions: life of 3 years, volatility of 100%, risk free rate of return 1.46%, dividend yield of 0%, and forfeiture rate of 0%.
During the year ended January 31, 2021, 200,000 (2020 - 80,000) options were exercised for proceeds of $98,950 (C$130,000) (2020 - $39,028).
Details of the Company's stock option activity are as follows:
Options outstanding and exercisable | |||||||||
Options outstanding and exercisable | Weighted average exercise price - C$ - | Weighted average remaining life (years) | |||||||
Balance January 31, 2019 | 2,520,000 | 2.41 | 2.30 | ||||||
Granted | 1,830,000 | 1.14 | |||||||
Exercised | (80,000 | ) | 0.65 | ||||||
Expired/Cancelled | (1,015,000 | ) | 2.28 | ||||||
Balance, January 31, 2020 | 3,255,000 | 1.78 | 2.18 | ||||||
Granted | 4,055,000 | 0.73 | |||||||
Exercised | (200,000 | ) | 0.65 | ||||||
Expired/Cancelled | (145,000 | ) | 0.71 | ||||||
Balance January 31, 2021 | 6,965,000 | 1.22 | 2.05 |
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18. SHARE CAPITAL AND RESERVES (continued)
As at January 31, 2021, the following stock options were outstanding and exercisable:
Expiry Date | Exercise Price - C$ - | January 31, 2021 Outstanding | January 31, 2021 Exercisable | ||||||
June 25, 2021 | 2.80 | 1,350,000 | 1,350,000 | ||||||
February 5, 2022 | 1.11 | 460,000 | 460,000 | ||||||
October 9, 2022 | 1.38 | 500,000 | 500,000 | ||||||
January 24, 2023 | 0.80 | 100,000 | 100,000 | ||||||
August 17, 2023 | 0.70 | 3,905,000 | 1,301,667 | ||||||
January 28, 2024 | 1.50 | 150,000 | 50,000 | ||||||
October 9, 2024 | 1.00 | 500,000 | 500,000 | ||||||
6,965,000 | 4,261,667 |
During the year ended January 31, 2021, the Company recorded a share-based compensation expense of $494,435 (2020 - $492,631). The fair value of stock options was calculated using the Black-Scholes Option Pricing Model using the following weighted average assumptions:
2021 | 2020 | |||||
Risk-free rate | 0.19% | 0.29% | ||||
Expected life of options | 3 years | 3 years | ||||
Annualized volatility | 80% | 80% | ||||
Dividend rate | 0% | 0% |
19. GENERAL AND ADMINISTRATIVE EXPENSE
General and administration expenses for the year ended January 31, 2021 and 2020 were comprised of the following:
Year ended January 31, | ||||||
2021 | 2020 | |||||
-$- | -$- | |||||
Salaries and wages | 3,046,595 | 5,526,408 | ||||
Professional fees and consulting | 642,389 | 922,861 | ||||
Accounting and legal | 501,855 | 596,984 | ||||
Travel and entertainment | 102,046 | 430,301 | ||||
Foreign exchange loss (gain) | 2,156 | (34,884 | ) | |||
License fees, taxes and insurance | 1,849,571 | 992,437 | ||||
Office facilities and administrative | 417,131 | 499,504 | ||||
Shareholder communications | 15,834 | 7,237 | ||||
Other | 394,165 | 359,629 | ||||
6,971,742 | 9,300,477 |
20. SEGMENTED INFORMATION
The Company defines its major geographic operating segments as Oregon and Nevada. Due to the jurisdictional cannabis compliance issues ever-present in the industry, each state operation is by nature operationally segmented.
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20. SEGMENTED INFORMATION (continued)
Key decision makers primarily review revenue, cost of sales expense, and gross margin as the primary indicators of segment performance. As the Company continues to expand via acquisition, the segmented information will expand based on management's agreed upon allocation of costs beyond gross margin.
Segmented operational activity and balances are as follows:
January 31, 2021 | Oregon | Nevada | Corporate | Consolidated | ||||||||
Total revenue | $ | 2,661,223 | $ | 33,466,063 | $ | - | $ | 36,127,286 | ||||
Gross profit | 717,650 | 17,934,505 | - | 18,652,155 | ||||||||
Operating expenses: | ||||||||||||
General and administration | (668,041 | ) | (3,506,509 | ) | (2,797,192 | ) | (6,971,742 | ) | ||||
Sales, marketing, and promotion | (27,932 | ) | (136,697 | ) | (1,850 | ) | (166,479 | ) | ||||
Depreciation and amortization | (393,804 | ) | (1,667,339 | ) | (51,121 | ) | (2,112,264 | ) | ||||
Share-based compensation | - | - | (494,435 | ) | (494,435 | ) | ||||||
Impairment of inventory | (1,384,922 | ) | - | - | (1,384,922 | ) | ||||||
Interest, accretion, and other | (1,123,018 | ) | (100,028 | ) | (10,039,238 | ) | (11,262,284 | ) | ||||
Net profit (loss) before taxes | $ | (2,880,067 | ) | $ | 12,523,932 | $ | (13,383,836 | ) | $ | (3,739,971 | ) | |
Assets | $ | 9,206,964 | $ | 26,178,106 | $ | 33,424,439 | $ | 68,809,509 | ||||
Liabilities | $ | 2,635,899 | $ | 9,696,697 | $ | 31,138,412 | $ | 43,471,008 |
January 31, 2020 | Oregon | Nevada | Corporate | Consolidated | ||||||||
Total revenue | $ | 5,503,872 | $ | 32,201,223 | $ | - | $ | 37,705,095 | ||||
Gross profit (loss) | (1,006,077 | ) | 14,144,123 | - | 13,138,046 | |||||||
Operating expenses | (2,007,400 | ) | (6,455,101 | ) | (5,856,652 | ) | (14,319,153 | ) | ||||
Impairment of goodwill, assets | (26,514,747 | ) | - | - | (26,514,747 | ) | ||||||
Interest, accretion, and other | (1,540,265 | ) | 7,979 | 387,173 | (1,145,113 | ) | ||||||
Net profit (loss) before taxes | $ | (31,068,489 | ) | $ | 7,697,001 | $ | (5,469,479 | ) | $ | (28,840,967 | ) | |
Assets | $ | 9,646,005 | $ | 21,149,800 | $ | 30,654,280 | $ | 61,450,085 | ||||
Liabilities | $ | 3,079,174 | $ | 4,164,557 | $ | 40,626,800 | $ | 47,870,531 |
21. COMMITMENTS
The Company and its subsidiaries are committed under lease agreements with third parties and related parties, for land, office space, and equipment in Nevada and Oregon. At January 31, 2021, the Company has the following future minimum payments:
Third Parties | Related Parties | Total | |||||||
2022 | $ | 277,214 | $ | 1,431,192 | $ | 1,708,406 | |||
2023 | $ | 232,961 | $ | 1,467,282 | $ | 1,700,243 | |||
2024 | $ | 224,513 | $ | 1,504,455 | $ | 1,728,968 | |||
2025 | $ | 80,414 | $ | 1,314,551 | $ | 1,394,965 | |||
2026 | $ | 45,743 | $ | 1,353,987 | $ | 1,399,730 | |||
Thereafter | $ | 415,496 | $ | 10,405,121 | $ | 10,820,617 | |||
$ | 1,276,341 | $ | 17,476,588 | $ | 18,752,929 |
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22. SUPPLEMENTAL DISCLOSURE WITH RESPECT TO CASH FLOWS
Supplemental and non-cash transactions during the year ended January 31, 2021
• | There were interest payments of $2,515,446 and income taxes of $2,832,676 paid. | |
• | The Company issued 7,132,042 common shares valued at $2,582,903 pursuant to the amended terms of the purchase of Phantom Farms, including SDP. | |
• | The Company issued 95,849 common shares value at $38,415 as partial repayment of the $175,000 convertible promissory note related to the Megawood acquisition. | |
• | The Company issued 456,862 common shares valued at $429,582 to Swell as part of the purchase agreement dated May 23, 2019 as settlement of a commitment to issue shares. | |
• | The Company issued 19,774 common shares valued at $21,371 to the vendors of EFF for a partial settlement of the commitment to issue shares. |
Supplemental and non-cash transactions during the year ended January 31, 2020
• | There were interest payments of $3,291,295 and no income taxes were paid. | |
• | The Company issued 2,670,000 common shares valued at $2,507,138 for the acquisition of Phantom Farms. | |
• | The Company issued 1,266,667 common shares valued at $1,130,363 for the acquisition of Swell Companies. | |
• | The Company issued 7,015,238 common shares valued at $3,796,815 for the acquisition of Swell Companies. | |
• | The Company issued 3,983,886 common shares valued at $4,136,646 for the purchase of a building. | |
• | The Company issued 368,688 common shares valued at $368,688 to settle a portion of a share payment note. | |
• | The Company issued 8,016,388 common shares valued at $4,539,991 upon the conversion of debentures. | |
• | The Company issued 977,479 common shares valued at $660,647 upon the conversion of a portion of a convertible promissory note. | |
• | Transfer from reserves to share capital of $289,159 and $38,952 on exercise of warrants and options respectively |
23. TAXATION
The Company reconciles the expected tax expense at the U.S. statutory tax rate of 21% to the amount recognized in the statement of loss and comprehensive loss.
Since the Company operates in the United States cannabis industry, the Company is subject to U.S. Internal Revenue Code section 280E for U.S. federal income tax purposes; and therefore, is subject to the disallowance of ordinary and necessary business deductions for income tax purposes pursuant to section 280E.
Consequently, the Company is only allowed to deduct 1) direct production costs and indirect production costs incident to and necessary for production and 2) costs incurred to purchase goods that are resold, including transportation or other necessary charges incurred in acquiring possession of the goods. This results in permanent differences between ordinary and necessary business expenses deemed non-allowable under IRC section 280E. However, the State of Oregon does not conform to IRC section 280E and thus the Company deducts all operating expenses on its Oregon corporate tax return.
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Additionally, the State of Nevada does not assess income tax and therefore no income tax provision for Nevada has been calculated.
The reconciliation of income taxes at statutory rates with the reported taxes is as follows for the years ended January 31, 2021 and 2020:
Year ended January 31, | ||||||
2021 | 2020 | |||||
-$- | -$- | |||||
Loss for the year | (3,739,971 | ) | (28,840,967 | ) | ||
Statutory tax rates | 27% | 27% | ||||
Expected income tax recovery | (1,009,792 | ) | (7,787,061 | ) | ||
Change in statutory, foreign tax, foreign exchange rates and other | (1,141,010 | ) | 3,135,069 | |||
Permanent differences | 3,561,240 | 8,006,873 | ||||
Share issue costs | (7,733 | ) | (7,590 | ) | ||
Change in unrecognized deductible temporary differences | 963,341 | 367,375 | ||||
Total income tax expense | 2,366,046 | 3,714,666 |
Current income tax expense for the year ended January 31, 2021 represents current and deferred taxation arising from business operations in the United States.
The significant components of the Company's deferred tax assets that have not been included on the consolidated statement of financial position are as follows at January 31, 2021 and 2020:
Year ended January 31, | ||||||
2021 | 2020 | |||||
-$- | -$- | |||||
Deferred tax assets (liabilities) | ||||||
Exploration and evaluation assets | 1,258,000 | 254,000 | ||||
Property and equipment | (236,000 | ) | 1,012,000 | |||
Share issue costs | 499,000 | 611,000 | ||||
Biological assets | (885,000 | ) | 186,000 | |||
Intangible assets | (1,784,000 | ) | 619,000 | |||
Goodwill | 3,984,000 | - | ||||
Marketable securities | - | 2,000 | ||||
Asset retirement obligation | 15,000 | 15,000 | ||||
Right-of-use assets | (2,051,000 | ) | - | |||
Lease liabilities | 2,127,000 | - | ||||
Allowable capital losses | 138,000 | 36,000 | ||||
Non-capital losses available for future period | 4,551,000 | 3,918,000 | ||||
7,616,000 | 6,653,000 | |||||
Unrecognized deferred tax assets | (7,616,000) | (6,653,000) | ||||
Deferred tax assets | - | - |
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C21 INVESTMENTS INC. |
23. TAXATION (continued)
The significant components of the Company's temporary differences, unused tax credits and unused tax losses that have not been included in the consolidated statement of financial position are as follows at January 31, 2021 and 2020:
2021 | Expiry Date Range | 2020 | |||||||
-$- | -$- | ||||||||
Temporary Differences | |||||||||
Exploration and evaluation assets | 4,661,000 | No expiry date | 942,000 | ||||||
Property and equipment | (1,125,000 | ) | No expiry date | 4,819,000 | |||||
Share issue costs | 1,847,000 | 2038 to 2041 | 2,262,000 | ||||||
Biological assets | (4,213,000 | ) | No expiry date | 886,000 | |||||
Intangible assets | (8,494,000 | ) | No expiry date | 2,949,000 | |||||
Goodwill | 18,970,000 | No expiry date | |||||||
Marketable securities | - | No expiry date | 15,000 | ||||||
Asset retirement obligation | 55,000 | No expiry date | 54,000 | ||||||
Right-of-use assets | (9,766,000 | ) | No expiry date | ||||||
Lease liabilities | 10,129,000 | No expiry date | |||||||
Allowable capital losses | 513,000 | No expiry date | 135,000 | ||||||
Non-capital losses available for future periods | 16,856,000 | Varies | 14,511,000 | ||||||
Canada | 16,856,000 | 2026 to 2041 | 14,511,000 | ||||||
USA | - | No expiry date | - |
24. FINANCIAL RISK MANAGEMENT
The Board of Directors approves and monitors the risk management processes, inclusive of documented investment policies, counterparty limits, and controlling and reporting structures. The type of risk exposure and the way in which such exposure is managed is provided as follows:
Credit risk
Liquidity risk
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24. FINANCIAL RISK MANAGEMENT (continued)
Liquidity risk is the risk that the Company will not be able to meet its obligations as they become due. The Company's ability to continue as a going concern is dependent on management's ability to raise required funding through future equity or debt issuances. The Company manages its liquidity risk by forecasting cash flows from operations and anticipating any investing and financing activities. Management and the Board of Directors are actively involved in the review, planning and approval of significant expenditures and commitments.
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C21 INVESTMENTS INC. |
24. FINANCIAL RISK MANAGEMENT (continued)
The following table summarizes the Company's financial liabilities at January 31, 2021:
Maturity analysis of financial liabilities | Total | Within 1 year | 1 - 5 years | Greater than 5 years | ||||||||
Accounts payable and accrued liabilities | $ | 2,680,996 | $ | 2,680,996 | $ | - | $ | - | ||||
Promissory note payable | 14,186,667 | 6,080,000 | 8,106,667 | - | ||||||||
Convertible promissory note | 2,437,465 | 2,437,465 | - | - | ||||||||
Long-term debt | 543,330 | 81,044 | 123,210 | 339,076 | ||||||||
Lease liabilities | 10,129,072 | 437,857 | 2,863,867 | 6,827,348 | ||||||||
Total | $ | 29,977,530 | $ | 11,717,362 | $ | 11,093,744 | $ | 7,166,424 |
As at January 31, 2021, the Company has undiscounted lease payments of $17,519,767 related to right of use assets.
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 subject to any interest rate volatility as its long-term debt instruments and convertible notes are carried at a fixed interest rate throughout their term.
Foreign currency risk
The Company has administration in Canada and operations in the U.S. and is exposed to foreign exchange risk due to fluctuations in the U.S. dollar and Canadian dollar. Foreign exchange risk arises from financial assets and liabilities denominated in currency other than the U.S. dollar. A change of 1% in the CAD/USD exchange rate would impact loss and comprehensive loss by $217,000.
Capital Management
The Company's objectives when managing its capital are to ensure there are sufficient capital resources to continue operating as a going concern and maintain the Company's ability to ensure sufficient levels of funding to support its ongoing operations and development. The purpose of these objectives is to provide continued returns and benefits to the Company's shareholders. The Company's capital includes debt and shareholders' equity.
The Board of Directors does not establish quantitative return on capital criteria for management, but rather relies on the expertise of the Company's management to sustain future development of the business considering changes in economic conditions and the risk characteristics of the Company's underlying assets.
At January 31, 2021, the Company is not subject to externally imposed capital requirements, with the exception of restricted cash posted as a deposit with respect to its former oil well business.
Fair value
Financial instruments measured at fair value are classified into one of three levels in the fair value hierarchy according to the relative reliability of the inputs used to estimate the fair values. The three levels of the fair value hierarchy are:
Level 1 - Unadjusted quoted prices in active markets for identical assets or liabilities;
Level 2 - Inputs other than quoted prices that are observable for the asset or liability either directly (i.e. as prices) or indirectly (i.e. derived from prices); and
Level 3 - Inputs that are not based on observable market data.
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C21 INVESTMENTS INC. |
24. FINANCIAL RISK MANAGEMENT (continued)
The following table shows the carrying amounts of financial assets and financial liabilities by category:
January 31, 2021 | January 31, 2020 | |||||
Financial assets at amortized cost (1) | $ | 6,494,793 | $ | 3,565,721 | ||
Financial liabilities at amortized cost (2) | $ | 29,977,530 | $ | 40,403,587 | ||
Financial liabilities at fair value through profit or loss (3) | $ | 9,430,991 | $ | 3,699,152 |
(1) Includes cash, restricted cash and receivables.
(2) Includes accounts payable and accrued liabilities, promissory note, convertible promissory note, convertible debentures, consideration payable, lease liabilities and debt.
(3) Includes derivative liability.
25. RELATED PARTY TRANSACTIONS
Balances due to related parties included in accounts payable, accrued liabilities, and promissory note payable at January 31, 2021 and 2020:
January 31, 2021 | January 31, 2020 | |||||
Due to the President and CEO(1) | $ | 14,369,004 | $ | 21,713,910 | ||
Lease liabilities due to a company controlled by the CEO | 9,539,744 | 3,053,929 | ||||
Lease liabilities due to SDP Development | 589,328 | 749,766 | ||||
Due to directors and officers of the Company | - | 1,476 | ||||
Due to the CFO of the Company | 527 | 64 | ||||
$ | 24,498,603 | $ | 25,519,145 |
(1) Due to the President and CEO consists of promissory note principal and interest and reimbursable expenses incurred in the normal course of business.
The Company had the following transactions with related parties including key management personnel during the year ended January 31, 2021 and 2020:
Year ended January 31, | ||||||
2021 | 2020 | |||||
-$- | -$- | |||||
Consulting fees paid to a director | - | 38,310 | ||||
Amounts paid to CEO or companies controlled by CEO(1) | 10,368,616 | 13,039,739 | ||||
Salary paid to key management personnel | 499,710 | 1,131,196 | ||||
Share compensation including warrants and stock options for directors and officers | 360,610 | 95,613 | ||||
Convertible debenture interest paid to directors and officers | 18,346 | 27,230 | ||||
Lease payments made to SDP Development | 228,192 | 282,896 | ||||
11,475,474 | 14,614,984 |
(1) Amounts paid to CEO or companies controlled by CEO consists of salary, lease payments, and promissory note principal and interest.
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C21 INVESTMENTS INC. |
25. RELATED PARTY TRANSACTIONS (continued)
On February 12, 2020, the Company amended the purchase agreement with SDP Development, of which a Director of the Company is a principal owner. The Company had agreed on February 4, 2019 (Note 3) to purchase SDP Development on October 15, 2020, which owned six real estate properties that were leased in connection with Phantom Farms' cannabis cultivation, processing and wholesale distribution operations. The aggregate purchase price was $8,010,000 payable in cash, or, at the election of the vendors, in whole or in part by the issue of 2,670,000 shares at $3.00 per common share.
On February 12, 2020 the parties agreed to the following modified terms: the Company purchased the two Southern Oregon farms from SDP Development constituting over 60 acres of real property housing the two outdoor cannabis cultivation facilities totaling 80,000 square feet of canopy, rent reduction on the three Phantom properties in Central Oregon, and a release from the obligation to purchase the sixth property in Southern Oregon. In exchange, the SDP vendors received 7,132,041 common shares of the Company with a fair value of $2,582,903. The consideration exceeded the fair market value of the land acquired and as a result, the Company recorded transaction costs of $1,204,740. The Company has three remaining leases with SDP Development. The undiscounted future cash flows for the three remaining leases total $684,576.
On November 16, 2020, the Company amended the terms of the three Nevada leases with Double G Holdings (a Company controlled by the Company's President and CEO). The term of the two dispensary leases and the warehouse lease was extended to November 30, 2027 with a right to extend for a further five years and with an annual increase to the base rent of 3% commencing January 1, 2022. The undiscounted future cash flows for all three leases including the five year extension total $16,930,437.
On August 17, 2020, the Company granted a total of 1,250,000 stock options to key management personnel to purchase common shares, exercisable on or before August 17, 2023, at an exercise price of C$0.70 per share. In connection with these options, the Company recorded share based compensation expense of $130,012 (C$174,022) in the year.
On January 28, 2021, the Company granted a total of 150,000 stock options to key management personnel to purchase common shares, exercisable on or before January 28, 2024, at an exercise price of C$1.50 per share.
On December 31, 2020, the Company granted a total of 210,800 warrants to the CEO to purchase common shares, exercisable on or before December 31, 2023, at an exercise price of C$1.00 per share. In connection with these warrants, the Company recorded share based compensation of $70,270 (C$94,057) in the year.
On January 30, 2021, the Company granted a total of 469,200 warrants to the CEO to purchase common shares, exercisable on or before January 30, 2024, at an exercise price of C$1.00 per share. In connection with these warrants, the Company recorded share based compensation of $156,243 (C$209,133) in the year.
26. CONTINGENCIES
From time to time, the Company is involved in various litigation matters arising in the ordinary course of its business. Management is of the opinion that disposition of any current matter will not have a material adverse impact on the Company's financial position, results of operations, or the ability to carry on any of its business activities.
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C21 INVESTMENTS INC. |
26. CONTINGENCIES (continued)
Legal proceedings
A complaint was filed in the Oregon State Circuit Court for Clackamas County, on April 29, 2019, by two current owners of Proudest Monkey Holdings, LLC (the former sole member of EFF) (the "Plaintiffs"), alleging contract, employment, and statutory claims with an amount in controversy of $1,837,500 against the Company, its wholly-owned subsidiaries 320204 US Holdings Corp, EFF, Swell Companies Limited, and Phantom Brands LLC, in addition to three directors, two officers, and one former employee. The Company and the other defendants wholly denied the allegations and claims made in the lawsuit and is defending the lawsuit. On June 21, 2019, the Company filed Oregon Rule of Civil Procedure (ORCP) 21 motions to dismiss all of the Plaintiffs' claims against it, its wholly-owned subsidiaries, and other defendants; on May 6, 2020, the court granted the Company's Rule 21 motion in its entirety to dismiss all of Plaintiffs' claims pursuant to Oregon Rules of Civil Procedure 21A(1). The judgment of dismissal was entered by the Clackamas County court on or about October 14, 2020.
The Company submitted a petition to recover the costs and attorney fees incurred by the Company as the prevailing party in the matter and the parties briefed and argument the petition before the Clackamas County court. On January 20, 2021, the Court ruled in the Company's favor, awarding the Company and its subsidiaries $68,195 in attorney's fees and $1,252 in costs through a supplemental judgment. On March 3, 2021, Plaintiffs filed a notice of appeal from the supplemental judgement awarding attorney fees. It is too early to predict the resolution of the appeal, however the judgment remains subject to execution at any time.
On November 12, 2020, Plaintiffs filed a notice of appeal with the appeals court administrator. The Oregon Court of Appeals assigned the case to the appellate settlement conference program, as it does in due course. It is too early to predict the resolution of the appeal. The parties have agreed to attempt to settle all of the Oregon claims through voluntary mediation, and such mediation is forthcoming and in the process of being scheduled.
On or about September 13, 2019, the Company delivered a notice to the Plaintiffs of alleged breach and default under the purchase and sale agreement, due to unlawful, intentional acts and material misrepresentations before and after the completion of the purchase. As a result of such breach, the Company denied the Plaintiffs' tender of their share payment notes in connection with the agreement. On or about October 14, 2019, Proudest Monkey Holdings, LLC and one of its current owners, sued the Company in the Supreme Court of British Columbia to compel the issuance and delivery of the subject shares, including interests and costs. In connection with the Oregon lawsuit, the Company conducted an internal investigation regarding malfeasance by the Plaintiffs (discussed more fully below under Oregon Compliance). On November 8, 2019, the Company responded and counterclaimed for general, special and punitive damages, including interest and costs, related to breach of contract, repudiation of contract, breach of indemnity and fraudulent and negligent misrepresentation by the Plaintiffs. The Company's counterclaims included the malfeasance discovered during the internal investigation. Plaintiffs filed a response to the Company's counterclaims on or about June 5, 2020 and the parties have stipulated to a form of amended pleading which includes the joinder of additional parties, an owner of PMH and EFF, and additional contract and equitable claims and damages, similar to those alleged by the Plaintiffs in the Oregon lawsuit (breach of contract, indemnity, unjust enrichment and wrongful termination claims). This action remains in the discovery stage, given that the parties have exchanged written discovery, but it remains too early to predict its resolution. The parties have agreed to attempt to settle all of the British Columbian claims through voluntary mediation, and such mediation is forthcoming and in the process of being scheduled.
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26. CONTINGENCIES (continued)
On or about May 30, 2019, Wallace Hill filed a civil claim in the Supreme Court of British Columbia alleging breach of contract and entitlement to 1,800,000 common shares of the Company, fully vested by March 1, 2019, and damages due to the lost opportunity to sell those shares after such date for a profit. On June 23, 2019, the Company circulated a letter to Wallace Hill terminating the agreement and accepting Wallace Hill's repudiation of the agreement based on Wallace Hill's previously published defamatory comments and termination of the agreement. Also, on June 23, 2019, the Company filed its response to the civil claim denying all claims and filed counterclaims alleging breach of contract, a declaratory judgment of termination of the agreement, defamation and an injunction from further defamatory comments. This action remains at the beginning of the discovery phase and it is too early to predict its resolution. It is noteworthy that Wallace Hill has taken no action in prosecuting its civil claim since the Company filed its counterclaims.
Earn out shares
The Company has granted the opportunity for the vendors of certain acquisitions to earn shares of the Company if certain conditions are satisfied. The earn out shares available to the vendors of Eco Firma Farms are considered to have no value. The earn out shares available to the vendors of both Swell Companies and Phantom Farms (Notes 3 and 4) are recorded as a derivative liability (Note 17).
27. RECLASSIFICATION OF COMPARATIVE FIGURES
Certain prior year amounts have been reclassified for consistency with the current year presentation. These reclassifications had no effect on the reported results of operations. An adjustment has been made to the Consolidated Statements of Loss and Comprehensive Loss for fiscal year ended January 31, 2020, to reclassify $184,655 from general and administration expenses to cost of sales.
28. SUBSEQUENT EVENTS
On February 4, 2021, warrants were exercised to purchase 456,100 common shares of the Company for proceeds of $535,204. Included in the above total was the purchase of 426,100 common shares of the Company by a Director of the Company.
On April 5, 2021, the Company issued 19,774 common shares to vendors of Eco Firma Farms as part of the purchase agreement dated June 13, 2018 as settlement of the share payment note, recognized as a reduction to the Company's commitment to issue shares.
On April 23, 2021, the Company closed on a purchase and sale agreement for certain assets in Oregon. This agreement was announced on January 7, 2021. As a result of the sale, the Company has disposed of all assets and liabilities classified as held for sale.
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Item 19. Exhibits
* previously filed.
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SIGNATURES
The Registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and has duly caused and authorized the undersigned to sight this Annual Report on its behalf.
C21 Investments Inc. | ||
By: | /s/ Sonny Newman | |
Name: | Sonny Newman | |
Title: | President and Chief Executive Officer |
Date: August 15, 2022
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