The terms "BAM", "Company", "we", "our", and "us" refer to Body and Mind Inc.
unless the context suggests otherwise.
FORWARD-LOOKING STATEMENTS
The following management's discussion and analysis of the Company's financial
condition and results of operations (the "MD&A") contains forward-looking
statements that involve risks and uncertainties. All statements, other than
statements of historical facts, included in this Form 10-Q that address
activities, events or developments that we expect, believe or anticipate will or
may occur in the future are forward-looking statements. These forward-looking
statements are based on assumptions which we believe are reasonable based on
current expectations and projections about future events and industry conditions
and trends affecting our business. However, whether actual results and
developments will conform to our expectations and predictions is subject to a
number of risks and uncertainties that, among other things, could cause actual
results to differ materially from those contained in the forward-looking
statements, including, without limitation, the Risk Factors set forth in our
Annual Report on Form 10-K for the fiscal year ended July 31, 2019, including
the consolidated financial statements and related notes contained therein. These
factors, or any one of them, may cause our actual results or actions in the
future to differ materially from any forward-looking statement made in this
document. Refer to "Forward-looking Statements" as disclosed in our Annual
Report on Form 10-K for the fiscal year ended July 31, 2019.
Introduction
This MD&A is focused on material changes in our financial condition from July
31, 2019, our most recently completed year end, to January 31, 2020, and our
results of operations for the three and six months ended January 31, 2020, and
should be read in conjunction with Item 7, Management's Discussion and Analysis
of Financial Condition and Results of Operations as contained in our Annual
Report on Form 10-K for the fiscal year ended July 31, 2019.
Company Overview
Body and Mind is a multi-state cannabis operator, which has retail,
distribution, cultivation, and/or processing operations in Nevada, California,
Arkansas and Ohio.
Our platform approach to expansion focuses on limited license states and
jurisdictions, entering new markets through lower cost license applications and
opportunistic/targeted acquisitions.
We have developed the marquis lifestyle "Body and Mind" brand in Nevada with
strong penetration into dispensaries and have recently expanded our brand and
products to dispensaries in California. The Body and Mind brand appeals to a
wide range of cannabis consumers with products including flower, oils, extracts
(wax, live resin, ambrosia) and edibles.
We have a long track record of producing award-winning cannabis products and we
have success with licensing to manufacture for brands. We are in the process of
constructing a larger production facility in Nevada.
We are a Nevada corporation that is multi-state cannabis operator. Through our
wholly-owned subsidiary, Nevada Medical Group, LLC ("NMG"), we are engaged in
the cultivation and production of medical and adult-use recreational marijuana
products. NMG produces cannabis flower, oil extracts and edibles under license
in the state of Nevada, which are available for sale under the brand name "Body
and Mind" in dispensaries in Nevada. In addition, we through NMG, have a 30%
interest in NMG Ohio, LLC, which owns an Ohio medical cannabis dispensary, which
also has a provisional production license. Through our wholly-owned subsidiary
NMG Long Beach, LLC, we are managing a medical and adult-use cannabis retail
dispensary in Long Beach, California. We, through NMG, have a 60% ownership in a
San Diego medical and adult-use cannabis dispensary, which is still under
construction and waiting for all licenses, permits and authorizations. Through
our wholly-owned subsidiary NMG Cathedral City, LLC ("NMGCC"), we were managing
a licensed cannabis business conducting commercial cannabis activity in
Cathedral City, California pursuant to a management agreement with Satellites
Dip, LLC ("SD") who is the actual licensed manufacturer until November 30, 2019.
On November 30, 2019, we along with NMGCC entered into a settlement agreement
with SD with respect to the management agreement and NMGCC entered into a brand
director agreement with SD whereby NMGCC has been engaged to provide certain
advisory and brand director services in connection with SD's manufacture of
Company-branded products, as well as certain other products as agreed to by
NMGCC as more fully described in our Current Report on Form 8-K filed with the
SEC on December 5, 2019. In addition, as part of the revised arrangement with
SD, our wholly-owned subsidiary, DEP Nevada Inc. ("DEP") entered into a brand
license agreement with SD whereby DEP has granted SD a non-exclusive,
non-transferable, and non-sub-licensable right to use certain licensed marks in
connection with or on licensed products as more fully described in our Current
Report on Form 8-K filed with the SEC on December 5, 2019. Our products are sold
and distributed to numerous licensed dispensaries throughout California.
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Our common stock is listed on the Canadian Securities Exchange under the symbol
"BAMM", has been admitted to trade on the OTCQB Venture Market under the symbol
"BMMJ", and is registered under section 12(g) of the Securities Act of 1934, as
amended. We are also a reporting issuer under the Securities Acts of British
Columbia and Ontario.
Our head office located at 750 - 1095 West Pender Street, Vancouver, British
Columbia, Canada V6E 2M6.
Development of Our Business
Incorporation and Early Corporate History
We were incorporated in the State of Delaware on November 5, 1998, under the
name Concept Development Group, Inc. In May 2004, we acquired 100% of
Vocalscape, Inc. and changed our name to Vocalscape, Inc. On October 28, 2005,
we changed our name to Nevstar Precious Metals, Inc. On October 23, 2008, we
changed our name to Deploy Technologies Inc. ("Deploy Tech") and, on September
15, 2010, we incorporated a wholly-owned subsidiary, Deploy Acquisition Corp.
("Deploy") under the laws of the State of Nevada, USA.
On September 17, 2010, we merged with and into Deploy under the laws of the
State of Nevada. Deploy, as the surviving corporation of the merger, assumed all
the assets, obligations and commitments of Deploy Tech, and we were effectively
re-domiciled in the State of Nevada. Upon the completion of the merger, Deploy
assumed the name "Deploy Technologies Inc.", and all of the issued and
outstanding common stock of Deploy Tech was automatically converted into and
became Deploy's - that is, our Company's - issued and outstanding common stock.
On November 14, 2017 we changed our name to Body and Mind Inc. in conjunction
with the acquisition of NMG.
On May 10, 2011, we registered as an extra-provincial company in British
Columbia, and on September 30, 2011, we filed a certificate of amendment with
the Nevada Secretary of State to designate 2,900,000 shares of our authorized
capital stock as Class A Preferred Shares (the "Preferred Shares"). On September
2, 2014, we filed a certificate of amendment with the Nevada Secretary of State
increasing the authorized Preferred Shares from 2,900,000 shares to 20,000,000
shares.
On November 11, 2014, we filed a certificate of change with the Nevada Secretary
of State whereby we reverse split our authorized as well as the issued and
outstanding shares of common stock (the "Common Shares") on the basis of one (1)
new share for ten (10) old shares. This resulted in a reduction of our
authorized capital from 100,000,000 Common Shares to 10,000,000 Common Shares,
and a reduction of our issued and outstanding Common Shares from 23,130,209
Common Shares to approximately 2,313,021 Common Shares. On April 11, 2017, we
filed a certificate of amendment with the Nevada Secretary of State to increase
the authorized capital from 10,000,000 Common Shares to 900,000,000 Common
Shares. Effective on November 14, 2017, we cancelled our entire authorized class
of Preferred Shares.
Acquisition of Nevada Medical Group, LLC
On August 10, 2017, we incorporated a wholly-owned subsidiary, DEP Nevada Inc.
("DEP"). On September 14, 2017, we, with DEP, entered into a definitive
agreement (the "Share Exchange Agreement") with Nevada Medical Group, LLC
("NMG"), an arm's length party, to carry out the business combination
transaction initially announced on May 17, 2017, following the signing of the
letter of intent between Toro Pacific Management Inc. ("Toro") and NMG (the
"Letter of Intent"), which was assigned to us pursuant to an assignment and
novation agreement among Toro, NMG, and our Company dated effective May 12, 2017
(the "Assignment Agreement"). Pursuant to the Assignment Agreement, Toro
received 470,000 of our Common Shares.
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Pursuant to the Share Exchange Agreement, we changed our name to "Body and Mind,
Inc.", effective on November 14, 2017, by filing a certificate of amendment with
the Nevada Secretary of State; at the same time, we cancelled our entire
authorized class of Preferred Shares. In addition, on November 14, 2017, we
filed a certificate of change with the Nevada Secretary of State whereby we
reverse split our issued and outstanding Common Shares on the basis of one (1)
new share for three (3) old shares (the "Consolidation") which resulted in there
being 28,239,876 Common Shares issued and outstanding post-Consolidation. DEP,
our wholly-owned subsidiary, acquired all of the issued and outstanding
securities of NMG in exchange for the issuance of our Common Shares on a
post-Consolidation basis and certain cash and other non-cash consideration, as
further described below (the "Acquisition"). Completion of the Acquisition
resulted in a fundamental change under the policies of the Canadian Securities
Exchange (the "CSE"). Subsequent to completion of the Acquisition, we filed
articles of exchange with the Nevada Secretary of State.
We completed a concurrent equity financing to raise aggregate gross proceeds of
CAD$6,007,429.89 through the issuance of subscription receipts (the
"Subscription Receipts"), at a pre-Consolidation price of CAD$0.22 per
Subscription Receipt (the "Concurrent Financing"). On November 14, 2017, each
Subscription Receipt was exchanged in accordance with its terms, for no
additional consideration, for one pre-Consolidation Common Share and one common
share purchase warrant (each a "Warrant") of the Company. Each Warrant is
exercisable by the holder at a price of CAD$0.90 for a period of 24 months from
the date of issuance. Each Warrant is subject to acceleration provisions
following May 14, 2018, if the closing trading price of the Common Shares is
equal to or greater than CAD$1.20 for seven consecutive trading days, at which
time we may accelerate the expiry date of the Warrants by issuing a press
release announcing the reduced warrant term whereupon the Warrants will expire
21 calendar days after the date of such press release.
In consideration for all of the issued securities of NMG, the NMG
securityholders (collectively, the "NMG Members") received, on a pro rata basis,
(a) 16,000,000 post-Consolidation Common Shares (the "Payment Shares") at a
deemed price of CAD$0.66 per share (the "Share Exchange"), and (b) $2,000,000
cash. We also issued five non-interest bearing promissory notes in the aggregate
principal amount of $2,000,000 (the "Promissory Notes"), as follows: we issued a
promissory note in the principal amount of $450,000 to MBK Investments, LLC; we
issued a Promissory Note in the principal amount of $450,000 to the Rozok Family
Trust; we issued a Promissory Note in the principal amount of $490,000 to KAJ
Universal Real Estate Investments, LLC; we issued a Promissory Note in the
principal amount of $120,000 to NV Trees, LLC; and we issued a Promissory Note
in the principal amount of $490,000 to SW Fort Apache, LLC. The Promissory Notes
were secured by a senior priority security interest in all of our assets, and
are due to be repaid at the earlier of fifteen (15) months from the closing date
of the Acquisition, or, if an equity or debt financing subsequent to the
Concurrent Financing were to be closed in an aggregate amount of not less than
$5,000,000, then within 30 days of the closing date of such subsequent
financing. We assumed NMG's obligations pursuant to a loan in the amount of
$400,000, payable to TI Nevada, LLC, ("TI Nevada") of which US$225,000 was paid
on the Closing Date (as defined below) and the remaining $175,000, which was
secured by a senior priority security interest in all of our assets, will be
paid within 15 months of the Closing Date. Furthermore, we reimbursed NMG
($84,000) for expenditures incurred prior to the Closing Date which were related
to the acquisition of production equipment.
Any Payment Shares received by a "Related Person" (as defined in the CSE Policy
1) in connection with the Acquisition, and certain other Payment Shares as may
be required by the CSE ("Escrow Shares"), are subject to escrow conditions
prescribed by the CSE pursuant to the terms of an agreement (the "Escrow
Agreement") entered into among us, the holders of Escrow Shares and New Horizon
Transfer Inc., the escrow agent. Payment Shares received by the former members
of NMG are subject to escrow under the rules and policies imposed by the CSE,
and are further subject to voluntary pooling agreements entered into between us
and the former members of NMG (the "Voluntary Pooling Agreements"), pursuant to
which the Payment Shares will be released from pooling to the former members of
NMG in accordance with the following schedule:
6 months after the Closing Date 10% of the respective Payment Shares
12 months after the Closing Date 20% of the respective Payment Shares
18 months after the Closing Date 25% of the respective Payment Shares
24 months after the Closing Date 45% of the respective Payment Shares
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The Acquisition closed on November 14, 2017 (the "Closing Date"). On completion
of the Acquisition, we assumed the business of NMG, being the cultivation and
production of medical marijuana products.
On December 18, 2017, we reached an agreement with a real estate investment
group, led by NMG's President, Robert Hasman, who intended to purchase a
building adjacent to our existing facility and lease it back to a newly formed
entity called Pepper Lane North LLC ("PLN" or "Partnership") on a long-term
basis with renewal options. PLN is a strategic partnership between the Company
and a dispensary chain in the State of Nevada. The other PLN member intended to
transfer an active cultivation license to the PLN facility and all expenditures
under PLN were to be funded on a 50/50 basis by the PLN members.
The new facility was expected to primarily consist of flowering rooms as
production, packaging, distribution, and head office functions were to remain at
the existing facility. We had also earmarked approximately 4,000 square feet of
frontage for a dispensary upon receipt of a retail license. It was contemplated
that at least half of the sales under PLN would be sold to the other PLN member
through their existing dispensary network. In addition, we had signed an
operating and management agreement with PLN and were to receive the greater of
$15,000/month or 10% of PLN's net profits.
Prior to forming PLN, the members of PLN engaged surveyors to ensure compliance
with permitting procedures and that PLN would receive the necessary approvals to
move forward. Subsequent to January 31, 2018 we were notified that a church was
located in close proximity of the building and that permitting was unlikely to
proceed. We filed an insurance claim with the surveyor's insurer to recover our
out of pocket damages. As a result of these events, the lease and partnership
agreements with PLN have been terminated. The company has decided not to legally
pursue the claim against the survey company.
Convertible Loan and Management Agreements with Comprehensive Care Group LLC
On March 19, 2018, we, acting through our wholly-owned subsidiaries DEP and NMG,
entered into a convertible loan agreement (the "Convertible Loan Agreement") and
a management agreement (the "Management Agreement"), respectively, with
Comprehensive Care Group LLC ("CCG"), an Arkansas limited liability company,
with respect to the development of a medical marijuana dispensary, 50 plant
cultivation facility in West Memphis, Arkansas. Each of the Convertible Loan
Agreement and the Management Agreement are effective as of March 15, 2019.
Pursuant to the Convertible Loan Agreement, DEP has agreed to make loan advances
to CCG from time to time in the aggregate principal amount of up to $1,250,000.
The loan proceeds are to be used to fund the construction of the medical
marijuana dispensary facility, and to provide working capital to cover initial
operating expenses. All pre-construction activities for the dispensary have been
completed, and substantial construction progress has been made, with interior
framing 90% complete in the dispensary and cultivation areas. Work is
in-progress on roughing in chase ways for power upgrades while electrical
rough-in remains ongoing throughout the project. Additionally, HVAC ductwork is
90% complete in the dispensary area.
The parties may mutually agree to adjust the amount of the loan to an increased
amount or a lesser amount from time to time based on CCG's reasonable
operational and construction needs, as set forth in one or more budgets to be
prepared by CCG and presented to DEP. The interest on outstanding advances will
be fixed at a rate of $6,000 per month until such time as the parties mutually
agree to increase the interest to a fixed rate of $10,000 per month, payable
monthly in arrears on or before the first calendar day of each month commencing
March 1, 2019. CCG is not obligated to repay any principal outstanding under the
loan until March 30, 2021. Either CCG or DEP may unilaterally extend the
maturity date by one year, and may thereafter continue to extend the maturity
date on a yearly basis by increments of one year (each, an "Extension Option")
by providing written notice of the exercise of the Extension Option by the party
seeking an extension to the other party; provided, however, that under no
circumstances shall any extended maturity date extend beyond the expiration of
the term of the Management Agreement entered into between NMG and CCG.
Upon the latter of: (a) one year after granting of a medical marijuana
dispensary license by the Arkansas Medical Marijuana Commission to CCG, or (b)
one year after entering into the Convertible Loan Agreement, DEP may, in its
sole discretion, subject to DEP providing all reasonable assistance to obtain
all necessary approvals from the applicable government authorities to engage in
the medical marijuana dispensary business, elect to convert all of the
outstanding indebtedness into preferred units of CCG equal to 40% of the overall
member units of CCG, subject to approval of the Arkansas Medical Marijuana
Commission, with the following preferred rights: (i) the right to an allocative
share of 66.67% of the net profits of CCG (as defined in the Convertible Loan
Agreement) and the right to distributions equal to 66.67% of the net profits on
a monthly basis; (ii) the right to a 66.67% share of CCG's assets upon
dissolution of CCG; and (iii) the right to 66.67% of all voting rights of
members of CCG.
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Pursuant to the Management Agreement, NMG has agreed to provide operations and
management services to CCG, (including management, staffing, operations
administration, oversight and other related services), in relation to CCG's
retail facility located in West Memphis, Arkansas. In consideration for such
services, commencing on the effective date (March 15, 2019), CCG has agreed to
pay NMG a monthly management fee in the amount equal to 66.67% of the Monthly
Net Profits (as defined below) of CCG for the immediately-preceding month, all
as determined in a manner mutually agreeable to NMG and CCG. Notwithstanding the
foregoing, in the event that DEP exercises its conversion right under the
Convertible Loan Agreement, then NMG's monthly management fee shall be fixed at
$6,000.00 per month, unless otherwise agreed by the parties in writing. For
purposes of the Management Agreement, "Monthly Net Profits" means, for each
calendar month, an amount equal to CCG's gross revenue for such calendar month
less CCG's operating expenses (including all applicable expenses as set out
under Section 2 of the Management Agreement, cost of goods sold, interest, and
tax for said month), as reasonably determined in accordance with generally
accepted accounting principles. The remaining 33.33% of the Monthly Net Profits
is to be paid to CCG, which it, in its sole discretion, may distribute to its
owners.
Acquisition of NMG Ohio LLC
At the time we acquired NMG, it already owned a 30% interest in NMG Ohio, LLC
("NMG Ohio"). On or around June 7, 2018, NMG Ohio was notified by the State of
Ohio that it was awarded a medical cannabis dispensary license and a provisional
production license. NMG Ohio has a cannabis dispensary carrying on business as
"The Clubhouse" in Elyria, Loraine County, Ohio. On January 31, 2019, we through
NMG entered into a definitive agreement to acquire the remaining 70% interest in
NMG Ohio. The consideration for the remaining 70% interest in NMG Ohio is to
consist of cash payments totaling $1,575,000 and 3,173,864 common shares of the
Company. As at the date hereof, we have issued 2,380,398 of the 3,173,864 common
shares with a fair value of $1,448,805, and paid $1,181,250. Closing of the
acquisition remains subject to receipt of regulatory approval.
Strategic Investment and Commercial Advisory Agreements with Australis Capital
Inc.
On October 30, 2018, we entered into a strategic investment agreement (the
"Investment Agreement") with Australis Capital Inc. ("Australis"), an Alberta
corporation that has its common shares listed on the Canadian Securities
Exchange (the "CSE"), whereby Australis agreed to acquire:
(a) 16,000,000 units of our Company, with each unit being comprised of one
share of our common stock and one common share purchase warrant at a
purchase price of CAD$0.40 per unit, for gross proceeds of CAD$6,400,000;
and
(b) CAD$1,600,000 principal amount 8% unsecured convertible debentures (the
"Debentures") of our Company having a maturity date of two years from the
date of issue. The Debentures are convertible at the option of Australis
into common shares of our Company at a conversion price equal to CAD$0.55
per common share up to the maturity date, subject to adjustment and
acceleration in certain circumstances. If, at any time prior to the
maturity date, the closing price of our common shares on the CSE (or such
other stock exchange on which our common shares are then listed) is equal
to or greater than CAD$1.65 for 20 consecutive trading days, our Company
may force the conversion of the then outstanding principal amount of the
debentures (and any accrued and unpaid interest thereon) at the then
applicable conversion price on not less than 10 business days' notice to
Australis. On July 1, 2019, we entered into a conversion agreement with
Australis, whereby Australis has agreed to convert the Debenture on July
1, 2020. Upon execution of the conversion agreement, we remitted
CAD$148,339.72 to Australis as an advanced interest payment for the period
from November 2, 2018 to July 1, 2020. Upon conversion of the Debenture,
Australis will receive 2,909,091 Common Shares of our Company, to be
issued at a deemed valued of CAD$0.55 per Common Share.
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Pursuant to the Investment Agreement, we entered into a commercial advisory
agreement (the "Commercial Advisory Agreement") with Australis Capital (Nevada)
Inc. ("Australis Nevada"), a wholly-owned subsidiary of Australis, pursuant to
which Australis Nevada has agreed to provide advisory and consulting services to
our Company for a fee of $10,000 per month payable on the first day of each
month for a term ending on the date that is the earlier of (i) five years
following the closing of the transactions contemplated by the Investment
Agreement, and (ii) the date Australis no longer holds 10% or more of our
Company's issued and outstanding common shares.
Pursuant to the terms of the Investment Agreement and subject to certain
exceptions, Australis will be entitled to maintain its pro rata ownership
interest the Company until such time as it no longer holds 10% or more of our
Company's issued and outstanding common shares.
Pursuant to the terms of the Investment Agreement and subject to applicable laws
and the rules of the CSE, for as long as Australis owns at least 10% of our
issued and outstanding common shares, Australis will be entitled to nominate one
director for election to our Board of Directors of the Company. If Australis
exercises all of its warrants and converts all of its debentures, Australis will
be entitled to nominate a second director for election to our Board of
Directors. Further, for as long as Australis maintains ownership of at least 25%
of our issued and outstanding common shares, Australis will be entitled to
maintain two directors on our Board of Directors, provided that each director
nominee must meet the requirements of applicable corporate, securities and other
laws and rules of the CSE. Mr. Scott Dowty, Chief Executive Officer and a
director of Australis, was initially appointed as a director of our Company to
replace then-existing board member Chris Macleod, upon closing of Australis's
strategic investment under the Investment Agreement on November 2, 2018,
however, on October 16, 2019, Brent Reuter replaced Mr. Dowty as Australis'
nominee on our Board of Directors as Mr. Dowty resigned.
With respect to the proceeds from the financing, the Investment Agreement
directed that the proceeds will only be used by our Company as follows, unless
otherwise agreed to in writing by Australis:
(a) a maximum of CAD$400,000 to pay outstanding accounts payable, of which
only CAD$300,000 was allowed to be used to pay an advisory fee to
Canaccord Genuity Corp.;
(b) $1,175,000 was used by our Company as partial payment of promissory notes
held by certain creditors, of which a balance of $1,000,000 remained owing
to the creditors after application of the partial payments;
(c) $1,925,000 will be used by our Company for strategic acquisitions and/or
investment opportunities within the State of Ohio;
(d) $1,650,000 will be allocated to the development, build out and equipment
purchases for NMG Ohio's dispensary and/or production facility, unless the
parties agree to allocate the funds to the development of our Company's
production facility in Nevada;
(e) $600,000 will be applied by our Company purchase trim from third parties;
and
(f) the balance of the proceeds will be allocated towards the working capital
of the Company.
Transaction and Settlement with Green Light District Holdings Inc. - ShowGrow
Long Beach and San Diego
Prior Agreement with Green Light District Holdings Inc.
On November 28, 2018, we entered into an interim agreement (the "Prior GLDH
Agreement") with Green Light District Holdings Inc. ("GLDH"), a private company
incorporated under the laws of Delaware, and David Barakett, whereby our Company
agreed to acquire up to 100% of the issued and outstanding common shares of
GLDH. We concurrently made a strategic investment in a senior secured
convertible note issued by GLDH in the principal amount of $5,200,000 (the
"Prior GLDH Note"), bearing interest at the rate of 20% per annum and maturing
on November 28, 2020.
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GLDH is the owner of the ShowGrow dispensary brand, and owner of:
(a) the ShowGrow Long Beach dispensary,
(b) 43% of the equity interest and 60% of the voting rights in the ShowGrow
San Diego dispensary, and
(c) 30% of the equity interest in the ShowGrow Las Vegas dispensary.
GLDH is also the owner of the ShowGrow app. The dispensaries are in various
stages of licensing: Long Beach has a medical and adult use commercial license,
San Diego has a medical commercial cannabis retail conditional use permit, and
Las Vegas has a recreational license. GLDH focuses on building dispensaries in
high volume locations.
In order to fund our Company's original investment in GLDH, Australis advanced a
$4,000,000 loan which is evidenced by a senior secured note dated November 28,
2018, bearing an interest rate of 15% per annum and maturing in two years. The
terms require semi-annual interest payments unless we elect to accrue the
interest by adding it to the principal amount of the debt facility. We may
prepay the loan at any time, in any amount, subject to a 5% prepayment penalty
on any amount repaid within the first year of the loan. Additionally, on
November 30, 2018, Australis exercised $1.2 million in warrants they held in our
Company at an exercise price of CAD$0.50, which equated to 3,206,160 common
shares.
We paid a financing fee to Australis in the approximate amount of CAD$795,660,
by issuing 1,105,083 common shares of our Company at a deemed price of CAD$0.72
per share. We also paid a financial advisory fee of CAD$150,000 in cash.
Original Settlement and Release Agreement
On June 19, 2019, our Company, our indirect wholly-owned subsidiary, NMG Long
Beach, LLC ("NMG Long Beach"), and our 60% owned subsidiary, NMG San Diego, LLC
("NMG San Diego"), entered into a settlement agreement (the "Original GLDH
Settlement Agreement") with GLDH, The Airport Collective, Inc. ("Airport
Collective"), Mr. Barakett, and SGSD, LLC ("SGSD"). SGSD was the commercial
tenant at 7625 Carroll Road, San Diego, California 92121 (the "San Diego
Location").
Pursuant to the Original GLDH Settlement Agreement, our Company, GLDH, and Mr.
Barakett agreed to restructure the Prior GLDH Agreement, and enter into a mutual
release of all claims related to the Prior GLDH Agreement.
In connection with the settlement, (a) SGSD agreed to assign its lease for the
San Diego Location to NMG San Diego, and (b) GLDH, Airport Collective and NMG
Long Beach have entered into an asset purchase agreement dated June 19, 2019
(the "Asset Purchase Agreement"), pursuant to which NMG Long Beach has agreed to
purchase all of the assets of GLDH and Airport Collective utilized in the
medical and adult-use commercial cannabis retail business at 3411 E. Anaheim
St., Long Beach, CA 90804 (the "Long Beach Location").
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Amended and Restated Settlement and Release Agreement
On June 28, 2019, our Company, NMG Long Beach, NMG San Diego, GLDH, Airport
Collective, Mr. Barakett, and SGSD entered into an amended and restated
settlement and release agreement (the "Amended GLDH Settlement Agreement") which
supersedes and replaces the Original GLDH Settlement Agreement. Pursuant to the
Amended GLDH Settlement Agreement, the parties agreed as follows:
i. GLDH, Airport Collective, and Mr. Barakett have agreed to release our
Company from all claims related to the Prior GLDH Agreement upon closing
of the Asset Purchase Agreement in consideration of the following:
A. our Company will pay Mr. Barakett or his designee USD$750,000 by
issuing Common Shares at a price of CAD$0.7439 per share, with the
number of shares being calculated with reference to a negotiated
CAD/USD exchange rate of CAD1.3296:USD$1.00 (the "Agreed Foreign
Exchange Rate"), for a total possible issuance of 1,340,502 Common
Shares; such issuance is contingent on NMG San Diego receiving all
licenses, permits, and authorizations required for NMG San Diego to
conduct medical commercial cannabis retail operations at the San Diego
Location (the "SD Medical Licenses");
B. our Company will pay Mr. Barakett or his designee USD$750,000 by
issuing Common Shares at a price of CAD$0.7439 per share, with the
number of shares being calculated with reference to the Agreed Foreign
Exchange Rate for a total possible issuance of 1,340,502 Common Shares;
such issuance is contingent on NMG San Diego receiving all licenses,
permits, and authorizations required for NMG San Diego to conduct
adult-use commercial cannabis retail operations at the San Diego
Location (the "SD Adult-use Licenses"); and
C. our Company will pay certain legal and consulting expenses incurred by
GLDH, Airport Collective and Barakett in an aggregate amount of
US$90,500; and
ii. SGSD agreed to assign its lease for the San Diego Location to NMG San
Diego, and to release our Company, NMG Long Beach and NMG San Diego from
any and all claims, in consideration of the payment by our Company of a
total of USD$500,000 to SGSD's members, to be paid and satisfied by the
issuance of Common Shares to them at the maximum discount allowed by the
CSE.
NMG San Diego is owned 60% by the Company's subsidiary, DEP Nevada, Inc. and 40%
by SJJR, LLC ("SJJR"). Mr. Barakett has agreed to cover SJJR's portion of all
start-up costs associated with NMG San Diego establishing commercial cannabis
operations at the San Diego Location, inclusive of: (i) the costs associated
with becoming a tenant at the San Diego Location; and (ii) all construction
costs associated with building out the San Diego Location for NMG San Diego's
operations. The share consideration payable to Mr. Barakett under the Amended
GLDH Settlement Agreement is subject to reduction if Mr. Barakett fails to meet
this obligation on a timely basis.
NMG San Diego, which has now assumed the lease on the ShowGrow San Diego
premises, has applied for its own medical commercial cannabis retail license and
adult-use commercial retail license, and is currently proceeding with
construction associated with the build out of the San Diego premises to start
operations in the near future. In consideration for the landlord, Green Road,
LLC, agreeing to consent to the assignment of the original lease with SGSD to
NGM San Diego, we agreed to provide the following consideration to the landlord:
i. $700,000 in Common Shares of the Company calculated upon execution of the
assignment and first amendment to commercial lease (the "Assignment and
First Amendment"), dated June 13, 2019, at the maximum discount allowed
by the CSE to be issued to the landlord immediately following execution
of the Assignment and First Amendment;
ii. $783,765.26 in cash to be paid to the landlord via bank draft within five
(5) business days of execution of the Assignment and First Amendment; and
iii. $750,000 in cash, plus interest at the rate of five percent (5%) simple
per annum accruing from the effective date to be paid no later than five
(5) business days of the landlord's receipt from the City of San Diego of
a Conditional Use Permit allowing adult-use commercial cannabis
storefront retail operations at the San Diego Location.
Pursuant to the Assignment and First Amendment, the parties agreed to amend the
original lease to permit NMG San Diego to have three (3) five (5) year renewal
options as opposed to two (2) renewal options. In addition, the parties agreed
to reduce the amount of the sale bonus provision in the original lease to
$1,000,000 from $2,000,000, which shall only be payable in connection with the
first two assignments triggering this obligation, and thereafter, assignments
will not require payment of a sale bonus. Furthermore, the parties also amended
certain provisions of the original lease to ensure that any change in members
representing less than fifty percent (50%) of the existing membership interests
of NMG San Diego shall be an excluded transaction and not trigger the sale bonus
or be deemed an assignment requiring consent of the landlord
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If NMG San Diego is unable, through no fault of the GLDH, Airport Collective or
Mr. Barakett, to receive its medical commercial cannabis retail license or its
adult-use commercial cannabis retail license at the San Diego Location in
accordance with the terms and conditions of the Amended Settlement Agreement,
NMG San Diego and our Company will utilize best efforts to negotiate in good
faith an amendment to the Amended Settlement Agreement satisfactory to all of
the parties.
Amended and Restated Convertible Note and General Security Agreement
As contemplated by the Original GLDH Settlement Agreement, our Company and GLDH
entered into a loan agreement dated June 19, 2019 (the "2019 GLDH Loan
Agreement"), pursuant to which the Prior GLDH Note has been superseded and
replaced with an amended and restated senior secured convertible note payable to
the Company by GLDH in the principal amount of $5,200,000 (the "Amended and
Restated GLDH Note"). The Amended and Restated GLDH Note bears interest at the
rate of 20% per annum, compounded annually, and will mature and become repayable
on June 19, 2022. GLDH's obligations under 2019 GLDH Loan Agreement and the
Amended and Restated GLDH Note have been guaranteed by Airport Collective, and
are secured under a security agreement dated June 19, 2019 by all of GLDH's and
Airport Collective's personal property, including but not limited to equipment,
inventory, accounts receivable, cash or cash equivalents, and rights under
contracts.
Asset Purchase Agreement
Pursuant to the Asset Purchase Agreement, NMG Long Beach has agreed to purchase
all of GLDH's and Airport Collective's assets (the "Purchased Assets") utilized
in the retail cannabis business at the Long Beach Location for $6,700,000. Upon
closing of the transaction, the outstanding principal amount under the Amended
and Restated GLDH Note will be applied to the purchase price, and Airport
Collective will be released from its obligations as a guarantor of the GLDH's
obligations under the Amended and Restated GLDH Note.
The Company will pay the balance of the purchase price for the Purchased Assets
by issuing up to 2,681,006 shares of common stock, to be issued at a deemed
issue price of CAD$.0.7439 each; the number of shares required to pay and
satisfy the balance of the purchase price for the Purchased Assets in the amount
of $1,500,000 was determined with reference to the Agreed Foreign Exchange Rate
of CAD$1.3296:USD$1.00. The purchase price - and therefore the amount of the
share consideration - remains subject to reduction with reference to the
liabilities of the business that will be outstanding on the closing date.
Trademark and Technology License and Services Agreement
In connection with the Asset Purchase Agreement, our Company, and its affiliates
and subsidiaries, will license certain intellectual property from Green Light
District Management, LLC ("GLDM"), a Delaware limited liability company, and
GLDH. The licenses consist of:
(a) a perpetual license to utilize operational intellectual property,
consisting of customer data, sales data, customer outreach strategies
standard operating procedures, and other proprietary operational
intellectual property; and
(b) a two-year license to utilize intellectual property such as trademarks and
branding (the "Branding IP").
As consideration for the licenses, we have agreed to utilize the Branding IP
until June 19, 2021 at the Long Beach Location, and at the San Diego Location
for a period of two years from operations commencing at that location.
Additionally, we have agreed to pay GLDM and GLDH 3% of gross receipts from
sales at the Long Beach Location on a monthly basis for only the first twelve
months of the term of the license agreement. We have agreed that, throughout the
term of the license agreement, we will purchase all products and merchandise
bearing the "ShowGrow" brand exclusively from GLDM. GLDM has agreed that it
shall not itself utilize, nor allow any third-party to utilize, the Branding IP
within a five mile radius of the Long Beach Location. GLDM has also agreed to
provide certain services to our Company throughout the term of the license
agreement.
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Contemporaneous Loan
Our Company and GLDH have also entered into a contemporaneous loan (the
"Contemporaneous Loan") in the amount of $726,720.00 to fund certain business
improvements and expansion needs of GLDH's business operations. The Company and
NMG Long Beach have agreed to forgive the Contemporaneous Loan on the date of
closing of the Asset Purchase Agreement.
The closing under the Asset Purchase Agreement will not take place until NMG
Long Beach has acquired local and state commercial cannabis licenses to conduct
medical and adult-use commercial cannabis retail operations at the Long Beach
Location. In the meantime, the parties have entered into a Management Assignment
and Assumption Agreement, pursuant to which NMG Long Beach has assumed all
management and control of the business operations at the Long Beach Location.
Management Assignment and Assumption Agreement
On or around August 1, 2019, NMG Long Beach began managing the ShowGrow Long
Beach business pursuant to the management assignment and assumption agreement
dated June 19, 2019, among NMG Long Beach, GLDH and Airport Collective. Under
the agreement, NMG Long Beach is entitled to manage the business and recognize
the profits from the business until NMG Long Beach receives its own commercial
cannabis licenses and purchases the Purchased Assets in accordance with the
terms and conditions of the Asset Purchase Agreement.
Barakett Consulting Agreement
In connection with the Asset Purchase Agreement, NMG Long Beach and Mr. Barakett
entered into a consulting agreement, dated June 19, 2019 (the "Consulting
Agreement"), whereby NMG Long Beach has agreed to engage Mr. Barakett to provide
certain consulting and advisory services in connection with running the business
at the Long Beach Location and the San Diego Location.
The Consulting Agreement is for a term of five months and NMG Long Beach has
agreed to pay Mr. Barakett a total of $200,000 in consideration for his services
to be provided, with US$50,000 having been paid upon execution of the Consulting
Agreement, and US$30,000 being payable on each of one month, two months, three
months, four months and five months following the initial payment. In addition,
NMG Long Beach has agreed to reimburse Mr. Barakett upon presentation of
invoices for reasonable expenses which may be pre-authorized by NMG Long Beach
from time to time.
Management and Administrative Services Agreement with Satellites Dip, LLC
On June 6, 2019, our Company, acting through our California subsidiary, NMG
Cathedral City, LLC ("NMGCC") entered into a management and administrative
services agreement (the "California Management Agreement") with Satellites Dip,
LLC, a California limited liability company ("SD") that is licensed to carry on
commercial cannabis distribution and manufacturing operations within the state
of California. Under the California Management Agreement, NMGCC has agreed to
provide certain management and administrative services to SD, which may include,
without limitation, the following: (i) management of operations; (ii) inventory
management; (iii) equipment and physical plant maintenance; (iv) regulatory
compliance; (v) payroll; (vi) human resources services; (vii) marketing
services; (viii) information technology services; (ix) coordination of legal
services; (x) coordination of tax services; (xi) coordination of accounting
services; (xii) security services; (xiii) controlling the operating budget;
(xiv) facility inspections; (xv) maintenance of detailed records and accounts
related to SD's business, and identification and tracking of key performance
indicators; and (xvi) such other activities that NMGCC or SD determines in its
reasonable judgment are necessary or desirable for the day-to-day operation or
management of SD's business. In consideration of such services, NMGCC will be
paid a management fee equal to the greater of: (a) 30% of net profits (as such
term is defined in the California Management Agreement); and (b) $10,000 per
month.
The initial term of the California Management Agreement will expire on June 6,
2020. The California Management Agreement may not be terminated prior to the
expiry of the initial term, except in the case of a material breach that cannot
reasonably be cured or remains uncured for 30 days after the non-breaching party
provides written notice of the breach to the breaching party. Either party may,
at least 30 days prior to the expiration of the initial term, provide notice in
writing to the other party that it intends to renew the California Management
Agreement for an additional one year term, but any such renewal will be subject
to mutual agreement.
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In addition, NMGCC agreed to broker commercial arrangements between SD and
third-party cannabis brand owners, with the view to securing licenses for use in
SD's business. In particular, NMGCC agreed: (a) that, within 30 days of the
effective date of the California Management Agreement, it would arrange for its
affiliate company, NMG, to license certain trademarks and other intellectual
property to SD for use relation to cannabis products to be manufactured by SD
(the "Branded Products") on terms at least as favorable as the most favored
licensee; (b) to use good faith efforts to establish similar license agreements
with third-party cannabis brand owners; and (c) to use good faith efforts to
assist SD in the development of SD branded products in the event SD decides to
create its own brand(s).
NMGCC has furnished equipment and machinery necessary for the manufacture of the
Branded Products by SD. As contemplated by the California Management Agreement,
NMGCC has leased such equipment and machinery to SD pursuant to an Equipment
Lease Agreement between the parties dated June 6, 2019. The initial term of the
Equipment Lease Agreement will expire on June 6, 2020. Either party may, at
least 30 days prior to the expiration of the initial term, provide notice in
writing to the other party that it intends to renew the Equipment Agreement for
an additional one-year term, but any such renewal will be subject to mutual
agreement. It is the intent of the parties that the monthly rent payable under
the Equipment Lease Agreement be completely net to NMGCC, such that NMGCC will
not be liable for any costs or expenses of any nature whatsoever relating to the
equipment or any improvements to the equipment, or use of the equipment. SD is
solely responsible for any such costs, charges, expenses, and outlays, including
taxes, maintenance, and repairs.
On September 12, 2019, our Company announced that SD's Cathedral City facility
has begun shipping certain Body and Mind products, following upon receipt of
final testing and California packaging compliance certifications for such
products. Initial product introductions include Lemon Brulee and Lemon Kush live
resin sugar, Purple Punch blunts and Purple Punch pre-rolls. Live resin sugar is
a concentrate, created using material that is fresh-frozen immediately upon
harvesting.
In conjunction with entering into the California Management Agreement, the
Company through NMGCC entered into a loan and security agreement dated June 6,
2019, whereby NMGCC has loaned SD US$250,000 to fund the property and business
improvements and expansion needs of SD's business operations. The loan will
become due and payable on June 6, 2020, subject to extension by mutual agreement
between the parties, and will bear interest at a rate of 12% per annum. Interest
will accrue and be compounded quarterly, and will be payable by SD upon maturity
of the loan. SD may prepay, in whole or in part, all or any portion of the
principal amount and accrued interest on the loan without being subject to any
pre-payment penalty. The loan is evidenced by a promissory note, and the
performance of SD of its obligations under the loan agreement and the promissory
note are secured pursuant to a security agreement.
Settlement and Release Agreement
On November 30, 2019, we through NMGCC entered into a settlement and release
agreement (the "Settlement Agreement") with SD whereby NMGCC and SD agreed to
terminate the California Management Agreement and to enter into a mutual release
of any and all claims related to the California Management Agreement, subject to
the terms of the Settlement Agreement.
As of November 30, 2019, SD owed NMGCC management fees (the "Monies Owed") under
the California Management Agreement. In consideration of NMGCC's discharge of
the Monies Owed, SD has agreed to pay NMGCC one-hundred percent (100%) of all
proceeds received from the sale of all or any part of its inventory (the
"Inventory") as of November 1, 2019. Pursuant to the Settlement Agreement, SD
shall provide monthly updates of the remaining Inventory until the Inventory has
been fully exhausted. NMGCC will determine the sale price for any item in
Inventory subject to the Settlement Agreement.
As part of the Settlement Agreement, each of SDL and NMG mutually agree to
release and discharge the other from any and all claims arising from the
California Management Agreement on or before November 30, 2019.
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Brand Director Agreement
On November 30, 2019, NMGCC entered into a brand director agreement (the "Brand
Director Agreement") with SD. Pursuant to the Brand Director Agreement, SD has
engaged NMGCC to provide certain advisory and brand director services in
connection with SD's manufacture of Company-branded products, as well as certain
other products (the "Managed Products") as agreed to by NMGCC (the "Brand
Director Services"). The initial term of the Brand Director Agreement is six
months and the parties may renew the Brand Director Agreement for successive
three-month renewal periods.
The Brand Director Services include: (a) managing SD's production of the Managed
Products; (b) payment of a reimbursement fee to SD equal to the amount of direct
costs and direct taxes applicable to the Managed Products; (c) managing
inventory of the Managed Products; and (d) directing SD to enter into
distribution agreements and sale agreements with third-party commercial cannabis
licensees for the distribution and sale of the Managed Products in accordance
with applicable law. Pursuant to the Brand Director Agreement, NMGCC will pay a
monthly fee (the "Contribution Fee") of $5,000 to SD. In connection with the
Brand Director Agreement, as partial repayment for the principal and interest
accrued under a certain loan agreement (the "Loan Agreement") between NMGCC and
SD dated June 6, 2019, SD waives payment of the Contribution Fee for the first
five (5) months of the Brand Direction Agreement.
In consideration for the Brand Director Services, SD (as the "Licensee") has
agreed to pay NMGCC (in its capacity as the "Brand Director") a brand director
fee for each calendar month during the term of the Brand Director Agreement,
whereby Licensee shall pay to Brand Director a fee to be calculated as follows:
(x) net revenue for a single calendar month, multiplied by, (y) seventy-five
percent (75%); (z) plus any fees to be paid to NMGCC in connection with the
equipment lease agreement (the "Equipment Lease Agreement") dated June 6, 2019
(the "Equipment Lease Fee") added to the product of (x) and (y), the (q) total
amount shall be the fee paid to NMGCC. If the net revenue, minus the product of
(x) and (y) is less than the Equipment Lease Fee in any given month, the
difference shall carry over to the subsequent month, to be added to that month's
Equipment Lease Fee, or the difference may be paid by Licensee at its sole
option.
Brand License Agreement
On November 30, 2019, DEP entered into a brand license agreement (the "License
Agreement") with SD. Pursuant to the License Agreement, DEP granted SD a
non-exclusive, non-transferable, and non-sub-licensable right (the "License") to
use certain licensed marks in connection with or on licensed products, solely in
connection with SD's commercial cannabis activity in California. In
consideration for the License, SD will pay DEP a monthly fee equal to $100,
payable on a quarterly basis.
During the term of the License Agreement, SD must remain in compliance with all
state and local cannabis rules and regulations in California, and maintain valid
commercial cannabis licenses. SD will follow the guidance of DEP and only
utilize packaging and labelling materials purchased from (or at the direction
of) DEP. The License Agreement will be in full force and effect for the duration
of the Brand Director Agreement.
Equipment Purchase Agreement
On November 30, 2019, NMGCC and SD entered into an equipment purchase agreement
(the "Equipment Purchase Agreement") pursuant to which NMGCC agreed to purchase
certain equipment (the "Equipment") from SD. The aggregate purchase price for
the Equipment is $235,684.93 and will be applied to the outstanding balance
under the Loan Agreement.
First Amendment to the Equipment Lease Agreement
On November 30, 2019, NMGCC and SD entered into an amendment (the "First
Amendment") to the Equipment Lease Agreement. Pursuant to the First Amendment,
NMGCC and SD amended (i) the term of the Equipment Lease Agreement to be
coterminous with the Brand Director Agreement; and (ii) to update the equipment
being leased pursuant to the Equipment Lease Agreement and to update the monthly
rental rate for the equipment being leased.
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Release & Satisfaction of Loan Agreement
On November 30, 2019, NMGCC and SD entered into a release and satisfaction of
loan agreement (the "Release Agreement"). Pursuant to the Release Agreement,
NMGCC agreed that all indebtedness of SD to NMGCC arising from the Loan
Agreement (and promissory note issued in connection with the Loan Agreement) is
hereby satisfied and discharged in full. The release is granted based on SD's
obligations and duties pursuant to the Equipment Purchase Agreement and its five
(5) month waiver of the Contribution Fee under the Brand Director Agreement.
Conditional Use Permit for Nevada Production Facility
On June 20, 2019, we announced the receipt of a conditional use permit from
Clark County, Nevada, for a new production facility located within one mile of
NMG's existing cultivation facility located at 3375 Pepper Lane, in Las Vegas.
The new facility will be located within an existing commercial building where
our Company has secured a long-term lease. Architect plans are complete, and the
space has been custom designed to produce edibles, oils and extracts at scale.
The new facility will be approximately 7,500 square feet, and construction
commenced in late July. The new facility plans include high-volume extraction
equipment, which we expect will dramatically increase our manufacturing capacity
and efficiency for our extraction products, including oils, wax, live resin and
ambrosia. The new facility also expands the kitchen area and creates an
opportunity for the Company to white label for brands seeking an entry to the
Nevada market. The new production facility was anticipated to be operational in
mid to late September 2019, pending license transfer approvals from local and
state authorities. Substantial construction work has been advanced including
completion of offices, boardroom and facilities which are being utilized by the
Company. In addition, significant electrical, framing and HVAC work is complete
and waiting for formal permitting and inspections required by the Clark County
building department. Final inspections and permits are required prior to
receiving license transfer approvals from local and state authorities. We plan
to move our current production license eliminating the need to apply for a new
license.
Results of Operations for the three month periods ended January 31, 2020 and
2019:
The following table sets forth our results of operations for the three month
periods ended January 31, 2020 and 2019:
January 31, 2020 January 31, 2019
$ $
Sales, net of taxes 1,215,890 1,079,818
Cost of Sales (686,691 ) (575,948 )
Gross Margin 529,199 503,870
General and Administrative Expenses (1,812,866 ) (1,917,758 )
Foreign Currency Translation Adjustment (103,440 ) (120,725 )
Comprehensive Income (Loss) (1,338,792 ) (1,884,404 )
Basic and Diluted Earnings (Loss) Per
Share (0.01 ) (0.03 )
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Revenues
For the three month period ended January 31, 2020 we had total net sales of
$1,215,890 and cost of sales of $686,691 for a gross margin of $529,199 compared
total net sales of $1,079,818 and cost of sales of $575,948 for a gross margin
of $503,870 in the three month period ended January 31, 2019. During the three
months ended January 31, 2020, the Company recorded product sales as follows:
Three months
ended
January 31,
2020
Revenues - By Product $ %
Flower 1,286,109 81.8 %
Concentrates 217,154 13.8 %
Edibles 69,021 4.4 %
Total 1,572,284
The Company's revenue generating products, being flower, concentrates, edibles,
are expected to have relatively consistent revenues for the foreseeable future.
Operating Expenses
For the three month period ended January 31, 2020, operating expenses totaled
$1,812,866 compared with $1,917,758 for the three month period ended January 31,
2019. A significant reason for the decrease in operating expenses between the
periods related to a decrease in non-cash stock-based compensation from $870,808
to $369,437. The decrease is partially offset by an increased consulting fees
from $107,687 to $135,953 as a result of various ongoing acquisitions and
expansions. The Company adopted ASC 842, Lease Accounting, and presented lease
expense of $54,926 on the income statement related to the two leases in Nevada,
USA. The Company's office administration and salaries and wages increased
considerably as a result of increased operations in Nevada as well as the total
number of employees under payroll.
Other Items
During the three month period ended January 31, 2020, our other items accounted
for $48,315 in income as compared to $250,397 in expenses for the three month
period ended January 31, 2019. The significant components in other items
primarily relates to the Company's proportion of income on equity investee in
NMG Ohio LLC of $103,899 (2019 - loss of $23,939), interest income on the
secured convertible note related to the investment in GLDH and convertible loan
receivable from CCG in the amount of $278,688 (2019 - $Nil) and an interest
expense of $131,850 (2019 - $202,065) relating to the convertible loan held by
Australis that will be converted on July 1, 2020. On November 30, 2019, the
Company entered into a settlement and release agreement with SD resulting a loss
of $239,328 (2019 - $Nil).
Net Loss
Net loss for the quarter ended January 31, 2020 totaled $1,235,352 compared with
a net loss of $1,763,679 for the quarter ended January 31, 2019. The decrease in
net loss of $528,327 is largely due to the decrease in operating expenses as
discussed above
Other Comprehensive Income (Loss)
We recorded translation adjustments loss of $103,440 and $120,725 for the three
months ended January 31, 2020 and 2019, respectively. The amounts are included
in the statement of operations as other comprehensive gain for the respective
periods.
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Results of Operations for the six month periods ended January 31, 2020 and 2019:
The following table sets forth our results of operations for the six month
periods ended January 31, 2020 and 2019:
January 31, January 31,
2020 2019
$ $
Sales, net of taxes 2,458,992 2,274,377
Cost of Sales (1,609,664 ) (1,313,569 )
Gross Margin 849,328 960,808
General and Administrative Expenses (3,455,523 ) (2,383,809 )
Foreign Currency Translation Adjustment 15,753 (26,314 )
Comprehensive Income (Loss) (2,116,396 ) (2,001,788 )
Basic and Diluted Earnings (Loss) Per Share (0.02 ) (0.03 )
Revenues
For the six month period ended January 31, 2020 we had total net sales of
$2,458,992 and cost of sales of $1,609,664 for a gross margin of $849,328
compared total net sales of $2,274,377 and cost of sales of $1,313,569 for a
gross margin of $960,808 in the six month period ended January 31, 2019. During
the six months ended January 31, 2020, the Company recorded product sales as
follows:
Three months
ended
January 31,
2020
Revenues - By Product $ %
Flower 2,336,175 77.5 %
Concentrates 521,110 17.3 %
Edibles 156,625 5.2 %
Total 3,013,910
The Company's revenue generating products, being flower, concentrates, edibles,
are expected to have relatively consistent revenues for the foreseeable future.
Operating Expenses
For the six month period ended January 31, 2020, operating expenses totaled
$3,455,523 compared with $2,383,809 for the six month period ended January 31,
2019. A significant reason for the increase in operating expenses between the
periods related to increased consulting fees from $110,287 to $356,180 as a
result of various ongoing acquisitions and expansions. The Company adopted ASC
842, Lease Accounting, and presented lease expense of $111,630 on the income
statement related to the two leases in Nevada, USA. The Company's office
administration and salaries and wages increased considerably as a result of
increased operations in Nevada as well as the total number of employees under
payroll. The Company also recorded a non-cash stock-based compensation of
$659,015 related to August 2019, October 2019 and January 2020 options granted
to certain officers, directors, employees and/or consultants of the Company.
Other Items
During the six month period ended January 31, 2020, our other items accounted
for $474,046 in income as compared to $329,525 in expenses for the three month
period ended January 31, 2019. The significant components in other items
primarily relates to the Company's proportion of income on equity investee in
NMG Ohio LLC of $191,550 (2019 - loss of $31,559), interest income on the
secured convertible note related to the investment in GLDH and convertible loan
receivable from CCG in the amount of $556,688 (2019 - $Nil), and interest
expense of $131,850 related to the convertible loan held by Australis that will
be converted to common shares on July 1, 2020. On November 30, 2019, the Company
entered into a settlement and release agreement with SD resulting a loss of
$239,328 (2019 - $Nil).
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Net Loss
Net loss for the six months ended January 31, 2020 totaled $2,132,149 compared
with a net loss of $1,975,474 for the six months ended January 31, 2019. The
decrease in net loss of $156,675 is largely due to the increase in other income
as discussed above.
Other Comprehensive Income (Loss)
We recorded translation adjustments gain of $15,422 and a loss of $26,314 for
the six months ended January 31, 2020 and 2019, respectively. The amounts are
included in the statement of operations as other comprehensive gain for the
respective periods.
Liquidity and Capital Resources
The following table sets out our cash and working capital as of January 31,
2020:
As of
January 31,
2020
(unaudited)
Cash reserves $ 3,374,079
Working capital $ 5,443,575
On May 17, 2019, the Company closed a private placement of 11,780,904 units at a
price of $0.93 (CAD$1.25) per unit for aggregate gross proceeds of $10,956,241
(CAD$14,726,130). Each unit is comprised of one common share and one common
share purchase warrant. Each warrant entitles the holder to acquire one common
share of the Company at an exercise price of CAD$1.50 for a period of 48 months
following the closing date, subject to adjustment in certain events. The agents
received a cash commission of $589,499 (CAD$793,938). The agents also received
as additional consideration 635,150 non-transferable broker warrants. Each
broker warrant entitles the holder to acquire one unit at an exercise price of
CAD$1.25 per unit for a period of 48 months following the closing date. A
corporate finance fee of $63,774 (CAD $84,750) was also paid.
On May 28, 2019, the Company issued 12,793,840 common shares upon exercise of
12,793,840 warrants by Australis at a price of CAD$0.50 per common share for
aggregate proceeds of $4,733,721 (CAD$6,396,920). The proceeds were used, in
part, to fully repay the outstanding senior secured note in the amount of
$4,495,890 owing to Australis by the Company.
On July 16, 2019, the Company issued 7,333 common shares upon exercise of 7,333
warrants at a price of CAD$0.90 per common share for aggregate proceeds of
$5,057 (CAD$6,600).
On August 12, 2019, the Company issued 81,591 common shares upon exercise of
81,591 warrants at a price of CAD$0.66 per common share for aggregate proceeds
of $40,765 (CAD$53,850).
On September 12, 2019, the Company issued 38,912 common shares upon exercise of
38,912 warrants at a price of CAD$0.66 per common share for aggregate proceeds
of $19,450 (CAD$25,682).
On October 4, 2019, the Company issued 22,727 common shares upon exercise of
22,727 warrants at a price of CAD$0.90 per common share for aggregate proceeds
of $15,360 (CAD$20,454).
On November 14, 2019, the Company issued 22,485 common shares upon exercise of
22,485 warrants at a price of CAD$0.90 per common share for aggregate proceeds
of $15,291 (CAD$20,236).
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Statement of Cash flows
During the six month period ended January 31, 2020, our net cash decreased by
$5,630,637 (2019: increase of $2,393,902), which included net cash used in
operating activities of $2,565,786 (2019: $915,104), net cash used in investing
activities of $3,173,895 (2019: $6,510,559), net cash provided by financing
activities of $90,840 (2019: $9,845,879) and effect of exchange rate changes on
cash and cash equivalents of $18,204 (2019: ($26,314)).
Cash Flow used in Operating Activities
Cash flow used in operating activities totaled $2,565,786 and $915,104 during
the six months ended January 31, 2020 and 2019, respectively. Significant
changes in cash used in operating activities are outlined as follows:
• The Company incurred a net loss from operations of $2,132,149 during the
six months ended January 31, 2020 compared to $1,975,474 in 2019. The net
loss in 2020 included non-cash depreciation of $157,855 (2019: $141,901),
accrued interest income of $520,000 (2019: $Nil), gain of equity investee
of $191,550 (2019: loss of $31,559), loss on settlement with SD of
$239,328 (2019: $Nil) and stock-based compensation of $659,015 (2019:
$870,808).
The following non-cash items further adjusted the loss for the six months ended
January 31, 2020 and 2019:
• Increase in amounts receivable and prepaid of $716,996 (2019: $125,748),
increase in inventory of $131,841 (2019: $615,174), decrease in trade
payables and accrued liabilities of $37,812 (2019: increase of $369,957),
and decrease in due to related parties of $5,272 (2019: decrease of
$45,489).
Cash Flow used in Investing Activities
During the six month period ended January 31, 2020, investing activities used
cash of $3,173,895 compared to $6,510,559 during the three month period ended
January 31, 2019. The change in cash used in investing activities from the six
month period ended January 31, 2020 relates primarily to investment in Green
Light District Holdings, Inc. of $1,285,960 (2019: $5,752,180), additional
property and equipment of $802,471 (2019: $145,760), and loans provided to SD of
$334,348 (2019: $Nil). The Company also provided a convertible loan of $842,085
(2019: $Nil) to CCG in Arkansas.
Cash Flow provided by Financing Activities
During the six month period ended January 31, 2020, financing activities
provided cash of $90,840 compared to $9,845,879 during the six month period
ended January 31, 2019. During the six month period ended January 31, 2020, the
Company issued 165,715 common shares for proceeds of $90,840 related to the
exercise of 165,715 warrants.
Trends and Uncertainties
Potential Impact of the COVID-19 Pandemic
In December 2019, a strain of novel coronavirus (now commonly known as COVID-19)
was reported to have surfaced in Wuhan, China. COVID-19 has since spread rapidly
throughout many countries, and, on March 12, 2020, the World Health Organization
declared COVID-19 to be a pandemic. In an effort to contain and mitigate the
spread of COVID-19, many countries, including the United States, Canada and
China, have imposed unprecedented restrictions on travel, and there have been
business closures and a substantial reduction in economic activity in countries
that have had significant outbreaks of COVID-19. COVID-19 may have a future
material impact on our results of operation with respect to retail sales at our
dispensary locations as well as wholesales of our products in Nevada to
dispensaries in Nevada. However, significant uncertainty remains as to the
potential impact of the COVID-19 pandemic on our operations, and on the global
economy as a whole. It is currently not possible to predict how long the
pandemic will last or the time that it will take for economic activity to return
to prior levels. We do not yet know the full extent of any impact on our
business or our operations, however, we will continue to monitor the COVID-19
situation closely, and intend to follow health and safety guidelines as they
evolve.
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Off-balance Sheet Arrangements
The Company has no off-balance sheet arrangements that would require
disclosure.
Subsequent Events
On March 1, 2020, the Company issued 250,000 stock options with an exercise
price of CAD$0.405 per share for a term of five years expiring on 1 March 2025.
The options are subject to vesting provisions such that 25% of the options vest
six months from the date of grant, 25% of the options vest twelve months from
the date of grant, 25% of the options vest eighteen months from the date of
grant and 25% of the options vest twenty-four months from the date of grant.
Critical Accounting Policies
Our financial statements and accompanying notes have been prepared in accordance
with United States generally accepted accounting principles applied on a
consistent basis. The preparation of financial statements in conformity with
U.S. generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities, the disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting periods.
We regularly evaluate the accounting policies and estimates that we use to
prepare our financial statements. In general, management's estimates are based
on historical experience, on information from third party professionals, and on
various other assumptions that are believed to be reasonable under the facts and
circumstances. Actual results could differ from those estimates made by
management.
We believe the following critical accounting policies require us to make
significant judgments and estimates in the preparation of our consolidated
financial statements.
• Income taxes
The determination of deferred income tax assets or liabilities requires
subjective assumptions regarding future income tax rates and the
likelihood of utilizing tax carry-forwards. Changes in these assumptions
could materially affect the recorded amounts, and therefore do not
necessarily provide certainty as to their recorded values.
• Foreign currency
The Company determines the functional currency through an analysis of
several indicators such as expenses and cash flows, financing activities,
retention of operating cash flows, and frequency of transactions with the
reporting entity.
• Fair value of financial instruments
Management uses valuation techniques, in measuring the fair value of
financial instruments, where active market quotes are not available.
In applying the valuation techniques, management makes maximum use of
market inputs wherever possible, and uses estimates and assumptions that
are, as far as possible, consistent with observable data that market
participants would use in pricing the instrument. Where applicable data is
not observable, management uses its best estimate about the assumptions
that market participants would make. Such estimates include liquidity
risk, credit risk and volatility may vary from the actual results that
would be achieved in an arm's length transaction at the reporting date.
The assessment of the timing and extent of impairment of intangible assets
involves both significant judgements by management about the current and
future prospects for the intangible assets as well as estimates about the
factors used to quantify the extent of any impairment that is recognized.
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• Intellectual property
The recoverability of the carrying value of the intellectual property is
dependent on numerous factors. The carrying value of these assets is
reviewed by management when events or circumstances indicate that its
carrying value may not be recovered. If impairment is determined to exist,
an impairment loss is recognized to the extent that the carrying amount
exceeds the recoverable amount.
• Stock-based compensation
The option pricing models require the input of highly subjective
assumptions, particularly the expected stock price volatility. Changes in
the subjective input assumptions can materially affect the fair value
estimate, and therefore the existing models do not necessarily provide a
reliable single measure of the fair value of the Company's stock options.
Recent Accounting Pronouncements
In June 2016, the FASB issued ASU No. 2016-13 "Financial Instruments-Credit
Losses (Topic 326): Measurement of Credit Losses on Financial Instruments" which
requires the measurement and recognition of expected credit losses for financial
assets held at amortized cost. ASU 2016-13 replaces the existing incurred loss
impairment model with an expected loss methodology, which will result in more
timely recognition of credit losses. ASU 2016-13 is effective for annual
reporting periods, and interim periods within those years beginning after
December 15, 2019. The Company does not anticipate this amendment to have a
significant impact on the financial statements.
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 is currently
evaluating the effect of adopting this ASU on the Company's financial
statements.
Management of financial risks
The financial risk arising from the Company's operations are credit risk,
liquidity risk, interest rate risk and currency risk. These risks arise from the
normal course of operations and all transactions undertaken are to support the
Company's ability to continue as a going concern. The risks associated with
these financial instruments and the policies on how to mitigate these risks are
set out below. Management manages and monitors these exposures to ensure
appropriate measures are implemented on a timely and effective manner.
• Credit risk
Credit risk is the risk that one party to a financial instrument will fail
to discharge an obligation and cause the other party to incur a financial
loss. The Company is not exposed to credit risk as it does not hold cash
in excess of federally insured limits, with major financial institutions.
Credit risk associated with the convertible loans receivable (including
the investment in and advances to GLDH) arises from the possibility that
the principal and/or interest due may become uncollectible. The Company
mitigates this risk by managing and monitoring the underlying business
relationship. The Company is not currently exposed to any significant
credit risk associated with its trade receivable.
• Liquidity risk
Liquidity risk is the risk that the Company will not be able to meet its
financial obligations as they fall due. The Company had a working capital
of $5,443,575 as at January 31, 2020.
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• Interest rate risk
Interest rate risk is the risk that the fair value or future cash flows of
a financial instrument will fluctuate because of changes in market
interest rates. The Company is not exposed to interest rate risk as it
does not hold financial instruments that will fluctuate in value due to
changes in interest rates.
• Currency risk
Currency risk is the risk that the fair values of future cash flows of a
financial instrument will fluctuate because they are denominated in
currencies that differ from the respective functional currency. The
Company is exposed to currency risk by incurring expenditures and holding
assets denominated in currencies other than its functional currency.
Assuming all other variables remain constant, a 1% change in the Canadian
dollar against the US dollar would not result in a significant change to
the Company's operations.
• Other risks
The Company is not exposed to other risks unless otherwise noted.© Edgar Online, source Glimpses
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