BODY AND MIND INC. The terms "BAM", "Company", "we", "our", and "us" refer to
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
Introduction
This MD&A is focused on material changes in our financial condition from
Company Overview
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
We have a track record of producing award-winning cannabis products and we have success with winning licenses in new states and jurisdictions.
We are a
In
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On
On
In
In
In
On
Our common stock is listed on the Canadian Securities Exchange under the symbol "BAMM" and our common stock is posted for trading on the OTCQB Venture Market under the symbol "BMMJ."
Our head office located at
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Intercorporate Relationships
The following is a list of all of our subsidiaries and the corresponding date of jurisdiction of incorporation or organization and the ownership interest of each. All of our subsidiaries are directly or indirectly owned by us:
Name of Entity Place of Ownership Date of
Incorporation/Formation Interest Acquisition
or formation
DEP Nevada Inc.(1) Nevada, USA 100% August 10,
2017
Nevada Medical Nevada, USA 100% November 14,
Group, LLC(2) 2017
NMG Long Beach, California, USA 100% December 18,
LLC(3) 2018
NMG San Diego, California, USA 60% January 30,
LLC(4) 2019
NMG Ohio LLC(5) Ohio, USA 100% April 27,
2017
NMG OH 1, LLC(6) Ohio, USA 100% January 29,
2020
NMG OH P1, LLC(7) Ohio, USA 100% January 29,
2020
NMG MI 1, Inc.(8) Michigan, USA 100% June 24,
2021
NMG MI P1 Inc. (9) Michigan, USA 100% June 24,
2021
NMG MI C1 Inc. (10) Michigan, USA 100% June 24,
2021
Canopy Monterey California, USA 100% December 1,
Bay, LLC (11) 2021
NMG CA P1, LLC(12) California, USA 100% January 7,
2020
NMG CA C1, LLC(13) California, USA 100% October 7,
2020
BaM Body and Mind New Jersey, USA 100% December 21,
Dispensary NJ, 2022
Inc.(14)
Notes:
(1) DEP Nevada Inc. is a wholly-owned subsidiary of Body and Mind Inc.
(2) Nevada Medical Group, LLC is a wholly-owned subsidiary of DEP Nevada Inc.
(3) NMG Long Beach, LLC is a wholly-owned subsidiary ofDEP Nevada Inc. .
(4) NMG San Diego, LLC is a 60% owned subsidiary of DEP Nevada Inc. .
(5) NMG Ohio LLC is a wholly-owned subsidiary of Nevada Medical Group LLC
(6) NMG OH 1, LLC is a wholly-owned subsidiary of DEP Nevada Inc.
(7) NMG OH P1, LLC is a wholly-owned subsidiary of DEP Nevada Inc.
(8) NMG MI 1, Inc. is a wholly-owned subsidiary of DEP Nevada, Inc.
(9) NMG MI P1 Inc. is a wholly-owned subsidiary of DEP Nevada, Inc.
(10) NMG MI C1 Inc. is a wholly-owned subsidiary of DEP Nevada, Inc.
(11) Canopy Monterey Bay, LLC is a wholly-owned subsidiary of DEP Nevada, Inc.
(12) NMG CA P1, LLC is a wholly-owned subsidiary of DEP Nevada, Inc.
(13) NMG CA C1, LLC is a wholly-owned subsidiary of DEP Nevada, Inc.
(14) BaM Body and Mind Dispensary NJ, Inc. (formerly, CraftedPlants NJ Corp. )
is a wholly-owned subsidiary of DEP Nevada, Inc.
Business Operations
Development of Our Business
Incorporation and Early Corporate History
We were incorporated on
On
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On
On
On
Pursuant to the Share Exchange Agreement, we changed our name to "
Concurrent with the Share Exchange Agreement, we completed an equity financing
to raise aggregate gross proceeds of
On completion of the Share Exchange Agreement, we assumed the business of NMG, being the cultivation and production of medical marijuana products.
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Convertible Loan and Management Agreements with
On
Pursuant to the Convertible Loan Agreement, DEP agreed to make loan advances to
CCG from time to time in the aggregate principal amount of up to
The interest on the outstanding principal amount is currently set at
Upon the latter of: (a) one year after granting of a medical marijuana
dispensary license by the
Pursuant to the Management Agreement, NMG provides operations and management
services to CCG (including management, staffing, operations administration,
oversight and other related services) for the medical marijuana dispensary. In
consideration for such services CCG pays NMG a monthly management fee in the
amount equal to 66.67% of the Monthly Net Profits (as defined below) of CCG for
the immediately-preceding month. Notwithstanding the foregoing, in the event
that DEP exercises its conversion right under the Convertible Loan Agreement,
then NMG's monthly management fee shall be fixed at
Acquisition ofNMG Ohio LLC
We, through NMG, currently own
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Transaction and Settlement with
Prior Agreement with
On
At the time, GLDH was 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 were in various stages of licensing.
In order to fund our original investment in GLDH, Australis advanced a
We paid a financing fee to Australis in the approximate amount of
Original Settlement and Release Agreement
On
Pursuant to the Original GLDH Settlement Agreement, we, GLDH, and
In connection with the settlement, (a) SGSD agreed to assign its lease for the
San Diego Location to NMG SD, and (b) GLDH, Airport Collective and NMG LB
entered into an asset purchase agreement dated
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Amended and Restated Settlement and Release Agreement
On
i. GLDH, Airport Collective, and Mr. Barakett agreed to release us from all
claims related to the Prior GLDH Agreement upon closing of the Asset
Purchase Agreement in consideration of the following:
A. the Company issuing to Mr. Barakett or his designee up to 1,340,502
Common Shares at a deemed price of CAD$0.7439 per share, subject to NMG
SD receiving all licenses, permits, and authorizations required for NMG
SD to conduct medical commercial cannabis retail operations at the San
Diego Location (the "SD Medical Licenses") (issued);
B. the Company issuing to Mr. Barakett or his designee up to 1,340,502
Common Shares at a deemed price of CAD$0.7439 per share, subject to NMG
SD receiving all licenses, permits, and authorizations required for NMG
SD to conduct adult-use commercial cannabis retail operations at the
San Diego Location (the "SD Adult-use Licenses") (issued); and
C. the Company paying certain legal and consulting expenses incurred by
GLDH, Airport Collective and Barakett in an aggregate amount of
US$90,500 (paid); and
ii. SGSD agreed to assign its lease for the San Diego Location to NMG SD, and
to release our Company, NMG LB and NMG SD from any and all claims, in
consideration of the payment by us of a total of USD$500,000 to SGSD's
members, to be paid and satisfied by the issuance of Common Shares to them
at the maximum discount allowed by the CSE (issued).
NMG SD is owned 60% by our subsidiary, DEP, and 40% by
NMG SD, which has assumed the lease on the ShowGrow San Diego premises, has been
awarded its own medical commercial cannabis retail license and adult-use
commercial retail license and commenced operations on
i. $700,000 in Common Shares of the Company calculated upon execution of the
assignment and first amendment to commercial lease (the "Assignment and
First Amendment"), dated June 13, 2019 , at the maximum discount allowed
by the CSE to be issued to the landlord immediately following execution
of the Assignment and First Amendment (1,031,725 shares issued on August
12, 2019 );
ii. $783,765 in cash to be paid to the landlord via bank draft within five
(5) business days of execution of the Assignment and First Amendment
(paid); and
iii. $750,000 in cash, plus interest at the rate of five percent (5%) simple
per annum accruing from the effective date to be paid no later than five
(5) business days of the landlord's receipt from the City of San Diego of
a Conditional Use Permit allowing adult-use commercial cannabis
storefront retail operations at the San Diego Location (paid).
Pursuant to the Assignment and First Amendment, the parties agreed to amend the
original lease to permit NMG SD to have three (3) five (5) year renewal options
as opposed to two (2) renewal options. In addition, the parties agreed to reduce
the amount of the sale bonus provision in the original lease to
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Amended and Restated Convertible Note and General Security Agreement
As contemplated by the Original GLDH Settlement Agreement, we entered into a
loan agreement with GLDH dated
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
We will pay the balance of the purchase price for the Purchased Assets by
issuing up to 2,681,006 Common shares at a deemed price of
Contemporaneous Loan
We entered into a contemporaneous loan (the "Contemporaneous Loan") with GLDH in
the amount of
Management Assignment and Assumption Agreement
On or around
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Acquisition of Canopy
Membership Interest Purchase Agreement #1
On
As consideration for DEP's purchase of the Purchased Interests, DEP will pay to
Sellers a total purchase price of
Pursuant to MIPA #1, DEP is obligated to transfer the Cash Purchase Price in
escrow to
As described below, contemporaneous with the execution of MIPA #1, DEP also
entered into a second membership interest purchase agreement to purchase,
subject to all approvals required by applicable laws and regulations, the
remaining twenty percent (20%) of the issued and outstanding membership
interests of Canopy from the Continuing Owner ("MIPA #2"). In MIPA #1, the
parties have agreed that the target working capital for Canopy on the date that
DEP is assigned the Purchased Interests shall be Zero Dollars (
The foregoing description of MIPA #1 does not purport to be complete and is
qualified in its entirety by the MIPA #1, which is filed as Exhibit 10.63 to our
Annual Report on Form 10-K for the fiscal year ended
Secured Promissory Note
DEP issued the Promissory Note payable to the Sellers in the principal amount of
The Promissory Note does not become effective by its terms unless and until the state regulators and local regulators approve DEP as the owner of the Purchased Interests (the date such approval is received being the "Effective Date"). In the event the MIPA #1 for DEP to purchase the Purchased Interests is terminated for any reason, the Promissory Note will terminate automatically.
Pursuant to the Promissory Note, interest will accrue on the principal amount from the Effective Date at the rate of ten percent (10%) compounded annually. DEP will be obligated to make monthly interest-only payments for the initial six (6) months following the Effective Date. Following the initial six (6) months, no payments shall be due until the maturity date, which is the date that is five (5) years following the Effective Date.
Following the transfer of the Purchased Interests to DEP, Canopy will sign a joinder to the Promissory Note and further enter into a security agreement granting a security interest to the Sellers in all of Canopy's assets to secure DEP's fulfillment of its obligations under the Promissory Note.
The foregoing description of the Secured Promissory Note does not purport to be
complete and is qualified in its entirety by the Secured Promissory Note, which
is filed as Exhibit 10.64 to our Annual Report on Form 10-K for the fiscal year
ended
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Security Agreement
On
The foregoing description of the Security Agreement does not purport to be
complete and is qualified in its entirety by the Security Agreement, which is
filed as Exhibit 10.65 to our Annual Report on Form 10-K for the fiscal year
ended
Escrow Agreement
On
The Escrow Agent shall receive, as compensation for services a fee in the amount
of
The foregoing description of the Escrow Agreement does not purport to be
complete and is qualified in its entirety by the Escrow Agreement, which is
filed as Exhibit 10.66 to our Annual Report on Form 10-K for the fiscal year
ended
Membership Interest Purchase Agreement #2
On
As consideration for DEP's purchase of the Remaining Purchased Interests, DEP
will pay to the Continuing Owner a total purchase price of
The Purchase Price is to be adjusted based on the actual working capital of Canopy as of the closing of MIPA #1.
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Within seven business days from the date that DEP receives notification from the city and state regulators that it is approved as the sole owner of Canopy and all adjustment calculations for determining the working capital are completed, DEP shall be obligated to pay to Continuing Owner the Purchase Price subject to applicable adjustments.
The foregoing description of the MIPA #2 does not purport to be complete and is
qualified in its entirety by the MIPA #2, which is filed as Exhibit 10.68 to our
Annual Report on Form 10-K for the fiscal year ended
Amendment to MIPA #1 and MIPA #2
On
(a) The Company agreed to issue to the Sellers shares with an aggregate value
of $1,250,000 based on the VWAP for the 10 consecutive trading days prior
to the effective date of the First Amendment being June 17, 2022 (the
"Effective Date") (9,328,358 shares);
(b) The Company agreed to issue additional shares to the Continuing Owner
equal to the difference between the amount of the shares of common stock
of the Company that were issued by the Company to the Continuing Owner on
December 3, 2021 (the "MIPA #2 Shares") and the amount of shares that the
Continuing Owner would have received had the VWAP for the MIPA #2 Shares
been calculated as of the Effective Date (the "Additional PA #2 Shares")
(4,734,530 shares);
(c) On the date that is 18 months (548 days) following the Effective Date of
the First Amendment (the "Additional Share Issuance Date") the Company
will issue $100,000 worth of shares to the Sellers based on the 10-day
VWAP calculated as of the Additional Share Issuance Date; and
(d) The Company agreed to issue to the Continuing Owner $300,000 worth of
shares (the "Additional True-up Shares") within three days following the
Effective Date of the First Amendment, which shall be priced at the 10-day
VWAP calculated as of the Effective Date of the First Amendment (2,238,806
shares).
Prior to the conclusion of the calculation of the actual working capital in accordance with MIPA #1 and MIPA #2, the Sellers must complete, execute and deliver to DEP Schedule D to the First Amendment, which shall set forth the amount of Additional True-up Shares each Seller is entitled to (as applicable) and such Additional True-up Shares shall be retitled in accordance with Schedule D to the First Amendment. In the event Schedule D to the First Amendment is not completed, executed and delivered to DEP prior to the conclusion of the calculation of the actual working capital, DEP shall have no obligation to retitle the shares and all Sellers will waive any claims against DEP and the Company in connection with such issuance made in accordance with Section 2(b)(v) of the First Amendment.
Upon conclusion of the calculation of the actual working capital in accordance with MIPA #1 and MIPA #2, the parties have further agreed as follows:
(a) If the actual working capital is less than the target working capital of
$nil, the Purchase Price (as defined in PA #2) shall be reduced by an
amount equal to the difference between the target working capital and the
actual working capital and all of the Additional True-up Shares shall be
forfeited and retuned to Company for cancellation;
(b) If the actual working capital is greater than the target working capital
of $nil and the Additional True-up Shares are sufficient to cover the
difference between the actual working capital and the target working
capital (the "DEP Deficit"), the parties agree that all or a portion of
the Additional True-up Shares (valued at the 10-day VWAP calculated as of
the Effective Date of the First Amendment and subject to compliance with
the policies of the CSE) shall be issued to Sellers to satisfy the DEP
Deficit owed by DEP to the Sellers in accordance with Section 2.02(b) of
PA #2;
(c) If the actual working capital is greater than the target working capital
and the Additional True-up Shares are insufficient to cover the DEP
Deficit, all of the Additional True-up Shares shall be issued to the
Sellers and the parties agree that any additional amounts owed to the
Sellers shall be paid by DEP to the Sellers via additional shares of
common stock of the Company.
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In addition to the terms of the First Amendment, the parties have agreed that the release of any Additional True-up Shares shall be subject to the Sellers providing written direction to DEP for the release of the Additional True-up Shares payable under the First Amendment.
On
Pursuant to the closing of MIPA #1, as amended, and MIPA #2, as amended, the
Company issued an aggregate of 16,301,694 shares of common stock to the Sellers
in accordance with their instructions at a deemed price of
The foregoing description of the First Amendment does not purport to be complete
and is qualified in its entirety by the First Amendment, which is filed as
Exhibit 10.72 to our Annual Report on Form 10-K for the fiscal year ended
Landlord Consent to Change of Control of Tenant
Canopy's retail dispensary in
On
The Landlord Consent is subject to the following conditions: (1) Tenant must pay
the Landlord a transfer fee equal to
The foregoing description of the Landlord Consent does not purport to be
complete and is qualified in its entirety by the Landlord Consent, which is
filed as Exhibit 10.67 to our Annual Report on Form 10-K for the fiscal year
ended
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The Lease
The Lease provides for a five-year term that includes three five-year extension
periods (each, an "Option Term") (collectively, the "Lease Term"). The monthly
rent under the Lease for the first four months is
The monthly rent is subject to an annual increase of three percent per year, but
in no event less than the amount of the increase in the Consumer Price Index, as
of the first day of July every year during the term of the lease (the
"Adjustment Date"), in each fiscal year (
The monthly rent for the first year of each Option Term shall be the fair market value monthly rent for the premises as determined by the Landlord as of the effective date of the Tenant's exercise of an Option Term. In the event there is a dispute between the Landlord and the Tenant regarding the monthly rent for the first year of an Option Term as of the date of Tenant's exercise of an Option Term, and the Landlord and Tenant cannot mutually agree on a monthly rent for an Option Term 90 days before the expiration of the Lease, third-party appraisers will set the Option Term monthly rent.
In addition to monthly rent, the Tenant is required to pay certain maintenance fees based on Tenant's gross sales for each year during the term of the Lease. These fees are modified and replaced in the Second Amendment.
The Second Amendment to Lease
On
The maintenance fees in the Lease are superseded and replaced with the a new monthly maintenance fee equal to One and One Half Percent (1.5%) of the Tenant's gross sales, which shall be computed each calendar month and, on or before the fifteenth (15th) day of the calendar month immediately following the close of such period, the Tenant shall pay to the Landlord the maintenance fee for the immediately preceding calendar month.
The Second Amendment includes a waiver and release of all claims against the Landlord up to and including the date of the Second Amendment.
Agreement and Plan of Merger -
On
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Pursuant to the terms of the Merger Agreement, on the closing DEP delivered a
cash payment of
Further, pursuant to the terms of the Merger Agreement, on
1. If, within two (2) years of the closing date, the Surviving Entity's
application is approved and is granted pending license approval from the
New Jersey Cannabis Regulatory Commission (the "CRC"), 70% of the Merger
Consideration Shares will be release from escrow.
2. If, within three (3) years of the closing date, the Surviving Entity opens
for business as a recreational cannabis dispensary, 30% of the Merger
Consideration Shares will be released from escrow.
If either or both of the milestones are not achieved within the time periods after the closing date (the "Milestone Dates"), the Company shall have the option to cancel the Merger Consideration Shares attributable to the failed milestone by delivering written notice to Sellers and in the event of such cancellation, the portion of the Merger Consideration Shares attributable to the failed milestone shall be surrendered and cancelled without any further action required by the parties. Notwithstanding the foregoing, if either or both of the milestones are not achieved (or if it becomes obvious that they will not be achieved) by their respective Milestone Dates because of delays that are not caused by the Sellers, the Sellers may, before the applicable Milestone Dates, provide notice to the Company, and the applicable Milestone Date will be extended to such date as is reasonably necessary for the milestone to be achieved. The parties will work together in mutual good faith to determine the dates by when the milestones can be reasonably achieved.
The foregoing description of the Merger Agreement does not purport to be
complete and is qualified in its entirety by the Merger Agreement, which is
filed as Exhibit 2.3 in the Company's fiscal year 2022 Form 10-K filed on
Nevada Production Facility
On
Material Contracts
Other than already disclosed above under the subsection titled "Description of Our Business", we have the following material contracts:
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Loan Agreement
On
Pursuant to the Loan Agreement, we have issued an aggregate of 8,000,000 common
stock purchase warrants (each, a "Warrant") to the Agent of which (i) 4,800,000
Warrants will entitle the holder to acquire shares of common stock (each, a
"Warrant Share") at an exercise price of
The Initial Term Loan is evidenced by a Term Note (a "Term Note"), which is attached as Exhibit C to the Loan Agreement. If the Delayed Draw Term Loan is drawn upon by us, it will also be evidenced by a separate Term Note.
The following table sets forth additional terms of the Loan Agreement and the
other loan documents entered into on
Loan Term Four years Face AmountUS$11,111,111 (the "Face Amount") funded in two (2) draws: (i) Initial Term Loan ofUS$6,666,667 issued on closing; and (ii) Delayed Draw Term Loan ofUS$4,444,444 issued upon 30 day request of the Company, which request must be made to the Agent byDecember 1, 2021 . Interest Rate Amended to 15% per annum, which 2% interest may be paid in kind, with the interest being payable on the first day of each month.
Default Interest Rate 20% per annum (inclusive of the 13% rate noted above) Origination Discount 10% of the Face Amount treated as consideration for the use
or forbearance of money
Agent Fee The Borrower paid the Agent a US$66,666.67 fee upon
execution of the Loan Agreement, which was withheld from
the initial advance of the Initial Term Loan made by the
Lender. A further Agent Fee of $44,444.44 will be withheld
from the advance of the Delayed Draw Term Loan made by the
Lender, if drawn upon by the Company.
Lender Expenses The Borrower is required to pay the Lender's reasonable
costs, fees and expenses, including attorney's fees, in
connection with entering into the Loan Agreement and the
other loan documents, subject to a cap of US$125,000 .Voluntary Prepayment The Borrower may not prepay within one year of the closing
date ("No Call Period"). Provided that no event of default
has occurred following the No Call Period, Borrower may
prepay the principle balance, in a minimum amount of
US$1,000,000 , at the following rates: (1) Following the No
Call Period through two-year anniversary of the Closing
Date: 107%; (2) Following the two-year anniversary of the
Closing Date through the three-year anniversary of the
Closing Date: 103%; and (3) following the three year
anniversary of the Closing Date and prior to the Maturity
Date: 100%.
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Mandatory Prepayment Under certain circumstances, if the Borrower or any
Guarantor incurs insurance claims or condemnation
proceedings, then Borrower or the Guarantor must either
reinvest such proceeds in assets useful to the Borrower's or
Guarantor's business, as applicable, or use the resulting
net cash proceeds to prepay the loan. There are mandatory
prepayment provisions for some change of control scenarios.Financial Covenants The Borrower and its subsidiaries taken as a whole are
required to have at least $1,500,00 in liquidity at all
times reported monthly. The Borrower and Guarantors on a
consolidated basis must maintain a leverage ratio of at
least 3:1 for acquisitions.
Other Covenants The Borrower and its subsidiaries are subject to additional
covenants customary for this type of transaction, including
without limitation, covenants related to notices of certain
events and reporting, and covenants restricting the
Borrower's and its subsidiaries' business activities, other
debt, fundamental transactions, acquisitions and
dispositions, investments, dividend payments and affiliate
transactions, in each case subject to mutually agreed upon
qualifications and exceptions.Events of Default The Loan Agreement contains events of defaults customary for
this type of transaction, some of which are subject to
mutually agreed upon cure periods and notice requirements.
Remedies The Loan Agreement and the other loan documents contain
remedies customary for this type of transaction, including,
without limitation, giving the Lender the ability to declare
the loan and all amounts owed under the Loan Agreement due
and payable upon the occurrence of an event of default and
to operate or sell collateral and use the proceeds to repay
the loan.Other Provisions The Loan Agreement and the other loan documents contain
other provisions customary for this type of transaction,
including, without limitation, representations and
warranties, indemnities and confidentiality undertaking.
Exit Fee Amendment No. 2 to Loan Agreement (see below) provides for
an exit fee equal to 1.5% of the principal balance, which is
due and payable upon any payment, in part or in full, of the
initial term loan and the delayed draw term loan.
On
Pursuant to the Amendment No. 2 to Loan Agreement, the maturity date was
extended by one year from
As partial consideration for Amendment No. 2 to Loan Agreement, the Company has
issued 1,000,000 common stock purchase warrants (each, a "Warrant") to the
Lender. Each Warrant entitles the holder to acquire one share of common stock
(each, a "Warrant Share") at an exercise price of
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Security Agreement
On
Pursuant to the Security Agreement, the Grantors are granting to the Secured
Parties a security interest in all personal property and other assets owned as
of the Effective Date or acquired thereafter (the "Collateral"). Certain assets
are excluded from the Collateral such as: (i) intent to use
Upon a default under the Loan Agreement, the Secured Parties may enter upon the premises of the Grantors where any Collateral is located through self-help, without judicial process, without first obtaining a final judgment or giving the Grantors or any other Person notice and opportunity for a hearing on the Secured Parties' claim or action and may collect, receive, assemble, process, appropriate and realize the Collateral, or any part thereof. In such event, the Grantors agree to assemble the Collateral and make it available to the Agent. Until the Agent is able to effect a disposition of the Collateral, the Agent shall have the right to hold or use the Collateral, or any part thereof, to the extent that it deems appropriate in its sole discretion for the purpose of preserving the Collateral or its value or for any other purpose deemed appropriate by the Agent. Agent shall not have any rights to take any action that would violate law.
To protect the Secured Parties' interests in the Collateral, the Grantor's have executed a power of attorney appointing Agent as the Grantors' attorney in fact with such power and appointment only exercisable in the event of a default under the Loan Agreement and we have further agreed to file all UCC Financing Statements evidencing the granted security interests set forth in the Security Agreement.
Pledge Agreement
On
Pursuant to the Pledge Agreement, Pledgors are pledging to the Secured Parties a lien on certain equity interests in Pledgors' subsidiaries as follows (collectively, the "Pledged Collateral"):
1) Company is pledging to the Secured Parties all rights, privileges and
interests in Company's equity securities in DEP, which comprises of one
hundred percent (100%) of the issued and outstanding shares of DEP;
2) NMG is pledging to the Secured Parties all rights, privileges and
interests in NMG's equity securities in NMG Ohio, which comprises of one
hundred percent (100%) of the issued and outstanding membership interest
of NMG Ohio; and
3) DEP is pledging to the Secured Parties all rights, privileges and
interests in DEP's equity securities in NMG, NMG OH 1, LLC, NMG OH P1,
LLC , NMG LONG BEACH , LLC, NMG MI C1, INC., NMG MI P1, INC., NMG MI 1,
INC., NMG CA C1, LLC , NMG CA P1, LLC , NMG CA 1, LLC, and NMG CATHEDRAL
CITY , LLC (collectively, the "DEP Pledged Subsidiaries"). DEP owns one
hundred percent (100%) of the issued and outstanding equity interests in
each of the DEP Pledged Subsidiaries (collectively, DEP, NMG Ohio, and the
DEP Pledged Subsidiaries being, the "Pledged Entities").
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The pledge, assignment and delivery of the Pledged Collateral pursuant to the Pledge Agreement creates a valid first priority lien. Without the prior written consent of the Agent, no Pledgor will sell, assign, transfer, pledge, or otherwise encumber any of its rights in or to the Pledged Collateral, or any unpaid dividends, interest or other distributions or payments with respect to the Pledged Collateral.
As long as no default under the Loan Agreement has occurred and is continuing, Pledgors shall have the right to vote and give consents with respect to the Pledged Collateral for all purposes not inconsistent with the provisions of the Pledge Agreement.
Upon a default, the Agent, acting on behalf of the Secured Parties, is hereby authorized and empowered to (i) transfer the Pledged Collateral to the Secured Parties; (ii) transfer and register in its name the Pledged Collateral; (iii) exchange certificates representing Pledged Collateral for certificates of smaller or larger denominations, (iv) exercise the voting and all other rights; (v) collect and receive all cash dividends; (vi) notify the Pledged Entities to make payment to Agent of any amounts due in connection with the Pledged Collateral; (vii) endorse instruments in the name of the Pledgors to allow collection; (viii) enforce collection of any of the Pledged Collateral by suit or otherwise; (ix) sell, with notice and in accordance with applicable law, Pledged Collateral; (x) act with respect to the Pledged Collateral as though Agent was the outright owner; (xi) appoint a receiver (selected by Agent in its sole discretion) to administer the Pledged Collateral; and (xii) exercise any other rights or remedies the Secured Parties may have under the UCC or other applicable law.
Pledgors irrevocably appoint the Agent acting on behalf of the Secured Parties, as the proxy and attorney in fact with respect to the Pledged Collateral.
Omnibus Collateral Assignment
On
Pursuant to the Collateral Assignment, Assignors have granted to the Agent for the benefit of the Lender(s) a security interest in all the rights, interests and privileges which such Assignor has or may have in or under the following contracts (the "Assigned Contracts"):
1) Management Agreement between NMG and Comprehensive Care Group, LLC dated
March 15, 2019 ;
2) Convertible Credit Facility Agreement from DEP to NMG MI 1, Inc. (formerly
NMG MI 1, LLC) dated February 1, 2021 ;
3) Convertible Credit Facility Agreement from DEP to NMG MI C1, Inc.
(formerly NMG MI C1, LLC ) dated February 1, 2021 ; and
4) Convertible Credit Facility Agreement from DEP to NMG MI P1, Inc.
(formerly NMG MI P1, LLC ) dated February 1, 2021 .
The rights of the Agent may only be exercised in the event of a default and the exercise of such rights must not violate any applicable law. Each Assignor, upon the occurrence and continuation of a default, authorizes the Agent on behalf of the Lender(s), at the Agent's option and without notice, to directly receive any and all payments and other benefits owed to any Assignor under any Assigned Contract.
Intercompany Subordinated Demand Promissory Note
On
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So long as no default has occurred under the Loan Agreement, each Affiliate Obligor may make payments on account of the Subordinated Debt in the ordinary course of business, solely to the extent such payments are permitted under the Loan Agreement. Upon default, no Affiliate Obligor shall make, accept or receive, any payment of Subordinated Debt Payment.
Until our satisfaction of all obligations under the loan, no subsidiary holding rights to be paid Subordinated Debt will (i) accelerate, make demand, or otherwise make due and payable prior to the original due date thereof any Subordinated Debt; (ii) exercise any rights under or with respect to guaranties of the Subordinated Debt; (iii) exercise any of its rights or remedies in connection with the Subordinated Debt; (iv) exercise any right to set-off or counterclaim in respect of any debt, contest, protest, or object to any exercise of secured creditor remedies by Agent or any Lender; (v) object to any forbearance by the Agent; (vi) commence, or cause to be commenced, and insolvency proceeding; or (vii) contest, protest, or object to any Affiliate Obligor obtaining debtor-in-possession financing.
The foregoing descriptions of the Loan Agreement, the Security Agreement, the
Pledge Agreement, the Omnibus Collateral Assignment, the Intercompany
Subordinated Demand Promissory Note, the Term Note and the Warrants do not
purport to be complete and are qualified in their entirety by reference to the
full text of those documents, copies of which were attached as Exhibits 10.1,
10.2, 10.3, 10.4, 10.5, 10.6, 4.1 and 4.2, respectively, to our Current Report
on Form 8-K filed with the
Limited Waiver and Amendment to Loan Agreement
On
Pursuant to the Limited Waiver and Amendment to Loan Agreement, the Agent and
the Lender each waived the Specified Defaults on a limited one-time basis
subject to the terms and conditions thereof until (i) with respect to the First
Specified Default,
Subsequent to entering into the Limited Waiver and Amendment to Loan Agreement,
the parties verbally agreed and confirmed via email on
The foregoing description of the Limited Waiver and Amendment to Loan Agreement does not purport to be complete and is qualified in its entirety by the Limited Waiver and Amendment to Loan Agreement, which is filed as Exhibit 10.73 hereto and is incorporated by reference herein.
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Convertible Debenture Financing
On
In addition, pursuant to the SPAs, following the closing and until the later of
(a) the repayment or conversion of the Debentures, and (b)
Results of Operations for the three month periods ended
The following table sets forth our results of operations for the three month
periods ended
January January
31, 2023 31, 2022
$ $
Sales 7,742,054 8,046,526
Cost of Sales (5,475,729 ) (5,414,988 )
Gross Margin 2,266,325 2,631,538
Operating Expenses (4,028,991 ) (3,602,311 )
Loss for the Period (2,741,050 ) (2,722,548 )
Foreign Currency Translation Adjustment (10,342 ) (35,160 )
Comprehensive Loss (2,751,392 ) (2,757,708 )
Basic and Diluted Earnings (Loss) Per Share (0.02 ) (0.02 )
Revenues
For the three month period ended
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During the three months ended January 31, 2023 , the Company recorded product
sales as follows:
Three months ended January 31, 2023
Revenues - By Segment $ %
Wholesale 1,389,657 18 %
Retail 6,352,397 82 %
Total 7,742,054
Operating Expenses
For the three month period ended
The Company had a decrease in depreciation and amortization expense to
Other Items
During the three month period ended
Net Loss
Net loss for the quarter ended
Other Comprehensive Income (Loss)
We recorded a foreign currency translation adjustment loss of
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Results of Operations for the six month periods ended
The following table sets forth our results of operations for the six month
periods ended
January January
31, 2023 31, 2022
$ $
Sales 15,573,749 15,617,342
Cost of Sales (11,668,218 ) (9,831,691 )
Gross Margin 3,905,531 5,785,651
Operating Expenses (7,646,262 ) (6,441,115 )
Loss for the Period (5,693,845 ) (3,399,802 )
Foreign Currency Translation Adjustment (80,402 ) 1,121
Comprehensive Loss (5,774,247 ) (3,398,681 )
Basic and Diluted Earnings (Loss) Per Share (0.05 ) (0.03 )
Revenues
For the six month period ended
During the six months endedJanuary 31, 2023 , the Company recorded product sales as follows: Six months ended January 31, 2023 Revenues - By Segment $ % Wholesale 2,695,638 17 % Retail 12,878,111 83 % Total 15,573,749 Operating Expenses
For the six month period ended
The Company had a decrease in depreciation and amortization expense of
Other Items
During the six month period ended
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Net Loss
Net loss for the six months ended
Other Comprehensive Income (Loss)
We recorded a foreign currency translation adjustment loss of
Liquidity and Capital Resources
The following table sets out our cash and working capital as ofJanuary 31, 2023 : As ofJanuary 31, 2023 (unaudited) Cash reserves$ 3,157,753
Working capital deficit$ 368,804
At
Statement of Cash flows
During the six month period ended
Cash Flow used in Operating Activities
Significant changes in cash used in operating activities are outlined as follows:
· The Company incurred a net loss from operations of $5,693,845 during the
six months ended January 31, 2023 compared to $3,399,802 in 2022. The net
loss in 2023 included, among other things, amortization of debt discount
of $248,423 (2022 - $235,487 ), amortization of intangible assets of
$655,900 (2022 - $671,322 ), amortization of ROU assets of $718,896 (2022 -
$405,386 ), depreciation of property and equipment of $538,280 (2022 -
$471,938 ), accrued interest income of $36,000 (2022 - $36,000 ), and
stock-based compensation of $54,471 (2022 - $294,944 ).
The following non-cash items further adjusted the loss for the six months ended
· Increase in accounts receivable and prepaid of $397,762 (2022 - decrease
of $470,282 ), decrease in inventory of $1,080,584 (2022 - increase of
$484,191 ), increase in deposits of $62 (2022 - $107,290 ), increase in
trade payables and accrued liabilities of $171,015 (2022 - decrease of
$22,352 ), increase in income taxes payable and deferred taxes of
$1,242,908 (2022 - $2,102,257 ), decrease in due to related parties of
$36,917 (2022 - $20,264 ), and decrease of operating lease liabilities of
$740,422 (2022 - $336,076 ).
Cash Flow provided by Investing Activities
During the six month period ended
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The change in cash used in investing activities for the six month period ended
Cash Flow provided by Financing Activities
During the six month period ended
Trends and Uncertainties
Potential Impact of the COVID-19 Pandemic
In
Off-balance sheet arrangements
There are no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors.
Critical Accounting Policies
Our financial statements and accompanying notes have been prepared in accordance
with
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.
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· Foreign currency
The Company determines the functional currency through an analysis of several indicators such as expenses and cash flows, financing activities, retention of operating cash flows, and frequency of transactions with the reporting entity.
· Fair value of financial instruments
Management uses valuation techniques, in measuring the fair value of financial instruments, where active market quotes are not available.
In applying the valuation techniques, management makes maximum use of market inputs wherever possible, and uses estimates and assumptions that are, as far as possible, consistent with observable data that market participants would use in pricing the instrument. Where applicable data is not observable, management uses its best estimate about the assumptions that market participants would make. Such estimates include liquidity risk, credit risk and volatility may vary from the actual results that would be achieved in an arm's length transaction at the reporting date.
The assessment of the timing and extent of impairment of intangible assets involves both significant judgements by management about the current and future prospects for the intangible assets as well as estimates about the factors used to quantify the extent of any impairment that is recognized.
· Long-lived assets and goodwill
Long-lived assets and goodwill are reviewed for indicators of impairment at least annually. When there are indications of impairment, the Company calculates the fair value of reporting units for goodwill and the fair value of the asset groups for long-lived assets using various valuation techniques, which require the input of highly subjective assumptions that can materially affect the fair value estimate.
· Intellectual property
The recoverability of the carrying value of the intellectual property is dependent on numerous factors. The carrying value of these assets is reviewed by management when events or circumstances indicate that its carrying value may not be recovered. If impairment is determined to exist, an impairment loss is recognized to the extent that the carrying amount exceeds the recoverable amount.
· 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.
· Business Combination
The results of businesses acquired in a business combination are included in our consolidated financial statements from the date of the acquisition. Purchase accounting results in assets and liabilities of an acquired business being recorded at their estimated fair values on the acquisition date. Any excess consideration over the fair value of assets acquired and liabilities assumed is recognized as goodwill.
We perform valuations of assets acquired and liabilities assumed on each acquisition accounted for as a business combination in order to record the tangible and intangible assets acquired and liabilities assumed based on our best estimate of fair value. Determining the fair value of assets acquired and liabilities assumed requires management to use significant judgment and estimates including the selection of valuation methodologies, estimates of future revenue and cash flows, discount rates and selection of comparable companies. Significant estimation is required in determining the fair value of the customer relationship intangible assets, deferred revenue and contingent consideration liabilities. The significant estimation is primarily due to the judgmental nature of the inputs to the valuation models used to measure the fair value of these intangible assets, deferred revenue and contingent consideration liabilities, as well as the sensitivity of the respective fair values to the underlying significant assumptions. We use the income approach to measure the fair value of these intangible assets. The significant assumptions used to estimate the fair value of the intangible assets included forecasted revenues from existing customers and existing customer attrition rates. When estimating the significant assumptions to be used in the valuation we include a consideration of current industry information, market and economic trends, historical results of the acquired business and other relevant factors. These significant assumptions are forward-looking and could be affected by future economic and market conditions. We engage the assistance of valuation specialists in concluding on fair value measurements in connection with determining fair values of assets acquired and liabilities assumed in a business combination.
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Recent Accounting Pronouncements
In
Management of financial risks
The financial risk arising from the Company's operations are credit risk, liquidity risk, interest rate risk and currency risk.
These risks arise from the normal course of operations and all transactions undertaken are to support the Company's ability to continue as a going concern. The risks associated with these financial instruments and the policies on how to mitigate these risks are set out below. Management manages and monitors these exposures to ensure appropriate measures are implemented on a timely and effective manner.
· Credit risk
Credit risk is the risk that one party to a financial instrument will fail to discharge an obligation and cause the other party to incur a financial loss. The Company reduces its exposure to credit risk by maintaining its cash with major financial institutions. Credit risk associated with the convertible loans receivable arises from the possibility that the principal and/or interest due may become uncollectible. The Company mitigates this risk by managing and monitoring the underlying business relationship. The Company is not currently exposed to any significant credit risk associated with its trade receivable.
· 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 working capital deficit
of
· 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 market 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.
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