10-K 1 bmmj_10k.htm FORM 10-K bmmj_10k.htm

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-K

 

(Mark One)

Annual Report Under Section 13 or 15(d) of the Securities Exchange Act of 1934

 

 

For the fiscal year ended: July 31, 2020.

 

 

Transition report under Section 13 or 15(d) of the Securities Exchange Act of 1934

 

 

For the transition period from ______ to _______.

 

Commission file number: 000-55940

 

BODY AND MIND INC.

(Exact name of registrant as specified in its charter)

 

Nevada

 

98-1319227

(State or other jurisdiction of

incorporation or organization)

 

(IRS Employer

Identification Number)

 

750 – 1095 West Pender Street

Vancouver, British Columbia, Canada V6E 2M6

(Address of principal executive offices)

 

Issuer’s telephone number (800) 361-6312

 

Securities registered under Section 12(b) of the Exchange Act:

 

Title of each class

 

Trading Symbol (s)

 

Name of each exchange on which registered

N/A

 

N/A

 

N/A

 

Securities registered under Section 12(g) of the Exchange Act:

 

Common Shares, $0.0001 par value

(Title of class)

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐    No ☒

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐     No ☒

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒    No ☐

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒    No ☐

 

Indicate by checkmark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

 

 

Emerging growth company

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☒

 

Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.) Yes ☐     No ☒

 

The aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold as of the last business day of the registrant’s most recently completed second fiscal quarter ($0.38 on January 31, 2020) was approximately $28,858,655.

 

The registrant had 108,377,778 common shares outstanding as of December 14, 2020.

 

 

 

   

TABLE OF CONTENTS

 

PART I

 

 

 

Item 1. Business

 

4

 

Item 1A. Risk Factors

 

24

 

Item 1B. Unresolved Staff Comments

 

31

 

Item 2. Properties

 

31

 

Item 3.  Legal Proceedings

 

32

 

Item 4.  Mine Safety Disclosures

 

32

 

 

 

 

 

PART II

 

 

 

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

 

33

 

Item 6. Selected Financial Data

 

39

 

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

 

47

 

Item 8. Financial Statements and Supplementary Data

 

48

 

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

 

83

 

Item 9A. Controls and Procedures

 

83

 

Item 9B. Other Information

 

84

 

 

 

 

 

PART III

 

 

 

Item 10. Directors, Executive Officers and Corporate Governance

 

85

 

Item 11. Executive Compensation

 

90

 

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

 

95

 

Item 13. Certain Relationships and Related Transactions, and Director Independence

 

96

 

Item 14. Principal Accounting Fees and Services

 

97

 

 

 

 

 

PART IV

 

 

 

Item 15. Exhibits, Financial Statement Schedules

 

98

 

 

 
2

Table of Contents

   

REFERENCES

 

As used in this Annual Report on Form 10-K (the “Annual Report”): (i) the terms the “Registrant”, “we”, “us”, “our”, “Body and Mind”, “BaM” and the “Company” mean Body and Mind Inc. or as the context requires, collectively with its consolidated subsidiaries; (ii) “SEC” refers to the Securities and Exchange Commission; (iii) “Securities Act” refers to the United States Securities Act of 1933, as amended; (iv) “Exchange Act” refers to the United States Securities Exchange Act of 1934, as amended; and (v) all dollar amounts refer to United States dollars unless otherwise indicated.

 

FORWARD-LOOKING STATEMENTS

 

Certain statements contained in this Annual Report on Form 10-K constitute “forward-looking statements.” These statements appear in a number of places in this Annual Report and documents included herein and include statements regarding Body and Mind’s intent, belief or current expectation and that of Body and Mind’s officers and directors. These forward-looking statements involve known and unknown risks and uncertainties that may cause Body and Mind’s actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. In certain cases, forward-looking statements can be identified by the use of words such as “believe”, “intend”, “may”, “will”, “should”, “plans”, “anticipates”, “believes”, “potential”, “intends”, “expects” and other similar expressions. These statements are based on Body and Mind’s current plans and are subject to risks and uncertainties, and as such Body and Mind’s actual future activities and results of operations may be materially different from those set forth in the forward-looking statements. Any or all of the forward-looking statements in this Annual Report may turn out to be inaccurate and as such, you should not place undue reliance on these forward-looking statements. Body and Mind has based these forward-looking statements largely on its current expectations and projections about future events and financial trends that it believes may affect its financial condition, results of operations, business strategy and financial needs. The forward-looking statements can be affected by inaccurate assumptions or by known or unknown risks, uncertainties and assumptions due to a number of factors, including, dependence on key personnel, competitive factors, the operation of Body and Mind’s intended business, and general economic conditions in the United States and Canada. These forward-looking statements speak only as of the date on which they are made. Body and Mind assumes no obligation to update or to publicly announce the results of any change to any of the forward-looking statements contained or included herein to reflect actual results, future events or developments, changes in assumptions or changes in other factors affecting the forward-looking statements, other than where a duty to update such information or provide further disclosure is imposed by applicable law, including applicable United States federal securities laws. In addition, Body and Mind cannot assess the impact of each factor on its intended business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. Accordingly, readers should not place undue reliance on forward-looking statements. All subsequent written and oral forward-looking statements attributable to Body and Mind or persons acting on its behalf are expressly qualified in their entirety by the cautionary statements contained in this Annual Report. Important factors that you should also consider, include, but are not limited to, the factors discussed under “Risk Factors” in this Annual Report.

   

 
3

Table of Contents

 

PART I

 

ITEM 1. BUSINESS

 

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 completed construction and commenced production operations at the new Nevada production facility in early Q3 2020.

 

We are a Nevada corporation that, through our wholly-owned subsidiary, Nevada Medical Group, LLC (“NMG”), are engaged in the cultivation and production of medical and adult-use recreational marijuana products. NMG produces cannabis flower, oil extracts and edibles under license in the state of Nevada, which are available for sale under the brand name “Body and Mind” in dispensaries in Nevada.

 

In California, we, through our wholly-owned subsidiary NMG Cathedral City, LLC (“NMGCC”), 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. 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 provides 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. 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. Our products are sold and distributed to numerous licensed dispensaries throughout California. In late April 2020, we closed the San Diego ShowGrow dispensary transaction, which is owned 60% by our wholly-owned subsidiary, NMG San Diego, LLC (“NMG SD”), has received all licenses, permits and authorizations required to conduct medical and adult-use commercial cannabis retail operations, and which opened in early July 2020. We, through our wholly-owned subsidiary, NMG Long Beach, LLC (“NMG LB”), have been managing the ShowGrow Long Beach dispensary operations for over a year, have received all approvals and final license transfer for the dispensary to NMG LB at the end of August 2020, and are close to closing the acquisition of the dispensary.

 

In Ohio, we, through NMG, have been managing the fully operational The Clubhouse dispensary located in Elyria, Ohio, which is 30% owned by NMG, have an agreement to acquire the remaining 70%. We received all approvals and final license and name transfer from the Ohio Department of Pharmacy in early September 2020 and transferred the dispensary from NMG Ohio LLC to a 100% owned subsidiary of Body and Mind.

 

In Arkansas, we, through NMG, manage the “Body and Mind” branded medical marijuana dispensary in West Memphis, Arkansas, which opened on April 27, 2020.

 

Our common stock is listed on the Canadian Securities Exchange under the symbol “BAMM” and our common stock is posted for trading on the OTCQB Venture Market under the symbol “BMMJ.”

 

Our head office located at 750 – 1095 West Pender Street, Vancouver, British Columbia, Canada V6E 2M6.

 

 
4

Table of Contents

    

Intercorporate Relationships

 

The following is a list of all of our subsidiaries and the corresponding date of jurisdiction of incorporation or organization and the ownership interest of each. All of our subsidiaries are directly or indirectly owned by us:

 

Name of Entity

Place of Incorporation/Formation

Ownership Interest

Date of Acquisition or formation

DEP Nevada Inc.(1)

Nevada, USA

100%

August 10, 2017

Nevada Medical Group, LLC(2)

Nevada, USA

100%

November 14, 2017

NMG Retail, LLC(3)

Nevada, USA

75%

September 14, 2018

NMG Long Beach, LLC(4)

California, USA

100%

December 18, 2018

NMG Cathedral City, LLC(5)

California, USA

100%

January 4, 2019

NMG Chula Vista, LLC(6)

California, USA

51%

January 10, 2019

NMG San Diego, LLC(7)

California, USA

60%

January 30, 2019

NMG OH 1, LLC(8)

Ohio, USA

100%

January 30, 2020

 

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 Retail, LLC is a 75% owned subsidiary of DEP Nevada Inc

 

(4)

NMG Long Beach, LLC is a wholly-owned subsidiary of Nevada Medical Group, LLC.

 

(5)

NMG Cathedral City, LLC is a wholly-owned subsidiary of Nevada Medical Group, LLC.

 

(6)

NMG Chula Vista, LLC is a 51% owned subsidiary of Nevada Medical Group, LLC.

 

(7)

NMG San Diego, LLC is a 60% owned subsidiary of Nevada Medical Group, LLC.

 

(8)

NMG OH 1, LLC is a wholly-owned subsidiary of DEP Nevada Inc.

 

Business Operations

 

Development of Our Business

 

Incorporation and Early Corporate History

 

We were incorporated on November 5, 1998 in the State of Delaware under the name Concept Development Group, Inc. In May 2004, we acquired 100% of Kaleidoscope Venture Capital, Inc. (formerly Vocalscape Networks, Inc.) and changed our name to Vocalscape, Inc. In November 2005, we changed our name to Nevstar Precious Metals Inc. In September 2008, we changed our name to Deploy Technologies Inc. (“Deploy Tech”) and effective November 14, 2017, we changed our name to Body and Mind, Inc. (“Body and Mind”).

 

On September 15, 2010, we incorporated a wholly-owned subsidiary, Deploy Acquisition Corp. (“Deploy”) under the laws of the State of Nevada, USA. On September 17, 2010, Deploy completed a merger with Deploy Tech, its former parent company, pursuant to which Deploy was the surviving corporation and assumed all the assets, obligations and commitments of Deploy Tech. Upon the completion of the merger Deploy assumed the name “Deploy Technologies Inc.” and all of the issued and outstanding common stock of Deploy Tech was automatically converted into and became Deploy’s – that is, our Company’s issued and outstanding common stock.

 

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.

 

 
5

Table of Contents

    

On November 11, 2014, we filed a certificate of change with the Nevada Secretary of State whereby we reverse split our authorized as well as the issued and outstanding shares of common stock (the “Common Shares”) on the basis of one (1) new share for ten (10) old shares. This resulted in a reduction of our authorized capital from 100,000,000 Common Shares to 10,000,000 Common Shares, and a reduction of our issued and outstanding Common Shares from 23,130,209 Common Shares to approximately 2,313,021 Common Shares. On April 11, 2017, we filed a certificate of amendment with the Nevada Secretary of State to increase the authorized capital from 10,000,000 Common Shares to 900,000,000 Common Shares.

 

Acquisition of Nevada Medical Group, LLC

 

On September 14, 2017, we, with DEP, entered into a definitive agreement (the “Share Exchange Agreement”) with Nevada Medical Group, LLC (“NMG”), whereby DEP acquired all of the issued and outstanding securities of NMG in exchange for (a) 16,000,000 post reverse-split Common Shares, (b) $2,000,000 cash, and (b) promissory notes (the “Promissory Notes”) in the aggregate principal amount of $2,000,000, to the NMG securityholders on a pro rata basis in accordance with their respective ownership interest in NMG. The Promissory Notes were secured by a senior priority security interest in all of our assets, and were due to be repaid at the earlier of fifteen (15) months from the closing date of the Share Exchange Agreement, or, if an equity or debt financing subsequent to the Concurrent Financing (as defined below) were to be closed in an aggregate amount of not less than $5,000,000, then within 30 days of the closing date of such subsequent financing. The Share Exchange Agreement closed on November 14, 2017.

 

Pursuant to the Share Exchange Agreement, we changed our name to “Body and Mind, Inc.”, effective on November 14, 2017, by filing a certificate of amendment with the Nevada Secretary of State; at the same time, we cancelled our entire authorized class of Preferred Shares. In addition, on November 14, 2017, we filed a certificate of change with the Nevada Secretary of State whereby we reverse split our issued and outstanding Common Shares on the basis of one (1) new share for three (3) old shares (the “Consolidation”) which resulted in there being 28,239,876 Common Shares issued and outstanding post-Consolidation. Subsequent to completion of the Share Exchange Agreement, we filed articles of exchange with the Nevada Secretary of State.

 

Concurrent with the Share Exchange Agreement, we completed an equity financing to raise aggregate gross proceeds of CAD$6,007,429.89 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 was exercisable by the holder at a price of CAD$0.90 for a period of 24 months from the date of issuance.

 

On completion of the Share Exchange Agreement, we assumed the business of NMG, being the cultivation and production of medical marijuana products.

 

Convertible Loan and Management Agreements with Comprehensive Care Group LLC

 

On March 19, 2018, we, through our wholly-owned subsidiaries DEP and NMG, entered into a convertible loan agreement (the “Convertible Loan Agreement”) and a management agreement (the “Management Agreement”), respectively, with Comprehensive Care Group LLC (“CCG”), an Arkansas limited liability company, with respect to the development of a medical marijuana dispensary, 50 plant cultivation facility in West Memphis, Arkansas which agreements were effective as of March 15, 2019.

 

Pursuant to the Convertible Loan Agreement, DEP agreed to make loan advances to CCG from time to time in the aggregate principal amount of up to $1,250,000 and as of July 31, 2020, DEP has loaned $ 1,353,373 to CCG. The loan proceeds were used to fund the construction of the medical marijuana dispensary facility, and to provide working capital to cover initial operating expenses. The construction was completed and all permits and licenses were received for the dispensary in late April 2020, which opened for operations on April 27, 2020.

 

 
6

Table of Contents

    

The interest on the outstanding principal amount is currently set at $6,000 per month, payable monthly in arrears on or before the first calendar day of each month. CCG is not obligated to repay any principal outstanding under the loan until March 30, 2021. Either CCG or DEP may unilaterally extend the maturity date by one year, and may thereafter continue to extend the maturity date on a yearly basis by increments of one year (each, an “Extension Option”) by providing written notice of the exercise of the Extension Option by the party seeking an extension to the other party; provided, however, that under no circumstances shall any extended maturity date extend beyond the expiration of the term of the Management Agreement entered into between NMG and CCG.

 

Upon the latter of: (a) one year after granting of a medical marijuana dispensary license by the Arkansas Medical Marijuana Commission to CCG, or (b) one year after entering into the Convertible Loan Agreement, DEP may, in its sole discretion, subject to DEP providing all reasonable assistance to obtain all necessary approvals from the applicable government authorities to engage in the medical marijuana dispensary business, elect to convert all of the outstanding indebtedness into preferred units of CCG equal to 40% of the overall member units of CCG, subject to approval of the Arkansas Medical Marijuana Commission, with the following preferred rights: (i) the right to an allocative share of 66.67% of the net profits of CCG (as defined in the Convertible Loan Agreement) and the right to distributions equal to 66.67% of the net profits on a monthly basis; (ii) the right to a 66.67% share of CCG’s assets upon dissolution of CCG; and (iii) the right to 66.67% of all voting rights of members of CCG. DEP is waiting for regulatory clearance from the State regulators before proceeding with the conversion

 

Pursuant to the Management Agreement, NMG provides operations and management services to CCG (including management, staffing, operations administration, oversight and other related services) for the medical marijuana dispensary. In consideration for such services CCG pays NMG a monthly management fee in the amount equal to 66.67% of the Monthly Net Profits (as defined below) of CCG for the immediately-preceding month. Notwithstanding the foregoing, in the event that DEP exercises its conversion right under the Convertible Loan Agreement, then NMG’s monthly management fee shall be fixed at $6,000 per month, unless otherwise agreed by the parties in writing. For purposes of the Management Agreement, “Monthly Net Profits” means, for each calendar month, an amount equal to CCG’s gross revenue for such calendar month less CCG’s operating expenses (including cost of goods sold, interest, and tax for said month), as reasonably determined in accordance with generally accepted accounting principles.

 

Acquisition of NMG Ohio LLC

 

We, through NMG, currently own a 30% interest in NMG Ohio, LLC (“NMG Ohio”), which 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 consists of cash payments totaling $1,575,000 and 3,173,864 common shares of the Company. As at the date hereof, we have issued 2,380,398 of the 3,173,864 common shares with a fair value of $1,448,567, and paid $1,181,250. Closing of the acquisition was subject to receipt of regulatory approval, which all approvals and final license and name transfer approvals from the Ohio Department of Pharmacy were received in early September 2020, and we are very close to closing the acquisition of the remaining 70% interest in NMG Ohio.

 

Strategic Investment and Commercial Advisory Agreements with Australis Capital Inc.

 

Pursuant to an investment agreement (the “Investment Agreement”) entered into with Australis Capital Inc. (“Australis”) on October 30, 2018, whereby Australis acquired (a) 16,000,000 units of the Company, with each unit being comprised of one share of our common stock and one common share purchase warrant at a purchase price of CAD$0.40 per unit, for gross proceeds of CAD$6,400,000 and (b) CAD$1,600,000 principal amount 8% unsecured convertible debentures (the “Debentures”) of the Company, we entered into a commercial advisory agreement (the “Commercial Advisory Agreement”) with Australis Capital (Nevada) Inc. (“Australis Nevada”), a wholly-owned subsidiary of Australis, pursuant to which Australis Nevada has agreed to provide advisory and consulting services to us for a fee of $10,000 per month payable on the first day of each month for a term ending on the date that is the earlier of (i) five years following the closing of the transactions contemplated by the Investment Agreement, and (ii) the date Australis no longer holds 10% or more of our Company’s issued and outstanding common shares. The foregoing is more fully disclosed in our Current Report on Form 8-K filed with the SEC on November 5, 2018. On July 1, 2019, we entered into a conversion agreement with Australis, whereby Australis has agreed to convert the Debentures on July 1, 2020. Upon execution of the conversion agreement, we remitted CAD$148,340 to Australis as an advanced interest payment for the period from November 2, 2018 to July 1, 2020. On July 1, 2020, we issued 2,909,091 Common Shares to Australis at a deemed value of CAD$0.55 per Common Shares and the Debentures were fully converted to Common Shares.

 

 
7

Table of Contents

    

In addition, pursuant to the terms of the Investment Agreement and subject to certain exceptions, Australis will be entitled to maintain its pro rata ownership interest of the Company until such time as it no longer holds 10% or more of our issued and outstanding common shares.

 

Furthermore, pursuant to the terms of the Investment Agreement and subject to applicable laws and the rules of the CSE, for as long as Australis owns at least 10% of our issued and outstanding common shares, Australis will be entitled to nominate one director for election to our Board of Directors of the Company. If Australis exercises all of its warrants and converts all of its debentures, Australis will be entitled to nominate a second director for election to our Board of Directors. Further, for as long as Australis maintains ownership of at least 25% of our issued and outstanding common shares, Australis will be entitled to maintain two directors on our Board of Directors, provided that each director nominee must meet the requirements of applicable corporate, securities and other laws and rules of the CSE. As of July 31, 2020, Austrlais has exercised all of its warrants and the Debentures have all been converted, however, Australis no longer maintains ownership of at least 25% of our outstanding Common Shares. Australis’ current nominee director on our Board of Directors is Brent Reuter.

 

Transaction and Settlement with Green Light District Holdings Inc. – ShowGrow Long Beach and San Diego

 

Prior Agreement with Green Light District Holdings Inc.

 

On November 28, 2018, we entered into an interim agreement (the “Prior GLDH Agreement”) with Green Light District Holdings Inc. (“GLDH”), a private company incorporated under the laws of Delaware, and David Barakett, whereby our Company agreed to acquire up to 100% of the issued and outstanding common shares of GLDH. We concurrently made a strategic investment in a senior secured convertible note issued by GLDH in the principal amount of $5,200,000 (the “Prior GLDH Note”), bearing interest at the rate of 20% per annum and maturing on November 28, 2020.

 

At the time, GLDH was the owner of the ShowGrow dispensary brand, and owner of:

 

 

(a)

the ShowGrow Long Beach dispensary,

 

 

 

 

(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 $4,000,000 loan which was evidenced by a senior secured note dated November 28, 2018, bearing an interest rate of 15% per annum and maturing in two years. The terms required semi-annual interest payments unless we elected to accrue the interest by adding it to the principal amount of the debt facility. We may prepay the loan at any time, in any amount, subject to a 5% prepayment penalty on any amount repaid within the first year of the loan. Additionally, Australis exercised $1.2 million in warrants they held in our Company at an exercise price of CAD$0.50, which equated to 3,206,160 common shares.

 

We paid a financing fee to Australis in the approximate amount of CAD$795,660, by issuing 1,105,083 Common Shares at a deemed price of CAD$0.72 per share.

 

 
8

Table of Contents

   

Original Settlement and Release Agreement

 

On June 19, 2019, our Company, our indirect wholly-owned subsidiary NMG LB, and our 60% owned subsidiary NMG SD, entered into a settlement agreement (the “Original GLDH Settlement Agreement”) with GLDH, The Airport Collective, Inc. (“Airport Collective”), Mr. Barakett, and SGSD, LLC (“SGSD”). SGSD was the commercial tenant at 7625 Carroll Road, San Diego, California 92121 (the “San Diego Location”).

 

Pursuant to the Original GLDH Settlement Agreement, we, GLDH, and Mr. Barakett agreed to restructure the Prior GLDH Agreement, and enter into a mutual release of all claims related to the Prior GLDH Agreement.

 

In connection with the settlement, (a) SGSD agreed to assign its lease for the San Diego Location to NMG SD, and (b) GLDH, Airport Collective and NMG LB entered into an asset purchase agreement dated June 19, 2019 (the “Asset Purchase Agreement”), pursuant to which NMG LB agreed to purchase all of the assets of GLDH and Airport Collective utilized in the medical and adult-use commercial cannabis retail business at 3411 E. Anaheim St., Long Beach, CA 90804 (the “Long Beach Location”).

 

Amended and Restated Settlement and Release Agreement

 

On June 28, 2019, we, NMG LB, NMG SD, GLDH, Airport Collective, Mr. Barakett, and SGSD entered into an amended and restated settlement and release agreement (the “Amended GLDH Settlement Agreement”) which supersedes and replaces the Original GLDH Settlement Agreement. Pursuant to the Amended GLDH Settlement Agreement, the parties agreed as follows:

 

 

i.

GLDH, Airport Collective, and Mr. Barakett agreed to release us from all claims related to the Prior GLDH Agreement upon closing of the Asset Purchase Agreement in consideration of the following:

 

 

A.

the Company issuing to Mr. Barakett or his designee up to 1,340,502 Common Shares at a deemed price of CAD$0.7439 per share, subject to NMG SD receiving all licenses, permits, and authorizations required for NMG SD to conduct medical commercial cannabis retail operations at the San Diego Location (the “SD Medical Licenses”) (issued);

 

 

 

 

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 the our subsidiary, DEP, and 40% by SJJR, LLC (“SJJR”). Mr. Barakett agreed to cover SJJR’s portion of all start-up costs associated with NMG SD establishing commercial cannabis operations at the San Diego Location, inclusive of: (i) the costs associated with becoming a tenant at the San Diego Location; and (ii) all construction costs associated with building out the San Diego Location for NMG SD’s operations. The share consideration payable to Mr. Barakett under the Amended GLDH Settlement Agreement is subject to reduction if Mr. Barakett fails to meet this obligation on a timely basis.

 

 
9

Table of Contents

    

NMG SD, which has assumed the lease on the ShowGrow San Diego premises, has been awarded its own medical commercial cannabis retail license and adult-use commercial retail license and commenced operations on April 15, 2020. In consideration for the landlord, Green Road, LLC, agreeing to consent to the assignment of the original lease with SGSD to NGM SD, we agreed to provide the following consideration to the landlord:

 

 

i.

$700,000 in Common Shares of the Company calculated upon execution of the assignment and first amendment to commercial lease (the “Assignment and First Amendment”), dated June 13, 2019, at the maximum discount allowed by the CSE to be issued to the landlord immediately following execution of the Assignment and First Amendment (1,031,725 shares issued on August 12, 2019);

 

 

 

 

ii.

$783,765.26 in cash to be paid to the landlord via bank draft within five (5) business days of execution of the Assignment and First Amendment (paid); and

 

 

 

 

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 $1,000,000 from $2,000,000, which shall only be payable in connection with the first two assignments triggering this obligation, and thereafter, assignments will not require payment of a sale bonus. Furthermore, the parties also amended certain provisions of the original lease to ensure that any change in members representing less than fifty percent (50%) of the existing membership interests of NMG SD shall be an excluded transaction and not trigger the sale bonus or be deemed an assignment requiring consent of the landlord.

 

Amended and Restated Convertible Note and General Security Agreement

 

As contemplated by the Original GLDH Settlement Agreement, we entered into a loan agreement with GLDH dated June 19, 2019 (the “2019 GLDH Loan Agreement”), pursuant to which the Prior GLDH Note has been superseded and replaced with an amended and restated senior secured convertible note payable to us by GLDH in the principal amount of $5,200,000 (the “Amended and Restated GLDH Note”). The Amended and Restated GLDH Note bears interest at the rate of 20% per annum, compounded annually, and will mature and 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.

 

We will pay the balance of the purchase price for the Purchased Assets by issuing up to 2,681,006 Common shares at a deemed price of CAD$0.7439 per share (issued in escrow on August 12, 2019); the number of shares required to pay and satisfy the balance of the purchase price for the Purchased Assets in the amount of $1,500,000 was determined with reference to the Agreed Foreign Exchange Rate of CAD$1.3296:USD$1.00. 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, which is expected to occur in the near future as NMG LB has obtained local and state commercial cannabis licenses to conduct medical and adult-use commercial cannabis retail operation at the Long Beach Location.

 

 
10

Table of Contents

    

Contemporaneous Loan

 

We entered into a contemporaneous loan (the “Contemporaneous Loan”) with GLDH in the amount of $726,720.00 to fund certain business improvements and expansion needs of GLDH’s business operations. We and NMG LB agreed to forgive the Contemporaneous Loan on the date of closing of the Asset Purchase Agreement.

 

Management Assignment and Assumption Agreement

 

On or around August 1, 2019, NMG LB began managing the ShowGrow Long Beach business pursuant to the management assignment and assumption agreement dated June 19, 2019, among NMG LB, GLDH and Airport Collective. Under the agreement, NMG LB is entitled to manage the business and recognize the profits from the business until NMG LB receives its own commercial cannabis licenses, which have been received, and the Asset Purchase Agreement is closed.

 

Transactions with Satellites Dip, LLC

 

On June 6, 2019, we, through our wholly-owned subsidiary, 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 agreed to provide certain management and administrative services to SD, in exchange for 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 California Management Agreement had an initial term expiring on June 6, 2020.

 

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 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. 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.

 

In conjunction with entering into the California Management Agreement, we through NMGCC entered into a loan and security agreement (the “Loan Agreement”) dated June 6, 2019, whereby NMGCC loaned SD US$250,000 to fund the property and business improvements and expansion needs of SD’s business operations. The loan is due and payable on June 6, 2020, subject to extension by mutual agreement between the parties, and bears interest at a rate of 12% per annum. Interest will accrue and be compounded quarterly, and will be payable by SD upon maturity. 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 was 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.

 

 
11

Table of Contents

    

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 SD and NMGCC 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.

 

Brand Director Agreement

 

In conjunction with the Settlement 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 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 was six months and the parties may continue to 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, however, SD waived payment of the Contribution Fee for the first five (5) months of the Brand Direction Agreement.

 

In consideration for the Brand Director Services, SD agreed to pay NMGCC a monthly brand director 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 SD at its sole option.

 

Equipment Purchase Agreement

 

Also in conjunction with the Settlement 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 $235,685.

 

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.

 

 
12

Table of Contents

    

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.

 

New Nevada Production Facility

 

On June 20, 2019, we announced the receipt of a conditional use permit from Clark County, Nevada, for a new production facility located within one mile of NMG’s existing cultivation facility located at 3375 Pepper Lane, in Las Vegas. The new facility is approximately 7,500 square feet, and tenant improvement of the building holding the facility was completed in February 2020. The new facility includes high-volume extraction equipment, which we expect will dramatically increase our manufacturing capacity and efficiency for our extraction products, including oils, wax, live resin and ambrosia. The 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. After passing all inspections, receiving all permits, and finalizing license transfer approvals, the new production facility began operations in March 2020.

 

Our Products and Services

 

We cultivate and produce medical and adult-use recreational marijuana products such as cannabis flower, oil extracts and edibles under the brand name “Body and Mind”. We also produce products under license agreements.

 

We have built our business plan around capitalizing on the medical-use and recreational cannabis markets. The regulated medical and recreational use cannabis industry is a rapidly growing industry that presents a unique opportunity under current market conditions. In the United States, the development and growth of the industry has generally been driven by state law and regulation. Accordingly, the market varies on a state-by-state basis. State laws that legalize and regulate medical-use cannabis allow patients to consume cannabis for medicinal reasons with a doctor’s recommendation subject to various requirements and limitations. States have authorized numerous medical conditions as qualifying conditions for treatment with medical-use cannabis, including but not limited to treatment for cancer, glaucoma, HIV/AIDS, wasting syndrome, pain, nausea, seizures, muscle spasms, multiple sclerosis, post-traumatic stress disorder (PTSD), migraines, arthritis, Parkinson’s disease, Alzheimer’s disease, lupus, residual limb pain, spinal cord injuries, inflammatory bowel disease and terminal illness.

 

As of the date of this Annual Report on Form 10-K, 35 states and the District of Columbia have passed laws allowing their residents to use medical cannabis.

 

We believe that the following conditions create an attractive opportunity for the cultivation and production of products within the medical and recreational use cannabis industry:

 

 

·

Significant industry growth in recent years and expected continued growth;

 

 

 

 

·

A shift in public opinion and increasing momentum toward the legalization of cannabis;

 

 

 

 

·

Limited access to capital by industry participants in light of risk perceived by financial institutions of violating federal laws and regulatory guidelines for offering banking services to cannabis-related businesses;

 

 

 

 

·

NMG is currently in the process of obtaining a recreational distribution license;

 

 

 

 

·

NMG currently has three main product lines: (i) flower, (ii) edibles, and (iii) extracts; and

 

 

 

 

·

NMG currently cultivates recreational marijuana.

 

Notwithstanding the foregoing market opportunity and trends, and despite legalization at the state level, we continue to believe that the current state of federal law creates significant uncertainty and potential risks associated with investing in medical-use and recreational-use cannabis facilities.

 

 
13

Table of Contents

    

We use a state licensed distribution company to distribute our products and our primary market is in State of Nevada.

 

In addition to Body and Mind branded products, NMG manufactures products for national brands including Her Highness and Shoogies.

 

Our Strategy

 

Body and Mind’s strategy is focused on a platform approach to expansion which focuses on limited license states and jurisdictions. We work to maximize shareholder value through:

 

 

1)

Production and distribute Body and Mind branded products (production and/or cultivation);

 

2)

Use excess production capacity to produce and distribute synergistic third party brands;

 

3)

Own or operate strategic retail stores for vertical integration; and

 

4)

Enter new markets though lower cost applications and opportunistic / targeted acquisitions.

  

We have a track record of award-winning cannabis strains, flower and extracts and as early entrants to the Nevada market management has experience with writing license applications, cultivating and operating efficiently and working within a strict metric or track and trace environment.

 

We have developed the premium, marquis lifestyle “Body and Mind” brand in Nevada with strong penetration into dispensaries and have expanded the brand to dispensaries in California. The Body and Mind brand appeals to a wide range of cannabis consumers with products including 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 currently produce cannabis oil cartridges for Gpen, a well known vaporizer manufacturer. We have constructed and are operating in a new larger production facility and are in discussions with several cannabis brands who may be interested in having Body and Mind produce their brand and products under license in Nevada.

 

NMG was organized as a limited liability company under the laws of the State of Nevada on March 3, 2014. NMG was an early applicant in Nevada in 2014 and was awarded one of the first state medical licenses for both cultivation and production of marijuana. NMG has been a licensed producer and cultivator of cannabis products since it was issued its first cultivation license on November 5, 2015 and production license on December 10, 2015. On July 1, 2017, NMG was awarded an additional state recreational cultivation and production license. NMG produces cannabis flower, oil extracts and edibles, which are available for sale under the brand name “Body & Mind” in dispensaries in Nevada.

 

NMG anticipates an increase in demand due to the recently approved “Adult Use” licensing in the State of Nevada that began in July 2017. NMG has several growth initiatives underway including new product introductions, product licensing, third party extraction, out-of-State licensing, and acquisitions.

 

Since our acquisition of NMG, as discussed in more detail above, we have been focused on:

 

 

(1)

improving NMG’s existing facility;

 

 

 

 

(2)

increasing product availability; and

 

 

 

 

(3)

lowering production costs.

 

 
14

Table of Contents

 

Increased Product Availability

 

We focused on flower and developing top end strains during the early years of our business. When Nevada was a medical only market we performed significant research on edibles with products including granola bars, beef jerky, hard candies and gummies. We also performed a great deal of research on extraction with products ranging from shatter, rosin, distillate and raw oil.

 

As adult recreation rules changed the products that could be produced, we have focused on increasing our product offerings and licensing opportunities. We have determined that the edible market is a sector of the marijuana industry with a high profit margin. To capitalize on this, we have made a dedicated effort to hire an individual with an extensive background in confectionary products and proper dosing techniques. Since hiring this individual on March 6, 2018, we have maintained a consistent passing of all state-mandated testing of our edibles regarding dosing.

 

In addition, we have implemented improved recipes of our established edible products which has increased our product’s shelf life and improved taste. We have developed preparation recipes for our Pretzel Bites which is our top selling edible product and we have implemented an improved recipe for our gummies products.

 

We continually work on research for new edible products and developing recipes.

 

Lowering Our Production Costs

 

As cannabis flower continues to be the foundation product for the marijuana industry, we are striving for continuous improvement to our cultivation process. Our aim will always focus on increasing the production yields of each harvest, and to obtain the highest quality product harvest. Doing so achieves two things for us and our customers: (1) allows us to maximize our profit; and (2) gives our customers the best value for their dollar by offering highly potent THC products.

 

As of September 2018, we have three additional grow rooms operating which has increased our overall flower production. We have a record-keeping system in place to aid us in selecting flower strains that produce the largest yields and the highest THC. Our record-keeping system tracks room metrics, nutrient intake of the plants, and other vital metrics which helps us identify the best possible conditions for the plant to maximize its yield. We have introduced a perpetual harvest system to increase efficiency and allow for a steady supply of cannabis.

 

We have completed the process of installing separate HVAC units for each cultivation area throughout our facility. A centralized control system has been put in place to provide real-time information and control for all HVAC units in the facility. This system helps us track each room’s environmental metrics and help us maintain a proactive response in the event of any equipment failure. In addition to the centralized AC control system, we have completed installation of a CO2 system in our grow rooms. This CO2 system pumps carbon dioxide into the grow rooms which we expect to increase our flower yields by approximately 20-30 per cent. We have also completed installation of measurement devices for temperature, carbon dioxide, and humidity levels in each grow room. This will give us a real time reading of our grow rooms, allowing us to make adjustments in real time.

 

We commenced yield and production research with several brands of LED lights in October 2019. The research comprises of growing various strains under both conventional and new LED lighting systems. Data is gathered on the yield, strength and cultivation time under each light source to evaluate the efficacy of various LED lighting systems.

 

Having completed the construction and startup of the new Nevada production facility, we have begun the design process for conversion of the former extraction and kitchen space into additional cultivation capacity. Based on square footage of available space, this expansion will provide about 18% increase in cultivation capacity. We expect this increase to be realized in mid to late FY 2021.

   

 
15

Table of Contents

       

Effect of Existing or Probable Governmental Regulations on the Business

 

The United States Food and Drug Administration (FDA) regulates all food and food ingredients introduced into or offered for sale in interstate commerce (with the exception of meat, poultry, and certain processed egg products). At this time, our edible food products are not introduced into or offered for sale in interstate commerce, and FDA approval of our edible products is not required. However, we must, and do, comply with food labeling requirements set forth by the Southern Nevada Health District (SNHD) and the Nevada Department of Taxation, which include: a statement of identity, net quantity of contents, ingredient statement, manufacturer information, nutritional labeling, “use-by” date, safe handling instructions, an allergen statement, “Keep out of reach of children” statement, “THIS IS A CANNABIS PRODUCT” statement, cannabinoid profile, terpenoid profile, total amount of THC, our production license number, production run number, date of production, date of final testing, date on which the product was packaged, etc.

 

Our operations as a licensed cultivator and producer of marijuana and marijuana products could be found in violation of the federal Controlled Substances Act. Due to this, we may face higher federal income tax liability as it is subject to Section 280E of the Internal Revenue Code. Section 280E of the Internal Revenue Code disallows a cannabis company from deducting any expenses from their income on its federal income tax return, except for those considered to be cost of goods sold (COGS). While this severely impacts marijuana retailers, as opposed to cultivators and producers, we do face higher federal income tax liability than a non-cannabis company.

 

The State of Nevada, per Nevada Revised Statutes Section 372A.290, has implemented the following taxes on marijuana and marijuana products: (i) a fifteen percent (15%) excise tax on the wholesale sale which is paid by the cultivator and is calculated on the fair market value at wholesale set by the Department of Taxation, and (ii) a ten percent (10%) excise tax on the retail sale which is paid by the retail store. We are obligated to collect and remit the wholesale cultivation tax on all wholesale sales and file the appropriate tax returns on a monthly basis. We currently do not have retail operations in Nevada, and therefore are not required to collect and/or remit any retail taxes. All marijuana and marijuana products sold at retail must also pay and remit sales taxes at the applicable local sales tax level.

 

Principal Products and Services

 

We cultivate and produce medical and adult-use recreational marijuana products such as cannabis flower, oil, extracts and edibles under the brand name “Body and Mind”.

 

Principal Products

 

Finished Flower Buds – Packaged flower buds sold by strain type. We sell our Flower in various packaged weights (1.0 Gram, 3.5 Gram, and by the pound being the most popular). Flower strains include GC4, Key Lime Pie, Mandarin Cookies, Donuts, Purple Punch, Sequoia Strawberry, Sin Mint Cookies, True Power and White Nightmare.

 

Pre-Rolled Joints – grinded flower buds rolled in joint paper by strain type. Each pre-roll is one gram. Roughly 3 to 6 strains are available at any time and can include strains such as GC4, Key Lime Pie, Mandarin Cookies, Donuts, Purple Punch, Sequoia Strawberry, Sin Mint Cookies, True Power and White Nightmare.

 

Pre-Rolled Blunts – grinded flower buds rolled in blunt joint paper by strain type. Each pre-roll blunt is one gram. Roughly 3 to 6 strains are available at any time and can include strains such as GC4, Key Lime Pie, Mandarin Cookies, Donuts, Purple Punch, Sequoia Strawberry, Sin Mint Cookies, True Power and White Nightmare.

 

Concentrates (in various forms) – these are concentrates with various consistencies regarding their final form:

 

 

·

Shatter – a glass like concentrate

 

·

Sugar – a sugar/salt like concentrate

 

·

Ambrosia – a sugar/ salt like concentrate with terpenes added

 

·

Badder – a concentrate with a malleable texture

 

·

Live Resin Sugar – made from extracting material that was frozen immediately after harvesting

 

 
16

Table of Contents

   

Disposable Vape Pens – a disposable pen vaporizer filled with our in-house produced distillate oil. Distillate flavors include Blackberry, Bruce Banner, Canteloupe, Do Si Do, Forbidden Fruit, Gelato, Guava, Hardcore OG, Lime, Mandarin Cookies, Mimosa, Pineapple, Strawberry Diesel, Tangerine, Watermellon. Disposable pens are available with either 0.5 gram or 0.25 grams of distillate.

 

Raw Distillate Oil Cartridges – vaporizer cartridge filled with our in-house produced distillate oil. Raw Distillate flavors include Blackberry, Bruce Banner, Canteloupe, Do Si Do, Forbidden Fruit, Gelato, Guava, Hardcore OG, Lime, Mandarin Cookies, Mimosa, Pineapple, Strawberry Diesel, Tangerine, Watermellon. Raw distillate oil cartridges are available with either 0.5 gram or 0.25 grams of distillate

 

G Pen Gio Cartridges – vaporizer cartridges for Gpen vaporizers filled with our in-house produced distillate oil. G Pen Gio cartridge flavors include Blackberry, Bruce Banner, Canteloupe, Do Si Do, Forbidden Fruit, Gelato, Guava, Hardcore OG, Lime, Mandarin Cookies, Mimosa, Pineapple, Strawberry Diesel, Tangerine, Watermellon. G Pen Gio cartridges are available with either 0.5 gram or 0.25 grams of distillate.

 

Edibles – distillate infused edible products. Our top selling edible product is our pretzel bites which are available in 10 piece and 3 piece packages and have distillate infused butter caramel sandwiched between two pretzels which are dipped in chocolate. Limited edition runs of pretzel bites have been created for Independence Day as well as a custom run with neon and coconut for a Las Vegas music festival.

 

Distribution Methods

 

In Nevada, we sell directly to licensed Nevada dispensaries.

 

In California, we provide brand director services in connection with SD’s manufacture of Company-branded products as well as certain other products in Cathedral City, California, which SD sells to licensed California dispensaries. In addition, we, through our 60% owned subsidiary, NMG SD, operate the ShowGrow San Diego dispensary, which opened in early April 2020. Furthermore, we, through our wholly-owned subsidiary, NMG LB, have been managing the ShowGrow Long Beach dispensary, have received all approval and final license transfer for such dispensary to NMG LB and are close to closing the acquisition of such dispensary.

 

In Ohio, we, through NMG, have been managing the fully operational Clubhouse dispensary located in Elyria,Ohio, which is 30% owned by NMG.

 

In Arkansas, we, through NMG, manage the “Body and Mind” branded medical marijuana dispensary in West Memphis, Arkansas, which opened on April 27, 2020.

 

Sources and availability of raw materials

 

Finished Flower – In Nevada, our clones are all produced in-house from older batches of plants. Other clone sources are readily available to purchase throughout Nevada. Our coco growing medium (soil like material) is the only component of raw materials that is produced outside of our control. Coco suppliers are readily available in the event of a loss of our supplier. We produce our nutrients in-house using basic nutrients readily available in the cultivation market. Our packaging is produced overseas, and suppliers are readily available.

 

Pre-Rolled Joints – In Nevada, our flower buds produce the material for our pre-rolls. All of our pre-roll packaging is easily obtained. There are numerus suppliers of joint paper, joint vials, and other joint packaging materials. In California, the source for our pre-rolled joints is tested quality flower from licensed facilities. We have relationships with licensed cultivators and there are numerous licensed cultivators who can supply flower. Our packaging is produced overseas, and suppliers are readily available.

  

 
17

Table of Contents

    

Concentrates – our flower is used to produce our concentrates. All the chemicals, supplies, and equipment required to produce concentrates can be easily obtained.

 

Single Use Vape Pens – our flower and extraction process is used to produce the oil placed in the single use vape pen. The vape pen and packaging is obtained from 3rd party suppliers and there are numerous suppliers that can meet our demand. The company does not use vitamin E acetate or any other artificial agent for thinning any cannabis oil products.

 

Vape Cartridges – our flower and extraction process is used to produce the oil placed in vape cartridges. The vape cartridge and packaging is obtained from 3rd party suppliers and there are numerous suppliers that can meet our demand. The company does not use vitamin E acetate or any other artificial agent for thinning any cannabis oil products.

 

Distillate Oil - our flower is used to produce distillate oil. The packaging is obtained from 3rd party suppliers. There are plenty of suppliers that can meet our demand. All chemicals required for the distillation are common and readily available for purchase.

 

Rosin – our flower is used to produce rosin. Our packaging is obtained from 3rd party suppliers and there are plenty of suppliers to meet our demand.

 

Edibles – all ingredients are locally sourced. We use our in-house produced distillate oil to infuse all the edibles. We cultivate and produce medical and recreational marijuana products such as flower, oil extracts and edibles under the brand name “Body and Mind”.

 

Competitive business conditions

 

Supply & Demand - as our competitors expand operations, there is more supply creating less demand for mid and low quality cannabis products. We continue to provide high quality products, excellent customer service, and competitive prices.

 

We have built our business plan around capitalizing on the medical-use and recreational cannabis market. The regulated medical-recreational use cannabis industry is a rapidly growing industry that presents a unique opportunity under current market conditions. In the United States, the development and growth of the industry has generally been driven by state law and regulation, and accordingly, the market varies on a state-by-state basis. As of the date hereof, 35 states and the District of Columbia have passed laws allowing their citizens to use medical cannabis.

 

We believe that the following conditions create an attractive opportunity for the cultivation, production and retail sales of products within the medical recreational-use cannabis industry:

 

 

·

Significant industry growth in recent years and expected continued growth;

 

 

 

 

·

A shift in public opinion and increasing momentum toward the legalization of cannabis;

 

 

 

 

·

Limited access to capital by industry participants in light of risk perceived by financial institutions of violating federal laws and regulatory guidelines for offering banking services to cannabis-related businesses;

 

 

 

 

·

Opportunity for skilled operators to transfer operational and execution experience to new facilities and operations.

 

Notwithstanding the foregoing market opportunity and trends, and despite legalization at the state level, we continue to believe that the current state of federal law creates significant uncertainty and potential risks associated with investing in medical-use and recreational-use cannabis facilities.

 

 
18

Table of Contents

    

We use a state licensed distribution company to distribute our products and our primary market is in State of Nevada. In California, we distribute products under a brand director and brand marketing agreement with licensed cannabis company Satellites Dip LLC. Body and Mind sells directly to customers in California through the ShowGrow San Diego and ShowGrow Long Beach dispensaries.

 

Product Regulation

 

State laws that legalize and regulate medical-use cannabis allow patients to consume cannabis for medicinal reasons with a doctor’s recommendation subject to various requirements and limitations. In Nevada, an applicant of a medical-use cannabis card must obtain verification from attending provider of health care that the person has been diagnosed with a chronic or debilitating medical condition, and its symptoms may be mitigated by the medical use of marijuana. Nevada has characterized the following as “chronic or debilitating medical conditions”: acquired immune deficiency syndrome; cancer, glaucoma, a medical condition or treatment for a medical condition that produces cachexia, persistent muscle spasms, seizures, severe nausea, or severe pain. The above list may be amended or added to from time to time. Nevada extends reciprocity for non-residents who hold a valid medical-use card in their state of residence, as long as the person abides by Nevada’s legal limits on the possession. Medical-use card holders may not possess more than two and one-half ounces of usable marijuana in any one 14-day period.

 

In Ohio, patients must have a qualifying medical condition to be eligible for a medical-use card. Such qualifying medical conditions include: HIV/AIDS; Alzheimer’s disease; amyotrophic lateral sclerosis (ALS); cancer; chronic traumatic encephalopathy (CTE); Crohn’s disease; epilepsy or another seizure disorder; fibromyalgia; glaucoma; hepatitis C; inflammatory bowel disease; multiple sclerosis; pain that is chronic and severe, or intractable; Parkinson’s disease; post-traumatic stress disorder; sickle cell anemia; spinal cord disease or injury; Tourette’s syndrome; traumatic brain injury; and ulcerative colitis. Ohio prohibits smoking of medical-use cannabis, but permits oils, tinctures, plant material, edibles and patches. Ohio medical-use card holders may not possess more than a 90-day supply of medical marijuana, which is defined by form, as follows: plant material- no more than eight ounces of tier I medical marijuana, no more than five and three-tenths ounces of tier II medical marijuana; no more than twenty-six and fifty-five-hundredths grams of THC content in patches for transdermal administration or lotions, creams, or ointments for topical administration; no more than nine and nine-tenths grams of THC content in oil, tincture, capsule, or edible form for oral administration; no more than fifty-three and one-tenths grams of THC content in medical marijuana oil for vaporization.

 

In November 2016, California and Nevada voters both approved cannabis use for adults over the age of 21 without a physician’s prescription or recommendation, and permitted the cultivation and sale of marijuana, in each case subject to certain limitations. We have obtained the necessary permits and licenses to expand our existing business to cultivate and distribute cannabis in compliance with the laws in the State of Nevada and California. Despite the changes in state laws, cannabis remains illegal under federal law. In November 2016, California voters approved Proposition 64, which is also known as the Adult Use of Marijuana Act (“the AUMA”), in a ballot initiative. Among other things, the AUMA makes it legal for adults over the age of 21 to use marijuana and to possess up to 28.5 grams of marijuana flowers and 8 grams of marijuana concentrates. Individuals are also permitted to grow up to six marijuana plants for personal use. In addition, the AUMA establishes a licensing system for businesses to, among other things, cultivate, process and distribute marijuana products under certain conditions. On January 1, 2018, the California Bureau of Marijuana Control enacted regulations to implement the AUMA. Nevada voters approved Question 2 in a ballot initiative in November 2016. Among other things, Question 2 makes it legal for adults over the age of 21 to use marijuana and to possess up to one ounce of marijuana flowers and one-eighth of an ounce of marijuana concentrates. Individuals are also permitted to grow up to six marijuana plants for personal use. In addition, Question 2 authorizes businesses to cultivate, process and distribute marijuana products under certain conditions.

 

The U.S. Department of Justice (the “DOJ”) has not historically devoted resources to prosecuting individuals whose conduct is limited to possession of small amounts of marijuana for use on private property but has relied on state and local law enforcement to address marijuana activity. In the event the DOJ reverses its stated policy and begins strict enforcement of the CSA in states that have laws legalizing medical marijuana and recreational marijuana in small amounts, there may be a direct and adverse impact to our business and our revenue and profits.

 

 
19

Table of Contents

    

We are monitoring the current federal administration’s, the DOJ’s and Congress’ positions on federal marijuana law and policy. Since the beginning of the new Congress in January 2019, there have been positive discussions about the Federal Government’s approach to cannabis. The DOJ has not signaled any change in their enforcement efforts. Based on public statements and reports, we understand that certain aspects of those laws and policies are currently under review, but no official changes have been announced. It is possible that certain changes to existing laws or policies could have a negative effect on our business and results of operations. Although the possession, cultivation and distribution of marijuana for medical and adult use is permitted in California and Nevada, provided compliance with applicable state and local laws, rules, and regulations, marijuana is illegal under federal law. We believe we operate our business in compliance with applicable Nevada, California, Ohio and Arkansas laws and regulations. Any changes in federal, state or local law enforcement regarding marijuana may affect our ability to operate our business. Strict enforcement of federal law regarding marijuana would likely result in the inability to proceed with our business plans, could expose us to potential criminal liability and could subject our properties to civil forfeiture. Any changes in banking, insurance or other business services may also affect our ability to operate our business.

 

Competitive Conditions and Position

 

Production and Sales

 

NMG has a number of licenses and a long-term lease for a facility allowing it to cultivate and produce medical and recreational marijuana. In addition to flower products, we produce marijuana extract products such as distillate oil, ice wax, dry sift, shatter, edibles and topicals.

 

The Nevada, California, Ohio and Arkansas Markets

 

We face competition from a variety of competitors. Several factors impacting competition include, but are not limited to, the quality control and consistency of products being produced, the hiring and retention of competent personnel within the industry, brand marketing and production costs.

 

The United States Market

 

We face competition from a diverse mix of market participants, including, but not limited to, independent investors, hedge funds and other cannabis operators, all of whom may compete with us to acquire real estate zoned for medical-use and/or recreational-use cannabis facilities. The current market for medical and recreational marijuana products may be limited as more competitors enter the market.

 

See – Risk Factors – Risks related to the Business and Industry.

 

Intellectual Property

 

Patents and Trademarks

 

We currently have “BaM” trademarked in Nevada, Montana and Colorado. The description of the Trademark is: Capital “B” lowercase “a” capital “M” which is an abbreviation for Body and Mind.

 

Nevada – NMG filed and registered the “BaM” trademark with the State of Nevada effective January 26, 2016. The trademark expires January 26, 2021.

 

Montana - NMG filed and registered the “BaM” trademark with the State of Montana effective July 20, 2017. The trademark expires July 20, 2022.

 

Colorado - NMG filed and registered the “BaM” trademark with the State of Colorado effective August 16, 2017. The trademark expires August 16, 2021.

 

 
20

Table of Contents

    

Employees

 

Including all companies, we currently have 101 full-time employees across all of its locations.

 

Material Contracts

 

Other than already disclosed above under the subsection titled “Description of Our Business”, we have the following material contracts:

 

Assignment Agreement

 

Subsequent to the signing of the letter of intent (the “Letter of Intent”) between Toro Pacific Management Inc. (“Toro”) and NMG with respect to the acquisition of NMG, we entered into an assignment and novation agreement with Toro and NMG, dated effective May 12, 2017, as amended on November 13, 2017, which assigned the Letter of Intent to us from Toro. Pursuant to the Assignment Agreement, we were committed to issue Toro 470,000 Common Shares under the following release schedule terms:

 

1)

47,000 shares on November 14, 2017; and

2)

70,500 shares every six months on the following dates May 14, 2018, November 14, 2018, May 14, 2019, November 14, 2019, May 14, 2020 and November 14, 2020.

 

Promissory Notes

 

1)

On November 14, 2017, we issued five non-interest bearing promissory notes for an aggregate principal amount of $2,000,000 (the “Vendor Promissory Notes”) as follows: $450,000 to MBK Investments, LLC, $450,000 to the Rozok Family Trust, $490,000 to KAJ Universal Real Estate Investments, LLC, $120,000 to NV Trees, LLC, and $490,000 to SW Fort Apache, LLC. The Vendor Promissory Notes were secured by a senior priority security interest in all assets of the Company, to be paid by February 14, 2019 or, if an equity or debt financing subsequent to the November 14, 2017 is closed in an aggregate amount of not less than $5,000,000, then within 30 days of the closing date of such subsequent financing.

 

 

2)

On November 14, 2017, we assumed NMG’s obligations pursuant to a loan in the amount of $400,000, payable to TI Nevada, LLC, of which $225,000 was paid on November 14, 2017 and the remaining $175,000 was issued as a non-interest bearing promissory note (the “TI Nevada Promissory Note”). The TI Nevada Promissory Note was secured by a senior priority security interest in all assets of the Company to be paid by February 14, 2019.

 

Concurrent with the closing of the Investment Agreement between Australis and the Company dated October 30, 2018, we entered into amending agreements (the “Amending Agreements”) with each of the NMG securityholders with respect to promissory notes (the “Promissory Notes”) issued by the Company in favor of each of the NMG securityholders upon closing of the certain Share Exchange Agreement between the Company, NMG and the NMG securityholders, dated September 14, 2017, whereby the Company and the NMG securityholders, other than TI Nevada, LLC, agreed to amend the terms of the Promissory Notes to provide for:

 

 

(a)

a payment of 50% of the outstanding principal on or before November 12, 2018;

 

 
21

Table of Contents

 

 

(b)

the remaining 50% of the outstanding principal to bear interest at 8% commencing on February 14, 2019 (the “Due Date”). All interest accrued under the note shall be due and payable to the lender on a quarterly basis commencing on May 1, 2019, and continuing every three (3) months thereafter until all principal, interest, and other amounts payable under the note has been paid. All outstanding principal, interest, and other amounts payable hereunder shall be due and payable in a balloon payment on the date (the “Maturity Date”) that is the earlier of:

 

 

 

(i)

12 months from the Due Date; and

 

 

 

 

 

 

(ii)

Within ten (10) business days after closing a financing subsequent to November 12, 2018 in the amount of not less than an aggregate of Five Million US Dollars (US$5,000,000). The Company has, at its sole discretion, and at any time and for whatever reason, the option to make payment in full or in partial payments to reduce the balance outstanding.

 

 

 

 

 

(c)

the Section titled “Default Rate” in the Promissory Note is hereby deleted in its entirety and replaced with the following:

 

 

 

 

 

 

From and after the occurrence of any Default in this Note, and until such Default has been cured, all outstanding amounts under this Note (including, but not limited to, interest and late charges) shall bear interest at a rate of FIFTEEN PERCENT (15%) annually (the “Default Rate”).

 

 

 

 

(d)

the Section titled “Rights of Lender on Default” in the Promissory Note is hereby deleted in its entirety and replaced with the following:

 

 

 

 

 

Upon the occurrence of any Default, Lender shall be entitled to exercise any one or more of the following remedies without notice or demand:

 

 

 

 

 

(i)

to accelerate and declare the entire unpaid balance then due and payable under this Note to be immediately due and payable, even though the time of maturity as expressed herein shall not have arrived;

 

 

 

 

 

 

(ii)

to foreclose upon the collateral pursuant to the note and the agreement; and

 

 

 

 

 

 

(iii)

to exercise any other right or remedy permitted by law;

   

and, with respect to TI Nevada, LLC, the Company, TI Nevada, LLC and all of the other NMG securityholders agreed to amend the Promissory Note issued to TI Nevada, LLC to provide for:

 

 

(a)

payment of 100% of the outstanding principal on or before November 12, 2018; and

 

 

 

 

(b)

the Section titled “Default Rate” in the Promissory Note is hereby deleted in its entirety and replaced with the following:

 

 

 

 

 

From and after the occurrence of any Default in this Note, and until such Default has been cured, all outstanding amounts under this Note (including, but not limited to, interest and late charges) shall bear interest at a rate of FIFTEEN PERCENT (15%) annually (the “Default Rate”).

 

Conversion Agreement

 

On July 1, 2019, we entered into a conversion agreement (the “Conversion Agreement”) with Australis, whereby Australis agreed to convert the Debentures 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. On July 1, 2020, we issued 2,909,091 Common Shares to Australis at a deemed value of CAD$0.55 per Common Shares and the Debentures were fully converted to Common Shares.

 

 
22

Table of Contents

    

Trademark and Technology License and Services Agreement

 

In connection with the Asset Purchase Agreement, we and our 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.

 

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.

 

Licenses

 

City of Las Vegas – Conditional Cultivation Business License

Body and Mind was granted license # M66-00066, a conditional business license by the city of Las Vegas, Nevada on July 1, 2020. The license is for a medical marijuana cultivation facility and expires on January 1, 2021.

 

City of Las Vegas – Conditional Production Business License

Bam – Body and Mind was granted license # M68-00014, a conditional business license by the city of Las Vegas, Nevada on July 30, 2020. The license is for a medical marijuana production facility and expires on January 1, 2021.

 

Clark County Limited Business License

NMG was granted license #2000032.MMR-301, a temporary business license by Clark County, Nevada (“Clark County”). The temporary business license expires on December 31, 2020.

 

Nevada State Business License

NMG was granted a Nevada State Business License on January 7, 2020 under the identification number #NV20141151164. The license has an expiry date of March 31, 2021.

 

Nevada Medical Marijuana Program – State Certificate (Cultivation)

Body and Mind was issued certificate number 30658964196185382559 to be a medical marijuana cultivation establishment on July 1, 2020 by the Department of Taxation for C144 (“Certificate 30658964196185382559”). The certificate expires on June 30, 2021.

 

 
23

Table of Contents

    

Nevada Marijuana Cultivation Facility License

Body and Mind was issued license number 79806207400948405980 to be a marijuana cultivation facility on July 1, 2020 by the Department of Taxation for RC144 (“License 79806207400948405980”). The license expires on June 30, 2021.

 

Nevada Medical Marijuana Program – State Certificate (Production)

Body and Mind was issued certificate number 82120463387641172380 to be a medical marijuana production establishment on July 1, 2020 by the Department of Taxation for P044 (“Certificate 82120463387641172380”). The certificate expires on June 30, 2021.

 

Nevada Marijuana Production Facility License

Body and Mind was issued license number 20833618692863727137 to be a marijuana production facility on July 1, 2020 by the Department of Taxation for RP144 (“License 20833618692863727137”). The license expires on June 30, 2021.

 

California Bureau of Cannabis Control – State License

NMG San Diego, LLC was issued license number C10-0000653-LIC, a provisional storefront adult-use and medicinal retailer license on November 12, 2019 by the California Bureau of Cannabis Control. The license expires on November 11, 2021.

 

ITEM 1A. RISK FACTORS

 

In addition to the information contained in this Annual Report on Form 10-K, we have identified the following material risks and uncertainties which reflect our outlook and conditions known to us as of the date of this Annual Report. These material risks and uncertainties should be carefully reviewed by our stockholders and any potential investors in evaluating the Company, our business and the market value of our common stock. Furthermore, any one of these material risks and uncertainties has the potential to cause actual results, performance, achievements or events to be materially different from any future results, performance, achievements or events implied, suggested or expressed by any forward-looking statements made by us or by persons acting on our behalf. Refer to “Forward-looking Statements”.

 

There is no assurance that we will be successful in preventing the material adverse effects that any one or more of the following material risks and uncertainties may cause on our business, prospects, financial condition and operating results, which may result in a significant decrease in the market price of our common stock. Furthermore, there is no assurance that these material risks and uncertainties represent a complete list of the material risks and uncertainties facing us. There may be additional risks and uncertainties of a material nature that, as of the date of this Annual Report, we are unaware of or that we consider immaterial that may become material in the future, any one or more of which may result in a material adverse effect on us. You could lose all or a significant portion of your investment due to any one of these material risks and uncertainties.

 

Risks Related to the Business and Industry

 

We have a limited operating history which may make it difficult for investors to predict future performance based on current operations.

 

We have a limited operating history upon which investors may base an evaluation of our potential future performance. Our subsidiary, NMG was formed on March 3, 2014 and began carrying on business in the same year, and therefore, our prospects must be considered in light of the risks common to early-stage enterprises, including under-capitalization, cash shortages, limitations with respect to personnel, financial, and other resources and lack of revenues.

 

 
24

Table of Contents

    

We have incurred losses in prior periods, and losses in the future could cause the quoted price of our Common Shares to decline or have a material adverse effect on our financial condition, our ability to pay our debts as they become due and on our cash flow.

 

We have incurred losses in prior periods. For the fiscal year ended July 31, 2020, we incurred a comprehensive loss of $4,693,935 and, as of that date, we had an accumulated deficit of $14,865,608. Any losses in the future could cause the quoted price of our Common Shares on the CSE to decline or have a material adverse effect on our financial condition, our ability to pay our debts as they become due, and on our cash flow.

 

We are a holding company and investors are subject to the risks attributable to our subsidiaries which generate substantially all of our revenues.

 

We are a holding company and essentially all of our operating assets are the capital stock of our subsidiaries. As a result, investors in us are subject to the risks attributable to our subsidiaries. As a holding company, we conduct our business through our subsidiaries, which generate substantially all of our revenues. Consequently, our cash flows and ability to complete current or desirable future enhancement opportunities are dependent on the earnings of our subsidiaries and the distribution of those earnings to us. The ability of our subsidiaries to pay dividends and other distributions will depend on their operating results and will be subject to applicable laws and regulations which require that solvency and capital standards be maintained by such companies and contractual restrictions contained in the instruments governing their debt. In the event of a bankruptcy, liquidation or reorganization of any of our subsidiaries, holders of indebtedness and trade creditors will generally be entitled to payment of their claims from the assets of those subsidiaries before any assets are made available for distribution to us.

 

As a manufacturer and distributor of ingestible products, we face exposure to product liability claims, regulatory action and litigation if products are alleged to have caused harm.

 

We face an inherent risk of exposure to product liability claims, regulatory action and litigation if our products are alleged to have caused significant loss or injury. In addition, the manufacture and sale of our products involves the risk of injury to consumers due to tampering by unauthorized third parties or product contamination. Previously unknown adverse reactions resulting from human consumption of our products alone or in combination with other medications or substances could occur. We may be subject to various product liability claims, including, among others, that its products caused injury or illness, include inadequate instructions for use or include inadequate warnings concerning possible side effects or interactions with other substances. A product liability claim or regulatory action against us could result in increased costs, could adversely affect our reputation with our clients and consumers generally, and could have a material adverse effect on our results of operations and financial condition. There can be no assurances that we will be able to obtain or maintain product liability insurance on acceptable terms or with adequate coverage against potential liabilities. Such insurance is expensive and may not be available in the future on acceptable terms, or at all. The inability to obtain sufficient insurance coverage on reasonable terms or to otherwise protect against potential product liability claims could prevent or inhibit the commercialization of our potential products.

 

As a manufacturer and distributor of products, we face exposure to product recalls or return of products.

 

We may be subject to the recall or return of our products for reasons such as, product defects, contamination, unintended harmful side effects, interactions with other substances, packaging safety and inadequate or inaccurate labeling disclosure. If any of our products are recalled, we could be required to incur the unexpected expense of the recall and any legal proceedings that might arise in connection with the recall. We may lose a significant amount of sales and may not be able to replace those sales at an acceptable margin or at all. In addition, a product recall may require significant management attention. There can be no assurance that any quality, potency or contamination problems will be detected in time to avoid unforeseen product recalls, regulatory action or lawsuits. Additionally, if one of our significant brands were subject to recall, the image of the brand and Body and Mind could be harmed. A recall for any of the foregoing reasons could lead to decreased demand for our products and could have a material adverse effect on our results of operations and financial condition. Additionally, product recalls may lead to increased scrutiny of our regulatory agencies, requiring further management attention and potential legal fees and other expenses.

 

 
25

Table of Contents

    

The impact of the novel coronavirus (COVID-19) pandemic on the global economy and our operations remains uncertain, which could have a material adverse impact on our business, results of operations and financial condition and on the market price of our common shares.

 

In December 2019, a strain of novel coronavirus (now commonly known as COVID-19) was reported to have surfaced in Wuhan, China. COVID-19 has since spread rapidly throughout many countries, and, on March 11, 2020, the World Health Organization declared COVID-19 to be a pandemic. In an effort to contain and mitigate the spread of COVID-19, many countries, including the United States, Canada and China, have imposed unprecedented restrictions on travel, and there have been business closures and a substantial reduction in economic activity in countries that have had significant outbreaks of COVID-19. 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. In Nevada, the state forced all in-store sales to be halted in March 2020, only allowing home delivery sales, and eventually curbside pickup sales. This order forced the retail market and the wholesale demand to nearly stop until retailers satisfied regulatory requirements to carry out home delivery and curbside pickup. This had a significant negative impact on our sales from March 2020 to May 2020 in Nevada. Significant uncertainty remains as to the potential impact of the COVID-19 pandemic on our operations, and on the global economy as a whole. It is currently not possible to predict how long the pandemic will last or the time that it will take for economic activity to return to prior levels. The COVID-19 pandemic has resulted in significant financial market volatility and uncertainty. A continuation or worsening of the levels of market disruption and volatility seen in the recent past could have an adverse effect on our ability to access capital, on our business, results of operations and financial condition, and on the market price of our common shares.

 

Our future success depends on our key executive officers and our ability to attract, retain, and motivate qualified personnel.

 

Our future performance depends on the continued services and continuing contributions of our senior management, particularly the Chief Executive Officer who consults to us. Certain members of our senior management team are generally contracted on an at-will basis, which means that they could terminate their employment with us at any time with little or short notice. The loss of the services of our senior management, the CEO, or other key employees/contractors for any reason could significantly delay or prevent the achievement of our strategic objectives and harm our business, financial condition and operating results.

 

Our continuing ability to attract and retain highly qualified personnel will also be critical to our success because of the need to hire and retain additional personnel as business grows. There can be no assurance that we will be able to attract or retain highly qualified personnel. Because of these factors, we may not be able to effectively manage or grow our business, which could adversely affect our financial condition and operations.

 

Litigation may adversely affect our business, financial condition and operating results.

 

We and/or our subsidiaries may become party to litigation from time to time in the ordinary course of our respective businesses which could adversely affect our respective operations. Should any litigation in which we and/or our subsidiaries become involved be determined against us and/or our subsidiaries, such a decision may adversely affect our respective abilities to continue operating, adversely affect the market price of our Common Shares and use significant resources. Even if we and/or our subsidiaries, as the case may be, is involved in litigation and succeeds, litigation can redirect significant company resources. In addition, litigation may also create a negative perception of our brand.

 

 
26

Table of Contents

    

Our intended growth could suffer if the markets into which we sell our products and services decline, do not grow as anticipated or experience cyclicality.

 

Our growth depends in part on the growth of the markets which we serve, and visibility into our markets is limited. Our quarterly sales and profits depend substantially on the volume and timing of orders received during the fiscal quarter, which are difficult to forecast. Any decline or lower than expected growth in our served markets could diminish demand for our products and services, which could adversely affect our financial condition and results of operations.

 

Our business operates in industries that may experience periodic, cyclical downturns. In addition, if our business demand depends on customers’ spending budgets, product and economic cycles can affect the spending decisions of these customers. Demand for our products and services is also sensitive to changes in customer order patterns, which may be affected by announced price changes, changes in incentive programs, new product introductions and customer inventory levels. Any of these factors could adversely affect our growth and results of operations in any given period.

 

We face intense competition and our competitors may have a longer operating history or greater financial resources allowing them to compete more effectively.

 

We may face intense competition from other companies, some of which can be expected to have longer operating histories and more financial resources and manufacturing and marketing experience than us. Increased competition by larger and better financed competitors could materially and adversely affect our business, financial condition and results of operations.

 

The State of Nevada has only issued to date a small number of licenses to produce and sell medical marijuana. There are, however, many applicants for licenses. The number of licenses granted could have a material impact on our operations. Because of early stages of the industry in which we operate, we expect to face additional competition from new entrants. If the number of users of medical marijuana in the United States increases, the demand for products will increase and we expect that competition will become more intense, as current and future competitors begin to offer an increasing number of diversified products. We may not have sufficient resources to maintain research and development, marketing, sales and client support efforts on a competitive basis, which could materially and adversely affect our business, financial condition and results of operations.

 

Failure to comply with environmental and safety laws may result in us incurring additional costs for corrective measures.

 

Medical marijuana operations are subject to environmental and safety laws and regulations concerning, among other things, emissions and discharges to water, air and land, the handling and disposal of hazardous and non-hazardous materials and wastes, and employee health and safety. Our failure to comply with environmental and safety laws and regulations may result in additional costs for corrective measures, penalties or in restrictions in manufacturing operations. In addition, changes in environmental, employee health and safety or other laws, more vigorous enforcement thereof or other unanticipated events could require extensive changes to operations or give rise to material liabilities, which could have an adverse effect on our business, financial conditions and results of operations.

 

Our cannabis crop could be harmed by pests, plant diseases or other agricultural risks which would have a material adverse affect on our business.

 

Our business involves the growing of cannabis, which is an agricultural product. As such, our business is subject to the risks inherent in the agricultural business, such as pests, plant diseases and similar agricultural risks. This could lead to a reduced yield when harvesting the cannabis affecting the supply of cannabis for distribution, and, therefore, could have a material adverse effect on our business operations and our ability to meet consumer demand.

 

We may experience increased costs during the growth stage of the cannabis due to the possibility of rising energy costs.

 

Growing cannabis requires a considerable amount of energy. We are vulnerable to rising costs of energy due to our need to consume considerable amounts of energy to grow our product. Rising or volatile energy costs may adversely impact our business by increasing production costs and decreasing revenue if those increased costs cannot be transferred to the consumer.

 

 
27

Table of Contents

    

The cannabis industry is difficult to forecast due to the industry being in the early growth stages.

 

Detailed sales forecasts are not generally obtainable from sources at this early stage of the medical marijuana industry in the United States. A failure in the demand for products to materialize as a result of competition, technological change or other factors could have a material adverse effect on our business, financial condition and results of operations.

 

Our public image and the consumer perception of us is greatly influenced by scientific research, regulatory investigations, and media attention. Negative publicity will result in an unfavorable public image and will negatively affect our financial condition and results of operations.

 

We believe the medical marijuana industry is highly dependent upon consumer perception regarding the safety, efficacy and quality of the medical marijuana produced. Consumer perception of our products and proposed products can be significantly influenced by scientific research or findings, regulatory investigations, litigation, media attention and other publicity regarding the consumption of medical marijuana products. There can be no assurance that future scientific research, findings, regulatory proceedings, litigation, media attention or other research findings or publicity will be favourable to the medical marijuana market or any particular product, or consistent with earlier publicity.

 

Our dependence upon consumer perceptions means that adverse reports, findings, attention or other publicity, whether or not accurate or with merit, could have a material adverse effect on us, the demand for our products and proposed products, and our business, financial condition, cash flow and results of operations. Further, adverse publicity reports or other media attention regarding the safety, efficacy and quality of medical marijuana in general, or our products and proposed products specifically, or associating the consumption of medical marijuana with illness or other negative effects or events, could have a material adverse effect on our business and results of operations. Such adverse publicity reports or other media attention could arise even if the adverse effects associated with such products resulted from consumers’ failure to consume such products appropriately or as directed.

 

Risks related to the Federal and State Regulations

 

Federal regulation and enforcement may adversely affect the implementation of cannabis laws and regulations may negatively impact our results of operations.

 

Cannabis is a Schedule I controlled substance under the Controlled Substance Act (the “CSA”). Even in those jurisdictions in which the manufacture and use of medical cannabis has been legalized at the state level, the possession, use, cultivation, and transfer of cannabis remains a violation of federal law. Federal law criminalizing the use of cannabis preempts state laws that legalize its use for medicinal or adult-retail purposes, and therefore strict enforcement of federal law regarding cannabis would severely restrict our ability to carry out our business plan.

 

The U.S. Department of Justice under the Obama administration had issued memoranda, including the so-called “Cole Memorandum” on August 29, 2013, characterizing enforcement of federal cannabis prohibitions under the CSA to prosecute those complying with state regulatory systems allowing the use, manufacture and distribution of medical cannabis as an inefficient use of federal investigative and prosecutorial resources when state regulatory and enforcement efforts are effective with respect to enumerated federal enforcement priorities under the CSA. In the Cole Memorandum, the U.S. Department of Justice provided guidance to all federal prosecutors indicating that federal enforcement of the CSA against cannabis-related conduct should be focused on eight priorities, which are to prevent: (1) distribution of cannabis to minors; (2) revenue from sale of cannabis to criminal enterprises, gangs and cartels; (3) transfer of cannabis from states where it is legal to states where it is illegal; (4) cannabis activity from being a pretext for trafficking of other illegal drugs or illegal activity; (5) violence or use of firearms in cannabis cultivation and distribution; (6) drugged driving and adverse public health consequences from cannabis use; (7) growth of cannabis on federal lands; and (8) cannabis possession or use on federal property.

 

 
28

Table of Contents

    

On January 4, 2018, Attorney General Jeff Sessions issued a new memo updating the Department of Justice’s policy on federal marijuana enforcement (the “Sessions Memorandum”). The Sessions Memorandum effectively rescinded and replaced the Cole Memorandum, and directed all U.S. Attorneys to enforce the laws enacted by Congress and to follow well-established principles when pursuing prosecutions related to marijuana activities. While in theory the protections under the Cole Memorandum have been abolished, the new policy does not explicitly direct local U.S. Attorneys to launch an attack on state-legal marijuana businesses. Rather, the new policy promulgated by the Sessions Memorandum is to return local control to federal prosecutors who know where and how to deploy Justice Department resources most effectively to reduce violent crime, stem the tide of the drug crisis, and dismantle criminal gangs. The threat of federal prosecution remains for legitimate, state-legal marijuana businesses, including our business.

 

However, no assurance can be given that the federal prosecutor in each judicial district where we operate will agree that our activities within such prosecutor’s district do not go contrary to the Justice Department’s goals. There is also no guarantee that the current administration or future administrations will not revise the federal enforcement priorities enumerated in the Cole Memorandum, the Sessions Memorandum or otherwise choose to strictly enforce the federal laws governing cannabis production or distribution.

 

On April 11th, 2018, U.S. Senator Cory Gardner received assurances from President Donald Trump that 1) states with legal marijuana industries would not be targeted by the Justice Department, 2) the rescission of the Cole Memorandum would not impact state’s legal marijuana industries, and 3) that the President would support a federalism-based legislative solution to fix the states’ rights issue once and for all. The President’s comments are encouraging to legal marijuana businesses; however, no legislative action at the federal level has been taken.

 

Under U.S. federal law, banks or other financial institutions that provide us with banking services could be found guilty of money laundering, which restricts our ability to receive reputable banking services and adversely affects our business operations.

 

Under U.S. federal law it may potentially be a violation of federal money laundering statutes for financial institutions to take any proceeds from marijuana sales or any other Schedule I substance. Banks and other financial institutions could be prosecuted and possibly convicted of money laundering for providing services to cannabis businesses. Under U.S. federal law, banks or other financial institutions that provide a cannabis business with a checking account, debit or credit card, small business loan, or any other service could be found guilty of money laundering or conspiracy. Financial institutions must submit a “suspicious activity report” (“SAR”) as required by federal money laundering laws. These marijuana related SARs are divided into three categories: marijuana limited, marijuana priority, and marijuana terminated, based on the financial institution’s belief that the marijuana business follows state law, is operating out of compliance with state law, or where the banking relationship has been terminated. There can be no assurance that a negative SAR will not be filed against us limiting our access to banking services as well as subjecting us to Federal review. This will also negatively impact our public image and affect operations.

 

The Independent Alcohol Distributors of Nevada have obtained a preliminary injunction against the issuance of recreational marijuana licenses to anyone other than licensed alcohol distributors. If this injunction remains in place we will be unable to obtain a recreational marijuana distributor license which would have an adverse effect on our business operations.

 

In leading up to the launch of recreational marijuana sales on July 1, 2017, the State of Nevada Department of Taxation (the “Department”) made a determination in March 2017 that there would be an insufficient number of marijuana distributors based on the limited response to its call for distributor license applications, and the Department proceeded to accept applications for distributor licenses from many existing medical marijuana entities (“MMEs”), who have the infrastructure and know-how to handle the distribution of recreational marijuana.

 

The Independent Alcohol Distributors of Nevada (“IADON”) filed a suit in District Court in Carson City, Nevada requesting a preliminary injunction against the Department to prevent the issuance of licenses to distribute recreational marijuana to anyone other than licensed alcohol distributors. The original ballot initiative passed by the voters of Nevada on November 8, 2016 provided that the Department shall issue licenses for marijuana distributions only to persons holding a wholesaler dealer license under Chapter 369 of NRS (alcohol distributor license), unless the department determined that an insufficient number of marijuana distributors will results from the limitation. On June 20, 2017, the Judge in the IADON litigation granted IADON’s motion for preliminary injunction, and thereby enjoined the Department from issuing a retail marijuana distributor license to any person or entity other than wholesale alcohol distributors.

 

 
29

Table of Contents

    

This litigation remains ongoing, and the Nevada Supreme Court has not indicated when it will reach its ruling. If the courts find in favor of IADON, then wholesale alcohol distributors will have exclusive rights to distribute marijuana. We may experience increased costs and inefficiencies for having to use a third-party for distribution purposes, which would have an adverse effect on our business and results of operations.

 

Risks related to Our Securities

 

We may issue additional Common Shares in the future, which could cause significant dilution to all shareholders.

 

Our Articles of Incorporation authorize the issuance of up to 900,000,000 Common Shares, with a par value of $0.0001 per share. As of December 9, 2020, the Company had 108,377,778 Common Shares issued and outstanding, 9,055,000 stock options outstanding and 12,415,284 share purchase warrants outstanding.

 

As at December 9, 2020, the Company’s 9,055,000 stock options outstanding are exercisable into 9,055,000 Common Shares of the Company with the following terms:

 

Number of Options

outstanding

 

Exercise price

 

Expiry dates

2,800,000

 

CAD$0.66

 

November 24, 2022

175,000

 

CAD$0.41

 

June 6, 2023

1,605,000

 

CAD$0.57

 

December 10, 2023

150,000

 

CAD$0.61

 

December 10, 2023

2,250,000

 

CAD$0.88

 

August 21, 2024

250,000

 

CAD$0.93

 

October 1, 2024

200,000

 

CAD$0.88

 

January 23, 2025

250,000

 

CAD$0.405

 

March 1, 2025

1,375,000

 

CAD$0.67

 

April 30, 2025

9,055,000

 

Number of Options

exercisable

 

Exercise price

 

Expiry dates

2,800,000

 

CAD$0.66

 

November 24, 2022

175,000

 

CAD$0.41

 

June 6, 2023

1,605,000

 

CAD$0.57

 

December 10, 2023

150,000

 

CAD$0.61

 

December 10, 2023

1,125,000

 

CAD$0.88

 

August 21, 2024

125,000

 

CAD$0.93

 

October 1, 2024

50,000

 

CAD$0.88

 

January 23, 2025

62,500

 

CAD$0.405

 

March 1, 2025

343,750

 

CAD$0.67

 

April 30, 2025

6,436,250

 

As at December 9, 2020, the Company’s 12,415,284 share purchase warrants outstanding are exercisable into 12,415,284 Common Shares of the Company with the following terms:

 

Number of warrants

outstanding and exercisable

 

Exercise price

 

Expiry dates

11,780,134

 

CAD$1.50

 

May 17, 2023

635,150

 

CAD$1.25

 

May 16, 2023

12,415,284

 

 

 

 

   

Pursuant to the membership interest purchase agreement to acquire the remaining 70% of NMG Ohio, we issued 793,466 Common Shares on October 21, 2020.

 

We also issued 70,500 Common Shares to Toro Pacific Management Inc. on November 14, 2020.

 

We may issue additional Common Shares in the future in connection with a financing or an acquisition. Such issuances may not require the approval of our shareholders. Any issuance of additional shares of our Common Shares, or equity securities convertible into our Common Shares, including but not limited to, warrants and options, will dilute the percentage ownership interest of all shareholders, may dilute the book value per share of our Common Shares, and may negatively impact the market price of our Common Shares.

 

 
30

Table of Contents

    

Because we do not intend to pay any cash dividends on our Common Shares, our shareholders will not be able to receive a return on their shares unless they sell them.

 

We intend to retain any future earnings to finance the development and expansion of our business. We do not anticipate paying any cash dividends on our Common Shares in the foreseeable future. Declaring and paying future dividends, if any, will be determined by our Board, based upon earnings, financial condition, capital resources, capital requirements, restrictions in our Articles of Incorporation, contractual restrictions, and such other factors as our Board deems relevant. Unless we pay dividends, our shareholders will not be able to receive a return on their shares unless they sell them. There is no assurance that shareholders will be able to sell shares when desired.

 

Our Common Shares are categorized as “penny stock”, which may make it more difficult for investors to buy and sell our Common Shares due to suitability requirements.

 

Our Common Shares are considered “penny stock”. The SEC has adopted Rule 15g-9 which generally defines “penny stock” to be any equity security that has a market price less than $5.00 per share or an exercise price of less than $5.00 per share, subject to certain exceptions. The price of our Common Shares is significantly less than $5.00 per share. This designation imposes additional sales practice requirements on broker-dealers who sell to persons other than established customers and “accredited investors”. The penny stock rules require a broker-dealer buying securities to disclose certain information concerning the transaction, obtain a written agreement from the purchaser and determine that the purchaser is reasonably suitable to purchase the securities given the increased risks generally inherent in penny stocks. These rules may restrict the ability and/or willingness of brokers or dealers to buy or sell our Common Shares, either directly or on behalf of their clients, may discourage potential stockholders from purchasing our Common Shares, or may adversely affect the ability of stockholders to sell their shares.

 

Financial Industry Regulatory Authority (“FINRA”) sales practice requirements may also limit a shareholder’s ability to buy and sell our Common Shares, which could depress the price of our Common Shares.

 

In addition to the “penny stock” rules described above, FINRA has adopted rules that require a broker-dealer to have reasonable grounds for believing that the investment is suitable for that customer before recommending an investment to a customer. Prior to recommending speculative low-priced securities to their non-institutional customers, broker-dealers must make reasonable efforts to obtain information about the customer’s financial status, tax status, investment objectives, and other information. Under interpretations of these rules, FINRA believes that there is a high probability that speculative low-priced securities will not be suitable for at least some customers. Thus, the FINRA requirements make it more difficult for broker-dealers to recommend that their customers buy our Common Shares, which may limit your ability to buy and sell our Common Shares, have an adverse effect on the market for our Common Shares, and thereby depress our price per Common Share.

 

ITEM 1B. UNRESOLVED STAFF COMMENTS

 

Not applicable.

 

ITEM 2. PROPERTIES

 

Property Leases

 

On November 10, 2017, NMG entered into a revised five-year lease agreement with Resort Holdings 5, LLC, a Nevada limited liability company, for the property located at 3375 Pepper Lane, Las Vegas, NV, containing approximately 18,000 square feet. We have four options to extend the lease and each option is for five years. The monthly rent was $12,875 + common area expenses and increased to $13,133 + common area expenses on January 1, 2020. The guaranteed minimum monthly rent is subject to a 2% increase on each anniversary date of the lease. In July 2018, Resort Holdings 5, LLC, the landlord, sold the property to a third party and assigned the lease to Minor Street Properties, LLC. All leases terms remain the same.

 

 
31

Table of Contents

    

On April 9, 2019, NMG entered into a three-year lease agreement with Haigaz and Nora Atamian, commercial property owners, for the property located at 6420 Sunset Corporate Drive, Las Vegas, NV, containing approximately 7,700 square feet. We have one option to extend the lease for an additional three-year term and an option to purchase the property at any point during the initial term. The monthly rent was $6,026 + common area expenses and increased to $6,252 + common area expenses on May 1, 2020. The guaranteed minimum monthly rent is subject to a $.03 per square foot, per month, increase on each anniversary date of the lease.

 

On August 2, 2018, NMG Ohio, LLC entered into a three-year lease agreement with MMCA Development, LLC, an Ohio limited liability company, for the property located at 709 Sugar Lane, Elyria, Ohio 44035, containing approximately 4,100 square feet. The monthly rent is $4,200.

 

On April 4, 2018, Comprehensive Care Group, LLC entered into a five-year lease agreement with MarGlas, LLC, an Arkansas limited liability company, for the property located at 201 & 203 N. Ok Street, West Memphis, Arkansas, containing approximately 10,000 square feet. We have two options to extend the lease and each option is for five years. The monthly rent is $3,000.

 

On December 1, 2018, SGSD, LLC entered into a five-year lease agreement with Green Road, LLC, a California limited liability company, for the property located at 7625 Carroll Road, San Diego, California, containing approximately 4,600 square feet. On June 13, 2019, SGSD, LLC assigned the lease to NMG San Diego, LLC. Under the terms of the assignment and first amendment to the original lease agreement dated June 13, 2019, we have three options to extend the lease and each option is for five years. The monthly base rent was $15,000 + common area expenses and increased to $15,450 + common area expenses on May 1, 2020. The guaranteed monthly rent is subject to a 1-6% increase on each anniversary date of the lease, based on increases in the Consumer Price Index for San Diego County.

 

On January 10, 2017, SJK Services, LLC entered into a five-year lease agreement with Meng Lin Zhang, a commercial property owner, for the property located at 3411 E. Anaheim St., Long Beach, California, containing approximately 1,856 square feet. On September 7, 2018, SJK Services, LLC amended its lease agreement with Meng Lin Zhang. On December 14, 2018, SJK Services, LLC assigned the amended lease agreement to The Airport Collective, Inc., a California corporation. On March 8, 2019, The Airport Collective, Inc. assigned the amended lease agreement to NMG Long Beach, LLC. Under the terms of the amended lease agreement, we have one option to extend the lease for five years. The monthly base rent was $6,636 + common area expenses, totaling $8,000 every month, and increased to $6,968 + common area expenses on January 10, 2021, totaling $8,400 every month. The guaranteed minimum monthly rent is subject to a 5% increase on each anniversary date of the lease.

 

On October 1, 2019, NMG Ohio, LLC entered into a three-year lease agreement with MMCA Development, LLC, an Ohio limited liability company, for the property located at 719 Sugar Lane, Elyria, Ohio 44035, containing approximately 4,000 square feet. The monthly rent is $4,000.

  

ITEM 3. LEGAL PROCEEDINGS

 

We are not, and were not during our most recently completed fiscal year, engaged in any legal proceedings and none of our property is or was during that period the subject of any legal proceedings. We do not know of any such legal proceedings which are contemplated.

 

A group of cannabis companies that did not win marijuana dispensary permits in the most recent round of state licensing in Nevada have filed an amended lawsuit, alleging corruption in the state agency that regulates the industry. The lawsuit names a long list of marijuana companies that did and didn’t receive dispensary licenses, including Nevada Medical Group, LLC.

 

On October 8, 2019, Nevada Medical Group, LLC filed its notice of intent to participate in the Complaint and Petition with the District Court, Clark County Nevada.

 

ITEM 4. MINE SAFETY DISCLOSURES

 

Not applicable.

 

 
32

Table of Contents

    

PART II

 

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

 

Market for Common Stock

 

Our common stock was quoted on the OTC Pink since November 6, 2008, initially under the symbol “DPLY” until December 8, 2017 and then under the symbol “BMMJ” as a result of our name change on November 14, 2017 in connection with our acquisition of NMG. As of July 30, 2019, our common stock was posted for trading on the OTCQB under the same symbol “BMMJ”. The market for our common stock is limited, and can be volatile. The following table sets forth the high and low bid prices relating to our common stock on a quarterly basis for the periods indicated as quoted by the OTCQB and OTC Pink. These quotations reflect inter-dealer prices without retail mark-up, mark-down, or commissions, and may not reflect actual transactions.

 

Quarter Ended

 

High Bid

 

 

Low Bid

 

July 31, 2020

 

$ 0.49

 

 

$ 0.21

 

April 30, 2020

 

$ 0.53

 

 

$ 0.15

 

January 31, 2020

 

$ 0.92

 

 

$ 0.33

 

October 31, 2019

 

$ 1.18

 

 

$ 0.56

 

July 31, 2019

 

$ 2.15

 

 

$ 0.65

 

April 30, 2019

 

$ 2.70

 

 

$ 0.46

 

January 31, 2019

 

$ 0.84

 

 

$ 0.35

 

October 31, 2018

 

$ 0.75

 

 

$ 0.26

 

July 31, 2018

 

$ 0.47

 

 

$ 0.25

 

 

In addition, shares of our common stock have been listed on the Canadian Securities Exchange (the “CSE”) since December 22, 2011, initially under the symbol under the symbol “DEP” (until December 6, 2017) and now under the symbol “BAMM” (since December 7, 2017). The following table sets forth the high and low sales prices of our common stock on a quarterly basis for the periods indicated as quoted by the CSE.

 

Quarter Ended

 

High

 

 

Low

 

July 31, 2020

 

CAD$

0.68

 

 

CAD$

0.30

 

April 30, 2020

 

CAD$

0.72

 

 

CAD$

0.22

 

January 31, 2020

 

CAD$

1.05

 

 

CAD$

0.43

 

October 31, 2019

 

CAD$

1.56

 

 

CAD$

0.76

 

July 31, 2019

 

CAD$

2.89

 

 

CAD$

0.84

 

April 30, 2019

 

CAD$

3.71

 

 

CAD$

0.62

 

January 31, 2019

 

CAD$

1.11

 

 

CAD$

0.51

 

October 31, 2018

 

CAD$

1.20

 

 

CAD$

0.33

 

July 31, 2018

 

CAD$

0.53

 

 

CAD$

0.37

 

  

On December 9, 2020, the last reported sale price of our common stock on the OTCQB was $0.39 per share and the last reported sale price of our common stock on the CSE was CAD$0.48 per share.

 

 
33

Table of Contents

    

Transfer Agent for Common Shares

 

The Registrar and Transfer Agent for our Common Shares is New Horizons Transfer located at 215 – 515 W Pender Street, Vancouver, British Columbia, Canada V6B 6H5.

 

Options

 

We have a 10% rolling stock option plan for its directors, employees and consultants to acquire our common shares at a price determined by the fair market value of our shares at the date of grant. Our stock option plan provides for immediate vesting or vesting at the discretion of our board of directors at the time of the option grant.

 

As of December 9, 2020, we have 9,055,000 stock options outstanding which are exercisable into 9,055,000 Common Shares.

 

Warrants

 

As of December 9, 2020, we have 12,415,284 common share purchase warrants outstanding which are exercisable into 12,415,284 Common Shares.

 

Holders of Common Shares

 

As of December 9, 2020, we had 205 shareholders of record, which does not include shareholders whose shares are held in street or nominee names, if any.

 

Dividends

 

We have not paid dividends or made distributions on our Common Shares during the past three fiscal years and through the date of this Annual Report. We have no present intention of paying dividends in the near future. We will pay dividends when, and if declared by our board of directors. We expect to pay dividends only out of retained earnings in the event that we do not require our retained earnings for operations and reserves. There are no restrictions in our articles of incorporation or bylaws that prevent us from declaring dividends, but Nevada corporate law prohibits us from declaring and paying dividends if after doing so we would not be able to pay our debts as they become due in the usual course of business, or our total assets would be less than the sum of our total liabilities plus the amount that would be needed to satisfy the rights of shareholders who have preferential rights superior to those receiving the distribution. We have no shares with preferential dividend and distribution rights authorized or outstanding.

 

Securities Authorized for Issuance under Equity Compensation Plans

 

The following table shows our equity securities that are authorized for issuance pursuant to equity compensation plans for our most recently completed financial year ended July 31, 2020.

 

Plan Category

 

Number of securities to be issued upon exercise of outstanding options, warrants and rights

(a)

 

 

Weighted-average exercise price of outstanding options, warrants and rights

(b)

 

 

Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a))

(c)

 

Equity compensation plans approved by security holders

 

 

9,155,000

 

 

CAD$ 0.70

 

 

 

1,596,381

 

Equity compensation plans not approved by security holders

 

Nil

 

 

Nil

 

 

Nil

 

Total

 

 

9,155,000

 

 

CAD$ 0.70

 

 

 

1,596,381

 

 

 
34

Table of Contents

    

On November 23, 2017, our board of directors ratified our 2012 Incentive Stock Option Plan (the “Body and Mind Option Plan”). The purpose of the Body and Mind Option Plan is to enhance the long-term shareholder value of Body and Mind by offering opportunities to directors, executive officers, key employees and eligible consultants of Body and Mind to acquire Body and Mind Common Shares in order to give these persons the opportunity to participate in Body and Mind’s growth and success, and to encourage them to remain in the service of Body and Mind.

 

On November 24, 2017, we issued an aggregate of 3,850,000 stock options in accordance with our stock option plan at an exercise price of CAD$0.66 per share for a five-year term expiring November 24, 2022, of which there are currently only 2,900,000 stock options outstanding from such grant of stock options. The options were granted to officers, directors and consultants of the Company. During the year ended July 31, 2020, the Company cancelled 950,000 stock options due to forfeiture.

 

The fair value of the stock options was calculated to be $726,578 using the Black-Scholes Option Pricing Model using the following assumptions:

  

Expected life of the options

 

 

5

 years

Expected volatility

 

 

198 %

Expected dividend yield

 

 

0 %

Risk-free interest rate

 

 

1.63 %

 

On June 6, 2018, we granted 175,000 stock options in accordance with our stock option plan at an exercise price of CAD$0.41 per common share for a five-year term expiring June 6, 2023 to a consultant of the Company.

 

The fair value of the stock options was calculated to be $63,101 using the Black-Scholes Option Pricing Model using the following assumptions:

 

Expected life of the options

 

5

years

Expected volatility

 

 

262 %

Expected dividend yield

 

 

0 %

Risk-free interest rate

 

 

2.16 %

 

On December 11, 2018, the Company issued 2,050,000 stock options in accordance with the Company’s stock option plan at an exercise price of CAD$0.57 per share for a five-year term expiring December 10, 2023, of which there are currently only 1,525,000 stock options outstanding from such grant of stock options. The options were granted to current directors, officers, employees and consultants of the Company. During the year ended 31 July 2020, the Company cancelled 525,000 stock options in this series due to forfeiture.

 

The fair value of the stock options was calculated to be $880,595 (CAD$1,165,117) using the Black-Scholes Option Pricing Model with the following assumptions:

 

Expected life of the options

 

5

years

Expected volatility

 

 

265 %

Expected dividend yield

 

 

0 %

Risk-free interest rate

 

 

2.03 %

 

 
35

Table of Contents

    

On August 21, 2019, the Company issued 2,850,000 stock options with an exercise price of CAD$0.88 per share for a term of five years expiring on August 21, 2024, of which there are currently only 1,900,000 stock options outstanding from such grant of stock options. 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. During the year ended 31 July 2020, the Company cancelled 950,000 stock options in this series due to forfeiture.

 

The total fair value of the stock options granted was calculated to be $1,373,856 (CAD$1,818,232) using the Black-Scholes Option Pricing Model with the following assumptions:

 

Expected life of the options

 

3.125

years

Expected volatility

 

 

195 %

Expected dividend yield

 

 

0 %

Risk-free interest rate

 

 

1.28 %

 

On October 1, 2019, the Company issued 250,000 stock options with an exercise price of CAD$0.93 per share for a term of five years expiring on October 1, 2024. 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.

 

The total fair value of the stock options granted was calculated to be $145,045 (CAD$191,960) using the Black-Scholes Option Pricing Model with the following assumptions:

 

Expected life of the options

 

3.125

years

Expected volatility

 

 

194 %

Expected dividend yield

 

 

0 %

Risk-free interest rate

 

 

1.37 %

 

On January 23, 2020, the Company issued 200,000 stock options with an exercise price of CAD$0.88 per share for a term of five years expiring on January 23, 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.

 

The total fair value of the stock options granted was calculated to be $68,645 (CAD$90,608) using the Black-Scholes Option Pricing Model with the following assumptions:

 

Expected life of the options

 

3.125

years

Expected volatility

 

 

173 %

Expected dividend yield

 

 

0 %

Risk-free interest rate

 

 

1.43 %

 

On March 1, 2020, the Company issued 250,000 stock options with an exercise price of CAD$0.41 per share for a term of five years expiring on March 1, 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.

 

 
36

Table of Contents

    

The total fair value of the stock options granted was calculated to be $56,287 (CAD$75,331) using the Black-Scholes Option Pricing Model with the following assumptions:

 

Expected life of the options

 

3.125

years

Expected volatility

 

 

127 %

Expected dividend yield

 

 

0 %

Risk-free interest rate

 

 

1.11 %

 

On April 30, 2020, the Company issued 1,375,000 stock options with an exercise price of CAD$0.67 per share for a term of five years expiring on April 30, 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.

 

The total fair value of the stock options granted was calculated to be $524,432 (CAD$701,863) using the Black-Scholes Option Pricing Model with the following assumptions:

 

Expected life of the options

 

3.125

years

Expected volatility

 

 

133 %

Expected dividend yield

 

 

0 %

Risk-free interest rate

 

 

0.32 %

 

On July 7, 2020, the Company cancelled 350,000 stock options with an exercise price of CAD$0.88 per share, 80,000 stock options with an exercise price of CAD$0.57 per share and 150,000 stock options with an exercise price of CAD$0.57. Subsequently, the Company issued replacement stock options of 350,000 stock options with an exercise price of CAD$0.88 per share, 80,000 stock options with an exercise price of CAD$0.57 per share and 150,000 stock options with an exercise price of CAD$0.61 under the same vesting provisions and expiry dates as the original stock options.

 

The incremental fair value based on the difference between the replacement and original stock options immediately before they were modified was calculated to be $Nil (CAD$Nil) using the Black-Scholes Option Pricing Model with the following assumptions:

 

Expected life of the options

 

2.066

years

Expected volatility

 

 

116 %

Expected dividend yield

 

 

0 %

Risk-free interest rate

 

 

0.25 %

 

The Body and Mind Option Plan is subject to the following restrictions:

 

 

(a)

Unless authorized by the shareholders options granted under the Body and Mind Option Plan, shall not result, at any time, in the number of Body and Mind Common Shares reserved for issuance pursuant to options exceeding 10% of the issued and outstanding Body and Mind Common Shares as at the date of grant of any option under the Body and Mind Option Plan.

 

(b)

The aggregate number of Body and Mind Common Shares subject to an option that may be granted to any one individual in any 12-month period under the Body and Mind Option Plan shall not exceed 5% of the issued and outstanding Body and Mind Common Shares determined at the time of such grant.

 

 

(c)

The aggregate number of Body and Mind Common Shares subject to an option that may be granted to any one Consultant in any 12-month period under the Body and Mind Option Plan shall not exceed 2% of the issued and outstanding Body and Mind Common Shares determined at the time of such grant.

 

(d)

The aggregate number of Body and Mind Common Shares subject to an option that may be granted to any one person conducting Investor Relations Activities in any 12-month period under the Body and Mind Option Plan shall not exceed 2% of the issued and outstanding Body and Mind Common Shares determined at the time of such grant.

 

 
37

Table of Contents

    

Recent Sales of Unregistered Securities

 

Year Ended July 31, 2020

 

On August 12, 2019, we issued an aggregate of 4,337,111 common shares to three individuals and one trust pursuant to the Amended Settlement Agreement dated June 28, 2019, the Asset Purchase Agreement dated June 19, 2019 and the Assignment and First Amendment dated June 13, 2019, whereby 624,380 common shares were issued to two individuals at a price of CAD$1.048 per share, 2,681,006 common shares were issued to one individual at a deemed price of CAD$0.7439 and 1,031,725 common shares were issued to a trust at a price of CAD$0.904 per share. We relied upon the exemption from registration provided by Section 4(a)(2) under the U.S. Securities Act for the three individuals and one trust who are U.S. persons.

 

On August 12, 2019, we issued an aggregate of 81,591 common shares upon exercise of 81,591 warrants by two individuals at a price of CAD$0.66 per common share for aggregate proceeds of $40,765 (CAD$53,950). We relied on the exemption from registration provided by Rule 903 of Regulation S promulgated under the Securities Act for the issuance of such common shares as the securities were issued to the non-U.S. persons through an offshore transaction which was negotiated and consummated outside of the United States. [

 

On August 21, 2019, we granted 2,850,000 stock options in accordance with our stock option plan at an exercise price of CAD$0.88 per share for a five-year term expiring August 21, 2024. The options were granted to our current directors, officers, employees and consultants. We relied upon the exemption from registration under the Securities Act provided by Rule 903 of Regulation S for optionees who are non-U.S. persons and on the exemption from registration provided by Section 4(a)(2) under the U.S. Securities Act for optionees who are U.S. persons. On October 16, 2019, we cancelled 400,000 stock options at the voluntary request of a director of the corporation who resigned.

 

On September 12, 2019, we issued an aggregate of 38,912 common shares upon exercise of 38,912 warrants by one entity at a price of CAD$0.66 per common share for aggregate proceeds of $19,449 (CAD$25,682). We relied on the exemption from registration provided by Rule 903 of Regulation S promulgated under the Securities Act for the issuance of such common shares as the securities were issued to the non-U.S. person through an offshore transaction which was negotiated and consummated outside of the United States.

 

On October 1, 2019, we granted 250,000 stock options in accordance with our stock option plan at an exercise price of CAD$0.93 per share for a five-year term expiring October 1, 2024. The options were granted to one of our directors. We relied upon the exemption from registration under the Securities Act provided by Section 4(a)(2) under the U.S. Securities Act for the optionee who is a U.S. person.

 

On October 4, 2019, we issued an aggregate of 22,727 common shares upon exercise of 22,727 warrants by one individual at a price of CAD$0.90 per common share for aggregate proceeds of $15,359 (CAD$20,454). We relied on the exemption from registration provided by Rule 903 of Regulation S promulgated under the Securities Act for the issuance of such common shares as the securities were issued to the non-U.S. person through an offshore transaction which was negotiated and consummated outside of the United States.

 

On November 14, 2019, we 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 $15,264 (CAD$20,237). We relied on the exemption from registration provided by Rule 903 of Regulation S promulgated under the Securities Act for the issuance of such common shares as the securities were issued to the non-U.S. person through an offshore transaction which was negotiated and consummated outside of the United States.

 

 
38

Table of Contents

    

On January 23, 2020, we granted 200,000 stock options in accordance with our stock option plan at an exercise price of CAD$0.88 per share for a five-year term expiring January 23, 2025. The options were granted to one of our officers and directors. We relied upon the exemption from registration under the Securities Act provided by provided by Rule 903 of Regulation S promulgated under the Securities Act as the options were granted to a non-U.S. person.

 

On March 1, 2020, we granted 250,000 stock options in accordance with our stock option plan at an exercise price of CAD$0.405 per share for a five-year term expiring on March 1, 2025. The options were granted to one of our officers and directors. We relied upon the exemption from registration under the Securities Act provided by Section 4(a)(2) under the Securities Act as the options were granted to a U.S. person.

 

On April 24, 2020, we issued an aggregate of 2,681,004 common shares to one individual pursuant to the Amended Settlement Agreement dated June 28, 2019 at a deemed price of CAD$0.7439 per share. We relied upon the exemption from registration provided by Section 4(a)(2) under the U.S. Securities Act for the one individual who is a U.S. person.

 

On April 30, 2020, we granted an aggregate of 1,375,000 stock options in accordance with our stock option plan at an exercise price of CAD$0.67 per share for a five-year term expiring on April 30, 2025. The options were granted to our officers, directors and a consultant. We relied upon the exemption from registration under the Securities Act provided by Rule 903 of Regulation S for optionees who are non-U.S. persons and on the exemption from registration provided by Section 4(a)(2) under the U.S. Securities Act for optionees who are U.S. persons.

 

On July 1, 2020, we issued 2,909,091 shares of common stock to Australis at a deemed value of CAD$0.55 per share pursuant to the conversion of the convertible debenture in the principal amount of CAD$1.600,000 that was issued by us to Australis on November 2, 2018. We relied upon the exemption from registration under Securities Act provided by Rule 506(b) of Regulation D and/or Section 4(a)(2) under the Securities Act.

 

On July 7, 2020, we granted an aggregate of 580,000 stock options in accordance with our stock option plan of which 350,000 stock options had an exercise price of CAD$0.88 per share expiring on August 21, 2024, 80,000 stock options had an exercise price of CAD$0.57 per share expiring on December 10, 2023 and 150,000 stock options had an exercise price of CAD$0.61 per share expiring on December 10, 2023. We relied upon the exemption from registration under the Securities Act provided by Rule 903 of Regulation S as the optionees were non-U.S. persons.

 

ITEM 6. SELECTED FINANCIAL DATA

 

The following tables provide selected financial data for each of the past two years, and should be read in conjunction with, and are qualified in their entirety be reference to, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations and our consolidated financial statements and related notes for the fiscal year ended July 31, 2020, as presented under Item 8. Financial Statements and Supplementary Data. These historical results are not necessarily indicative of the results to be expected for any future period.

 

INCOME STATEMENT DATA

 

Year

Ended

31 July

2020

 

 

Year Ended

31 July

2019

 

Revenue

 

$ 6,232,521

 

 

$ 5,336,557

 

Sales tax

 

$ 945,232

 

 

$ 724,339

 

Cost of sales

 

$ 3,778,898

 

 

$ 2,831,642

 

Gross Margin

 

$ 1,508,391

 

 

$ 1,780,576

 

Operating Expenses

 

$ (7,055,199 )

 

$ (5,865,987 )

Comprehensive Loss

 

$ (4,693,935 )

 

$ (3,457,842 )

Net Loss Per Share

 

$ (0.04 )

 

$ (0.05 )

Weighted Average Number of Common Shares Outstanding (basic and diluted)

 

 

102,644,757

 

 

 

69,548,041

 

 

 
39

Table of Contents

 

BALANCE SHEET DATA

 

As at 31 July

2020

 

 

As at 31 July

2019

 

Working Capital (Deficiency)

 

$ 2,791,289

 

 

$ 10,262,959

 

Total Assets

 

$ 38,799,268

 

 

$ 36,239,251

 

Accumulated Deficit

 

$ (14,865,608 )

 

$ (10,525,062 )

Shareholders’ Equity

 

$ 33,304,449

 

 

$ 33,196,203

 

 

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

The following management’s discussion and analysis of the Company’s financial condition and results of operations contain forward-looking statements that involve risks, uncertainties and assumptions including, among others, statements regarding our capital needs, business plans and expectations. In evaluating these statements, you should consider various factors, including the risks, uncertainties and assumptions set forth in reports and other documents we have filed with or furnished to the SEC and, including, without limitation, this Annual Report on Form 10-K filing for the fiscal year ended July 31, 2020, including the consolidated financial statements and related notes contained herein. 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” and Item 1A. Risk Factors.

 

Introduction

 

The following discussion summarizes the results of operations for each of our fiscal years ended July 31, 2020 and 2019 and our financial condition as at July 31, 2020 and 2019, with a particular emphasis on fiscal 2020, our most recently completed fiscal year.

 

Overview

 

Our principal business is the production and cultivation of medical and recreational marijuana in Nevada pursuant to licenses held by NMG operating under the marquee brand name of Body & Mind and produces flower, oil, extracts and edibles and are available for sale in dispensaries in Nevada. In addition, we have retail/ dispensary operations in Ohio pursuant to the licenses held by NMG, retail/dispensary operations in California pursuant to licenses held by NMG SD and NMG LB and brand directors services and licensing arrangements with a licensed manufacturer in California providing Body and Mind branded products to dispensaries in California. We anticipate brand expansion into Ohio and Arkansas.

 

Results of Operations for the years ended July 31, 2020 and 2019

 

The following table sets forth our results of operations for the fiscal years ended July 31, 2020 and 2019:

 

 

 

July 31,

2020

$

 

 

July 31,

2019

$

 

Sales

 

 

6,232,521

 

 

 

5,336,557

 

Cost of sales and other

 

 

(4,724,130 )

 

 

(3,555,981 )

General and Administrative Expenses

 

 

(7,055,199 )

 

 

(4,623,179 )

Other Items

 

 

1,082,587

 

 

 

(910,148

)

Net Loss

 

 

(4,598,389 )

 

 

(3,752,751 )

Foreign Currency Translation Adjustment

 

 

(95,546 )

 

 

294,909

 

Comprehensive Loss

 

 

(4,693,935 )

 

 

(3,457,842 )

Basic and Diluted Loss Per Share

 

 

(0.04 )

 

 

(0.05 )

 

 
40

Table of Contents

   

Revenues

 

For the year ended July 31, 2020 we had total net sales of $5,287,289 and cost of sales of $3,778,898 for a gross margin of $1,508,391 compared to total net sales of $4,612,218 and cost of sales of $2,831,642 for a gross margin of $1,780,576 in the year ended July 31, 2019. During the year ended July 31, 2020, the Company recorded product sales as follows:

 

Revenues – By Product

 

Year ended July 31, 2020
$

 

 

%

 

 

 

 

 

 

 

 

Flower

 

 

4,921,876

 

 

 

79 %

Concentrates

 

 

999,357

 

 

 

16 %

Edibles

 

 

311,288

 

 

 

5 %

 

 

 

 

 

 

 

 

 

Total

 

 

6,232,521

 

 

 

 

 

 

Operating Expenses

 

For the year ended July 31, 2020, general and administrative expenses totaled $7,055,199 compared with $4,623,179 for the year ended July 31, 2019. A significant reason for the increase in general and administrative expenses between the years related to increased consulting fees from $167,942 to $565,472 and business development increased from $Nil to $449,949 as a result of various ongoing acquisitions and expansions. The Company adopted ASC 842, Lease Accounting, and presented lease expense of $219,384 on the income statement related to the Company's leases in Nevada, USA and California, USA. The Company’s office administration increased from $931,045 to $1,090,215, rent increased from $119,074 to $275,102 and salaries and wages increased from $926,198 to $1,589,037 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 $1,278,282 related to August 2019, October 2019, January 2020, March 2020, April 2020 and July 2020 options granted to certain officers, directors, employees and/or consultants of the Company compared to $880,595 in 2019.

 

Income Taxes

 

The (benefit) expense for income taxes consists of the following:

 

 

 

2020

 

 

2019

 

 

 

 

 

 

 

 

Current:

 

 

 

 

 

 

Federal

 

$ 1,428,797

 

 

$ -

 

State

 

 

9,040

 

 

 

-

 

 

 

 

1,437,838

 

 

 

-

 

 

 

 

 

 

 

 

 

 

Deferred:

 

 

 

 

 

 

 

 

Federal

 

 

(1,303,670 )

 

 

-

 

State

 

 

-

 

 

 

-

 

 

 

 

(1,303,670 )

 

 

-

 

 

 

 

 

 

 

 

 

 

Total (benefit) expense for income taxes

 

$ 134,168

 

 

$ -

 

 

 
41

Table of Contents

    

Section 280E of the Internal Revenue Code (“IRC”) prohibits businesses engaged in the trafficking of Schedule I or Schedule II controlled substances from deducting normal business expenses, such as payroll and rent, from gross income (revenue less cost of goods sold). Section 280E was originally intended to penalize criminal market operators, but because cannabis remains a Schedule I controlled substance for U.S. Federal purposes, the Internal Revenue Service (the “IRS”) has subsequently applied Section 280E to state-legal cannabis businesses. Cannabis businesses operating in states that align their tax codes with the IRC are also unable to deduct normal business expenses from their state taxes. The nondeductible expenses shown in the effective rate reconciliation above is comprised primarily of the impact of applying Section 280E to the Company’s businesses that are involved in selling cannabis, along with other typical non-deductible expenses such as lobbying expenses.

 

 

 

2020

 

 

2019

 

 

 

 

 

 

 

 

Net loss for the year before income tax

 

$ (4,464,221 )

 

$ (3,752,751 )

Federal and state income tax rates

 

 

21.00 %

 

 

21.00 %

 

 

 

 

 

 

 

 

 

Expected income tax recovery

 

 

(937,486 )

 

 

(788,078 )

IRC 280E disallowance

 

 

941,288

 

 

 

-

 

Stock options

 

 

268,439

 

 

 

184,924

 

Non-consolidated income

 

 

54,147

 

 

 

-

 

Other permanent differences

 

 

15,757

 

 

 

1,158,055

 

Change in estimates and others

 

 

1,193,750

 

 

 

120,554

 

Opening deferred tax adjustments

 

 

(1,251,727 )

 

 

-

 

Change in tax rates

 

 

-

 

 

 

178,289

 

Change in benefit not recognized

 

 

(150,000 )

 

 

(853,744 )

 

 

 

 

 

 

 

 

 

Total income tax expense

 

$ 134,168

 

 

$ -

 

 

Other Items

 

During the year ended July 31, 2020, our other items accounted for $1,082,587 in income as compared to $910,148 in expenses for the year ended July 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 $397,119 (2019 – $56,466), interest income on the secured convertible note related to the investment in GLDH and convertible loan receivable from CCG in the amount of $1,119,503 (2019 - $719,865), and interest expense of $132,718 (2019 - $1,242,808) related to the convertible loan held by Australis that was 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).

 

Net Loss

 

Net loss for the year ended July 31, 2020 totaled $4,598,389 compared with a net loss of $3,752,751 for the year ended July 31, 2019. The increase in net loss of $845,638 is largely due to the increase in operating expenses as discussed above and the income tax expense of $134,168.

 

Other Comprehensive Income (Loss)

 

We recorded translation adjustments loss of $95,546 and gain of $294,909 for the year ended July 31, 2020 and 2019, respectively. The amounts are included in the statement of operations as other comprehensive income(loss) for the respective years.

 

 
42

Table of Contents

    

Liquidity and Capital Resources

 

The following table sets out our cash and working capital as of July 31, 2020 and 2019:

 

 

 

As of

July 31,

2020

 

 

As of

July 31,

2019

 

 

 

 

 

 

 

 

Cash reserves

 

$ 1,352,130

 

 

$ 9,004,716

 

Working capital (deficiency)

 

$ 2,791,289

 

 

$ 10,262,959

 

 

Financings

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).

 

Statement of Cashflows

 

During the year ended July 31, 2020, our net cash decreased by $7,652,586 (2019: increase of $8,679,879), which included net cash used in operating activities of $2,566,345 (2019: $3,229,443), net cash used in investing activities of $5,081,534 (2019: $8,508,258), net cash provided by financing activities of $90,839 (2019: $20,122,671) and effect of exchange rate changes on cash and cash equivalents of $95,546 (2019: $294,909).

 

Cash Flow used in Operating Activities

 

Cash flow used in operating activities totaled $2,310,164 and $3,229,443 during the year ended July 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 $4,598,389 during the year ended July 31, 2020 compared to $3,752,751 in 2019. The net loss in 2020 included, among other things, non-cash depreciation of $378,105 (2019: $289,560), amortization of right-of-use assets of $123,240 (2019: $Nil), accrued interest income of $131,850 (2019: $1,242,808), gain of equity investee of $397,119 (2019: $56,466), loss on settlement with SD of $239,328 (2019: $Nil), advances to GLDH expensed of $680,018 (2019: $Nil) and stock-based compensation of $1,278,282 (2019: $880,595).

 

 
43

Table of Contents

    

The following non-cash items further adjusted the loss for the year ended July 31, 2020 and 2019:

 

 

Decrease in amounts receivable and prepaid of $27,923 (2019: increase of $502,070), increase in inventory of $587,514 (2019: $437,002), decrease in trade payables and accrued liabilities of $290,060 (2019: increase of $531,434), decrease in lease liabilities of $88,155 (2019: $Nil), increase in income taxes payable of $1,370,121 (2019: $Nil), increase in due to related parties of $39,985 (2019: decrease of $38,129), net increase in loan payable to NMG Ohio of $1,139,560 (2019: loan receivable of $673,633) and decrease in deferred tax liability of $1,303,670.

 

Cash Flow used in Investing Activities

 

During the year ended July 31, 2020, investing activities used cash of $5,337,715 compared to $8,508,258 during the year ended July 31, 2019. The change in cash used in investing activities from the year ended July 31, 2020 relates primarily to investment in Green Light District Holdings, Inc. of $2,893,609 (2019: $6,650,641), additional property and equipment of $871,720 (2019: $368,162), and payments to SD of $334,348 (2019: $255,980). The Company also provided a convertible loan of $1,238,038 (2019: $52,225) to CCG in Arkansas.

 

Cash Flow provided by Financing Activities

 

During the year ended July 31, 2020, financing activities provided cash of $90,839 compared to $20,122,671 during the year ended July 31, 2019. During the year ended July 31, 2020, the Company issued 165,715 common shares for proceeds of $90,839 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 11, 2020, the World Health Organization declared COVID-19 to be a pandemic. In an effort to contain and mitigate the spread of COVID-19, many countries, including the United States, Canada and China, have imposed unprecedented restrictions on travel, and there have been business closures and a substantial reduction in economic activity in countries that have had significant outbreaks of COVID-19. COVID-19 may have a future material impact on our results of operation with respect to retail sales at our dispensary locations as well as wholesales of our products in Nevada to dispensaries in Nevada. Significant uncertainty remains as to the potential impact of the COVID-19 pandemic on our operations, and on the global economy as a whole. It is currently not possible to predict how long the pandemic will last or the time that it will take for economic activity to return to prior levels. We do not yet know the full extent of any impact on our business or our operations, however, we will continue to monitor the COVID-19 situation closely, and intend to follow health and safety guidelines as they evolve.

 

Off-balance sheet arrangements

 

There are no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors.

 

Subsequent events

 

On September 1, 2020, our wholly owned subsidiary, NMG Long Beach LLC, received all approvals and final license transfer for the ShowGrow Long Beach dispensary.

 

On September 9, 2020, our wholly owned subsidiary, NMG OH 1 LLC, received all approvals and final license and name transfer from the Ohio Department of Pharmacy for the Clubhouse dispensary located in Elyria, Ohio.

 

 
44

Table of Contents

    

On September 23, 2020, we announced the launch of Pretzel Bite edibles into California.

 

On October 21, 2020, we issued 793,466 shares of common stock in connection with the NMG Ohio transaction. On October 22, 2020, we announced the closing of the NMG Ohio transaction and outlined a complaint for disciplinary action by the Nevada Cannabis Compliance Board (the “CCB”) with respect to Nevada Medical Group LLC (NMG), the Company’s Nevada operating subsidiary. The CCB’s complaint alleges that certain employees were on site without valid agent cards and, additionally, that NMG failed to maintain security measures, restricting access to the establishment building. The disciplinary action sought includes fines, as well as licence termination. NMG intends to contest or resolve the complaint through the prescribed legal process mandated by the CCB.  NMG will continue to operate without interruption while fully co-operating with the investigation.

 

On October 28, 2020, we announced we had been awarded best dispensary in Arkansas by Ark420.com.

 

On November 9, 2020, we corrected a prior news release on the NMG Ohio transaction to announce that we provided the final consideration to the members of NMG Ohio, other than NMG Nevada, and the participants pursuant to the definitive agreement in order to acquire the remaining 70% interest in NMG Ohio, however, the transfer of the remaining 70% interest in NMG Ohio to NMG Nevada will not occur until all of the closing conditions under the Definitive Agreement have been satisfied.

 

Outstanding share data

 

At December 9, 2020, we had 108,377,778 issued and outstanding common shares, 9,055,000 outstanding stock options and 12,415,284 outstanding warrants.

 

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.

  

 
45

Table of Contents

   

 

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.

 

 

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, 2022. The Company does not anticipate this amendment to have a significant impact on the consolidated 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 consolidated financial statements.

 

In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740) – Simplifying the Accounting for Income Taxes. ASU 2019-12 removes certain exceptions for investments, intraperiod allocations and interim calculations, and adds guidance to reduce complexity in accounting for income taxes. ASU 2019-12 is effective for annual and interim periods beginning after December 15, 2020. Early adoption is permitted. The Company is currently evaluating the effect of adopting this ASU on the Company’s consolidated financial statements.

 

 
46

Table of Contents

    

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

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 $2,791,289 as at July 31, 2020. However, the Company may require additional financing to meet all current and future financial obligations.

  

 

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.

 

 
47

Table of Contents

 

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

 

 

BODY AND MIND INC.

 

CONSOLIDATED FINANCIAL STATEMENTS

 

For the year ended 31 July 2020

 

(Expressed in U.S. Dollars)

 

 
48

Table of Contents

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

To the Shareholders and Board of Directors of

Body and Mind Inc.

 

Opinion on the Financial Statements

 

We have audited the accompanying consolidated balance sheet of Body and Mind Inc. (the “Company”) as of July 31, 2020, the related consolidated statements of operations, comprehensive loss, changes in stockholders’ equity and cash flows for the year ended July 31, 2020, and the related notes (collectively referred to as the “financial statements”).  In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of July 31, 2020, and the results of its operations and its cash flows for the year ended July 31, 2020, in conformity with accounting principles generally accepted in the United States of America.

 

Explanatory Paragraph – Change in Accounting Principles

 

As discussed in Note 3 to the financial statements, the Company changed its method of accounting for leases during the year ended July 31, 2020 due to the adoption of ASU No. 2016-02, Leases (Topic 842), as amended, effective August 1, 2019, using the modified retrospective approach.

 

Basis for Opinion

 

These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

 

We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audit we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion.

 

Our audit included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audit provides a reasonable basis for our opinion.

 

/s/ Marcum LLP

 

Marcum LLP

 

We have served as the Company’s auditor since 2020.

 

Costa Mesa, CA

December 15, 2020

 

 

49

Table of Contents

    

 

 

Report of Independent Registered Public Accounting Firm

 

To the shareholders and the board of directors of Body and Mind Inc.:

 

Opinion on the Consolidated Financial Statements

 

We have audited the accompanying consolidated balance sheet of Body and Mind Inc. (the "Company") as of July 31, 2019, the related consolidated statements of operations, changes in stockholders’ equity and cash flows, for the year then ended, and the related notes (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of July 31, 2019, and the results of its operations and its cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States of America.

 

Basis for Opinion

 

These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

 

We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting in accordance with the standards of the PCAOB. As part of our audit we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion in accordance with the standards of the PCAOB.

 

Our audit included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audit provides a reasonable basis for our opinion.

 

/s/ DMCL LLP

 

DALE MATHESON CARR-HILTON LABONTE LLP

CHARTERED PROFESSIONAL ACCOUNTANTS

  

We have served as the Company’s auditor since 2017.

 

Vancouver, Canada

November 13, 2019

 

  

   

 
50

Table of Contents

 

Body and Mind Inc.

Statement 1

 

 

Consolidated Balance Sheets

 

(U.S. Dollars)

 

 

 

 

As of

31 July 2020

 

 

As of

31 July 2019

 

 

 

 

 

 

 

 

ASSETS

 

 

 

 

 

 

Current

 

 

 

 

 

 

Cash

 

$ 1,352,130

 

 

$ 9,004,716

 

Amounts receivable

 

 

972,705

 

 

 

939,909

 

Interest receivable on convertible loan (Note 6)

 

 

78,000

 

 

 

27,000

 

Prepaids

 

 

138,016

 

 

 

227,843

 

Inventory (Note 5)

 

 

1,769,837

 

 

 

1,390,419

 

Convertible loan receivable (Note 6)

 

 

1,290,263

 

 

 

-

 

Total Current Assets

 

 

5,600,951

 

 

 

11,589,887

 

 

 

 

 

 

 

 

 

 

Convertible Loan Receivable (Note 6)

 

 

-

 

 

 

52,225

 

Investment in NMG Ohio LLC (Note 17)

 

 

3,161,240

 

 

 

2,764,121

 

Investment in and advances to GLDH (Note 18)

 

 

8,910,854

 

 

 

7,373,036

 

Loan Receivable from NMG Ohio LLC (Note 17)

 

 

-

 

 

 

701,781

 

Other investments (Note 19)

 

 

-

 

 

 

255,980

 

Property and Equipment (Note 7)

 

 

6,733,019

 

 

 

2,694,500

 

Brand and Licenses

 

 

11,757,483

 

 

 

8,172,000

 

Goodwill

 

 

2,635,721

 

 

 

2,635,721

 

TOTAL ASSETS

 

$ 38,799,268

 

 

$ 36,239,251

 

 

 

 

 

 

 

 

 

 

LIABILITIES

 

 

 

 

 

 

 

 

Current

 

 

 

 

 

 

 

 

Accounts payable

 

$ 753,846

 

 

$ 979,384

 

Accrued liabilities

 

 

30,712

 

 

 

95,234

 

Income taxes payable

 

 

1,609,479

 

 

 

239,358

 

Due to related parties (Note 8)

 

 

52,937

 

 

 

12,952

 

Lease liabilities (Note 20)

 

 

362,688

 

 

 

-

 

Total Current Liabilities

 

 

2,809,662

 

 

 

1,326,928

 

 

 

 

 

 

 

 

 

 

Lease Liabilities (Note 20)

 

 

1,806,212

 

 

 

-

 

Loan Payable to NMG Ohio LLC (Note 17)

 

 

466,495

 

 

 

-

 

Deferred Tax Liability

 

 

412,450

 

 

 

1,716,120

 

TOTAL LIABILITIES

 

 

5,494,819

 

 

 

3,043,048

 

 

 

 

 

 

 

 

 

 

STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

Capital StockStatement 3 (Note 11)

 

 

 

 

 

 

 

 

Authorized:

 

 

 

 

 

 

 

 

900,000,000 Common Shares – Par Value $0.0001

 

 

 

 

 

 

 

 

Issued and Outstanding:

 

 

 

 

 

 

 

 

107,513,812 (2019 – 97,279,891) Common Shares

 

 

10,751

 

 

 

9,728

 

Additional Paid-in Capital

 

 

47,665,678

 

 

 

41,765,408

 

Shares to be Issued (Notes 10, 11 and 14)

 

 

19,703

 

 

 

1,118,815

 

Other Comprehensive Income

 

 

731,768

 

 

 

827,314

 

Accumulated Deficit

 

 

(14,865,608 )

 

 

(10,525,062 )

TOTAL STOCKHOLDERS’ EQUITY ATTRIBUTABLE TO BAM

 

 

33,562,292

 

 

 

33,196,203

 

NON-CONTROLLING INTEREST

 

 

(257,843 )

 

 

-

 

TOTAL EQUITY

 

 

33,304,449

 

 

 

33,196,203

 

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY

 

$ 38,799,268

 

 

$ 36,239,251

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

 
51

Table of Contents

 

 

Body and Mind Inc.

 

Statement 2

 

 

 

Consolidated Statements of Operations

(U.S. Dollars)

 

 

 

 

 

Year Ended 31 July

 

 

 

2020

 

 

2019

 

 

 

 

 

 

 

 

Sales

 

$ 6,232,521

 

 

$ 5,336,557

 

Sales tax

 

 

(945,232 )

 

 

(724,339 )

Cost of sales

 

 

(3,778,898 )

 

 

(2,831,642 )

 

 

 

1,508,391

 

 

 

1,780,576

 

 

 

 

 

 

 

 

 

 

General and Administrative Expenses

 

 

 

 

 

 

 

 

Accounting and legal (Note 8)

 

 

676,935

 

 

 

895,263

 

Bad debt expense

 

 

54,047

 

 

 

-

 

Business development

 

 

449,949

 

 

 

-

 

Consulting fees (Notes 8 and 16)

 

 

565,472

 

 

 

167,942

 

Depreciation

 

 

112,025

 

 

 

12,870

 

Insurance

 

 

113,523

 

 

 

76,659

 

Lease expense

 

 

219,384

 

 

 

-

 

Licenses, utilities and office administration

 

 

1,090,215

 

 

 

931,045

 

Management fees (Note 8)

 

 

449,877

 

 

 

420,202

 

Regulatory, filing and transfer agent fees

 

 

65,997

 

 

 

137,117

 

Rent

 

 

275,102

 

 

 

119,074

 

Salaries and wages

 

 

1,589,037

 

 

 

926,198

 

Stock-based compensation (Note 11)

 

 

1,278,282

 

 

 

880,595

 

Travel

 

 

115,354

 

 

 

56,214

 

 

 

 

(7,055,199 )

 

 

(4,623,179 )

Net Operating Loss Before Other Income (Expenses)

 

 

(5,546,808 )

 

 

(2,842,603 )

Other Income (Expenses)

 

 

 

 

 

 

 

 

Foreign exchange, net

 

 

5,388

 

 

 

(241,862 )

Interest expense

 

 

(132,718 )

 

 

(1,242,808 )

Interest income

 

 

1,119,503

 

 

 

719,865

 

Loss on settlement (Note 19)

 

 

(331,743 )

 

 

-

 

Management fee income

 

 

-

 

 

 

37,000

 

Other income

 

 

26,046

 

 

 

-

 

Early loan repayment penalty

 

 

-

 

 

 

(200,000 )

Write-off of assets

 

 

(1,008 )

 

 

(38,809 )

Equity in earnings (Note 17)

 

 

397,119

 

 

 

56,466

 

Net Loss Before Income Tax

 

$ (4,464,221 )

 

$ (3,752,751 )

Income tax expense

 

 

(134,168 )

 

 

-

 

Net Loss

 

 

(4,598,389 )

 

 

(3,752,751 )

Other Comprehensive Income (Loss)

 

 

 

 

 

 

 

 

Foreign currency translation adjustment

 

 

(95,546 )

 

 

294,909

 

Comprehensive Loss

 

$ (4,693,935 )

 

$ (3,457,842 )

Net loss attributable to:

 

 

 

 

 

 

 

 

Body and Mind Inc.

 

 

(4,340,546 )

 

 

(3,752,751 )

Non-controlling interest

 

 

(257,843 )

 

 

-

 

 

 

 

 

 

 

 

 

 

Comprehensive loss attributable to:

 

 

 

 

 

 

 

 

Body and Mind Inc.

 

 

(4,436,092 )

 

 

(3,457,842 )

Non-controlling interest

 

 

(257,843 )

 

 

-

 

Loss per Share – Basic and Diluted

 

$ (0.04 )

 

$ (0.05 )

Weighted Average Number of Shares Outstanding

 

 

102,644,757

 

 

 

69,548,041

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

 
52

Table of Contents

 

Body and Mind Inc.

 

Statement 3

 

 

 

Consolidated Statements of Changes in Stockholders’ Equity

(U.S. Dollars)

 

 

 

 

 

Share Capital

 

 

Additional

 

 

 

 

Other

 

 

 

 

 

 

 

 

 

Common Shares

 

 

paid-in

 

 

Shares to be

 

 

comprehensive

 

 

 

 

Non-controlling

 

 

 

 

 

Number

 

 

Amount

 

 

capital

 

 

issued

 

 

income

 

 

Deficit

 

 

interest

 

 

Total

 

Balance – 31 July 2018

 

 

47,774,817

 

 

$ 4,778

 

 

$ 16,918,082

 

 

$ 103,267

 

 

$ 532,405

 

 

$ (6,772,311 )

 

$ -

 

 

$ 10,786,221

 

Private placement (Note 11)

 

 

27,780,134

 

 

 

2,778

 

 

 

15,085,636

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

15,088,414

 

Exercise of warrants (Note 11)

 

 

16,007,333

 

 

 

1,601

 

 

 

5,955,166

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

5,956,767

 

Issuance of escrowed shares (Note 11)

 

 

141,000

 

 

 

14

 

 

 

50,003

 

 

 

(50,017 )

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Share issue costs

 

 

322,581

 

 

 

31

 

 

 

(270,767 )

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(270,736 )

Finance fee for promissory note (Notes 9 and 11)

 

 

1,105,083

 

 

 

111

 

 

 

822,383

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

822,494

 

Investment agreement with Australis (Notes 11 and 16)

 

 

1,768,545

 

 

 

177

 

 

 

786,946

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

787,123

 

Acquisition of NMG Ohio LLC (Notes 11 and 17)

 

 

2,380,398

 

 

 

238

 

 

 

1,448,567

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

1,448,805

 

Shares to be issued on conversion of debt (Note 10)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

1,065,565

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

1,065,565

 

Equity component of convertible debenture (Note 10)

 

 

-

 

 

 

-

 

 

 

88,797

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

88,797

 

Stock-based compensation (Note 11)

 

 

-

 

 

 

-

 

 

 

880,595

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

880,595

 

Foreign currency translation adjustment

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

294,909

 

 

 

-

 

 

 

-

 

 

 

294,909

 

Loss for the year

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(3,752,751 )

 

 

-

 

 

 

(3,752,751 )

Balance – 31 July 2019

 

 

97,279,891

 

 

 

9,728

 

 

 

41,765,408

 

 

 

1,118,815

 

 

 

827,314

 

 

 

(10,525,062 )

 

 

-

 

 

 

33,196,203

 

Acquisition of GLDH (Note 18)

 

 

7,018,115

 

 

 

702

 

 

 

4,094,255

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

4,094,957

 

Conversion of debt (Note 10)

 

 

2,909,091

 

 

 

291

 

 

 

1,196,793

 

 

 

(1,197,084 )

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Exercise of warrants (Note 11)

 

 

165,715

 

 

 

16

 

 

 

90,823

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

90,839

 

Escrow release

 

 

141,000

 

 

 

14

 

 

 

33,533

 

 

 

(33,547 )

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Share payment reduction related to investment in GLDH (Note 18)

 

 

-

 

 

 

-

 

 

 

(793,416 )

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(793,416 )

Stock-based compensation (Note 11)

 

 

-

 

 

 

-

 

 

 

1,278,282

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

1,278,282

 

Accretion and interest on convertible debt

 

 

-

 

 

 

-

 

 

 

-

 

 

 

131,519

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

131,519

 

Foreign currency translation adjustment

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(95,546 )

 

 

-

 

 

 

-

 

 

 

(95,546 )

Loss for the year

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(4,340,546 )

 

 

(257,843 )

 

 

(4,598,389 )

Balance – 31 July 2020

 

 

107,513,812

 

 

$ 10,751

 

 

$ 47,665,678

 

 

$ 19,703

 

 

$ 731,768

 

 

$ (14,865,608 )

 

$ (257,843 )

 

$ 33,304,449

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

 
53

Table of Contents

  

Body and Mind Inc.

 

Statement 4

 

 

 

Consolidated Statements of Cash Flows

(U.S. Dollars)

 

 

 

Year Ended 31 July

 

Cash Resources Provided By (Used In)

 

2020

 

 

2019

 

Operating Activities

 

 

 

 

 

 

Net loss for the year

 

$ (4,598,389 )

 

$ (3,752,751 )

Items not affecting cash:

 

 

 

 

 

 

 

 

Accrued interest and accretion

 

 

131,519

 

 

 

1,242,808

 

Accrued interest income

 

 

(1,029,503 )

 

 

(693,333 )

Advances to GLDH expensed during the year

 

 

680,018

 

 

 

-

 

Amortization of licenses

 

 

78,025

 

 

 

-

 

Amortization of ROU assets

 

 

123,240

 

 

 

-

 

Deferred tax expense

 

 

(1,303,670 )

 

 

-

 

Depreciation

 

 

378,105

 

 

 

289,560

 

Foreign exchange

 

 

196,621

 

 

 

(59,265 )

Gain of equity investee

 

 

(397,119 )

 

 

(56,466 )

Loss on settlement

 

 

331,743

 

 

 

-

 

Stock-based compensation

 

 

1,278,282

 

 

 

880,595

 

Write off of amounts receivable

 

 

1,008

 

 

 

38,809

 

Write off of inventory

 

 

208,096

 

 

 

-

 

Amounts receivable and prepaids

 

 

(23,077 )

 

 

(529,070 )

Interest receivable on convertible loan

 

 

51,000

 

 

 

27,000

 

Inventory

 

 

(587,514 )

 

 

(437,002 )

Trade payables and accrued liabilities

 

 

(290,060 )

 

 

531,434

 

Income taxes payable

 

 

1,370,121

 

 

 

-

 

Due to related parties

 

 

39,985

 

 

 

(38,129 )

Lease liabilities

 

 

(88,155 )

 

 

-

 

Loan to NMG Ohio LLC

 

 

(112,869 )

 

 

(673,633 )

Loan from NMG Ohio LLC

 

 

1,252,429

 

 

 

-

 

Cash used in operating activities

 

 

(2,310,164 )

 

 

(3,229,443 )

 

 

 

 

 

 

 

 

 

Investing Activities

 

 

 

 

 

 

 

 

Repayment by (investment in) NMG Ohio, LLC

 

 

-

 

 

 

(1,181,250 )

Investment in GLDH

 

 

(2,893,609 )

 

 

(6,650,641 )

Other investments

 

 

(334,348 )

 

 

(255,980 )

Purchase of property and equipment

 

 

(871,720 )

 

 

(368,162 )

Convertible loan receivable

 

 

(1,238,038 )

 

 

(52,225 )

Cash used in investing activities

 

 

(5,337,715 )

 

 

(8,508,258 )

 

 

 

 

 

 

 

 

 

Financing Activities

 

 

 

 

 

 

 

 

Issuance of shares, net of share issue costs

 

 

90,839

 

 

 

21,561,568

 

Loans obtained

 

 

-

 

 

 

5,217,547

 

Loans repaid

 

 

-

 

 

 

(6,656,444 )

Cash provided by financing activities

 

 

90,839

 

 

 

20,122,671

 

 

 

 

 

 

 

 

 

 

Effect of exchange rate changes on cash

 

 

(95,546 )

 

 

294,909

 

 

 

 

 

 

 

 

 

 

Net Increase (Decrease) in Cash

 

 

(7,652,586 )

 

 

8,679,879

 

Cash– Beginning of Year

 

 

9,004,716

 

 

 

324,837

 

Cash– End of Year

 

$ 1,352,130

 

 

$ 9,004,716

 

 

Supplemental Disclosures with Respect to Cash Flows (Note 13)

 

The accompanying notes are an integral part of these consolidated financial statements.

 

 
54

Table of Contents

 

Body and Mind Inc.

Notes to Consolidated Financial Statements

For the year ended 31 July 2020

U.S. Dollars

 

1.

Nature and Continuance of Operations

 

 

Body and Mind Inc. (the “Company”) was incorporated on 5 November 1998 in the State of Delaware, USA, under the name Concept Development Group, Inc. In May 2004, the Company acquired 100% of Vocalscape, Inc. and changed its name to Vocalscape, Inc. On October 28, 2005, the Company changed its name to Nevstar Precious Metals Inc. On October 23, 2008, the Company changed its name to Deploy Technologies Inc. (“Deploy Tech”) and, on September 15, 2010, the Company incorporated a wholly-owned subsidiary, Deploy Acquisition Corp. (“Deploy”) under the laws of the State of Nevada, USA. On September 17, 2010, the Company merged with and into Deploy under the laws of the State of Nevada. Deploy, as the surviving corporation of the merger, assumed all the assets, obligations and commitments of Deploy Tech, and we were effectively re-domiciled in the State of Nevada. Upon the completion of the merger, Deploy assumed the name “Deploy Technologies Inc.”, and all of the issued and outstanding common stock of Deploy Tech was automatically converted into and became Deploy’s issued and outstanding common stock.

 

 

On 14 November 2017, the Company acquired Nevada Medical Group, LLC (“NMG”) and changed its name to Body and Mind Inc. The Company is now a supplier and grower of medical and recreational cannabis in the state of Nevada, and has retail operations in California, Ohio and Arkansas.

 

 

 

Principles of Consolidation

 

These consolidated financial statements include the financial statements of the Company and its subsidiaries as follows:

 

Name

Jurisdiction

Ownership

Date of acquisition or formation

DEP Nevada Inc. (“DEP Nevada”)

Nevada, USA

100%

10 August 2017

Nevada Medical Group LLC (“NMG”)

Nevada, USA

100%

14 November 2017

NMG Retail LLC

Nevada, USA

75%

14 September 2018

NMG Long Beach LLC

California, USA

100%

18 December 2018

NMG Cathedral City LLC

California, USA

100%

4 January 2019

NMG Chula Vista LLC

California, USA

51%

10 January 2019

NMG San Diego LLC

California, USA

60%

30 January 2019

NMG OH 1, LLC

Ohio, USA

100%

30 January 2020

 

 

All inter-company transactions and balances are eliminated upon consolidation.

 

These consolidated financial statements include the following investments accounted for using the equity method of accounting:

 

Name

 

Jurisdiction

 

Ownership

 

Date of acquisition or formation

NMG Ohio LLC

 

Ohio, USA

 

30%

 

27 April 2017

 

2.

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 15 December 2022. The Company does not anticipate this amendment to have a significant impact on the consolidated financial statements.

   

 
55

Table of Contents

 

Body and Mind Inc.

Notes to Consolidated Financial Statements

For the year ended 31 July 2020

U.S. Dollars

 

2.

Recent Accounting Pronouncements Continued

 

 

 

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 15 December 2019. Early adoption is permitted. The Company is currently evaluating the effect of adopting this ASU on the Company’s consolidated financial statements.

 

In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740) – Simplifying the Accounting for Income Taxes. ASU 2019-12 removes certain exceptions for investments, intraperiod allocations and interim calculations, and adds guidance to reduce complexity in accounting for income taxes. ASU 2019-12 is effective for annual and interim periods beginning after 15 December 2020. Early adoption is permitted. The Company is currently evaluating the effect of adoption this ASU on the Company’s consolidated financial statements.

 

The Company does not believe other recently issued but not yet effective accounting standards, if currently adopted, would have a material effect on the consolidated financial position, statements of operations and cash flows.

 

 

3.

Significant Accounting Policies

 

 

 

The following is a summary of significant accounting policies used in the preparation of these consolidated financial statements.

 

Reclassification

 

Certain amounts in the prior period financial statements have been reclassified to conform to the presentation of current period financial statements. These reclassifications had no effect on the previously reported net loss.

 

Basis of presentation

 

These consolidated financial statements and related notes are presented in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and are expressed in U.S. dollars. The Company’s fiscal year end is 31 July.

 

Amounts receivable

 

Amounts receivable represents amounts owed from customers for sale of medical and recreational cannabis and sales tax recoverable. Amounts are presented net of the allowance for doubtful accounts, which represents the Company’s best estimate of the amount of probable credit losses in the existing accounts receivable balance. The Company determines the allowance for doubtful accounts based on historical experience and current economic conditions. The Company reviews the adequacy of its allowance for doubtful accounts on a quarterly basis. As of 31 July 2020 and 2019, the Company has no allowance for doubtful accounts.

 

Revenue recognition

 

The Company recognizes revenue from product sales when our customers obtain control of our products. This determination is based on the customer specific terms of the arrangement. Upon transfer of control, the Company has no further performance obligations.

 

Due to the nature of the Company’s revenue from contracts with customers, the Company does not have material contract assets or liabilities that fall under the scope of ASC 606.

 

The Company’s revenues accounted for under ASC 606, generally, do not require significant estimates or judgments based on the nature of the Company’s revenue streams. The sales prices are generally fixed and all consideration from contracts is included in the transaction price. The Company’s contracts do not include multiple performance obligations or material variable consideration.

 

 
56

Table of Contents

 

Body and Mind Inc.

Notes to Consolidated Financial Statements

For the year ended 31 July 2020

U.S. Dollars

 

3.

Significant Accounting PoliciesContinued

 

 

 

Inventory

 

Inventory consists of raw material, work in progress (live plants and plants in the drying process), finished goods, and consumables. The Company values its raw material, finished goods and consumables at the lower of the actual costs or its current estimated market value less costs to sell. The Company values its work in progress at cost. The Company periodically reviews its inventory for obsolete and potentially impaired items. As of 31 July 2020 and 2019, the Company has no allowance for inventory obsolescence.

 

Property and equipment

 

Property and equipment are stated at cost and are amortized over their estimated useful lives on a straight-line basis as follows:

 

Office equipment

 

7 years

Cultivation equipment

 

7 years

Production equipment

 

7 years

Kitchen equipment

 

7 years

Vehicles

 

7 years

Vault equipment

 

7 years

Leasehold improvements

 

shorter of useful life or the term of the lease

 

 

Brands and licenses

 

Intangible assets acquired from third parties are measured initially at fair value and either classified as indefinite life or finite life depending on their characteristics. Intangible assets with indefinite lives are tested for impairment at least annually and intangible assets with finite lives are reviewed for indicators of impairment at least annually. The Company’s brands and licenses acquired from NMG have indefinite lives; therefore no amortization is recognized. The Company’s brands and licenses acquired by NMG SD have a finite life of 13 years and are amortized over this estimated useful life on a straight-line basis.

 

Income taxes

 

Deferred income taxes are reported for timing differences between items of income or expense reported in the consolidated financial statements and those reported for income tax purposes in accordance with ASC 740, “Income Taxes”, which requires the use of the asset/liability method of accounting for income taxes. Deferred income taxes and tax benefits are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of assets and liabilities and their respective tax bases, and for tax losses and credit carry-forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The Company provides for deferred taxes for the estimated future tax effects attributable to temporary differences and carry-forwards when realization is more likely than not.

 

Basic and diluted net loss per share

 

The Company computes net income (loss) per share in accordance with ASC 260, “Earnings per Share”. ASC 260 requires presentation of both basic and diluted earnings per share (“EPS”) on the face of the income statement. Basic EPS is computed by dividing net income (loss) available to common shareholders (numerator) by the weighted average number of shares outstanding (denominator) during the period. Diluted EPS gives effect to all dilutive potential common shares outstanding during the period using the treasury stock method using the if-converted method. In computing diluted EPS, the average stock price for the period is used in determining the number of shares assumed to be purchased from the exercise of stock options or warrants. Diluted EPS excluded all dilutive potential shares if their effect is anti-dilutive.

 

 
57

Table of Contents

  

3.

Significant Accounting PoliciesContinued

 

 

 

Comprehensive loss

 

ASC 220, “Comprehensive Income”, establishes standards for the reporting and display of comprehensive income/loss and its components in the consolidated financial statements. As of 31 July 2020 and 2019, the Company reported foreign currency translation adjustments as other comprehensive income or loss and included a schedule of comprehensive income/loss in the consolidated financial statements.

 

Foreign currency translation

 

The Company’s functional currency is the Canadian dollar and its reporting currency is in U.S. dollars. The Company’s subsidiaries have a functional currency in U.S. dollars. The consolidated financial statements of the Company are translated to U.S. dollars in accordance with ASC 830, “Foreign Currency Matters”. Exchange gains and losses on inter-company balances that form part of the net investment in foreign operations are included in other comprehensive income. Monetary assets and liabilities denominated in foreign currencies are translated using the exchange rate prevailing at the balance sheet date. Gains and losses arising on translation or settlement of foreign currency denominated transactions or balances are included in the determination of net loss.

 

Stock-based compensation

 

The Company estimates the fair value of each stock option award at the grant date by using the Black-Scholes Option Pricing Model. The fair value determined represents the cost for the award and is recognized over the required service period, generally defined as the vesting period. The Company’s accounting policy is to recognize forfeitures as they occur.

 

Fair value measurements

 

The Company accounts for certain assets and liabilities at fair value. The hierarchy below lists three levels of fair value based on the extent to which inputs used in measuring fair value are observable in the market. We categorize each of our fair value measurements in one of these three levels based on the lowest level input that is significant to the fair value measurement in its entirety. These levels are:

 

 

·

Level 1 – inputs are based upon unadjusted quoted prices for identical instruments in active markets.

 

 

 

 

·

Level 2 – inputs are based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques (e.g. the Black-Scholes model) for which all significant inputs are observable in the market or can be corroborated by observable market data for substantially the full term of the assets or liabilities. Where applicable, these models project future cash flows and discount the future amounts to a present value using market-based observable inputs including interest rate curves, credit spreads, foreign exchange rates, and forward and spot prices for currencies.

 

 

 

 

·

Level 3 – inputs are generally unobservable and typically reflect management’s estimates of assumptions that market participants would use in pricing the asset or liability. The fair values are therefore determined using model-based techniques, including option pricing models and discounted cash flow models. Our Level 3 assets and liabilities include investments in other private entities, and goodwill and intangible assets, when they are recorded at fair value due to an impairment charge. Unobservable inputs used in the models are significant to the fair values of the assets and liabilities.

 

 

 

 

The Company measures equity investments without readily determinable fair values on a nonrecurring basis. The fair values of these investments are determined based on valuation techniques using the best information available, and may include quoted market prices, market comparables, and discounted cash flow projections.

 

 
58

Table of Contents

 

Body and Mind Inc.

 

Notes to Consolidated Financial Statements

For the year ended 31 July 2020

U.S. Dollars

 

3.

Significant Accounting PoliciesContinued

 

 

 

Fair value measurements Continued

 

Other current financial assets and current financial liabilities have fair values that approximate their carrying values.

 

Use of estimates and assumptions

 

The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenditures during the reporting period. Actual results could differ from these estimates.

 

Lease accounting

 

The Company adopted ASC 842, leases effective 1 August 2019 using a modified retrospective approach. Under ASC 842, leases are separated into two classifications: operating leases and financial leases. Lease classification under ASC 842 is relatively similar to ASC 840. For a lease to be classified as a finance lease, it must meet one of the five finance lease criteria: (1) transference of title/ownership to the lessee, (2) purchase option, (3) lease term for major part of the remaining economic life of the asset, (4) present value represents substantially all of the fair value of the asset, and (5) asset specialization. Any lease that does not meet these criteria is classified as an operating lease. ASC 842 requires all leases to be recognized on the Company’s balance sheet. Specifically, for operating leases, the Company recognize a right-of-use asset and a corresponding lease liability upon lease commitment.

 

4.

Financial Instruments

 

 

 

The following table represents the Company’s assets that are measured at fair value as of 31 July 2020 and 2019:

 

 

 

As of 31 July

 2020

 

 

As of 31 July

 2019

 

Financial assets at fair value

 

 

 

 

 

 

Cash

 

$ 1,352,130

 

 

$ 9,004,716

 

Convertible loan receivable

 

 

1,290,263

 

 

 

52,225

 

 

 

 

 

 

 

 

 

 

Total financial assets at fair value

 

$ 2,642,393

 

 

$ 9,056,941

 

 

 

Management of financial risks

 

The financial risk arising from the Company’s operations include credit risk, liquidity risk, interest rate risk and currency risk. These risks arise from the normal course of operations and all transactions undertaken are to support the Company’s ability to continue as a going concern. The risks associated with these financial instruments and the policies on how to mitigate these risks are set out below. Management manages and monitors these exposures to ensure appropriate measures are implemented on a timely and effective manner.

 

Credit risk

 

Credit risk is the risk that one party to a financial instrument will fail to discharge an obligation and cause the other party to incur a financial loss. The Company is not exposed to credit risk related to cash and cash equivalents 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 Green Light District Holdings, Inc.) 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.

 

 
59

Table of Contents

 

Body and Mind Inc.

 

Notes to Consolidated Financial Statements

For the year ended 31 July 2020

U.S. Dollars

  

4.

Financial InstrumentsContinued

 

 

 

Liquidity risk

 

Liquidity risk is the risk that the Company will not be able to meet its financial obligations as they fall due. The Company ensures, as far as reasonably possible, that it will have sufficient capital in order to meet short-term business requirements, after taking into account cash flows from operations and the Company’s holdings of cash. The Company has an accumulated deficit of $14,865,608, recurring losses of $5,546,808 and negative cash flows from operations of $2,310,164 for the year ended 31 July 2020, and had working capital of $2,791,289 at 31 July 2020. There can be no assurance that the Company will be successful with generating and maintaining profitable operations or will be able to secure future debt or equity financing for its working capital and expansion activities.

 

Interest rate risk

 

Interest rate risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market interest rates. The Company is not exposed to interest rate risk as it does not hold financial instruments that will fluctuate in value due to changes in interest rates.

 

Currency risk

 

Currency risk is the risk that the fair values of future cash flows of a financial instrument will fluctuate because they are denominated in currencies that differ from the respective functional currency. The Company is exposed to currency risk by incurring expenditures and holding assets denominated in currencies other than its functional currency.

 

 

5.

Inventory

  

 

 

31 July 2020

 

 

31 July 2019

 

 

 

 

 

 

 

 

Work in progress

 

$ 211,621

 

 

$ 208,417

 

Finished goods

 

 

959,939

 

 

 

615,108

 

Consumables

 

 

598,277

 

 

 

566,894

 

 

 

 

 

 

 

 

 

 

Total

 

$ 1,769,837

 

 

$ 1,390,419

 

  

6.

Convertible loan receivable

 

 

 

 Effective March 15, 2019, the Company, through its wholly owned subsidiaries, DEP Nevada and NMG, entered into a convertible loan agreement and a management agreement with Comprehensive Care Group LLC (“CCG”), an Arkansas limited liability company, with respect to the development of a medical cannabis dispensary facility in West Memphis, Arkansas.

 

Pursuant to the management agreement, NMG will provide operations and management services, including management, staffing, operations, administration, oversight, and other related services. Under the management agreement, NMG will be required to obtain approval from CCG for any key decisions as defined in the agreement and accordingly the Company does not control CCG. NMG will be paid a monthly management fee equal to 66.67% of the monthly net profits of CCG, subject to conversion of the convertible loan as discussed below upon which the monthly management fee shall be $6,000 per month, unless otherwise agreed by the parties in writing. The Company earned management fees of $Nil and $37,000 during the years ended 31 July 2020 and 2019.

 

 
60

Table of Contents

 

Body and Mind Inc.

 

Notes to Consolidated Financial Statements

For the year ended 31 July 2020

U.S. Dollars

   

6.

Convertible loan receivable Continued

 

 

 

The convertible loan agreement is for an amount up to $1,250,000 from DEP to CCG with proceeds to be used to fund construction of a facility, working capital and initial operating expenses. The loan bears interest at a fixed rate of $6,000 per month until the parties mutually agree to increase the interest. Upon the latter of one year of granting of a medical cannabis dispensary license by the appropriate authorities or one year after entering into the convertible loan agreement, DEP may elect to convert the loan into preferred units of CCG equal to 40% of all outstanding units of CCG, subject to approval of the Arkansas Medical Marijuana Commission.

 

The Company evaluated the convertible loan receivable’s settlement provisions and elected the fair value option in accordance with ASC 825 “Financial Instruments”, to value this instrument. Under such election, the loan receivable is measured initially and subsequently at fair value, with any changes in the fair value of the instrument being recorded in the consolidated financial statements as a change in fair value of the financial instruments. The Company estimates the fair value of this instrument by first estimating the fair value of the straight debt portion, excluding the embedded conversion option, using a discounted cash flow model. The Company then estimates the fair value of the embedded conversion option using the Black-Scholes Option Pricing Model. The sum of these two valuations is the fair value of the loan receivable balance of $1,290,263. Management believes that the accretion of the straight debt portion and embedded derivative related to the conversion option are not material due to the short term maturity of the loan. At 31 July 2020, the Company had advanced $1,290,263 (2019 - $52,225) and accrued interest income of $90,000 (2019 - $27,000) for the year ended 31 July 2020. As of 31 July 2020, total interest receivable was $78,000 (2019 - $27,000).

 

 

7.

Property and Equipment

  

 

 

Office Equipment

 

 

Cultivation Equipment

 

 

Production Equipment

 

 

Kitchen Equipment

 

 

Vehicles

 

 

Vault Equipment

 

 

Leasehold Improvements

 

 

Right-of-use Assets

 

 

Total

 

Cost:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, 31 July 2019

 

 

32,077

 

 

 

463,756

 

 

 

297,961

 

 

 

51,108

 

 

 

38,717

 

 

 

2,172

 

 

 

2,266,006

 

 

 

-

 

 

 

3,151,797

 

Additions

 

 

41,233

 

 

 

14,431

 

 

 

247,762

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

1,979,383

 

 

 

-

 

 

 

2,282,809

 

ASC 842 adoption (Notes 13 and 20)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

2,257,055

 

 

 

2,257,055

 

Balance, 31 July 2020

 

 

73,310

 

 

 

478,187

 

 

 

545,723

 

 

 

51,108

 

 

 

38,717

 

 

 

2,172

 

 

 

4,245,389

 

 

 

2,257,055

 

 

 

7,691,661

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated Depreciation:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, 31 July 2019

 

 

8,296

 

 

 

114,766

 

 

 

69,993

 

 

 

7,100

 

 

 

13,251

 

 

 

586

 

 

 

243,305

 

 

 

-

 

 

 

457,297

 

Depreciation

 

 

7,548

 

 

 

67,466

 

 

 

60,428

 

 

 

7,321

 

 

 

5,546

 

 

 

311

 

 

 

229,485

 

 

 

-

 

 

 

378,105

 

Amortization of ROU assets (Note 20)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

123,240

 

 

 

123,240

 

Balance, 31 July 2020

 

 

15,844

 

 

 

182,232

 

 

 

130,421

 

 

 

14,421

 

 

 

18,797

 

 

 

897

 

 

 

472,790

 

 

 

123,240

 

 

 

958,642

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Book Value:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

At 31 July 2019

 

 

23,781

 

 

 

348,990

 

 

 

227,968

 

 

 

44,008

 

 

 

25,466

 

 

 

1,586

 

 

 

2,022,701

 

 

 

-

 

 

 

2,694,500

 

At 31 July 2020

 

$ 57,466

 

 

$ 295,955

 

 

$ 415,302

 

 

$ 36,687

 

 

$ 19,920

 

 

$ 1,275

 

 

$ 3,772,599

 

 

$ 2,133,815

 

 

$ 6,733,019

 

 

For the year ended 31 July 2020, a total depreciation of $112,025 (2019 - $12,870) was included in General and Administrative Expenses and a total depreciation of $266,080 (2019 - $276,690) was included in Cost of Sales.

 

 
61

Table of Contents

 

Body and Mind Inc.

 

Notes to Consolidated Financial Statements

For the year ended 31 July 2020

U.S. Dollars

 

  

8.

Related Party Balances and Transactions

 

 

 

In addition to those disclosed elsewhere in these consolidated financial statements, related party transactions paid/accrued for the years ended 31 July 2020 and 2019 are as follows:

 

 

 

For the year ended 31 July 2020

 

 

For the year ended 31 July 2019

 

A company controlled by the President, Chief Executive Officer and a director

       Management fees

 

$ 154,439

 

 

$ 50,072

 

A company controlled by the Chief Financial Officer and a director

       Management fees

       Accounting fees

 

91,594

-

 

 

-

37,791

 

A company controlled by a former director and former President of NMG

       Management fees                 

 

 

141,665

 

 

 

225,992

 

A company controlled by the Corporate Secretary

       Management fees

       Consulting fees

 

63,853

3,044

 

 

62,353

-

 

Chief Operating Officer

       Consulting fees

 

 

-

 

 

 

90,000

 

A company controlled by the former Chief Executive Officer and a former director

       Management fees

 

 

9,224

 

 

 

90,696

 

 

 

$ 463,819

 

 

$ 556,904

 

 

 

Amounts owing to related parties at 31 July 2020 and 2019 are as follows:

 

 

 

 

a)

As of 31 July 2020, the Company owed $14,229 (2019 - $7,825) to the Chief Executive Officer of the Company and a company controlled by him.

 

 

 

 

b)

As of 31 July 2020, the Company owed $7,833 (2019 - $5,127) to the Chief Financial Officer of the Company and a company controlled by him.

 

 

 

 

c)

As of 31 July 2020, the Company owed $5,875 (2019 - $Nil) to the Corporate Secretary of the Company and a company controlled by him.

 

 

 

 

d)

As of 31 July 2020, the Company owed $25,000 (2019 - $Nil) to the former director and former President of NMG of the Company and a company controlled by him.

 

 

 

 

The above amounts owing to related parties are unsecured, non-interest bearing and are due on demand.

 

 
62

Table of Contents

  

Body and Mind Inc.

 

Notes to Consolidated Financial Statements

For the year ended 31 July 2020

U.S. Dollars

  

9.

Notes Payable

 

 

 

In connection with the investment of Green Light District Holdings, Inc. (“GLDH”) on 29 November 2018, the Company issued a promissory note in the amount of $4,000,000 to Australis Capital Inc. (“Australis”) (Notes 15 and 18). The promissory note bore interest at a rate of 15% per annum, was secured by the assets of the Company, had original maturity of two years and required semi-annual interest payments unless the Company elected to accrue the interest by adding it to the principal amount. The Company issued 1,105,083 common shares of the Company as a finance fee to Australis valued at $822,494 (Note 11). During the year ended 31 July 2019, the Company repaid the note in full. The Company also paid a prepayment penalty of $200,000 for repaying the note prior to the maturity date.

 

During the year ended 31 July 2020, the Company accrued interest and accretion expense of $Nil (2019 - $1,118,051).

 

 

10.

Convertible Debenture

 

 

 

In connection with an investment agreement with Australis on 30 October 2018 (Notes 11, 15 and 16), the Company issued an unsecured convertible debenture in the amount of $1,217,547 (CAD$1,600,000) to Australis. The convertible debenture bore interest at a rate of 8% per annum. Repayment of the outstanding principal amount of the convertible debenture, together with any accrued and unpaid interest, was to be made on or prior to 30 October 2020. The convertible debenture is convertible at the option of Australis into common shares of the Company at a conversion price of CAD$0.55 per common share, subject to adjustment and acceleration in certain circumstances.

 

At the date of issue, a beneficial conversion feature of $88,797 (CAD$116,714) was recognized and the debt portion of the convertible debentures was recorded at a value of $1,128,750 (CAD$1,483,636). The value of the beneficial conversion feature was recorded in equity as additional paid-in capital. Subsequent to initial recognition, the debt has been amortized over the term of the debt using the effective interest rate method at a rate of 11.3% per annum.

 

During the year ended 31 July 2019, the Company accrued interest and accretion expense of $98,392. The Company paid interest of $72,623 calculated up to July 31, 2019 and further paid interest of $88,821 in advance up to 30 June 2020. As consideration for receiving the interest in advance, Australis agreed to convert the debt into equity on 1 July 2020 and has given up the right to receive cash. Upon conversion, the Company issued 2,909,091 shares of common stock to Australis (Note 11).

 

During the year ended 31 July 2020, the Company accrued interest and accretion expense of $131,850 (2019 - $98,392).

 

 
63

Table of Contents

  

Body and Mind Inc.

 

Notes to Consolidated Financial Statements

For the year ended 31 July 2020

U.S. Dollars

  

11.

Capital Stock

 

 

 

The Company’s authorized share capital comprises 900,000,000 Common Shares, with a $0.0001 par value per share.

 

On 2 November 2018, the Company closed a non-brokered private placement of 16,000,000 units at a price of $0.30 (CAD$0.40) per unit for aggregate gross proceeds of $4,883,840 (CAD$6,400,000) (Note 10, 15 and 16). Each unit consists of one common share and one share purchase warrant. Each warrant entitles the holder to purchase one additional common share of the Company at a price of CAD$0.50 per warrant for a period of two years. The Company paid cash of $152,720 and issued 322,581 common shares valued at $221,691 as finders’ fees in relation to this private placement.

 

On 29 November 2018, the Company issued 1,105,083 common shares as a finance fee to Australis valued at $822,494 (Note 9).

 

On 30 November 2018, the Company issued 3,206,160 common shares upon exercise of 3,206,160 warrants by Australis at a price of CAD$0.50 per common share for aggregate proceeds of $1,205,196 (CAD$1,603,080).

 

On 31 January 2019, the Company issued 1,768,545 common shares to Australis for proceeds of $787,123 pursuant to the Investment Agreement (Note 16).

 

On 31 January 2019, the Company issued 2,380,398 common shares valued at $1,448,805 in relation to acquiring the remaining 70% of NMG Ohio LLC (Note 17).

 

On 14 May 2019, the Company issued 70,500 previously escrowed shares with a fair value of $22,689 to Toro Pacific Management Inc. in connection with the acquisition of NMG (Note 14).

 

On 17 May 2019, the Company closed a private placement of 11,780,134 units at a price of $0.93 (CAD$1.25) per unit for aggregate gross proceeds of $10,204,574 (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 28 May 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 $4,746,515 (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 (Note 9).

 

On 16 July 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 12 August 2019, the Company issued a total of 4,337,111 common shares of the Company in connection with the Purchase Agreement, NMG SD Settlement Agreement and the Lease Assignment Agreement valued at $2,752,782 (Notes 13 and 18).

 

On 12 August 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 $40,688 (CAD$53,850).

 

On 12 September 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 $19,405 (CAD$25,682).

 

 

 
64

Table of Contents

 

Body and Mind Inc.

 

Notes to Consolidated Financial Statements

For the year ended 31 July 2020

U.S. Dollars

  

11.

Capital Stock Continued

 

 

 

On 4 October 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 $15,455 (CAD$20,454).

 

On 4 November 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).

 

On 14 November 2019, the Company issued 70,500 previous escrowed shares with a fair value of $17,786 to Toro Pacific Management Inc. in connection with the acquisition of NMG (Note 14).

 

On 24 April 2020, the Company issued 2,681,004 common shares valued at $1,342,175 (CAD$1,796,272) in relation to NMG SD Settlement Agreement (Note 18).

 

On 14 May 2020, the Company issued 70,500 previous escrowed shares with a fair value of $15,760 to Toro Pacific Management Inc. in connection with the acquisition of NMG (Note 14).

 

On 1 July 2020, the Company issued 2,909,091 shares of common stock valued at $1,197,084 to Australis pursuant to the conversion of the convertible debenture (Note 10).

 

Stock options

 

The Company previously approved an incentive stock option plan, pursuant to which the Company may grant stock options up to an aggregate of 10% of the issued and outstanding common shares in the capital of the Company from time to time.

 

On 11 December 2018, the Company issued 2,050,000 stock options in accordance with the Company’s stock option plan at an exercise price of CAD$0.57 per share for a five year term expiring 10 December 2023. The options fully vested on the date of grant. The options were granted to current directors, officers, employees and consultants of the Company. During the year ended 31 July 2020, the Company cancelled 525,000 stock options in this series due to forfeiture.

 

The fair value of the stock options was calculated to be $880,595 (CAD$1,165,117) using the Black-Scholes Option Pricing Model with the following assumptions:

  

Expected life of the options

 

5

years

Expected volatility

 

 

265 %

Expected dividend yield

 

 

0 %

Risk-free interest rate

 

 

2.03 %

 

 

On 21 August 2019, the Company issued 2,850,000 stock options with an exercise price of CAD$0.88 per share for a term of five years expiring on 21 August 2024. 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. During the year ended 31 July 2020, the Company cancelled 950,000 stock options in this series due to forfeiture.

 

The total fair value of the stock options granted was calculated to be $1,373,856 (CAD$1,818,232) using the Black-Scholes Option Pricing Model with the following assumptions:

 

Expected life of the options

 

3.125

years

Expected volatility

 

 

195 %

Expected dividend yield

 

 

0 %

Risk-free interest rate

 

 

1.28 %

 

 

During the year ended 31 July 2020, the Company recorded a stock-based compensation of $977,571 (CAD$1,315,178) related to these options.

 

 
65

Table of Contents

  

Body and Mind Inc.

 

Notes to Consolidated Financial Statements

For the year ended 31 July 2020

U.S. Dollars

        

11.

Capital Stock Continued

 

 

 

Stock options Continued

 

On 1 October 2019, the Company issued 250,000 stock options with an exercise price of CAD$0.93 per share for a term of five years expiring on 1 October 2024. 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.

 

The total fair value of the stock options granted was calculated to be $145,045 (CAD$191,960) using the Black-Scholes Option Pricing Model with the following assumptions:

 

Expected life of the options

 

3.125

years 

Expected volatility

 

 

194 %

Expected dividend yield

 

 

0 %

Risk-free interest rate

 

 

1.37 %

 

 

During the year ended 31 July 2020, the Company recorded a stock-based compensation of $103,570 (CAD$139,338) related to these options.

 

On 23 January 2020, the Company issued 200,000 stock options with an exercise price of CAD$0.88 per share for a term of five years expiring on 23 January 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.

 

The total fair value of the stock options granted was calculated to be $68,645 (CAD$90,608) using the Black-Scholes Option Pricing Model with the following assumptions:

 

Expected life of the options

 

3.125

years 

Expected volatility

 

 

173 %

Expected dividend yield

 

 

0 %

Risk-free interest rate

 

 

1.43 %

 

 

During the year ended 31 July 2020, the Company recorded a stock-based compensation of $35,470 (CAD$47,719) related to these options.

 

On 1 March 2020, the Company issued 250,000 stock options with an exercise price of CAD$0.41 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.

 

The total fair value of the stock options granted was calculated to be $56,287 (CAD$75,331) using the Black-Scholes Option Pricing Model with the following assumptions:

 

Expected life of the options

 

3.125

years

Expected volatility

 

 

127 %

Expected dividend yield

 

 

0 %

Risk-free interest rate

 

 

1.11 %

 

 

During the year ended 31 July 2020, the Company recorded a stock-based compensation of $24,303 (CAD$32,696) related to these options.

 

 
66

Table of Contents

 

Body and Mind Inc.

 

Notes to Consolidated Financial Statements

For the year ended 31 July 2020

U.S. Dollars

    

11.

Capital Stock Continued

 

 

 

Stock options Continued

 

On 30 April 2020, the Company issued 1,375,000 stock options with an exercise price of CAD$0.67 per share for a term of five years expiring on 30 April 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.

 

The total fair value of the stock options granted was calculated to be $524,432 (CAD$701,863) using the Black-Scholes Option Pricing Model with the following assumptions:

 

Expected life of the options

 

3.125

years

Expected volatility

 

 

133 %

Expected dividend yield

 

 

0 %

Risk-free interest rate

 

 

0.32 %

 

 

During the year ended 31 July 2020, the Company recorded a stock-based compensation of $137,368 (CAD$184,808) related to these options.

 

On 7 July 2020, the Company cancelled 350,000 stock options with an exercise price of CAD$0.88 per share, 80,000 stock options with an exercise price of CAD$0.57 per share and 150,000 stock options with an exercise price of CAD$0.57. Subsequently, the Company issued replacement stock options of 350,000 stock options with an exercise price of CAD$0.88 per share, 80,000 stock options with an exercise price of CAD$0.57 per share and 150,000 stock options with an exercise price of CAD$0.61 under the same vesting provisions and expiry dates as the original stock options.

 

The incremental fair value based on the difference between the replacement and original stock options immediately before they were modified was calculated to be $Nil (CAD$Nil) using the Black-Scholes Option Pricing Model with the following assumptions:

 

Expected life of the options

 

2.066

years

Expected volatility

 

 

116 %

Expected dividend yield

 

 

0 %

Risk-free interest rate

 

 

0.25 %

 

 

 

Number of

options

 

 

Weighted average

exercise price

 

 

Weighted average contractual term remaining (in years)

 

 

Aggregate intrinsic value

 

Outstanding at 31 July 2018

 

 

4,025,000

 

 

 CAD$

0.65

 

 

 

4.34

 

 

 CAD$

-

 

Granted

 

 

2,050,000

 

 

 CAD$

0.57

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Outstanding at 31 July 2019

 

 

6,075,000

 

 

 CAD$

0.62

 

 

 

3.69

 

 

 CAD$

1,675,750

 

Granted

 

 

5,505,000

 

 

 CAD$

0.80

 

 

 

 

 

 

 

 

 

Cancelled

 

 

(2,425,000

)

 

 CAD$

0.73

 

 

 

 

 

 

 

 

 

Outstanding at 31 July 2020

 

 

9,155,000

 

 

 CAD$

0.70

 

 

 

3.48

 

 

 CAD$

-

 

Vested and fully exercisable at 31 July 2020

 

 

5,455,000

 

 

 CAD$

0.65

 

 

 

2.87

 

 

 CAD$

-

 

  

 
67

Table of Contents

  

Body and Mind Inc.

 

Notes to Consolidated Financial Statements

For the year ended 31 July 2020

U.S. Dollars

    

11.

Capital Stock Continued

 

 

 

Share purchase warrants and brokers’ warrants

 

  

 

 

Number of warrants

 

 

Weighted average

exercise price

 

Outstanding at 31 July 2018

 

 

10,106,820

 

 

CAD$ 0.89

 

Issued

 

 

28,415,284

 

 

CAD$

0.93

 

Exercised

 

 

(16,007,333 )

 

CAD$

0.50

 

 

 

 

 

 

 

 

 

 

Outstanding at 31 July 2019

 

 

22,514,771

 

 

CAD$

1.22

 

Exercised

 

 

(165,715 )

 

CAD$

0.73

 

Expired

 

 

(9,933,772 )

 

CAD$

0.89

 

Outstanding at 31 July 2020

 

 

12,415,284

 

 

CAD$

1.49

 

 

 

As of 31 July 2020, the following warrants are outstanding:

 

Number of warrants outstanding and exercisable

 

 

Exercise price

 

 

Expiry dates

 

 

11,780,134

 

 

CAD$ 1.50

 

 

17 May 2023

 

 

635,150

 

 

CAD$

1.25

 

 

16 May 2023

 

 

12,415,284

 

 

 

 

 

 

 

 

 

12.

Segmented Information and Major Customers

 

 

 

The Company’s activities are all in the one industry segment of medical and recreational cannabis. All of the Company’s revenue generating activities and capital assets relate to this segment and are located in the USA. During the year ended 31 July 2020, the Company had no major customer over 10% of its revenues (2019 – one major customer for 12% of its revenues).

 

 

13.

Supplemental Disclosures with Respect to Cash Flows

 

 

 

Year Ended

31 July

 

 

 

2020

 

 

2019

 

Cash paid during the year for interest

 

$ -

 

 

$ 392,623

 

Cash paid during the year for income taxes

 

$ 67,717

 

 

$ -

 

 

 

On 30 November 2019, the Company entered into a Settlement Agreement with SD whereby the Company settled an aggregate receivable amount of $590,328 in exchange for $90,315 accounts receivable from future sale of Inventory, write-off of accounts receivable of $92,415, $25,000 future credit towards the Contribution Fee, and a production equipment valued at $235,685, resulting in a loss of $331,743 (Note 19).

 

On 12 August 2019, the Company issued a total of 4,337,111 common shares of the Company in connection with the Purchase Agreement, NMG SD Settlement Agreement and the Lease Assignment Agreement valued at $2,752,782 (Notes 11 and 18).

 

On 24 April 2020, the Company issued a total of 2,681,004 common shares of the Company in connection with the NMG SD Settlement Agreement valued at $1,342,175 (Notes 11 and 18).

 

 
68

Table of Contents

 

Body and Mind Inc.

 

Notes to Consolidated Financial Statements

For the year ended 31 July 2020

U.S. Dollars

    

13.

Supplemental Disclosures with Respect to Cash Flows Continued

 

 

 

On adoption of ASC 842, Lease Accounting, the Company recognized right-of-use assets (Notes 7 and 20), and a corresponding increase in lease liabilities, in the amount of $1,181,143 which represented the present value of future lease payments using a discount rate of 12% per annum. In connection with the Lease Assignment Agreement, the Company assumed the lease for the San Diego dispensary and, as a result, the Company recognized additional right-of-use assets, and a corresponding increase in lease liabilities, in the amount of $1,075,912 which represented the present value of future lease payments using a discount rate of 12% per annum.

 

In connection with the closing of the business combination transaction to acquire all of the issued and outstanding securities of NMG, the net proceeds of the Company’s private placements of certain subscription receipts was released to the Company from escrow in the amount of $33,547 (Note 14).

 

 

14.

Business Acquisition

 

 

 

On 15 May 2017, the Company entered into an assignment and novation agreement (the “Assignment Agreement”) with Toro Pacific Management Inc. (the “Transferor”) pursuant to which the Transferor assigned a letter of intent (the “LOI”) effective 12 May 2017 to the Company in accordance with its terms. The Assignment Agreement and the LOI contemplated a business combination transaction (the “Acquisition”) to acquire all of the issued and outstanding securities of NMG, an arm’s length Nevada-based licensed producer of medical cannabis.

 

As consideration for the Assignment Agreement, the Company will issue to the Transferor 1,000,000 common shares of the Company. On 13 November 2017, the Assignment Agreement was amended, whereby the Company would issue the 1,000,000 common shares as follows:

 

 

a.

470,000 common shares to Benjamin Rutledge upon closing of the Acquisition (issued);

 

b.

60,000 common shares to Chris Hunt upon closing of the Acquisition (issued);

 

c.

470,000 common shares to the Transferor according to the following schedule:

 

 

·

1/10 of the Transferor’s shares upon closing of the Acquisition (issued);

 

 

·

1/6 of the remaining Transferor’s shares 6 months after closing the Acquisition (issued);

 

 

·

1/5 of the remaining Transferor’s shares 12 months after closing the Acquisition (issued);

 

 

·

1/4 of the remaining Transferor’s shares 18 months after closing the Acquisition (issued);

 

 

·

1/3 of the remaining Transferor’s shares 24 months after closing the Acquisition (issued);

 

 

·

1/2 of the remaining Transferor’s shares 30 months after closing the Acquisition (issued); and

 

 

·

the remaining Transferor’s shares 36 months after closing the Acquisition.

 

 

 

 

 

Intangible assets acquired from third parties are measured initially at fair value and either classified as indefinite life or finite life depending on their characteristics. The Company’s brands and licenses have indefinite lives as long as the Company is in business. There are no indications of impairment at 31 July 2020.

 

 
69

Table of Contents

 

Body and Mind Inc.

 

Notes to Consolidated Financial Statements

For the year ended 31 July 2020

U.S. Dollars

   

15.

Commitments

 

 

a) 

In connection with the strategic investment agreement with Australis dated 30 October 2018 (the “Investment Agreement”) (Notes 10, 11 and 16), the Company agreed to pay a monthly service fee of $10,000 to Australis. In connection with the Company’s investment in GLDH and the promissory note provided by Australis (Note 9), the Company agreed to increase the monthly services fee to Australis to $16,500 per month for 5 years unless ownership held by Australis drops below 10% in which the fee will cease. Following the repayment of the promissory note, the monthly service fee to Australis was reduced to $12,000 commencing June 2019.

 

 

 

 

b)

On 25 October 2017, NMG Ohio entered into a five-year lease agreement for the property located at 709 Sugar Lane, Elyria, Ohio, containing approximately 4,100 square feet. The monthly rent is $4,200. The Clubhouse dispensary in Ohio is managed by the Company.

 

 

 

 

c)

On 13 June 2019, the five-year lease agreement dated 1 December 2018 for the property located at 7625 Carroll Road, San Diego, California, containing approximately 4,600 square feet was assigned to NMG San Diego. Under the terms of the assignment and first amendment to the original lease agreement dated 13 June 2019, the Company has three options to extend the lease and each option is for five years. The monthly base rent is currently $15,000. The guaranteed monthly rent is subject to a 1-6% increase on each anniversary date of the lease, based on increases in the Consumer Price Index for San Diego County.

 

 

 

 

d)

On 8 March 2019, the five-year lease agreement dated 10 January 2017, as amended on 7 September 2018, for the property located at 3411 E. Anaheim St., Long Beach, California, containing approximately 1,856 square feet was assigned to NMG Long Beach. Under the terms of the amended lease agreement, the Company has one option to extend the lease for five years. The monthly base rent is $6,636 plus common area expenses, totaling $8,000 every month. The guaranteed minimum monthly rent is subject to a 5% increase on each anniversary date of the lease. The ShowGrow dispensary in Long Beach is managed by the Company.

 

 

 

 

e)

On 21 August 2019, the Company entered into new and updated management and consulting agreements, on a month-to-month basis, with the following individuals:

  

 

 

·

President and the Chief Executive Officer – $12,500 per month;

 

 

·

Chief Financial Officer – CAD$10,000 per month;

 

 

·

Chief Operating Officer – $15,000 per month;

 

 

·

Corporate Secretary – CAD$7,500 per month;

 

 

·

Former President of NMG and a former director – $16,666 per month increased to $25,000 per month on November 25, 2019; and

 

 

·

Former Chief Executive Officer and an advisor - $12,500 per month.

 

 

 

 

 

f)

On 23 April 2020, the Company entered into an amended management and consulting agreement with the past President of NMG and a former director to terminate the management agreement on 30 June 2020, pursuant to the execution of that certain Separation Agreement, provided that the Ohio and Nevada licenses as set out in an exhibit to the Separation Agreement (the “Licenses”) are fully transferred to the Company or its nominee as designated by the Company. In the event that the Licenses are not transferred by 30 June 2020, this Separation Agreement will be automatically extended until the Licenses are successfully transferred on a month-to-month basis at the current fee of $25,000 per month plus all applicable taxes until 30 September 2020, and thereafter, on a month-to-month basis at a reduced fee of $5,000 per month plus applicable taxes.

  

 
70

Table of Contents

 

Body and Mind Inc.

 

Notes to Consolidated Financial Statements

For the year ended 31 July 2020

U.S. Dollars

   

16.

Investment Agreement

 

 

 

On 30 October 2018, the Company entered into the Investment Agreement with Australis. Pursuant to the terms of the Investment Agreement, Australis will acquire (i) 16,000,000 units of the Company (Note 11), and (ii) CAD$1,600,000 principal amount 8% unsecured convertible debentures (Note 10).

 

Under the terms of the Investment Agreement, the parties agreed to negotiate in good faith a license agreement pursuant to which the Company will grant Australis an exclusive and assignable license to use the Body and Mind brand outside of the United States of America on commercially reasonable terms.

 

In addition, the Company will enter into a commercial advisory agreement with Australis Capital (Nevada) Inc. (“Australis Nevada”), a wholly-owned subsidiary of Australis, pursuant to which Australis Nevada will provide advisory and consulting services to the Company at $10,000 per 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 the issued and outstanding Common Shares (Note 15). Subject to certain exceptions, Australis will be entitled to maintain its’ pro rata interest in the Company until such time as it no longer holds 10% or more of the issued and outstanding Common Shares.

 

Subject to applicable laws and the rules of the Canadian Securities Exchange (the “CSE”), for as long as Australis owns at least 10% of the issued and outstanding common shares, Australis will be entitled to nominate one director for election to the Board of Directors of the Company (the “Board”). If Australis exercises all of the warrants and converts all of the debentures purchased, Australis will be entitled to nominate a second director for election to the Board.

 

On 2 November 2018, the Company executed the Investment Agreement and completed the sale of securities pursuant to the Investment Agreement.

 

On 31 January 2019, the Company issued 1,768,545 common shares to Australis for proceeds of $787,123 pursuant to the Investment Agreement whereby the Company granted Australis anti-dilution participation rights to allow Australis to maintain a 35.783% ownership interest in the Company (Note 11). During the year ended 31 July 2020, the Company paid an advisory fee of $144,000 (2019 - $133,000), respectively. 

 

 
71

Table of Contents

 

Body and Mind Inc.

 

Notes to Consolidated Financial Statements

For the year ended 31 July 2020

U.S. Dollars

  

17.

Investment in NMG Ohio LLC

 

 

 

On 31 January 2019, the Company entered into a definitive agreement (“Definitive Agreement”) to acquire 100% ownership of NMG Ohio. The Company will purchase the remaining 70% interest for total cash payments of $1,575,000 and issuance of 3,173,864 common shares of the Company. As of 31 July 2019, the Company had issued 2,380,398 of the 3,173,864 common shares with a fair value of $1,448,805. During the year ended 31 July 2019, the Company made cash payments of $1,181,250. At 31 July 2020, the Definitive Agreement had not closed.

 

The remaining cash payments totaling $393,750 and the remaining issuance of 793,466 common shares are expected to be paid and issued upon completion of the remaining Definitive Agreement closing items.

 

Until such time as the Definitive Agreement closes, the Company will continue to account for its 30% ownership interest in NMG Ohio as an investment using the equity method of accounting. During the year ended 31 July 2020, NMG Ohio recorded net revenues of $4,846,631, expenses of $3,522,902 and a net income of $1,323,729. The Company recorded an equity in earnings of $397,119 relating to its 30% pro rata share of net income which was included in other items on the statement of operations.

  

 

 

31 July 2020

 

 

31 July 2019

 

30% equity investment:

 

 

 

 

 

 

Opening balance

 

$ 134,066

 

 

$ 77,600

 

Equity pickup

 

 

397,119

 

 

 

56,466

 

 

 

 

 

 

 

 

 

 

Total equity investment in NMG Ohio

 

 

531,185

 

 

 

134,066

 

 

 

 

 

 

 

 

 

 

Acquisition of remaining 70% interest:

 

 

 

 

 

 

 

 

Opening balance

 

 

2,630,055

 

 

 

-

 

Acquisition costs: Common shares issued to vendors at fair value

 

 

-

 

 

 

1,448,805

 

Acquisition costs: Cash payments to vendors

 

 

-

 

 

 

1,181,250

 

 

 

 

 

 

 

 

 

 

Total advances for remaining 70% acquisition of NMG Ohio

 

 

2,630,055

 

 

 

2,630,055

 

 

 

 

 

 

 

 

 

 

Total investment in NMG Ohio

 

$ 3,161,240

 

 

$ 2,764,121

 

 

 

Summarized financial information for NMG Ohio is as follows:

 

 

 

31 July 2020

 

 

 

 

 

Current assets

 

$ 925,423

 

Non-current assets

 

 

852,625

 

Total assets

 

 

1,778,048

 

 

 

 

 

 

Current liabilities

 

 

302,948

 

Non-current liabilities

 

 

-

 

Total liabilities

 

 

302,948

 

 

 

 

 

 

Revenues

 

 

4,846,631

 

Gross profit

 

 

2,044,812

 

Net income

 

 

1,323,729

 

 

 

 

 

 

Net income attributable to the Company

 

$ 397,119

 

 

 

During the year ended 31 July 2020, the Company received $1,139,560, net (2019 – provided a loan of $673,633) from NMG Ohio related to dispensary build-out and license fees.

 

 
72

Table of Contents

 

Body and Mind Inc.

 

Notes to Consolidated Financial Statements

For the year ended 31 July 2020

U.S. Dollars

  

18.

Investment in and advances to GLDH

 

 

 

Interim Agreement – 28 November 2018

 

On 28 November 2018, the Company entered into a binding interim agreement (the “Interim Agreement”) with GLDH, a private company incorporated under the laws of Delaware, and David Barakett (“Barakett”) whereby the Company agreed to acquire 100% of the issued and outstanding common shares of GLDH in connection with the issuance of convertible notes (the “Transaction”). GLDH holds a number of assets relating to the production and sale of cannabis products in the United States of America. The Transaction will be contingent upon the Company completing its due diligence.

 

The terms of the Interim Agreement include the following:

 

The Company shall issue to Barakett common shares of the Company (the “Earn Out Shares”) based on the CSE listed 5-day VWAP of the common shares of the Company and at the USD/CAD exchange rate at the close of market on 27 November 2018. The common shares of the Company had a 5-day VWAP of CAD$0.7439 at a USD/CAD exchange rate of 1.3296 and as a result the Company agreed to issue up to a maximum of 11,255,899 common shares with a maximum consideration of US$6,297,580 or CAD$8,373,263. Barakett will be eligible to receive Earn Out Shares for a period of 12 months on the following basis:

 

 

1.

upon GLDH obtaining all of (i) the Long Beach Recreational License; (ii) the San Diego Medical License; (iii) the San Diego Recreational License; and (iv) the San Diego State License (“Milestone I”), the issuance of Earn Out Shares to Barakett totalling 5,627,950 shares (50% of the total Earn Out Shares);

 

2.

upon GLDH achieving total attributable revenues of at least US$3,300,000 over a period of three consecutive months from each of the Long Beach dispensary, the San Diego dispensary and Las Vegas ShowGrow (“Milestone II”), the issuance of Earn Out Shares to Barakeet totalling 4,502,360 (40% of the total Earn Out Shares); and

 

3.

prior to the completion of Milestone I and Milestone II, and upon completion of a certain audit of GLDH showing no taxes outstanding or any unknown material liabilities for GLDH, the issuance of Earn Out Shares to Barakett totalling 1,125,589 shares (10% of the total Earn Out Shares).

 

 

 

 

Additionally, the Company made an investment into GLDH by way of a US$5,200,000 senior secured convertible note (the “Note”) bearing interest at a rate of 20% per annum to be repaid to the Company on 28 November 2020 unless converted by the Company in accordance with the agreement. The Note is secured by a general security agreement and a UCC-1 financing statement in all U.S. states where GLDH has assets. Barakett provided a personal guarantee to the Company for the Note. The Company is in the process of finalizing the Purchase Agreement (see below) and applying the Note to the purchase price.

 

In order for the Company to fund the Note:

 

 

 

1.

the Company entered into a loan agreement with Australis, whereby Australis provided the Company a two-year US$4,000,000 loan (Note 9); and

 

2.

Australis exercised 3,206,160 warrants at a price of CAD$0.50 per common share for aggregate proceeds of approximately US$1,200,000 converted using an exchange rate of 0.7518 (Note 11).

 

 

 

 

Definitive Agreement (Superseding Interim Agreement)

 

On 3 July 2019, the Company entered into the following agreements with GLDH and other third parties:

 

 

1.

a definitive asset purchase agreement (the “Purchase Agreement”) between the Company’s wholly owned subsidiary, NMG Long Beach, LLC (“NMG LB”), GLDH and Airport Collective, Inc. to acquire 100% ownership interest in GLDH’s Long Beach, California dispensary;

 

 
73

Table of Contents

 

Body and Mind Inc.

 

Notes to Consolidated Financial Statements

For the year ended 31 July 2020

U.S. Dollars

  

18.

Investment in and advances to GLDH Continued

 

 

 

Definitive Agreement (Superseding Interim Agreement) Continued

 

 

2.

a settlement agreement (“NMG SD Settlement Agreement”) between the Company and its subsidiaries, and GLDH and its subsidiaries, to acquire a 60% ownership interest in GLDH’s San Diego, California dispensary; and

 

 

 

 

3.

a lease assignment (the “Lease Assignment Agreement”) on the San Diego operation between the Company’s 60%-owned subsidiary, NMG San Diego, LLC (“NMG SD”), Green Road, LLC, Show Grow San Diego, LLC (“SGSD”), and SJJR LLC.

 

 

 

 

The Purchase Agreement, NMG SD Settlement Agreement and Lease Assignment agreement supersede the Interim Agreement and are subject to certain closing conditions including receipt of applicable licences.

 

 

 

1.  

Purchase Agreement was executed under the following terms: 

 

 

 

 

 

The purchase price is USD$6,700,000 (the “Purchase Price”). The consideration under the Purchase Agreement includes the following on closing:

 

 

i.

the USD$5,200,000 Note and accrued interest is to be applied towards the Purchase Price; and

 

 

 

 

ii.

USD$1,500,000 to be paid in common shares of the Company at a price of CAD$0.7439 per common share to a maximum of 2,681,006 common shares (the “Share Payment”) (issued) (Note 11) upon NMG LB receiving the transfer of all licenses, permits and BCC authorizations for NMG LB to conduct medical and adult-use commercial cannabis retail operations. The Share Payment is subject to reduction equal to the net liability of GLDH and Airport Collective.

 

 

2.

The NMG SD Settlement Agreement’s consideration includes the following on closing:

 

 

i.

USD$500,000 to be paid in common shares (624,380 common shares issued) (Note 11) to SGSD at a share price equal to the maximum allowable discount pursuant to Canadian Securities Exchange policies, upon execution of the settlement agreement;

 

 

 

 

ii.

USD$750,000 to be paid in common shares (issued) (Note 11) to Barakett at a price of CAD$0.7439 per common share to a maximum of 1,340,502 Common Shares (the “DB Share Payment”) upon NMG SD receiving all licenses, permits and authorizations for NMG SD to conduct medical commercial cannabis retail operations; and

 

 

 

 

iii.

USD$750,000 to be paid in common shares (issued) (Note 11) to Barakett at a price of CAD$0.7439 per common share to a maximum of 1,340,502 common shares (the “DB Additional Shares Payment”) upon NMG SD receiving all licenses, permits and authorizations for NMG SD to conduct adult-use commercial cannabis retail operations.

  

 

3.

The Lease Assignment Agreement was executed under the following terms:

 

 

 

 

 

The Company is required to issue cash and share payments to the landlord as follows:

  

 

i.

USD$700,000, payable in common shares (1,031,725 common shares issued) (Note 11) at a share price equal to the maximum allowable discount pursuant to Canadian Securities Exchange policies, upon execution of the assignment agreement;

 

 

 

 

ii.

USD$783,765, payable in cash (paid), within 5 business days following execution of the assignment agreement (paid); and

 

 
74

Table of Contents

 

Body and Mind Inc.

 

Notes to Consolidated Financial Statements

For the year ended 31 July 2020

U.S. Dollars

  

18.

Investment in and advances to GLDH Continued

 

 

 

Definitive Agreement (Superseding Interim Agreement) Continued

 

 

 

iii.

USD$750,000, payable in cash (paid), including interest at 5% per annum, upon receipt of the San Diego Conditional Use Permit allowing adult-use commercial cannabis retail operations.

 

 

Additionally:

 

 

 

 

1.

The Company is to provide a loan to GLDH in the amount of USD$200,000 at an interest rate of 12% per annum, accrued and compounded quarterly and due within 3 years (provided);

 

 

 

 

2.

The Company is to enter into a consulting agreement with Barakett through NMG LB to provide certain consulting and advisory services to NMG LB, agreeing to pay Barakett a total of USD$200,000 ($50,000 paid in fiscal 2019 and additional $150,000 paid during the year ended 31 July 2020);

 

 

 

 

3.

The Company will forgive approximately USD$800,000 for prior operating loans advanced by the Company to GLDH; and;

 

 

 

 

4.

The Company licenses certain intellectual property from Green Light District Management, LLC and GLDH (collectively referred to as “Licensor”). The Licensor grants the Company a perpetual license to utilize its operational intellectual property consisting of customer data, sales data, customer outreach strategies standard operating procedures, and other proprietary operational intellectual property. Licensor grants the Company a license for 2 years to utilize intellectual property such as trademarks and branding (the “Branding IP”). As consideration for the licenses, the Company has agreed to utilize the Branding IP until 19 June 2021 at the Company’s premises and at the San Diego retail locations for a period of 2 years from operations commencing at that location. Additionally, the Company agreed to pay the Licensor 3% of gross receipts from sales at the Long Beach dispensary.

 

 

 

 

The total investment in GLDH at 31 July 2020 and 2019 is as follows:

  

 

 

31 July 2020

 

 

31 July 2019

 

 

 

 

 

 

 

 

Opening balance

 

$ 7,373,036

 

 

$ -

 

Note receivable

 

 

-

 

 

 

5,200,000

 

Share issuances

 

 

4,092,175

 

 

 

-

 

Share payment reduction

 

 

(793,416 )

 

 

-

 

Interest income accrued on the Note

 

 

1,040,000

 

 

 

693,333

 

Advances for working capital

 

 

2,143,609

 

 

 

666,876

 

Lease Assignment Agreement payment

 

 

750,000

 

 

 

783,765

 

Amount transferred to Property and Equipment

 

 

(1,431,585 )

 

 

-

 

Amount transferred to Brand and Licenses

 

 

(3,585,483 )

 

 

-

 

Expensed during the year

 

 

(501,862 )

 

 

-

 

Foreign exchange

 

 

(175,620 )

 

 

29,062

 

Ending balance

 

$ 8,910,854

 

 

$ 7,373,036

 

   

 

In April 2020, the Company fulfilled all obligations under the NMG SD Settlement Agreement and the Lease Assignment Agreement and completed the acquisition of a 60% owned dispensary located in San Diego (the “SD Transaction”). The SD Transaction was accounted for as an asset acquisition. The Company acquired the rights to an existing lease that was zoned for use as a cannabis dispensary.

 

The Company owns the dispensary through a 60% owned subsidiary, NMG SD. The Company consolidated 100% of the assets, liabilities and the operations of NMG SD with 40% disclosed as a non-controlling interest.

 

 
75

Table of Contents

 

Body and Mind Inc.

 

Notes to Consolidated Financial Statements

For the year ended 31 July 2020

U.S. Dollars

 

19.

Other Agreements

 

 

 

The Company and NMG Cathedral City (“NMG CC”) entered into a management and administrative services agreement (the “Management Agreement”) with Satellites Dip, LLC, (“SD”), a licensed cannabis business conducting commercial cannabis activity within the state of California. The one-year Management Agreement commenced on 6 June 2019 and encompassed the following:

  

 

a.

Management Fee: NMG CC will be paid a management fee of 30% of Net Profits or $10,000 per month, whichever is greater;

 

 

 

 

b.

Brand Licensing: NMG CC shall work to broker commercial arrangements between SD and third-party cannabis brand owners whereby SD licenses commercial cannabis brands from third parties in connection with SD’s commercial cannabis activity in exchange for a license fee;

 

 

 

 

c.

Equipment and Capital: NMG CC shall furnish all equipment and machinery necessary for SD’s manufacturing of the Branded Products. Any equipment provided by NMG CC to SD shall be owned by NMG CC in its entirety and, subject to SD’s approval of the terms, leased to SD pursuant to an Equipment Lease Agreement entered into between NMG CC and SD, dated 6 June 2019; and

 

 

 

 

d.

Loan: The Parties have entered into a certain secured loan agreement dated 6 June 2019 whereby NMG CC has loaned SD $250,000 (the “Loan”) to be used solely in connection with SD’s commercial cannabis activity. The Loan shall be due and payable on 6 June 2020 (the “Maturity Date”) and shall bear interest at a rate of 12% per annum which shall be accrued, compounded quarterly and payable on the Maturity Date. The Loan is secured by a security interest in and to all of SD’s assets.

 

 

On 30 November 2019, NMG CC entered into a settlement and release agreement (the “Settlement Agreement”) with SD whereby NMG CC and SD agreed to terminate the Management Agreement and to enter into a mutual release of any and all claims related to the Management Agreement, subject to the terms of the Settlement Agreement.

 

As of 30 November 2019, SD owed NMG CC management fees (the “Monies Owed”) under the Management Agreement. In consideration of NMG CC’s discharge of the Monies Owed, SD has agreed to pay NMG CC one-hundred percent (100%) of all proceeds received from the sale of all or any part of its inventory (the “Inventory”) as of 1 November 2019. Pursuant to the Settlement Agreement, SD shall provide monthly updates of the remaining Inventory until the Inventory has been fully exhausted. NMG CC will determine the sale price for any item in Inventory subject to the Settlement Agreement.

 

Brand Director Agreement

 

On 30 November 2019, NMG CC entered into a brand director agreement (the “Brand Director Agreement”) with SD. Pursuant to the Brand Director Agreement, SD has engaged NMG CC 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.

 

 
76

Table of Contents

 

Body and Mind Inc.

 

Notes to Consolidated Financial Statements

For the year ended 31 July 2020

U.S. Dollars

   

19.

Other Agreements Continued

 

 

 

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, NMG CC 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 NMG CC and SD dated 6 June 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 NMG CC (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 NMG CC in connection with the equipment lease agreement (the “Equipment Lease Agreement”) dated 6 June 2019 (the “Equipment Lease Fee”) added to the product of (x) and (y), the (q) total amount shall be the fee paid to NMG CC. 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 30 November 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 30 November 2019, NMG CC and SD entered into an equipment purchase agreement (the “Equipment Purchase Agreement”) pursuant to which NMG CC agreed to purchase certain equipment (the “Equipment”) from SD. The aggregate purchase price for the Equipment is $235,685 and will be applied to the outstanding balance under the Loan Agreement.

 

First Amendment to the Equipment Lease Agreement

 

On 30 November 2019, NMG CC and SD entered into an amendment (the “First Amendment”) to the Equipment Lease Agreement. Pursuant to the First Amendment, NMG CC 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.

 

 
77

Table of Contents

 

Body and Mind Inc.

 

Notes to Consolidated Financial Statements

For the year ended 31 July 2020

U.S. Dollars

 

19.

Other Agreements Continued

 

 

 

Release & Satisfaction of Loan Agreement

 

On 30 November 2019, NMG CC and SD entered into a release and satisfaction of loan agreement (the “Release Agreement”). Pursuant to the Release Agreement, NMG CC agreed that all indebtedness of SD to NMG CC 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.

 

The Company recorded a loss of $331,743 related to the Settlement Agreement with SD (Note 13) as follows:

 

Total amount settled

 

$ 590,328

 

 

 

 

 

 

Future proceeds from Inventory

 

 

90,315

 

Write-off of accounts receivable

 

 

(92,415 )

Credit towards future Contribution Fee

 

 

25,000

 

Production equipment acquired

 

 

235,685

 

 

 

 

 

 

Loss from the settlement

 

$ 331,743

 

 

20.

Lease Liabilities

 

 

a)

On 10 November 2017, NMG entered into a revised five-year lease agreement for the property located at 3375 Pepper Lane, Las Vegas, NV, containing approximately 18,000 square feet. The Company has four options to extend the lease and each option is for five years. The monthly rent was $12,500 plus common area expenses, which increased to $12,875 plus common area expenses on 1 January 2019 and again increased to $13,132 plus common are expenses on 1 December 2019. The guaranteed minimum monthly rent is subject to a 2% increase on each anniversary date of the lease.

 

 

 

 

b)

On 9 April 2019, NMG entered into a three-year lease agreement for the property located at 6420 Sunset Corporate Drive, Las Vegas, NV, containing approximately 7,700 square feet. The Company has one option to extend the lease for an additional three-year term and an option to purchase the property at any point during the initial term. The monthly rent is $6,026 plus $1,129 in common area expenses, totaling $7,156 every month.

 

 

 

 

c)

On 24 April 2020, the Company assumed a five-year lease dated 1 December 2018, as amended on 13 June 2019, for the property located at 7625 Carroll Road, San Diego, CA. The Company has three options to extend the lease and each option is for five years. The monthly rent is $15,914 per month increasing by 3% every year until 1 December 2022. The lease contains a sale bonus provision of $1,000,000 or 10% of the purchase price of the entire business, whichever is greater, in the event of sale or assignment of the lease.

 

 

 

 

On adoption of ASC 842, Lease Accounting, the Company recognized right-of-use assets (Notes 7 and 13), and a corresponding increase in lease liabilities, in the amount of $1,181,143 which represented the present value of future lease payments using a discount rate of 12% per annum related to the two leases in Nevada, USA. The Company adopted the modified retrospective approach on adopting ASC 842 and accordingly the adoption was made effective 1 August 2019, with no restatement of the prior year comparatives.

 

 
78

Table of Contents

 

Body and Mind Inc.

 

Notes to Consolidated Financial Statements

For the year ended 31 July 2020

U.S. Dollars

  

20.

Lease Liabilities Continued

 

 

 

On the assumption of the lease in San Diego, California, the Company recognized right-of-use assets (Notes 7 and 13), and a corresponding increase in lease liabilities, in the amount of $1,075,912 which represented the present value of future lease payments using a discount rate of 12% per annum.

 

During the year ended 31 July 2020, the Company recorded a total lease expense of $293,327 related to the accretion of lease liabilities and the amortization of right-of-use assets of which $49,296 was included in General and Administrative Expenses and $73,944 was included in Cost of Sales.

 

Supplemental cash flow information related to leases was as follows:

  

Cash paid for amounts included in the measurement of lease liabilities:

 

 

 

Operating cash flows from operating leases

 

$ 257,973

 

Right-of-use assets obtaining in exchange for lease obligations:

 

 

 

 

Operating leases

 

$ 2,257,055

 

 

 

 

 

 

Weighted-average remaining lease term – operating leases

 

7.53

years

Weighted-average discount rate – operating leases

 

 

12 %

 

 

The discount rate of 12% was determined by the Company as the rate of interest that the Company would have to pay to borrow on a collateralized basis over a similar term an amount equal to the lease payments in a similar economic environment.

 

 

 

Maturities of lease liabilities were as follows:

 

Year Ending 31 July

 

Operating Leases

 

2021

 

$ 417,695

 

2022

 

 

440,658

 

2023

 

 

450,995

 

2024

 

 

457,030

 

2025 and thereafter

 

 

1,569,096

 

Total lease payments

 

$ 3,335,474

 

Less imputed interest

 

 

(1,166,574 )

Total

 

$ 2,168,900

 

Less current portion

 

 

(362,688 )

Long term portion

 

 

1,806,212

 

  

 
79

Table of Contents

 

Body and Mind Inc.

 

Notes to Consolidated Financial Statements

For the year ended 31 July 2020

U.S. Dollars

  

21.

Income Taxes

 

 

 

A reconciliation of income taxes at statutory rates with the reported taxes for the years ended 31 July 2020 and 2019 is as follows:

 

The (benefit) expense for income taxes consists of the following:

 

 

 

2020

 

 

2019

 

 

 

 

 

 

 

 

Current:

 

 

 

 

 

 

Federal

 

$

1,428,798

 

 

$ -

 

State

 

 

9,040

 

 

 

-

 

 

 

 

1,437,838

 

 

 

-

 

 

 

 

 

 

 

 

 

 

Deferred:

 

 

 

 

 

 

 

 

Federal

 

 

(1,303,670 )

 

 

-

 

State

 

 

-

 

 

 

-

 

 

 

 

(1,303,670 )

 

 

-

 

 

 

 

 

 

 

 

 

 

Total (benefit) expense for income taxes

 

$ 134,168

 

 

$ -

 

 

 

Section 280E of the Internal Revenue Code (“IRC”) prohibits businesses engaged in the trafficking of Schedule I or Schedule II controlled substances from deducting normal business expenses, such as payroll and rent, from gross income (revenue less cost of goods sold). Section 280E was originally intended to penalize criminal market operators, but because cannabis remains a Schedule I controlled substance for U.S. Federal purposes, the Internal Revenue Service (the “IRS”) has subsequently applied Section 280E to state-legal cannabis businesses. Cannabis businesses operating in states that align their tax codes with the IRC are also unable to deduct normal business expenses from their state taxes. The nondeductible expenses shown in the effective rate reconciliation above is comprised primarily of the impact of applying Section 280E to the Company’s businesses that are involved in selling cannabis, along with other typical non-deductible expenses such as lobbying expenses.

  

 

 

2020

 

 

2019

 

 

 

 

 

 

 

 

Net loss for the year before income tax

 

$ (4,464,221 )

 

$ (3,752,751 )

Federal and state income tax rates

 

 

21.00 %

 

 

21.00 %

 

 

 

 

 

 

 

 

 

Expected income tax recovery

 

 

(937,486 )

 

 

(788,078 )

IRC 280E disallowance

 

 

941,288

 

 

 

-

 

Stock options

 

 

268,439

 

 

 

184,924

 

Non-consolidated income

 

 

54,147

 

 

 

-

 

Other permanent differences

 

 

15,757

 

 

 

1,158,055

 

Change in estimates and others

 

 

1,193,750

 

 

 

120,554

 

Opening deferred tax adjustments

 

 

(1,251,727 )

 

 

-

 

Change in tax rates

 

 

-

 

 

 

178,289

 

Change in benefit not recognized

 

 

(150,000 )

 

 

(853,744 )

 

 

 

 

 

 

 

 

 

Total income tax expense

 

$ 134,168

 

 

$ -

 

 

 
80

Table of Contents

 

Body and Mind Inc.

 

Notes to Consolidated Financial Statements

For the year ended 31 July 2020

U.S. Dollars

  

21.

Income Taxes - Continued

 

 

 

The significant components of the Company’s deferred income tax assets and liabilities are as follows:

  

 

 

As at

31 July 2020

 

 

As at

31 July 2019

 

 

 

 

 

 

 

 

Deferred income tax asset

 

 

 

 

 

 

Lease liabilities

 

$ 450,139

 

 

$ -

 

Net income tax operating loss carry forward

 

 

-

 

 

 

150,000