Grown Rogue International Inc 6-K, filed Oct 14, 2021
Grown Rogue International Inc. (GRUSF)
About this 6-K
Grown Rogue International Inc filed this 6-K on October 14, 2021.
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 6-K
REPORT OF FOREIGN PRIVATE ISSUER
PURSUANT TO RULE 13a-16 OR 15d-16 UNDER THE
THE SECURITIES EXCHANGE ACT OF 1934
Date: October 14, 2021
Commission File No. 0-53646
Grown Rogue International Inc.
(formerly Novicius Corp.)
(Translation of Registrant’s name into English)
340 Richmond Street West
Toronto, Ontario, Canada M5V 1X2
(Address of principal executive office)
Indicate by check mark whether the registrant files or will file annual reports under cover of Form 20-F or Form 40-F.
Form 20-F ☒ Form 40-F ☐
Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(1):
Yes ☐ No ☒
Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(7):
Yes ☐ No ☒
TABLE OF CONTENTS
1
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| Dated October 14, 2021 | GROWN ROGUE INTERNATIONAL INC. | |
| (FORMERLY: NOVICIUS CORP.) | ||
| By: | /s/ Obie Strickler | |
| Name: | Obie Strickler | |
| Title: | President & Chief Executive Officer | |
2
Exhibit 1
Grown Rogue Issues Promissory Note
Medford, Oregon, September 14, 2021 – Grown Rogue International Inc. (“Grown Rogue” or the “Company”) (CSE: GRIN) (OTC: GRUSF), a multi-state cannabis company with operations and assets in Oregon and Michigan, has announced that it has issued an unsecured non-convertible promissory note to Plant-Based Investment Corp. (the “Lender”) for a principal amount of US$800,000. The entire principal amount is to be advanced in separate tranches on or before September 30, 2021 and is due to be fully repaid by December 15, 2022 (“Maturity Date”). No interest is payable under the note provided there is no event of default.
The terms of the note require the Company to make certain participation payments to the Lender based on a percentage monthly sales of cannabis flower sold from the Company’s sun-grown A-flower 2021 harvest (the “Harvest”), less 15% of such amount to account for costs of sales. The percentage will be determined by dividing 2,000 by the total volume of pounds of the Harvest. A portion of these payments will be used to pay down the outstanding principal on a monthly basis. The note will automatically terminate when the full amount of any outstanding principal plus the applicable participation payments are paid prior to the Maturity Date. Should the participation payments fully repay the principal amount prior to the Maturity Date then the note will automatically terminate.
The issuance of the promissory note constitutes a “related party transaction” under Multilateral Instrument 61-101 - Protection of Minority Security Holders in Special Transactions (“MI 61-101”) as the lender is a control person of the Company. The Company has relied on the exemptions from the valuation and minority shareholder approval requirements of MI 61-101 contained in section 5.5(b) and 5.7(a) of MI 61-101.
About Grown Rogue
Grown Rogue International (CSE: GRIN | OTC: GRUSF) is a vertically-integrated, multi-state Cannabis family of brands on a mission to inspire consumers to “enhance experiences” through cannabis. We have combined an expert management team, award winning grow team, state of the art indoor and outdoor manufacturing facilities, and consumer insight based product categorization, to create innovative products thoughtfully curated from “seed to experience.” The Grown Rogue family of products include sungrown and indoor premium flower, along with nitro sealed indoor and sungrown pre-rolls and jars.
FORWARD-LOOKING STATEMENTS
This press release contains statements which constitute “forward-looking information” within the meaning of applicable securities laws, including statements regarding the plans, intentions, beliefs and current expectations of the Company with respect to future business activities. Forward- looking information is often identified by the words “may,” “would,” “could,” “should,” “will,” “intend,” “plan,” “anticipate,” “believe,” “estimate,” “expect” or similar expressions and include information regarding: (i) statements regarding the future direction of the Company (ii) the ability of the Company to successfully achieve its business and financial objectives, (iii) plans for expansion of the Company into Michigan and securing applicable regulatory approvals, and (iv) expectations for other economic, business, and/or competitive factors. Investors are cautioned that forward-looking information is not based on historical facts but instead reflect the Company’s management’s expectations, estimates or projections concerning the business of the Company’s future results or events based on the opinions, assumptions and estimates of management considered reasonable at the date the statements are made. Although the Company believes that the expectations reflected in such forward-looking information are reasonable, such information involves risks and uncertainties, and undue reliance should not be placed on such information, as unknown or unpredictable factors could have material adverse effects on future results, performance or achievements of the combined company. Among the key factors that could cause actual results to differ materially from those projected in the forward-looking information are the following: changes in general economic, business and political conditions, including changes in the financial markets; and in particular in the ability of the Company to raise debt and equity capital in the amounts and at the costs that it expects; adverse changes in the public perception of cannabis; decreases in the prevailing prices for cannabis and cannabis products in the markets that the Company operates in; adverse changes in applicable laws; or adverse changes in the application or enforcement of current laws; compliance with extensive government regulation and related costs, and other risks described in the Company’s public disclosure documents filed on www.sedar.com.
Should one or more of these risks or uncertainties materialize, or should assumptions underlying the forward-looking information prove incorrect, actual results may vary materially from those described herein as intended, planned, anticipated, believed, estimated or expected. Although the Company has attempted to identify important risks, uncertainties and factors which could cause actual results to differ materially, there may be others that cause results not to be as anticipated, estimated or intended. The Company does not intend, and does not assume any obligation, to update this forward-looking information except as otherwise required by applicable law.
SAFE HARBOR STATEMENT
This press release may contain forward-looking information within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), including all statements that are not statements of historical fact regarding the intent, belief or current expectations of the Company, its directors or its officers with respect to, among other things: (i) the Company’s financing plans; (ii) trends affecting the Company’s financial condition or results of operations; (iii) the Company’s growth strategy and operating strategy; and (iv) the declaration and payment of dividends. The words “may,” “would,” “will,” “expect,” “estimate,” “anticipate,” “believe,” “intend” and similar expressions and variations thereof are intended to identify forward-looking statements. Also, forward-looking statements represent our management’s beliefs and assumptions only as of the date hereof. Except as required by law, we assume no obligation to update these forward-looking statements publicly, or to update the reasons actual results could differ materially from those anticipated in these forward-looking statements, even if new information becomes available in the future. Investors are cautioned that any such forward-looking statements are not guarantees of future performance and involve risks and uncertainties, many of which are beyond the Company’s ability to control, and that actual results may differ materially from those projected in the forward-looking statements as a result of various factors including the risk disclosed in the Company’s Form 20-F and 6-K filings with the Securities and Exchange Commission.
The Company is indirectly involved in the manufacture, possession, use, sale and distribution of cannabis in the recreational cannabis marketplace in the United States through its indirect operating subsidiaries. Local state laws where its subsidiaries operate permit such activities however, these activities are currently illegal under United States federal law. Additional information regarding this and other risks and uncertainties relating to the Company's business are disclosed in the Company’s Listing Statement filed on its issuer profile on SEDAR at www.sedar.com. Should one or more of these risks, uncertainties or other factors materialize, or should assumptions underlying the forward-looking information or forward-looking statements prove incorrect, actual results may vary materially from those described herein as intended, planned, anticipated, believed, estimated or expected.
No stock exchange, securities commission or other regulatory authority has approved or disapproved the information contained herein.
For further information on Grown Rogue International please visit www.grownrogue.com or contact:
|
Obie Strickler Chief Executive Officer obie@grownrogue.com
Investor Relations Desk Inquiries invest@grownrogue.com (458) 226-2100 |
Exhibit 2
Form 52-109FV2
Certification of Interim Filings – Venture Issuer Basic Certificate
I, J. Obie Strickler, President and Chief Executive Officer of Grown Rogue International Inc., certify the following:
1. Review: I have reviewed the interim financial report and interim MD&A (together, the “interim filings”) of Grown Rogue International Inc. (the “issuer”) for the interim period ended July 31, 2021.
2. No misrepresentations: Based on my knowledge, having exercised reasonable diligence, the interim filings do not contain any untrue statement of a material fact or omit to state a material fact required to be stated or that is necessary to make a statement not misleading in light of the circumstances under which it was made, with respect to the period covered by the interim filings.
3. Fair presentation: Based on my knowledge, having exercised reasonable diligence, the interim financial report together with the other financial information included in the interim filings fairly present in all material respects the financial condition, financial performance and cash flows of the issuer, as of the date of and for the periods presented in the interim filings.
Date: September 29, 2021
“J. Obie Strickler”
J. Obie Strickler
President and Chief Executive Officer
|
NOTE TO READER
In contrast to the certificate required for non-venture issuers under National Instrument 52-109 Certification of Disclosure in Issuers’ Annual and Interim Filings (NI 52-109), this Venture Issuer Basic Certificate does not include representations relating to the establishment and maintenance of disclosure controls and procedures (DC&P) and internal control over financial reporting (ICFR), as defined in NI 52-109. In particular, the certifying officers filing this certificate are not making any representations relating to the establishment and maintenance of
i) controls and other procedures designed to provide reasonable assurance that information required to be disclosed by the issuer in its annual filings, interim filings or other reports filed or submitted under securities legislation is recorded, processed, summarized and reported within the time periods specified in securities legislation; and
ii) a process to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with the issuer’s GAAP.
The issuer’s certifying officers are responsible for ensuring that processes are in place to provide them with sufficient knowledge to support the representations they are making in this certificate. Investors should be aware that inherent limitations on the ability of certifying officers of a venture issuer to design and implement on a cost effective basis DC&P and ICFR as defined in NI 52-109 may result in additional risks to the quality, reliability, transparency and timeliness of interim and annual filings and other reports provided under securities legislation.
|
Exhibit 3
Form 52-109FV2
Certification of Interim Filings – Venture Issuer Basic Certificate
I, Ryan Kee, Chief Financial Officer and Corporate Secretary of Grown Rogue International Inc., certify the following:
1. Review: I have reviewed the interim financial report and interim MD&A (together, the “interim filings”) of Grown Rogue International Inc. (the “issuer”) for the interim period ended July 31, 2021.
2. No misrepresentations: Based on my knowledge, having exercised reasonable diligence, the interim filings do not contain any untrue statement of a material fact or omit to state a material fact required to be stated or that is necessary to make a statement not misleading in light of the circumstances under which it was made, with respect to the period covered by the interim filings.
3. Fair presentation: Based on my knowledge, having exercised reasonable diligence, the interim financial report together with the other financial information included in the interim filings fairly present in all material respects the financial condition, financial performance and cash flows of the issuer, as of the date of and for the periods presented in the interim filings.
Date: September 29, 2021
“Ryan Kee”
Ryan Kee
Chief Financial Officer and Corporate Secretary
|
NOTE TO READER
In contrast to the certificate required for non-venture issuers under National Instrument 52-109 Certification of Disclosure in Issuers’ Annual and Interim Filings (NI 52-109), this Venture Issuer Basic Certificate does not include representations relating to the establishment and maintenance of disclosure controls and procedures (DC&P) and internal control over financial reporting (ICFR), as defined in NI 52-109. In particular, the certifying officers filing this certificate are not making any representations relating to the establishment and maintenance of
i) controls and other procedures designed to provide reasonable assurance that information required to be disclosed by the issuer in its annual filings, interim filings or other reports filed or submitted under securities legislation is recorded, processed, summarized and reported within the time periods specified in securities legislation; and
ii) a process to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with the issuer’s GAAP.
The issuer’s certifying officers are responsible for ensuring that processes are in place to provide them with sufficient knowledge to support the representations they are making in this certificate. Investors should be aware that inherent limitations on the ability of certifying officers of a venture issuer to design and implement on a cost effective basis DC&P and ICFR as defined in NI 52-109 may result in additional risks to the quality, reliability, transparency and timeliness of interim and annual filings and other reports provided under securities legislation.
|
Exhibit 4
GROWN ROGUE INTERNATIONAL INC.
Unaudited Condensed Interim Consolidated Financial Statements
For the Three and Nine Months ended July 31, 2021 and 2020
Expressed in United States Dollars
NOTICE TO READER
The accompanying unaudited condensed consolidated interim financial statements have been prepared by the Company's management and the Company’s independent auditors have not performed a review of these interim financial statements.
Grown Rogue International Inc.
Condensed Interim Consolidated Statements of Financial Position
Unaudited - Expressed in United States Dollars
| July 31, 2021 | October 31, 2020 | |||||||
| ASSETS | ||||||||
| Current assets | ||||||||
| Cash | $ | 663,807 | $ | 217,788 | ||||
| Accounts receivable (Note 21) | 642,758 | 172,121 | ||||||
| Biological assets (Note 4) | 1,532,051 | 250,690 | ||||||
| Inventory (Note 5) | 1,465,859 | 1,124,360 | ||||||
| Prepaid expenses and other assets | 310,766 | 69,816 | ||||||
| Total current assets | $ | 4,615,241 | $ | 1,834,775 | ||||
| Marketable securities (Note 6) | 775,966 | 585,035 | ||||||
| Other investments (Note 8) | 750,000 | 187,812 | ||||||
| Property and equipment (Note 11) | 4,457,096 | 1,151,799 | ||||||
| Intangible assets and goodwill (Note 12) | 399,338 | 4,997 | ||||||
| TOTAL ASSETS | $ | 10,997,641 | $ | 3,764,418 | ||||
| LIABILITIES | ||||||||
| Current liabilities | ||||||||
| Accounts payable and accrued liabilities | $ | 1,387,488 | $ | 1,059,971 | ||||
| Current portion of lease liabilities (Note 10) | 386,941 | 100,277 | ||||||
| Current portion of long-term debt (Note 13) | 490,921 | 46,099 | ||||||
| Business acquisition consideration payable (Note 7) | 364,537 | - | ||||||
| Interest payable (Note 13) | 10,000 | 9,367 | ||||||
| Derivative liabilities (Note 14) | - | 583,390 | ||||||
| Unearned revenue | 8,000 | - | ||||||
| Income tax (Note 7) | 117,500 | - | ||||||
| Total current liabilities | $ | 2,765,387 | $ | 1,799,104 | ||||
| Accrued liabilities (Note 9) | 123,413 | 389,816 | ||||||
| Lease liabilities (Note 10) | 1,052,079 | 16,630 | ||||||
| Long-term debt (Note 13) | 1,107,534 | 753,715 | ||||||
| Convertible debentures (Note 14) | - | 1,739,678 | ||||||
| Deferred rent | - | 10,494 | ||||||
| TOTAL LIABILITIES | $ | 5,048,413 | $ | 4,709,437 | ||||
| EQUITY | ||||||||
| Share capital (Note 15) | $ | 20,540,357 | $ | 14,424,341 | ||||
| Shares issuable (Note 7) | 35,806 | - | ||||||
| Contributed surplus (Notes 16, 17) | 6,343,149 | 4,070,264 | ||||||
| Accumulated other comprehensive income (loss) | (97,179 | ) | (12,197 | ) | ||||
| Accumulated deficit | (21,784,049 | ) | (19,394,044 | ) | ||||
| Equity attributable to shareholders | $ | 5,038,084 | $ | (911,636 | ) | |||
| Non-controlling interest (Notes 25) | 911,144 | (33,383 | ) | |||||
| TOTAL EQUITY | $ | 5,949,228 | $ | (945,019 | ) | |||
| TOTAL LIABILITIES AND EQUITY | $ | 10,997,641 | $ | 3,764,418 | ||||
Going Concern (Note 2)
Subsequent Events (Note 26)
Approved on behalf of the Board of Directors:
| Signed "J. Obie Strickler", Director | Signed "Stephen Gledhill", Director |
The accompanying notes form an integral part of these condensed interim consolidated financial statements.
Pg 2 of 33
Grown Rogue International Inc.
Condensed Interim Consolidated Statements of Comprehensive Loss
Unaudited - Expressed in United States Dollars
| Three months ended July 31, | Nine months ended July 31, | |||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| Revenue | ||||||||||||||||
| Product sales | 3,028,991 | 903,994 | 5,274,543 | 3,182,902 | ||||||||||||
| Service revenue | - | - | 344,055 | - | ||||||||||||
| Total revenue | 3,028,991 | 903,994 | 5,618,598 | 3,182,902 | ||||||||||||
| Cost of goods sold | ||||||||||||||||
| Cost of finished cannabis inventory sold (Note 5) | (1,239,200 | ) | (475,982 | ) | (2,584,832 | ) | (1,817,480 | ) | ||||||||
| Cost of service revenues | - | - | (154,353 | ) | - | |||||||||||
| Gross profit, excluding fair value items | 1,789,791 | 428,012 | 2,879,413 | 1,365,422 | ||||||||||||
| Realized fair value amounts in inventory sold | (198,540 | ) | (626,522 | ) | (387,600 | ) | (1,471,821 | ) | ||||||||
| Unrealized fair value gain loss on growth of biological assets (Note 4) | 649,907 | 770,724 | 496,855 | 1,425,228 | ||||||||||||
| Gross profit | 2,241,158 | 572,214 | 2,988,668 | 1,318,829 | ||||||||||||
| Expenses | ||||||||||||||||
| Accretion expense | 187,493 | 321,875 | 801,929 | 461,415 | ||||||||||||
| Amortization of intangible assets | - | 5,980 | 4,997 | 20,620 | ||||||||||||
| Amortization of property & equipment (Note 11) | 55,610 | 61,958 | 134,311 | 173,687 | ||||||||||||
| General and administrative (Note 22) | 1,216,980 | 549,350 | 2,659,638 | 1,814,319 | ||||||||||||
| Share-based compensation | 65,543 | 329,014 | 201,553 | 320,852 | ||||||||||||
| Total expenses | 1,525,626 | 1,268,177 | 3,802,428 | 2,790,893 | ||||||||||||
| Gain (loss) from operations | 715,532 | (695,963 | ) | (813,760 | ) | (1,472,064 | ) | |||||||||
| Other income and (expense) | ||||||||||||||||
| Interest expense | (48,828 | ) | (96,881 | ) | (93,716 | ) | (258,472 | ) | ||||||||
| Other income | 3,977 | 125,860 | (18,342 | ) | 235,860 | |||||||||||
| Gain on disposal of subsidiary | - | 1,574 | - | 1,574 | ||||||||||||
| Loss on debt restructure | - | (462,213 | ) | - | (462,213 | ) | ||||||||||
| Gain on derecognition of derivative liability | - | 244,572 | - | 244,572 | ||||||||||||
| Gain on debt settlement | 53 | 23,939 | 131,673 | 23,939 | ||||||||||||
| Loss on settlement of non-controlling interest | - | - | (189,816 | ) | - | |||||||||||
| Unrealized gain on marketable securities | (422,867 | ) | 69,064 | 133,241 | (558,223 | ) | ||||||||||
| Unrealized loss on derivative liability (Note 14) | - | - | (1,258,996 | ) | - | |||||||||||
| Gain (loss) on disposal of property and equipment | (7,573 | ) | (4,024 | ) | (7,573 | ) | 10,940 | |||||||||
| Net income (loss) | 240,294 | (794,072 | ) | (2,117,289 | ) | (2,234,087 | ) | |||||||||
| Other comprehensive income (items that may be subsequently reclassified to profit & loss) | ||||||||||||||||
| Currency translation | (11,701 | ) | (3,420 | ) | (84,982 | ) | (110,145 | ) | ||||||||
| Total comprehensive income (loss) | 228,593 | (797,492 | ) | (2,202,271 | ) | (2,344,232 | ) | |||||||||
| Gain (loss) per share attributable to owners of the parent - basic | - | (0.01 | ) | (0.02 | ) | (0.02 | ) | |||||||||
| Weighted average shares outstanding - basic | 155,218,887 | 104,821,009 | 127,917,272 | 90,596,827 | ||||||||||||
| Gain (loss) per share attributable to owners of the parent – diluted | - | (0.01 | ) | (0.02 | ) | (0.02 | ) | |||||||||
| Weighted average shares outstanding - basic | 163,249,739 | 104,821,009 | 127,917,272 | 90,596,827 | ||||||||||||
| Net income (loss) for the period attributable to: | ||||||||||||||||
| Non-controlling interest | 283,126 | 708 | 272,716 | (36,441 | ) | |||||||||||
| Shareholders | (42,832 | ) | (794,780 | ) | (2,390,005 | ) | (2,197,646 | ) | ||||||||
| Net income (loss) | 240,294 | (794,072 | ) | (2,117,289 | ) | (2,234,087 | ) | |||||||||
| Comprehensive loss for the period attributable to: | ||||||||||||||||
| Non-controlling interest | 283,126 | 708 | 272,716 | (36,441 | ) | |||||||||||
| Shareholders | (54,533 | ) | (798,200 | ) | (2,474,987 | ) | (2,307,791 | ) | ||||||||
| Total comprehensive income (loss) | 228,593 | (797,492 | ) | (2,202,271 | ) | (2,344,232 | ) | |||||||||
The accompanying notes form an integral part of these condensed interim consolidated financial statements.
Pg 3 of 33
Grown Rogue International Inc.
Condensed Interim Consolidated Statements of Changes in Shareholders' Deficit
Unaudited - Expressed in United States Dollars
| Number of common shares | Share capital | Shares issuable | Contributed surplus | Currency translation reserve | Accumulated deficit | Non-controlling interests | Total equity | |||||||||||||||||||||||||
| Balance - October 31, 2020 | 107,782,397 | $ | 14,424,341 | $ | - | $ | 4,070,264 | $ | (12,197 | ) | $ | (19,394,044 | ) | $ | (33,383 | ) | $ | (945,019 | ) | |||||||||||||
| Shares issued for employment, director, & consulting services (Note 15.1) | 534,294 | 95,294 | - | - | - | - | - | 95,294 | ||||||||||||||||||||||||
| Shares issued pursuant to private placement (Notes 15.2) | 10,231,784 | 1,225,000 | - | - | - | - | - | 1,225,000 | ||||||||||||||||||||||||
| Expenses of non-brokered private placement (Note 15.2) | - | (15,148 | ) | - | - | - | - | - | (15,148 | ) | ||||||||||||||||||||||
| Shares issued to extend payment due date (Note 15.3) | 25,000 | 2,103 | - | - | - | - | - | 2,103 | ||||||||||||||||||||||||
| Shares payments towards acquisition of Golden Harvests and extend due date (Note 7, Note 15.5) | 600,000 | 107,461 | - | - | - | - | - | 107,461 | ||||||||||||||||||||||||
| Shares issuable for consideration for acquisition of Golden Harvests (Note 7) | - | - | 35,806 | - | - | - | - | 35,806 | ||||||||||||||||||||||||
| Shares issued to partner creditor (Note 15.4) | 400,000 | 36,310 | - | - | - | - | - | 36,310 | ||||||||||||||||||||||||
| Shares and warrants issued pursuant to brokered private placement of Special Warrants (Notes 15.6, 16) | 23,162,579 | 3,738,564 | - | - | - | - | - | 3,738,564 | ||||||||||||||||||||||||
| Expenses of brokered private placement of Special Warrants (Note 15.6) | - | (444,396 | ) | - | - | - | - | - | (444,396 | ) | ||||||||||||||||||||||
| Broker and advisory warrants issued pursuant to Special Warrant financing (Notes 15.6, 16.1) | - | (210,278 | ) | - | 210,278 | - | - | - | - | |||||||||||||||||||||||
| Settlement of convertible debentures for cash and common shares (Note 15.7) | 10,488,884 | 916,290 | 1,883,731 | - | - | - | 2,800,021 | |||||||||||||||||||||||||
| Issuance of non-controlling interest in subsidiary for cash (Note 25.4) | - | - | - | (475,000 | ) | - | - | 475,000 | - | |||||||||||||||||||||||
| Purchase of non-controlling interest in subsidiary (Note 25.4) | 3,711,938 | 664,816 | 475,000 | - | - | (475,000 | ) | 664,816 | ||||||||||||||||||||||||
| Change in ownership interests in subsidiaries | - | - | - | - | - | - | 671,812 | 671,812 | ||||||||||||||||||||||||
| Stock option vesting expense | - | - | - | 178,876 | - | - | - | 178,876 | ||||||||||||||||||||||||
| Currency translation adjustment | - | - | - | - | (84,982 | ) | - | - | (84,982 | ) | ||||||||||||||||||||||
| Net loss | - | - | - | - | - | (2,390,005 | ) | 272,716 | (2,117,289 | ) | ||||||||||||||||||||||
| Balance - July 31, 2021 | 156,936,876 | $ | 20,540,357 | $ | 35,806 | $ | 6,343,149 | $ | (97,179 | ) | $ | (21,784,049 | ) | $ | 911,144 | $ | 5,949,228 | |||||||||||||||
Pg 4 of 33
Grown Rogue International Inc.
Condensed Interim Consolidated Statements of Changes in Shareholders' Deficit
Unaudited - Expressed in United States Dollars
| Number of common shares | Share capital | Subscriptions payable | Contributed surplus | Currency translation reserve | Accumulated deficit | Non-controlling interests | Total equity | |||||||||||||||||||||||||
| Balance at October 31, 2019 | 73,219,916 | $ | 12,647,930 | $ | 5,136 | $ | 2,890,435 | $ | 121,920 | $ | (17,112,605 | ) | $ | 19,538 | $ | (1,427,646 | ) | |||||||||||||||
| Common units issued pursuant to private placement (Note 15.8) | 15,000,000 | 733,434 | - | 350,901 | - | - | - | 1,084,335 | ||||||||||||||||||||||||
| Share issuance costs | - | (11,508 | ) | - | (5,083 | ) | - | - | - | (16,591 | ) | |||||||||||||||||||||
| Common units issued pursuant to share swap (Note 15.8) | 15,000,000 | 1,121,848 | - | - | - | - | - | 1,121,848 | ||||||||||||||||||||||||
| Common shares issued for compensation (Note 15.9) | 684,386 | 55,106 | - | - | - | - | - | 55,106 | ||||||||||||||||||||||||
| Common shares issued for services (Note 15.10) | 2,300,000 | 163,543 | - | - | - | - | - | 163,543 | ||||||||||||||||||||||||
| Common shares issued for investment (Note 15.11) | 200,000 | 12,812 | - | - | - | - | - | 12,812 | ||||||||||||||||||||||||
| Conversion of debt into common shares (Note 15.12) | 238,095 | 37,733 | - | - | - | - | - | 37,733 | ||||||||||||||||||||||||
| Issuances pursuant to convertible agreements (Note 15.12) | 115,000 | 9,746 | - | 424,645 | - | - | - | 434,391 | ||||||||||||||||||||||||
| Stock option grants | - | - | - | 183,368 | - | - | - | 183,368 | ||||||||||||||||||||||||
| Elimination of non-controlling interest of subsidiary sold | - | - | - | - | - | - | 22,128 | 22,128 | ||||||||||||||||||||||||
| Currency translation adjustment | - | - | - | - | (110,145 | ) | - | - | (110,145 | ) | ||||||||||||||||||||||
| Net loss | - | - | - | - | - | (2,197,646 | ) | (36,441 | ) | (2,234,087 | ) | |||||||||||||||||||||
| Balance at July 31, 2020 | 106,757,397 | $ | 14,770,644 | $ | 5,136 | $ | 3,844,266 | $ | 11,775 | $ | (19,310,251 | ) | $ | 5,225 | $ | (673,205 | ) | |||||||||||||||
The accompanying notes form an integral part of these condensed interim consolidated financial statements.
Pg 5 of 33
Grown Rogue International Inc.
Condensed Interim Consolidated Cash Flow Statements
Unaudited - Expressed in United States Dollars
| Nine months ended July 31, | ||||||||
| Cash provided by (used in) | 2021 | 2020 | ||||||
| Operating activities | ||||||||
| Net loss | $ | (2,117,289 | ) | $ | (2,234,087 | ) | ||
| Adjustments for non-cash items in net loss | ||||||||
| Amortization of property and equipment | 134,311 | 173,687 | ||||||
| Amortization of property and equipment include in costs of inventory sold | 592,422 | 351,822 | ||||||
| Amortization of intangible assets | 4,997 | 20,620 | ||||||
| Unrealized gain on changes in fair value of biological assets | (496,855 | ) | (1,425,228 | ) | ||||
| Changes in fair value of inventory sold | 387,600 | 1,471,821 | ||||||
| Share-based compensation | 131,604 | 218,648 | ||||||
| Stock option expense | 178,876 | 157,309 | ||||||
| Accretion expense | 801,929 | 461,415 | ||||||
| Gain on liability settlement | - | (23,939 | ) | |||||
| Gain on disposal of property & equipment | 7,573 | 10,940 | ||||||
| Loss from debt restructuring | - | 462,213 | ||||||
| Unrealized gain on marketable securities | (133,241 | ) | 558,223 | |||||
| Gain on derecognition of derivative liability | - | (244,572 | ) | |||||
| Loss on fair value of derivative liability | 1,258,996 | - | ||||||
| Loss on acquisition of non-controlling interest paid in shares | 189,816 | - | ||||||
| Effects of foreign exchange | 3,701 | (110,145 | ) | |||||
| $ | 944,440 | $ | (151,273 | ) | ||||
| Changes in non-cash working capital (Note 18) | (1,845,152 | ) | 63,697 | |||||
| Net cash provided by operating activities | $ | (900,712 | ) | $ | (87,576 | ) | ||
| Investing activities | ||||||||
| Purchase of property and equipment | $ | (1,538,851 | ) | $ | (514,824 | ) | ||
| Net cash acquired (Note 7) | 76,128 | - | ||||||
| Other investment | (750,000 | ) | (150,000 | ) | ||||
| Receipt from sale of subsidiary | - | 85,000 | ||||||
| Loss on sale of subsidiary | - | (62,872 | ) | |||||
| Net cash used in investing activities | $ | (2,212,723 | ) | $ | (642,696 | ) | ||
| Financing activities | ||||||||
| Third party investment in subsidiary | $ | 475,000 | $ | - | ||||
| Proceeds from long-term debt | 525,000 | 615,000 | ||||||
| Proceeds from private placement | 1,225,000 | 1,067,745 | ||||||
| Proceeds from brokered private placement | 3,738,564 | - | ||||||
| Payment of equity and debenture issuance costs | (459,544 | ) | - | |||||
| Repayment of long-term debt | (371,040 | ) | (178,480 | ) | ||||
| Repayment of convertible debentures | (1,312,722 | ) | - | |||||
| Proceeds of subscription receipts | - | - | ||||||
| Payments of lease principal | (260,804 | ) | (257,567 | ) | ||||
| Net cash provided by financing activities | $ | 3,559,454 | $ | 1,246,698 | ||||
| Change in cash | $ | 446,019 | $ | 516,426 | ||||
| Cash balance, beginning | $ | 217,788 | $ | 74,926 | ||||
| Cash balance, ending | $ | 663,807 | $ | 591,352 | ||||
Supplemental cash flow disclosures (Note 19)
The accompanying notes form an integral part of these condensed interim consolidated financial statements.
Pg 6 of 33
Grown Rogue International Inc.
Notes to the Condensed Interim Consolidated Financial Statements
For the Three and Nine Months Ended July 31, 2021 and 2020
Unaudited - Expressed in United States Dollars, unless otherwise indicated
| 1. | Corporate Information |
These unaudited condensed interim consolidated financial statements for the three and nine months ended July 31, 2021 and 2020 (the “Financial Statements”), include the accounts of Grown Rogue International Inc. (together with its subsidiaries, “GRIN” or the “Company”) and its subsidiaries. The registered office of GRIN is located at 40 King St W Suite 5800, Toronto, Ontario, M5H 3S1.
GRIN’s subsidiaries and ownership thereof are summarized in the table below.
| Company | Ownership | |
| Grown Rogue Unlimited, LLC | 100% by GRIN | |
| Grown Rogue Gardens, LLC | 100% by Grown Rogue Unlimited, LLC | |
| GRU Properties, LLC | 100% by Grown Rogue Unlimited, LLC | |
| GRIP, LLC | 100% by Grown Rogue Unlimited, LLC | |
| Grown Rogue Distribution, LLC | 100% by Grown Rogue Unlimited, LLC | |
| GR Michigan, LLC | 87% by Grown Rogue Unlimited, LLC | |
| Idalia, LLC | 60% by Grown Rogue Unlimited, LLC | |
| Canopy Management, LLC | 0% (Note 1.1) | |
| Golden Harvests, LLC | 60% by Canopy Management, LLC |
| 1.1 | The Company, through its subsidiary, entered into an option to acquire an 87% controlling interest in Canopy Management LLC (“Canopy”), which held an option to acquire a 60% controlling interest in Golden Harvests, LLC (Note 7) which was exercised on May 1, 2021. Canopy is majority owned by the Company’s CEO, who is prohibited from omitting or taking certain actions where to do so would be contrary to the economic benefits which the Company expects to derive from the aforementioned options and the investments in the underlying businesses. The Company includes Canopy in the consolidated financial results and has allocated its net loss to net loss attributable to non-controlling interest. |
GRIN is primarily engaged in the business of growing and selling cannabis products. The primary cannabis product produced and sold is cannabis flower.
| 2. | Basis of Presentation |
Statement of Compliance and Going Concern
The Financial Statements have been prepared in accordance with International Financial Reporting Standards (“IFRS”) IAS 34 - Interim Financial Reporting, applicable to a going concern, which contemplates the realization of assets and liabilities in the normal course of business as they become due.
The Company’s ability to continue as a going concern is dependent upon, but not limited to, its ability to raise financing necessary to discharge its liabilities as they become due and generate positive cash flows from operations. For the nine months ended July 31, 2021, the Company incurred a net loss of approximately $2.1 million, and as of that date, the Company's accumulated deficit was approximately $21.8 million. These conditions have resulted in material uncertainties that may cast significant doubt about the Company's ability to continue as a going concern. The ability of the Company to continue as a going concern and to meet its obligations will be dependent upon successful sales of product and generating positive cash flows from operations as well as obtaining suitable financing. The accompanying Financial Statements do not reflect any adjustment that might result from the outcome of this uncertainty. If the going concern assumption is not used, then the adjustments required to report the Company’s assets and liabilities at liquidation values could be material to these Financial Statements.
Pg 7 of 33
Grown Rogue International Inc.
Notes to the Condensed Interim Consolidated Financial Statements
For the Three and Nine Months Ended July 31, 2021 and 2020
Unaudited - Expressed in United States Dollars, unless otherwise indicated
These Financial Statements do not include all disclosures required by IFRS for annual audited consolidated financial statements and accordingly should be read in conjunction with our annual consolidated financial statements for the year ended October 31, 2020. These unaudited condensed interim financial statements were authorized for issuance by the Board of Directors on September 29, 2021.
Basis of Measurement
These Financial Statements have been prepared on a historical cost basis except for certain financial instruments and biological assets, which are measured at fair value, as described herein.
Functional and Presentation Currency
The Company's functional currency is the Canadian dollar and the functional currency of its subsidiaries is the United States (“U.S.”) dollar. These Financial Statements are presented in U.S. dollars.
Transactions denominated in foreign currencies are initially recorded in the functional currency using exchange rates in effect at the dates of the transactions. Monetary assets and liabilities denominated in foreign currencies are translated into the functional currency using exchange rates prevailing at the end of the reporting period. All exchange gains and losses are included in the statements of loss and comprehensive loss.
For the purpose of presenting consolidated financial statements, the assets and liabilities of the Company are expressed in U.S. Dollars using exchange rates prevailing at the end of the reporting period. Income and expense items are translated at the average exchange rates for the period, unless exchange rates fluctuated significantly during that period, in which case the exchange rates at the dates of the transactions are used. Exchange differences arising, if any, are recognized in other comprehensive loss and reported as currency translation reserve in shareholders’ equity.
Foreign exchange gains or losses arising from a monetary item receivable from or payable to a foreign operation, the settlement of which is neither planned nor likely to occur in the foreseeable future and which, in substance, is considered to form part of the net investment in the foreign operation, are recognized in other comprehensive loss.
Basis of Consolidation
The subsidiaries are those companies controlled by the Company, as the Company is exposed, or has rights, to variable returns from its involvement with the subsidiaries and has the ability to affect those returns through its power over the subsidiaries by way of its ownership and rights pertaining to the subsidiaries. The financial statements of subsidiaries are included in these Financial Statements from the date that control commences until the date control ceases. All intercompany balances and transactions have been eliminated upon consolidation.
Estimation Uncertainty due to COVID-19
On March 11, 2020, the World Health Organization declared a global outbreak of COVID-19 to be a pandemic, which has had a significant impact on businesses through the restrictions put in place by the federal, state, provincial and municipal governments regarding travel, business operations and isolation/quarantine orders in Canada and the United States. Government measures imposed to limit the spread of COVID-19 did not have a material impact on the Company's operations during the nine months ended July 31, 2021, and the Company has not observed any material impairments, or significant changes in the fair value of its assets as a result of COVID-19.
Pg 8 of 33
Grown Rogue International Inc.
Notes to the Condensed Interim Consolidated Financial Statements
For the Three and Nine Months Ended July 31, 2021 and 2020
Unaudited - Expressed in United States Dollars, unless otherwise indicated
At this time, it is unknown the extent of the impact the COVID-19 outbreak may have on the Company as this will depend on future developments that are highly uncertain and that cannot be predicted with confidence. These uncertainties arise from the inability to predict the duration of the outbreak, including the duration of travel restrictions, business closures or disruptions, and quarantine/isolation measures that are currently, or may be put in place by Canada, the United States and other countries to fight the virus. While the extent of the impact is unknown, it remains possible that this outbreak may cause reduced customer demand, supply chain disruptions, staff shortages, and increased government regulations, all of which may negatively impact the Company’s business, results of operations and financial condition. The Company will continue to evaluate the situation with respect to the COVID-19 pandemic as it develops and will implement any such changes to its business as may deemed appropriate to mitigate any potential impacts to its business.
| 3. | Significant Accounting Policies and Significant Judgements |
The preparation of these Financial Statements requires management to make judgments, estimates, and assumptions that affect the application of policies and reported amounts of assets, liabilities, and expenses. Areas that have the most significant effect on the amounts recognized in the financial statements are disclosed in Note 4 of the Company’s consolidated financial statements for the year ended October 31, 2020. The accounting policies applied in these Financial Statements are consistent with those used in the Company’s consolidated financial statements for the year ended October 31, 2020.
| 3.1 | Business combinations |
A business combination is a transaction or event in which the acquirer obtains control of one or more businesses and is accounted for using the acquisition method. The total consideration paid for the acquisition is the aggregate of the fair values of assets acquired, liabilities assumed, and equity instruments issued in exchange for control of the acquiree at the acquisition date. The acquisition date is the date when the Company obtains control of the acquiree. The identifiable assets acquired and liabilities assumed are recognized at their acquisition date fair values, except for deferred taxes and share-based payment awards where IFRS provides exceptions to recording the amounts at fair values. Goodwill represents the difference between total consideration paid and the fair value of the net identifiable assets acquired. Acquisition costs incurred are expensed through the statement of comprehensive loss.
Contingent consideration is measured at its acquisition date fair value and is included as part of the consideration transferred in a business combination, subject to the applicable terms and conditions. Contingent consideration that is classified as equity is not remeasured at subsequent reporting dates and its subsequent settlement is accounted for within equity. Contingent consideration that is classified as an asset or a liability is remeasured at subsequent reporting dates in accordance with IFRS 9 Financial Instruments with the corresponding gain or loss recognized in profit or loss.
Based on the facts and circumstances that existed at the acquisition date, management will perform a valuation analysis to allocate the purchase price based on the fair values of the identifiable assets acquired and liabilities assumed on the acquisition date. Management has one year from the acquisition date to confirm and finalize the facts and circumstances that support the finalized fair value analysis and related purchase price allocation. Until such time, these values are provisionally reported and are subject to changed. Changes to fair values and allocations are retrospectively adjusted in subsequent periods.
Pg 9 of 33
Grown Rogue International Inc.
Notes to the Condensed Interim Consolidated Financial Statements
For the Three and Nine Months Ended July 31, 2021 and 2020
Unaudited - Expressed in United States Dollars, unless otherwise indicated
In determining the fair value of all identifiable assets acquired and liabilities assumed, the most significant estimates generally relate to contingent consideration and intangible assets. Management exercises judgment in estimating the probability and timing of when earn-out milestones are expected to be achieved, which is used as the basis for estimating fair value. Identified intangible assets are fair valued using appropriate valuation techniques which are generally based on a forecast of the total expected future net cash flows of the acquiree. Valuations are highly dependent on the inputs used and assumptions made by management regarding the future performance of these assets and any changes in the discount rate applied.
Acquisitions that do not meet the definition of a business combination are accounted for as asset acquisitions. Consideration paid for an asset acquisition is allocated to the individual identifiable assets acquired and liabilities assumed based on their relative fair values. Asset acquisitions do not give rise to goodwill.
Management exercises judgment in determining the entities that it controls for consolidation and associated non-controlling interests. For financial reporting purposes, an entity is considered controlled when the Company has power over an entity and its ability to affect its economic return from the entity. The Company has power over an entity when it has existing rights that give it the ability to direct the relevant activities which can significantly affect the investee’s returns. Such power can result from contractual arrangements. However, certain contractual arrangements contain rights that are designed to protect the Company’s interest, without direct equity ownership in the entity, in which case non-controlling interests are recognized.
| 3.2 | Intangible assets and goodwill |
Intangible assets are recorded at cost less accumulated amortization and any impairment losses. Intangible assets acquired in a business combination are measured at fair value at the acquisition date. Amortization of definite life intangibles is calculated on a straight-line basis over their estimated useful lives.
Goodwill represents the excess of the purchase price paid for the acquisition of an entity over the fair value of the net tangible and intangible assets acquired. Goodwill is allocated to the cash generating unit (“CGU”) or group of CGUs which are expected to benefit from the synergies of the combination. Goodwill is not subject to amortization.
Goodwill and intangible assets with an indefinite life or not yet available for use are tested for impairment annually at year-end, and whenever events or circumstances that make it more likely than not that an impairment may have occurred, such as a significant adverse change in the business climate or a decision to sell or dispose all or a portion of a reporting unit. Finite life intangible assets are tested whenever there is an indication of impairment.
Goodwill and indefinite life intangible assets are tested for impairment by comparing the carrying value of each CGU containing the assets to its recoverable amount. Indefinite life intangible assets are tested for impairment by comparing the carrying value of each CGU containing the assets to its recoverable amount. Goodwill is tested for impairment based on the level at which it is monitored by management, and not at a level higher than an operating segment. The Company’s goodwill is allocated to the cannabis operating segment and the U.S. cannabis and hemp-derived market CGU. The allocation of goodwill to the CGUs or group of CGUs requires the use of judgment.
Pg 10 of 33
Grown Rogue International Inc.
Notes to the Condensed Interim Consolidated Financial Statements
For the Three and Nine Months Ended July 31, 2021 and 2020
Unaudited - Expressed in United States Dollars, unless otherwise indicated
An impairment loss is recognized for the amount by which the CGU’s carrying amount exceeds its recoverable amount. The recoverable amounts of the CGUs’ assets are determined based on either fair value less costs of disposal or value-in-use method. There is a material degree of uncertainty with respect to the estimates of the recoverable amounts of the CGU, given the necessity of making key economic assumptions about the future. Impairment losses recognized in respect of a CGU are first allocated to the carrying value of goodwill, and any excess is allocated to the carrying value of assets in the CGU. Any impairment is recorded in profit and loss in the period in which the impairment is identified. A reversal of an asset impairment loss is allocated to the assets of the CGU on a pro rata basis. In allocating a reversal of an impairment loss, the carrying amount of an asset shall not be increased above the lower of its recoverable amount and the carrying amount that would have been determined had no impairment loss been recognized for the asset in the prior period. Impairment losses on goodwill are not subsequently reversed.
| 4. | Biological Assets |
Biological assets consist of cannabis plants, which reflect measurement at fair value less costs to sell (“FVLCTS”). Changes in the carrying amounts of biological assets for the nine months ended July 31, 2021 are as follows:
| July 31, 2021 | October 31, 2020 | |||||||
| Beginning balance | $ | 250,690 | $ | 156,589 | ||||
| Purchased cannabis plants | 1,792,963 | 724,878 | ||||||
| Allocation of operational overhead | 1,215,191 | 1,130,712 | ||||||
| Change in FVLCTS due to biological transformation | 496,855 | 1,515,492 | ||||||
| Transferred to inventory upon harvest | (2,223,648 | ) | (3,276,981 | ) | ||||
| Ending balance | $ | 1,532,051 | $ | 250,690 | ||||
FVLCTS is determined using a model which estimates the expected harvest yield for plants currently being cultivated, and then adjusts that amount for the expected selling price and also for any additional costs to be incurred, such as post-harvest costs.
The following significant unobservable inputs, all of which are classified as level 3 on the fair value hierarchy, were used by management as part of this model:
| - | Expected costs required to grow the cannabis up to the point of harvest |
| - | Estimated selling price per pound |
| - | Expected yield from the cannabis plants |
| - | Estimated stage of growth – the Company applied a weighted average number of days out of the 60-day growing cycle that biological assets have reached as of the measurement date based on historical evidence. The Company assigns fair value according to the stage of growth and estimated costs to complete cultivation. |
| Impact of 20% change | ||||||||||||||||
| July 31, 2021 | October 31, 2020 | July 31, 2021 | October 31, 2020 | |||||||||||||
| Estimated selling price per (pound) | $ | 790 | $ | 1,123 | $ | 342,442 | $ | 48,720 | ||||||||
| Estimated stage of growth | 31 | % | 63 | % | $ | 273,356 | $ | 38,104 | ||||||||
| Estimated flower yield per harvest (pound) | 1,924 | 216 | $ | 273,356 | $ | 38,104 | ||||||||||
Pg 11 of 33
Grown Rogue International Inc.
Notes to the Condensed Interim Consolidated Financial Statements
For the Three and Nine Months Ended July 31, 2021 and 2020
Unaudited - Expressed in United States Dollars, unless otherwise indicated
| 5. | Inventory |
The Company's inventory composition is as follows:
| July 31, 2021 | October 31, 2020 | |||||||
| Raw materials | $ | 27,993 | $ | 8,588 | ||||
| Work in process | 858,522 | 919,464 | ||||||
| Finished goods | 579,344 | 196,308 | ||||||
| Ending balance | $ | 1,465,859 | $ | 1,124,360 | ||||
The cost of inventories, excluding changes in fair value, included as an expense and included in cost of goods sold for the nine months ended July 31, 2021, was $2,584,832 (2020 - $1,817,480). The cost of inventories included as an expense and included in cost of goods sold for the three months ended July 31, 2021, was $1,239,200 (2020 - $475,982). For the nine months ended July 31, 2021, $592,422 in property and equipment amortization costs were included in cost of finished cannabis inventory sold (2020 – $351,822). For the three months ended July 31, 2021, $186,149 in property and equipment amortization costs were included in cost of finished cannabis inventory sold (2020 – $115,331).
| 6. | Marketable Securities |
During the year ended October 31, 2020, the Company received 2,362,204 common shares of Plant-Based Investment Corp (“PBIC”) by issuing to PBIC 15,000,000 common shares of the Company pursuant to a subscription agreement. The Company does not have control or significant influence over PBIC and has accounted for the investment at fair value through profit or loss.
As at July 31, 2021, the fair value of the shares was $775,966 (October 31, 2020 - $585,035), based upon the publicly quoted price of PBIC shares. During the nine months ended July 31, 2021, the Company recorded an unrealized gain on the shares in the amount of $133,241 (2020 – loss of $558,223) and foreign currency translation gain of $57,690 (2020 – foreign currency translation loss of $4,282).
| 7. | Business combinations |
| 7.1 | Golden Harvests, LLC (“Golden Harvests”) |
In February 2020, the Company, through its subsidiary GR Michigan, LLC, signed an Option to Purchase Agreement (the “Option Agreement”) to acquire a 60% controlling interest in Golden Harvests, LLC (“Golden Harvests”). Golden Harvests is a Michigan-based, fully licensed, and operating cultivation company located in Bay City, Michigan. During the nine months ended July 31, 2021, the Company’s majority controlled subsidiary GR Michigan, LLC, terminated the Option Agreement. Simultaneously with the termination of the Option Agreement, a new entity, Canopy Management, LLC (“Canopy”), majority-owned by the CEO, signed an option agreement to purchase Golden Harvests under similar terms (the “New Option”). Canopy has already been approved by the State of Michigan for licensing and this facilitated the Company’s ability to accelerate its option exercise to obtain a 60% interest in Golden Harvests. The Company has an option to acquire 87% of the CEO’s membership interest in Canopy, which, when exercised, pending approval by the State of Michigan of the Company’s application, will provide identical economic rights as the Company originally had in the Option Agreement. Canopy is majority owned by GRIN’s CEO, who has a fiduciary responsibility to the Company and is prohibited from omitting or taking certain actions relating to Canopy where to do so would be contrary to the economic benefits which the Company expects to derive from the acquisition of Golden Harvests. Canopy acquired a 60% controlling interest in Golden Harvests in May 2021, and we expect to exercise our option to acquire 87% of Canopy around near the end of calendar year 2021 or early 2022, and until we exercise the option to acquire 87% of Canopy, it will be consolidated with a 100% non-controlling interest.
Pg 12 of 33
Grown Rogue International Inc.
Notes to the Condensed Interim Consolidated Financial Statements
For the Three and Nine Months Ended July 31, 2021 and 2020
Unaudited - Expressed in United States Dollars, unless otherwise indicated
On May 1, 2021, the Company acquired Golden Harvests, a United States company based in Michigan specialized in the cultivation and wholesale of adult use and recreational flower. The Company acquired Golden Harvests by exercising an option to acquire a controlling 60% interest in Golden Harvests.
The Company acquired a controlling 60% interest in Golden Harvests for aggregate consideration of $1,007,719 comprised of 1,025,000 common shares of the Company with a fair value of $158,181 and cash payments of $849,536. Consideration remaining to be paid at the date of these Financial Statements included cash payments of $374,537 and 200,000 common shares with an aggregate fair value of $35,806.
| Total consideration | Common shares | $ | ||||||
| Cash paid | -- | 485,000 | ||||||
| Cash payable | -- | 364,537 | ||||||
| Common shares issued | 825,000 | 122,376 | ||||||
| Common shares issuable | 200,000 | 35,806 | ||||||
| Total | 1,025,000 | 1,007,719 | ||||||
| Net identifiable assets acquired (liabilities assumed) | $ | |||
| Cash | 386,128 | |||
| Accounts receivable | 155,067 | |||
| Prepaids and other current assets | 91,464 | |||
| Intangible asset: grow licenses | 154,000 | |||
| Biological assets | 477,672 | |||
| Inventory | 309,439 | |||
| Property, plant, and equipment | 1,311,917 | |||
| 2,885,687 | ||||
| Accounts payable and accrued liabilities | (542,630 | ) | ||
| Notes payable | (227,056 | ) | ||
| Lease liabilities | (564,309 | ) | ||
| Income taxes | (117,500 | ) | ||
| Net identifiable assets acquired | 1,434,192 | |||
Net cash acquired for the nine months ended July 31, 2021, was $76,128, which is acquired cash of $386,128 net of payments of $310,000.
| Purchase price allocation | $ | |||
| Net identifiable assets acquired | 1,434,192 | |||
| Goodwill | 245,339 | |||
| 1,679,531 | ||||
| Purchase consideration (60% controlling interest) | 1,007,719 | |||
Pg 13 of 33
Grown Rogue International Inc.
Notes to the Condensed Interim Consolidated Financial Statements
For the Three and Nine Months Ended July 31, 2021 and 2020
Unaudited - Expressed in United States Dollars, unless otherwise indicated
| Net cash flows | Prior to November 1, 2020 | Nine
months ended | Future payments | Total | ||||||||||||
| Cash consideration paid prior to October 31, 2020 | (165,000 | ) | (165,000 | ) | ||||||||||||
| Cash consideration paid after November 1, 2020 | (310,000 | ) | (310,000 | ) | ||||||||||||
| Cash acquired | 386,128 | 386,128 | ||||||||||||||
| (165,000 | ) | 76,128 | - | (88,872 | ) | |||||||||||
| Future cash payments | (374,537 | ) | (374,537 | ) | ||||||||||||
| Net cash flows during the three months ended July 31, 2021 | - | |||||||||||||||
| Net cash flows upon completion of all payments | (165,000 | ) | 76,128 | (374,537 | ) | (463,409 | ) | |||||||||
Goodwill arising from the acquisition represents expected synergies, future income growth, and other intangibles that do not qualify for separate recognition. The goodwill arising on this acquisition is expected to be fully deductible for tax purposes.
Management continues to gather relevant information that existed at the acquisition date to determine the fair value of the net identifiable assets acquired and liabilities assumed. As such, the initial purchase price was provisionally allocated based on the Company’s estimated fair value of the identifiable assets acquired and the liabilities assumed on the acquisition date. The values assigned are, therefore, preliminary and subject to change. Management continues to refine and finalize its purchase price allocation for the fair value of identifiable intangible assets and the allocation of goodwill.
For the nine months ended July 31, 2021, Golden Harvests accounted for $3.0 million in revenue and $0.5 million in reduction to net loss. If the acquisition had been completed on November 1, 2020, the Company estimates it would have recorded an increase of $4.3 million in revenues and reduction to net loss of $0.9 million.
Pg 14 of 33
Grown Rogue International Inc.
Notes to the Condensed Interim Consolidated Financial Statements
For the Three and Nine Months Ended July 31, 2021 and 2020
Unaudited - Expressed in United States Dollars, unless otherwise indicated
| 8. | Other investments |
| 8.1 | Investment in assets sold by High Street Capital Partners, LLC (“HSCP”) |
On February 5, 2021, the Company agreed to acquire substantially all of the assets of the growing and retail operations (the “HSCP Transaction”) of HSCP, for an aggregate total of $3,000,000 in consideration, payable in a series of tranches, subject to receipt of all necessary regulatory and other approvals, not to exceed 18 months from the date of the agreement evidencing the HSCP Transaction. The Company also executed a management services agreement with HSCP (“HSCP MSA”), pursuant to which the Company agreed to pay $21,500 per month as consideration for services rendered thereunder, until the completion of the HSCP Transaction. In accordance with the MSA, the Company will own all production from the growing assets derived from the growing operations of HSCP, and the Company will operate the growing facility of HSCP under the MSA until receipt of the necessary regulatory approvals relating to the acquisition by the Company of HSCP’s growing assets. The Company has no involvement with the retail operations contemplated in the agreement until the HSCP Transaction is completed.
During the nine months ended July 31, 2021, the Company paid $750,000 towards the total consideration of $3,000,000 under the HSCP Transaction.
| 9. | Accrued Liabilities |
The following table summarizes the liability payable to creditors who agreed to defer settlement for longer than one year from October 31, 2020 and 2019:
| CEO | Trade Vendors | Total | ||||||||||
| Balance at October 31, 2019 | $ | 180,799 | - | $ | 180,799 | |||||||
| Amounts deferred | 45,000 | 241,255 | 286,255 | |||||||||
| Amounts settled | - | (77,238 | ) | (77,238 | ) | |||||||
| Balance at October 31, 2020 | $ | 225,799 | 164,017 | $ | 389,816 | |||||||
| Amounts settled | (162,899 | ) | (103,504 | ) | (266,403 | ) | ||||||
| Balance at July 31, 2021 | $ | 62,900 | 60,513 | $ | 123,413 | |||||||
Pg 15 of 33
Grown Rogue International Inc.
Notes to the Condensed Interim Consolidated Financial Statements
For the Three and Nine Months Ended July 31, 2021 and 2020
Unaudited - Expressed in United States Dollars, unless otherwise indicated
| 10. | Leases |
The following is a continuity schedule of lease liabilities.
| Lease liabilities | July 31, 2021 | October 31, 2020 | ||||||
| Balance - beginning | $ | 116,907 | $ | 142,205 | ||||
| Adoption of IFRS 16 | - | 276,431 | ||||||
| Additions | 1,601,431 | 68,035 | ||||||
| Disposals | (18,513 | ) | - | |||||
| Interest expense on lease liabilities | 80,787 | 65,433 | ||||||
| Payments | (341,592 | ) | (435,197 | ) | ||||
| Balance - ending | $ | 1,439,020 | $ | 116,907 | ||||
| Current portion | 386,941 | 100,277 | ||||||
| Non-current portion | 1,052,079 | 16,630 | ||||||
Lease additions during the nine months ended July 31, 2021, included right-of-use property rental agreements totaling approximately $1.4 million, resulting from a property lease acquired (Note 7); a new lease agreement for an outdoor farm; and management’s assessment that operations were reasonably certain to continue for longer durations at ongoing locations.
Pg 16 of 33
Grown Rogue International Inc.
Notes to the Condensed Interim Consolidated Financial Statements
For the Three and Nine Months Ended July 31, 2021 and 2020
Unaudited - Expressed in United States Dollars, unless otherwise indicated
| 11. | Property and Equipment |
| Computer and Office Equipment | Production Equipment and Other | Construction in Progress | Leasehold Improvements | Right-of-use Assets | Total | |||||||||||||||||||
| COST | ||||||||||||||||||||||||
| Balance - October 31, 2019 | $ | 55,960 | $ | 156,781 | $ | 476,783 | $ | 1,238,680 | $ | 358,608 | $ | 2,286,812 | ||||||||||||
| Additions | 1,031 | 215,030 | 90,342 | 251,355 | 344,466 | 902,224 | ||||||||||||||||||
| Transfers | (2,061 | ) | 2,061 | (512,719 | ) | 512,719 | - | - | ||||||||||||||||
| Disposals | (39,764 | ) | (17,350 | ) | (9,331 | ) | (947 | ) | - | (67,392 | ) | |||||||||||||
| Balance - October 31, 2020 | $ | 15,166 | $ | 356,522 | $ | 45,075 | $ | 2,001,807 | $ | 703,074 | $ | 3,121,644 | ||||||||||||
| Additions | 979 | 108,788 | - | 2,343,023 | 1,617,287 | 4,070,077 | ||||||||||||||||||
| Transfers | - | - | (45,075 | ) | 45,075 | - | - | |||||||||||||||||
| Disposals | - | (14,453 | ) | - | (1,727 | ) | (43,490 | ) | (59,670 | ) | ||||||||||||||
| Balance - July 31, 2021 | $ | 16,145 | $ | 450,857 | $ | - | $ | 4,388,178 | $ | 2,276,871 | $ | 7,132,051 | ||||||||||||
| ACCUMULATED AMORTIZATION | ||||||||||||||||||||||||
| Balance - October 31, 2019 | $ | 19,701 | $ | 37,016 | $ | - | $ | 638,629 | $ | 126,549 | $ | 821,895 | ||||||||||||
| Amortization for the period | 6,360 | 41,397 | - | 810,619 | 305,365 | 1,163,741 | ||||||||||||||||||
| Transfers | (2,405 | ) | 2,405 | - | - | - | - | |||||||||||||||||
| Disposals | (8,490 | ) | (7,301 | ) | - | - | - | (15,791 | ) | |||||||||||||||
| Balance - October 31, 2020 | $ | 15,166 | $ | 73,517 | $ | - | $ | 1,449,248 | $ | 431,914 | $ | 1,969,845 | ||||||||||||
| Amortization for the period | 979 | 48,127 | - | 424,427 | 265,161 | 738,694 | ||||||||||||||||||
| Disposals | - | (7,517 | ) | - | (698 | ) | (25,369 | ) | (33,584 | ) | ||||||||||||||
| Balance – July 31, 2021 | $ | 16,145 | $ | 114,127 | $ | - | $ | 1,872,977 | $ | 671,706 | $ | 2,674,955 | ||||||||||||
| NET BOOK VALUE | ||||||||||||||||||||||||
| As at October 31, 2020 | $ | - | $ | 283,005 | $ | 45,075 | $ | 552,559 | $ | 271,160 | $ | 1,151,799 | ||||||||||||
| As at July 31, 2021 | $ | - | $ | 336,730 | $ | - | $ | 2,515,201 | $ | 1,605,165 | $ | 4,457,096 | ||||||||||||
For the nine months ended July 31, 2021, amortization capitalized was $604,383 (2020 - $559,572) and expensed amortization was $134,311 (2020 - $173,687).
Pg 17 of 33
Grown Rogue International Inc.
Notes to the Condensed Interim Consolidated Financial Statements
For the Three and Nine Months Ended July 31, 2021 and 2020
Unaudited - Expressed in United States Dollars, unless otherwise indicated
| 12. | Intangible assets and goodwill |
| Indefinite lived intangible assets and goodwill | Cost ($) | |||
| Grower licenses | 154,000 | |||
| Goodwill | 245,338 | |||
| 399,338 | ||||
The Company’s intangible assets include grower licenses and goodwill acquired during the three months ended July 31, 2021 (Note 7). Net amortizable intangible assets of $4,997 at October 31, 2020, included the cost of the Company’s website of $7,997 less accumulated amortization of $3,000.
| 13. | Long-term Debt |
Transactions related to the Company’s long-term debt for the nine months ended July 31, 2021 include the following:
| Movement in long-term debt | $ | |||
| Balance - October 31, 2019 | 150,000 | |||
| Additions (Notes 13.6, 13.7) | 615,000 | |||
| Interest accretion | 260,940 | |||
| Payments | (226,126 | ) | ||
| Balance - October 31, 2020 | 799,814 | |||
| Additions (Notes 13.1, 13.2, 13.3, 13.4, 13.5) | 852,056 | |||
| Interest accretion | 417,625 | |||
| Reclassification to acquisition consideration payable (Note 7) | (100,000 | ) | ||
| Payments | (371,040 | ) | ||
| Balance - July 31, 2021 | 1,598,455 | |||
| Current portion | 490,921 | |||
| Non-current portion | 1,107,534 | |||
| 13.1 | On November 23, 2020, debt was issued by Grown Rogue Distribution, LLC with a principal amount of $125,000, interest paid monthly at 10% per annum, and a maturity date of November 23, 2023. After the maturity date, additional interest payments are due quarterly, at amounts that cause total interest paid over the life of the debt to equal $125,000. The note is reported at amortized cost using an effective interest rate of approximately 27%. |
| 13.2 | On December 2, 2020, debt was issued by Grown Rogue Gardens, LLC with a principal amount of $150,000, interest accrued at 10% per annum, and a maturity date of December 31, 2021. Interest and principal are payable upon maturity. The maturity date can be extended by up to six-months for a $1,000 fee per $10,000 of principal extended. |
| 13.3 | On January 27, 2021, debt was issued by Grown Rogue Distribution, LLC with a principal amount of $250,000, interest paid monthly at 10% per annum, and a maturity date of January 27, 2024. After the maturity date, additional interest payments are due quarterly, at amounts that cause total interest paid over the life of the debt to equal $250,000. The note is reported at amortized cost using an effective interest rate of approximately 27%. |
Pg 18 of 33
Grown Rogue International Inc.
Notes to the Condensed Interim Consolidated Financial Statements
For the Three and Nine Months Ended July 31, 2021 and 2020
Unaudited - Expressed in United States Dollars, unless otherwise indicated
| 13.4 | On February 4, 2021, a note payable for $100,000 was issued to satisfy a milestone payment due to the seller of Golden Harvests. The note is payable 12 months from the issue date and accrues interest at $2,000 per month. This note payable was reclassified to acquisition consideration payable during the nine months ended July 31, 2021. |
| 13.5 | On May 1, 2021, the Company assumed a note payable owed by Golden Harvests (Note 7) with a carrying value of $227,056. The note is for a principal amount of $250,000, interest paid monthly at 10% per annum, and a maturity date of January 14, 2024. After the maturity date, additional interest payments are due quarterly, at amounts that cause total interest paid over the life of the debt to equal $250,000. The note is reported at amortized cost using an effective interest rate of approximately 33%. |
Accrued interest payable on long-term debt at July 31, 2021 was $10,000 (October 31, 2020 - $9,367).
Transactions related to the Company’s long-term debt for the year ended October 31, 2020, include the following:
| 13.6 | On December 5, 2019, debt was issued with a principal amount of $15,000, with simple interest accrued at a rate of 60% per annum and a maturity of 60 days. On February 18, 2020, all principal and interest was repaid. This amount was owed to the CEO of the Company. |
| 13.7 | Debt issuance by GR Michigan, LLC |
On March 20, 2020, debt with a principal amount of $600,000 was received under a secured debt investment of $600,000 (the "Michigan Debt"). The Michigan Debt carries a two-year term, with monthly payments of principal commencing June 15, 2020, and with payments calculated at 1% of cash sales receipts of Golden Harvests. Once the principal is repaid, each investor will receive a monthly royalty of 1% per $100,000 invested based upon cash sales receipts of Golden Harvests (the "Royalty"). The Royalty commences on the date that repayments equal to principal have been made and continues for a period of two years. The Royalty maximum is two times the amount of principal invested, and the Royalty minimum is equal to the principal loaned; the Company expects to pay the Royalty maximum by July 2023. The Company has the right, but not the obligation, to purchase the Royalty from any lender by paying an amount equal to the original principal invested by such lender. The debt is reported at the carrying value of the probability-weighted estimated future cash flows of all payments under the Michigan Debt agreement at amortized cost using the effective interest method. Interest accreted during the nine months ended July 31, 2021 was $346,171 (year ended October 31, 2020 - $260,940), calculated using an effective interest rate of approximately 73%. During the nine months ended July 31, 2021 $329,371 was repaid against this debt (year ended October 31, 2020 - $75,126).
Principal amounts of the Michigan Debt of $50,000 and $100,000 (a total of $150,000), were loaned by officers of the Company. Principal of $150,000 was loaned by a director of the Company.
Pg 19 of 33
Grown Rogue International Inc.
Notes to the Condensed Interim Consolidated Financial Statements
For the Three and Nine Months Ended July 31, 2021 and 2020
Unaudited - Expressed in United States Dollars, unless otherwise indicated
| 14. | Convertible Debentures |
| Movements in Convertible Debentures | ||||
| Balance - October 31, 2019 | $ | 1,995,609 | ||
| Conversion to common shares | (37,733 | ) | ||
| Interest accretion | 246,015 | |||
| Deemed extinguishment | (2,147,550 | ) | ||
| Effects of foreign exchange | (56,341 | ) | ||
| Balance after deemed extinguishment | $ | - | ||
| Deemed re-issuance | 2,464,241 | |||
| Fair value of derivative liability | (787,264 | ) | ||
| Conversion to common shares | (75,130 | ) | ||
| Interest accretion | 146,964 | |||
| Payments | (44,138 | ) | ||
| Effects of foreign exchange | 35,005 | |||
| Balance - October 31, 2020 | $ | 1,739,678 | ||
| Interest accretion | 510,678 | |||
| Conversion to common shares (Note 14.1) | (1,042,951 | ) | ||
| Payments | (1,312,722 | ) | ||
| Effects of foreign exchange | 105,317 | |||
| Balance – July 31, 2021 | $ | - | ||
Transactions related to the Company's convertible debentures for the nine months ended July 31, 2021, and the year ended October 31, 2020, include the following:
| 14.1 | During the nine months ended July 31, 2021, holders converted an aggregate total of convertible debenture principal of $1,042,951 (CAD$1,311,111) at CAD$0.125 per share into 10,488,884 common shares. |
| 14.2 | The derivative liability component of the convertible debentures was remeasured at fair value through profit and loss at each reporting period using the Black-Scholes pricing model. The fair value after full settlement of the convertible debentures, was $Nil (October 31, 2020 - $583,390), and the unrealized loss from remeasurement for the nine months ended July 31, 2021 was $1,258,996 (2020 - $Nil). The Black-Scholes pricing model assumptions used in the valuations during the nine months ended July 31, 2021, were as follows: |
| ○ | Expected dividend yield | Nil% |
| ○ | Risk-free interest rate | 0.14% |
| ○ | Expected life | 0.6 years |
| ○ | Expected volatility | 94% |
| 15. | Share Capital and subscriptions payable |
The Company is authorized to issue an unlimited number of common shares at no par value and an unlimited number of preferred shares issuable in series.
During the nine months ended July 31, 2021, the following share transactions occurred:
| 15.1 | The Company issued 534,294 common shares with a fair value of $95,294 for employment compensation, director services and consulting services. |
Pg 20 of 33
Grown Rogue International Inc.
Notes to the Condensed Interim Consolidated Financial Statements
For the Three and Nine Months Ended July 31, 2021 and 2020
Unaudited - Expressed in United States Dollars, unless otherwise indicated
| 15.2 | On February 5, 2021, the Company closed a non-brokered private placement of an aggregate total of 10,231,784 common shares with a fair value of $1,225,000. The private placement was raised in two tranches. In the first tranche, 2,031,784 common shares were issued for proceeds of $200,000. In the second tranche, 8,200,000 common shares and 8,200,000 warrants to purchase one common share were issued for proceeds of $1,025,000. All proceeds of the private placement were allocated to share capital, and costs of $15,148 incurred for this private placement were allocated to share capital. |
| 15.3 | The Company issued 25,000 shares with a fair value of $2,103 in order to extend an option payment as part of the Company’s acquisition of Golden Harvests (Note 7). |
| 15.4 | On January 14, 2021, the Company agreed to issue 400,000 shares with a fair value of $36,310 to a lender of Golden Harvests to support Golden Harvests’ business development. |
| 15.5 | The Company issued 600,000 common shares with an aggregate fair value of $107,461 to make payments towards the acquisition of Golden Harvests (Note 7). Of the 600,000 common shares issued, 200,000 common shares were issued to satisfy a milestone payment; 200,000 common shares were issued to satisfy a milestone payment; and 200,000 common shares were issued to extend the due date of a milestone payment. |
| 15.6 | On March 5, 2021, The Company announced the completion of a brokered private placement offering through the issuance of an aggregate of 21,056,890 special warrants (each a “Special Warrant”) at a price of CAD$0.225 (the “Issue Price”) per Special Warrant for aggregate gross proceeds of approximately $3.7 million (CAD$4,737,800) (the “Offering”). Each Special Warrant entitled the holder thereof to receive, for no additional consideration, one unit of the Company (each, a “Unit”) on the exercise or deemed exercise of the Special Warrant. Each Unit was comprised of one common share of the Company and one warrant to purchase one common share of the Company. Each Special Warrant entitled the holder to receive upon the exercise or deemed exercise thereof, at no additional consideration, 1.10 Units (instead of one (1) Unit), if the Company had not received a receipt for a final short form prospectus qualifying distribution of the common shares and warrants (the “Qualifying Prospectus”) from the applicable securities regulatory authorities (the “Securities Commissions”) on or before April 5, 2021. |
Each Special Warrant was to be deemed exercised on the date that was the earlier of: (i) the date that was three (3) days following the date on which the Company obtained receipt from the Securities Commissions for the Qualifying Prospectus underlying the Special Warrants and (ii) July 6, 2021. The Company obtained receipt for the Qualifying Prospectus on April 26, 2021. Accordingly, on April 30, 2021, the Company issued 23,162,579 Units, comprised of 23,162,579 common shares and 23,162,579 warrants to purchase one common share. The warrants entitle the holder to purchase one common share at an exercise price of CAD$0.30 for a period of two years.
Proceeds of $3,738,564 and expenses of $444,396 were allocated to share capital; also allocated to share capital were the expenses for fair value of Agent Warrants (Note 16) of $210,278.
| 15.7 | During the nine months ended July 31, 2021, holders of convertible debentures (Note 14) converted an aggregate total of convertible debenture principal of $1,042,951 (CAD$1,311,111) at CAD$0.125 per share into 10,488,884 common shares with an aggregate fair value of $916,290. The value of derivative liabilities settled with the conversions allocated to equity was $1,833,731. |
Pg 21 of 33
Grown Rogue International Inc.
Notes to the Condensed Interim Consolidated Financial Statements
For the Three and Nine Months Ended July 31, 2021 and 2020
Unaudited - Expressed in United States Dollars, unless otherwise indicated
During the nine months ended July 31, 2020, the following share transactions occurred:
| 15.8 | The Company issued 15,000,000 common shares to Cannabis Growth Opportunity Corporation ("CGOC") with an aggregate fair value of $733,434 pursuant to a private placement agreement with CGOC. |
In addition, CGOC and the Company entered into subscriptions agreements to exchange each other’s shares (the "Share Swap”). In connection with the Share Swap agreement, the Company issued 15,000,000 common shares resulting in an aggregate fair value of $1,121,848. Issuance costs of $11,508 were recognized in share capital and $5,083 in contributed surplus.
| 15.9 | As employee compensation, the Company issued 684,386 shares to employees with an estimated fair value of $55,106. |
| 15.10 | As consideration for services provided, the Company issued 2,300,000 common shares with an estimated fair value of $163,543. |
| 15.11 | Issuance of 200,000 common shares, with an estimated fair value of $12,812, issued to the owner of GH. |
| 15.12 | As consideration for notes payable, 353,095 common shares issued with estimated fair value of $47,479. Of the 353,09 shares, 238,095 represented convertible debt principal converted into common shares with a value of $37,733 (CAD$50,000) and 115,000 shares, with a value of $9,746, represented consideration for long-term debt. |
Pg 22 of 33
Grown Rogue International Inc.
Notes to the Condensed Interim Consolidated Financial Statements
For the Three and Nine Months Ended July 31, 2021 and 2020
Unaudited - Expressed in United States Dollars, unless otherwise indicated
| 16. | Warrants |
The following table summarizes the warrant activities for the nine months ended July 31, 2021:
| Number | Weighted Average Exercise Price | |||||||
| Balance - October 31, 2019 | 27,584,605 | 0.53 | ||||||
| Issued pursuant to private placement | 5,000,000 | 0.13 | ||||||
| Issued pursuant to private placement | 10,000,000 | 0.13 | ||||||
| Expired | (17,183 | ) | (14.05 | ) | ||||
| Cancellation of prior warrants associated with convertible debentures | (6,818,182 | ) | 0.55 | |||||
| Issuance of new warrants associated with convertible debentures | 6,818,182 | 0.16 | ||||||
| Consideration warrants for convertible debenture maturity extension | 1,590,909 | 0.16 | ||||||
| Balance - October 31, 2020 | 44,158,331 | 0.33 | ||||||
| Issuance pursuant to private placement (Note 15.2) | 8,200,000 | 0.20 | ||||||
| Issuance pursuant to the Offering (Note 15.6) | 23,162,579 | 0.30 | ||||||
| Expiration of broker warrants | (757,125 | ) | 0.44 | |||||
| Expiration of warrants | (17,843,998 | ) | 0.55 | |||||
| Balance – July 31, 2021 | 56,919,787 | 0.22 | ||||||
As at July 31, 2021, the following warrants were issued and outstanding:
| Remaining contractual | ||||||||||||
| Exercise price (CAD$) | Warrants outstanding | life (years) | Expiry date | |||||||||
| $ | 0.16 | 8,409,091 | 0.3 | November 1, 2021 | ||||||||
| 0.13 | 5,000,000 | 0.5 | February 10, 2022 | |||||||||
| 0.13 | 10,000,000 | 0.8 | May 15, 2022 | |||||||||
| 0.20 | 8,200,000 | 1.5 | February 5, 2023 | |||||||||
| 0.30 | 23,162,579 | 1.6 | March 5, 2023 | |||||||||
| 0.44 | 2,148,117 | 1.9 | June 28, 2023 | |||||||||
| $ | 0.22 | 56,919,787 | 1.2 | |||||||||
| 16.1 | Agent Warrants |
On March 5, 2021, in connection with the Offering described at Note 15.6, as consideration for the services rendered by the agent (the “Agent”), the Company issued to the Agent an aggregate of 1,127,758 broker warrants of the Company (the “Broker Warrants”) exercisable to acquire 1,127,758 compensation options (the “Compensation Options”) for no additional consideration. As consideration for certain advisory services provided in connection with the Offering, the Company issued to the Agent an aggregate of 113,500 advisory warrants (the “Advisory Warrants”) exercisable to acquire 113,500 Compensation Options for no additional consideration. The Broker Warrants and Advisory Warrants are collectively referred to as the “Agent Warrants.”
Pg 23 of 33
Grown Rogue International Inc.
Notes to the Condensed Interim Consolidated Financial Statements
For the Three and Nine Months Ended July 31, 2021 and 2020
Unaudited - Expressed in United States Dollars, unless otherwise indicated
Each Compensation Option entitles the holder thereof to purchase one unit of the Company (a “Compensation Unit”) at the Issue Price of CAD$0.225 for a period of twenty-four (24) months. Each Compensation Unit is comprised of one common share and one common share purchase warrant of the Company (a "Compensation Warrant"). Each Compensation Warrant shall entitle the holder thereof to purchase one common share in the capital of the Company at a price of CAD$0.30 for twenty-four (24) months. The following table sets out the Agent Warrants issued and outstanding at July 31, 2021.
| Exercise price (CAD$) | Agent Warrants outstanding | Remaining contractual life (years) | Expiry date | |||||||||
| $ | 0.225 | 1,241,258 | 1.8 | March 5, 2023 | ||||||||
The fair value of the Agent Warrants of $210,278 was allocated to share capital. The Black-Scholes pricing assumptions used in the valuation of the Agent Warrants were as follows:
| ○ | Expected dividend yield | Nil% |
| ○ | Risk-free interest rate | 0.92% |
| ○ | Expected life of Agent Warrant | 2 years |
| ○ | Expected life of underlying warrant | 1.99 years |
| ○ | Expected volatility | 100% |
| 17. | Stock Options |
The following table summarizes the stock option movements for the nine months ended July 31, 2021:
| Number | Exercise price (CAD$) | |||||||
| Balance - October 31, 2019 | 650,000 | 0.44 | ||||||
| Granted to employees | 3,575,000 | 0.15 | ||||||
| Forfeitures by service provider | (150,000 | ) | 0.44 | |||||
| Forfeitures by employees | (355,000 | ) | 0.15 | |||||
| Balance - October 31, 2020 | 3,720,000 | 0.19 | ||||||
| Granted to employees | 3,085,000 | 0.20 | ||||||
| Forfeitures by service providers | (30,000 | ) | 0.15 | |||||
| Forfeitures by employees | (950,000 | ) | 0.20 | |||||
| Balance – July 31, 2021 | 5,825,000 | 0.20 | ||||||
| 17.1 | During the nine months ended July 31, 2021, 3,085,000 options were granted (2020 – 3,575,000) to employees. |
The fair value of the options granted during the nine months ended July 31, 2021, was approximately $279,127 (CAD$343,034) which was estimated at the grant dates based on the Black-Scholes pricing model, using the following assumptions:
| ○ | Expected dividend yield | Nil% |
| ○ | Risk-free interest rate | 0.55% |
| ○ | Expected life | 4.0 years |
| ○ | Expected volatility | 98% |
Pg 24 of 33
Grown Rogue International Inc.
Notes to the Condensed Interim Consolidated Financial Statements
For the Three and Nine Months Ended July 31, 2021 and 2020
Unaudited - Expressed in United States Dollars, unless otherwise indicated
The vesting terms of options granted during the nine months ended July 31, 2021 are set out in the table below:
| Number granted | Vesting terms | |||
| 500,000 | ½ on grant date, ½ on first anniversary of grant date | |||
| 1,000,000 | ½ on grant date, ½ seven months after grant date | |||
| 500,000 | ½ six months after grant date, ½ on first anniversary of grant date | |||
| 450,000 | ⅓ on each anniversary of grant date | |||
| 400,000 | ½ on first anniversary of grant date, ½ of anniversary of grant date | |||
| 235,000 | On first anniversary of grant date | |||
| 3,085,000 | ||||
As at July 31, 2021 the following stock options were issued and outstanding (all prices are in Canadian Dollars unless otherwise noted):
| Exercise price (CAD$) | Options outstanding | Number exercisable | Remaining Contractual Life (years) | Expiry period | ||||||||||||
| $ | 0.44 | 500,000 | 500,000 | 0.4 | January 2022 | |||||||||||
| 0.15 | 2,240,000 | 1,950,000 | 2.9 | July 2024 | ||||||||||||
| 0.15 | 200,000 | - | 3.3 | November 2024 | ||||||||||||
| 0.15 | 500,000 | 250,000 | 3.3 | December 2024 | ||||||||||||
| 0.28 | 1,085,000 | - | 3.8 | April 2025 | ||||||||||||
| 0.16 | 1,300,000 | 500,000 | 3.8 | May 2025 | ||||||||||||
| 0.20 | 5,825,000 | 3,200,000 | 3.1 | |||||||||||||
| 18. | Changes in Non-Cash Working Capital |
The changes to the Company's non-cash working capital for the nine months ended July 31, 2021 and 2020 are as follows:
| Nine months ended July 31, | 2021 | 2020 | ||||||
| Accounts receivable | $ | (315,570 | ) | $ | (134,793 | ) | ||
| Inventory & biological assets | (714,535 | ) | 383,283 | |||||
| Prepaid expenses and other assets | (149,486 | ) | 64,180 | |||||
| Accounts payable and accrued liabilities | (674,194 | ) | (181,245 | ) | ||||
| Interest payable | 633 | (32,728 | ) | |||||
| Unearned revenue | 8,000 | (35,000 | ) | |||||
| Total | $ | (1,845,152 | ) | $ | 63,697 | |||
| 19. | Supplemental Cash Flow Disclosure |
| Nine months ended July 31, | 2021 | 2020 | ||||||
| Interest paid | $ | 80,200 | $ | 157,199 | ||||
| Fair value of common shares issued & issuable for services | 95,294 | 218,649 | ||||||
| Fair value of common shares issued to GH | 109,564 | - | ||||||
| Fair value of common shares issued to GH creditor | 36,310 | - | ||||||
| Right-of-use assets acquired through leases (Note 11) | 1,617,287 | 68,035 | ||||||
| Conversion of debenture into common shares | 916,290 | 37,733 | ||||||
| Derivative liability recognized as contributed surplus upon debenture conversion | 1,833,731 | - | ||||||
Pg 25 of 33
Grown Rogue International Inc.
Notes to the Condensed Interim Consolidated Financial Statements
For the Three and Nine Months Ended July 31, 2021 and 2020
Unaudited - Expressed in United States Dollars, unless otherwise indicated
| 20. | Related Party Transactions |
During the nine months ended July 31, 2021, the Company incurred the following related party transactions:
| 20.1 | Through its wholly owned subsidiary, GRU Properties, LLC, the Company leased a property located in Trail, Oregon (“Trail”) owned by the Company's President and CEO. The lease was extended during the nine months ended July 31, 2021, with a term through December 31, 2025. Lease charges of $55,000 were incurred for the nine months ended July 31, 2021 (2020 - $57,500). The Company has $Nil (October 31, 2020 - $45,000) owing under this lease at July 31, 2021 from deferred payments previously reported as non-current liabilities. The lease liability balance for Trail at July 31, 2021, was $253,680 (October 31, 2020 - $12,532). Also during the nine months ended July 31, 2021, the CEO leased equipment to the Company, which had a balance due of $38,775 at July 31, 2021. Payments of $10,173 were made against the equipment leases during the nine months ended July 31, 2021. Leases liabilities payable to the CEO were $303,612 in aggregate at July 31, 2021 (October 31, 2020 - $39,479). |
The CEO earns a royalty of 2.5% of sales of flower produced at Trail. This royalty terminates upon the final sale of flower from Trail which was planted during the year ended October 31, 2020. The CEO earned royalties of $18,215 during the nine months ended July 31, 2021 (2020 - $17,859).
The Company settled a total of $162,899 in long-term accrued liabilities due to the CEO by way of a payment of $62,899 and $100,000 attributed to the CEO’s subscription to a non-brokered private placement on February 5, 2021 (Note 15.2).
| 20.2 | The Company incurred expenses of $43,020 (2020 - $48,500) for services provided by the spouse of the CEO. At July 31, 2021, accounts and accrued liabilities payable to this individual were $1,746 (October 31, 2020 - $1,946). During the year ended October 31, 2020, this individual was granted 500,000 options which vested on the grant date. |
| 20.3 | Key management personnel consists of the President and CEO; the former Chief Strategy Officer; the CFO of GR Unlimited; the former Chief Market Officer (“CMO”); the Chief Operating Officer (“COO”)*; the Chief Accounting Officer (“CAO”); and the CFO of the Company. The compensation to key management is presented in the following table: |
| Nine months ended July 31, | 2021 | 2020 | ||||||
| Salaries and consulting fees | $ | 508,503 | $ | 359,000 | ||||
| Share-based compensation | 71,000 | 46,000 | ||||||
| Stock option expense | 75,571 | 78,028 | ||||||
| Total | $ | 655,074 | $ | 483,028 | ||||
| * | COO was appointed subsequent to April 30, 2021 and was paid & compensated prior to appointment; compensation for the nine months ended July 31, 2021, is included in the table above for comparability to past & ongoing expenses. |
Stock options granted to key management personnel and close family members of key management personnel include the following options, granted during the year ended October 31, 2020: 750,000 options to the CFO of GR Unlimited; 750,000 options to the CMO; and 250,000 options to the CAO. During the nine months ended July 31, 2021, 500,000 options were granted to the COO.
Compensation to directors during the nine months ended July 31, 2021, included common share issuances of 100,908 common shares with a fair value of $14,187 (2020 – 1,200,000 common shares with a fair value of $82,094) and fees of $13,500 (2020 - $13,500).
Accounts payable and accrued liabilities due to key management at July 31, 2021, totaled $210,475 (October 31, 2020 - $441,424), including the accrued liabilities described at Note 9.
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Grown Rogue International Inc.
Notes to the Condensed Interim Consolidated Financial Statements
For the Three and Nine Months Ended July 31, 2021 and 2020
Unaudited - Expressed in United States Dollars, unless otherwise indicated
| 20.4 | Debt balances and movements with related parties |
The following table sets out portions of debt pertaining to related parties:
| CEO | CFO of GR Unlimited LLC | Director | COO | Total | ||||||||||||||||
| Balance - October 31, 2019 | $ | - | - | - | - | $ | - | |||||||||||||
| Borrowed | 50,000 | 100,000 | 150,000 | - | 300,000 | |||||||||||||||
| Interest | 21,745 | 43,491 | 65,236 | - | 130,472 | |||||||||||||||
| Payments | (10,252 | ) | (20,504 | ) | (30,756 | ) | - | (61,512 | ) | |||||||||||
| Balance - October 31, 2020 | $ | 61,493 | 122,987 | 184,480 | - | $ | 368,960 | |||||||||||||
| Borrowed | - | - | - | 150,000 | 150,000 | |||||||||||||||
| Interest | 28,848 | 57,695 | 86,543 | 10,000 | 183,086 | |||||||||||||||
| Payments | (23,456 | ) | (46,912 | ) | (70,368 | ) | - | (140,736 | ) | |||||||||||
| Balance – July 31, 2021 | $ | 66,885 | 133,770 | 200,655 | 160,000 | $ | 561,310 | |||||||||||||
Pursuant to the loan and related agreements transacted during the year ended October 31, 2020, the CEO, CFO of GR Unlimited LLC, and a director obtained 5.5%; 1%; and 2.5% of GR Michigan LLC, respectively; third parties obtained 4% as part of the agreements, such that GR Michigan has a 13% non-controlling interest (Note 25.2). These parties, except the CEO, obtained the same interests in Canopy Management, LLC; the CEO obtained 92.5% of Canopy Management (Note 25.3).
| 20.5 | On November 23, 2020, a director purchased 6.25 newly issued equity units of Grown Rogue Distribution, LLC (Note 25.4) for $250,000, out of the total of 11.875 such units issued during the nine months ended July 31, 2021. On April 30, 2021, the Company purchased these units for consideration of 1,953,125 common shares with a fair value of $349,809. |
| 20.6 | Related party subscriptions to February 5, 2021, non-brokered private placement |
The following table sets out related party subscriptions to the February 5, 2021, non-brokered private placement described at Note 15.2.
| Subscription amount ($) | Shares | Warrants | ||||||||||
| Chief Operating Officer | 125,000 | 1,000,000 | 1,000,000 | |||||||||
| Chief Financial Officer of GR Unlimited | 250,000 | 2,000,000 | 2,000,000 | |||||||||
| Chief Executive Officer | 200,000 | 1,600,000 | 1,600,000 | |||||||||
| PBIC | 250,000 | 2,000,000 | 2,000,000 | |||||||||
| Total | $ | 825,000 | 6,600,000 | 6,600,000 | ||||||||
| 20.7 | On March 5, 2021, under the Offering (Note 15.6), PBIC invested proceeds of $394,546 which resulted in the issuance to PBIC of 2,444,444 common shares and 2,444,444 warrants to purchase common shares. Each warrant is exercisable at CAD$0.30 for a period of two years. |
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Grown Rogue International Inc.
Notes to the Condensed Interim Consolidated Financial Statements
For the Three and Nine Months Ended July 31, 2021 and 2020
Unaudited - Expressed in United States Dollars, unless otherwise indicated
| 21. | Financial Instruments |
| 21.1 | Market Risk (including interest rate risk and currency risk) |
Market risk is the risk that the fair value or cash flows of a financial instrument will fluctuate due to changes in market prices. Market risk reflects interest rate risk, currency risk and other price risks.
| 21.1.1 | Interest Rate Risk |
At July 31, 2021, the Company's exposure to interest rate risk relates to long-term debt and finance lease obligations; each of these items bears interest at a fixed rate.
| 21.1.2 | Currency Risk |
As at July 31, 2021, the Company had accounts payable and accrued liabilities of CAD$310,154. The Company is exposed to the risk of fluctuation in the rate of exchange between the Canadian Dollar and the United States Dollar.
| 21.2 | Credit Risk |
Credit risk is the risk that one party to a financial instrument will cause a loss for the other party by failing to pay for its obligation.
Credit risk to the Company is derived from cash and trade accounts receivable. The Company places its cash in deposit with United States financial institutions. The Company has established a policy to mitigate the risk of loss related to granting customer credit by primarily selling on a cash-on-delivery basis.
Accounts receivable primarily consist of trade accounts receivable and sales tax receivable. The Company provides credit to certain customers in the normal course of business and has established credit evaluation and monitoring processes to mitigate credit risk. Credit risk is assessed on a case-by-case basis and a provision is recorded where required.
The carrying amount of cash, accounts receivable, and other receivables represent the Company's maximum exposure to credit risk; the balances of these accounts are summarized in the following table:
| July 31, 2021 | October 31, 2020 | |||||||
| Cash | $ | 663,807 | $ | 217,788 | ||||
| Accounts Receivable | 642,758 | 172,121 | ||||||
| Total | $ | 1,306,565 | $ | 389,909 | ||||
The allowance for doubtful accounts at July 31, 2021 was $23,496 (October 31, 2020 - $7,425).
As at July 31, 2021 and October 31, 2020, the Company's trade accounts receivable and other receivable were aged as follows:
| July 31, 2021 | October 31, 2020 | |||||||
| Current | 120,635 | 59,235 | ||||||
| 1-30 days | 436,847 | 49,204 | ||||||
| 31 days-older | 10,321 | 3,500 | ||||||
| Total trade accounts receivable | $ | 567,803 | $ | 119,939 | ||||
| Other receivables | 74,955 | 60,182 | ||||||
| Total accounts receivable | $ | 642,758 | $ | 172,121 | ||||
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Grown Rogue International Inc.
Notes to the Condensed Interim Consolidated Financial Statements
For the Three and Nine Months Ended July 31, 2021 and 2020
Unaudited - Expressed in United States Dollars, unless otherwise indicated
| 21.3 | Liquidity Risk |
Liquidity risk is the risk that an entity will have difficulties in paying its financial liabilities.
The Company's approach to managing liquidity risk is to ensure that it will have sufficient liquidity to meet liabilities when they become due. At July 31, 2021, the Company’s working capital accounts were as follows:
| July 31, 2021 | October 31, 2020 | |||||||
| Cash | $ | 663,807 | $ | 217,788 | ||||
| Current assets excluding cash | 3,951,434 | 1,616,987 | ||||||
| Total current assets | 4,615,241 | 1,834,775 | ||||||
| Current liabilities | (2,765,387 | ) | (1,799,104 | ) | ||||
| Working capital (deficit) | $ | 1,849,854 | $ | 35,671 | ||||
The contractual maturities of the Company's liabilities occur over the next three years as follows:
| Year 1 | Years 2 - 3 | |||||||
| Accounts payable and accrued liabilities | $ | 1,387,488 | $ | 123,413 | ||||
| Lease liabilities | 386,941 | 1,052,079 | ||||||
| Debt | 490,921 | 1,107,534 | ||||||
| Business acquisition consideration payable | 364,537 | - | ||||||
| Interest payable | 10,000 | - | ||||||
| Unearned revenue | 8,000 | - | ||||||
| Income Tax | 117,500 | - | ||||||
| Total | $ | 2,765,387 | $ | 2,283,026 | ||||
| 21.4 | Fair Values |
The carrying amounts for the Company’s cash, accounts receivable, prepaid and other assets, accounts payable and accrued liabilities, current portions of debt and debentures payable, unearned revenue, and interest payable approximate their fair values because of the short-term nature of these items.
| 21.5 | Fair Value Hierarchy |
A number of the Company's accounting policies and disclosures require the measurement of fair valued for both financial and nonfinancial assets and liabilities. The Company has an established framework, which includes team members who have overall responsibility for overseeing all significant fair value measurements, including Level 3 fair values. When measuring the fair value of an asset or liability, the Company uses observable market data as far as possible. The Company regularly assesses significant unobservable inputs and valuation adjustments. Fair values are categorized into different levels in a fair value hierarchy based on the inputs used in the valuation techniques as follows:
Level 1: unadjusted quoted prices in active markets for identical assets or liabilities;
Level 2: inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly; or
Level 3: inputs for the asset or liability that are not based on observable market data (unobservable inputs).
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Grown Rogue International Inc.
Notes to the Condensed Interim Consolidated Financial Statements
For the Three and Nine Months Ended July 31, 2021 and 2020
Unaudited - Expressed in United States Dollars, unless otherwise indicated
The carrying values of the financial instruments at July 31, 2021 are summarized in the following table:
| Level in fair value hierarchy | Amortized Cost | FVTPL | ||||||||
| Financial Assets | ||||||||||
| Cash | Level 1 | $ | 663,807 | $ | - | |||||
| Accounts receivable | Level 2 | 642,758 | - | |||||||
| Marketable securities | Level 1 | - | 775,966 | |||||||
| Financial Liabilities | ||||||||||
| Accounts payable and accrued liabilities | Level 2 | $ | 1,510,901 | $ | - | |||||
| Debt | Level 2 | 1,598,455 | - | |||||||
| Interest payable | Level 2 | 10,000 | - | |||||||
| Business acquisition consideration payable | Level 2 | 364,537 | ||||||||
During the nine months ended July 31, 2021 there were no transfers of amounts between levels.
| 22. | General and Administrative Expenses |
General and administrative expenses for the three and nine months ended July 31, 2021 and 2020 are as follows:
| Three months ended July 31, | Nine months ended July 31, | |||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| Office, banking, travel, and overheads | $ | 455,371 | $ | 90,515 | $ | 777,630 | $ | 307,428 | ||||||||
| Professional services | 159,746 | 75,553 | 542,675 | 417,124 | ||||||||||||
| Salaries and benefits | 601,863 | 383,282 | 1,339,333 | 1,089,767 | ||||||||||||
| Total | $ | 1,216,980 | $ | 549,350 | $ | 2,659,638 | $ | 1,814,319 | ||||||||
| 23. | Capital Disclosures |
The Company includes equity, comprised of share capital, contributed surplus (including the fair value of equity instruments to be issued), equity component of convertible promissory notes and deficit, in the definition of capital.
The Company’s objectives when managing capital are as follows:
| ○ | to safeguard the Company’s assets and ensure the Company’s ability to continue as a going concern. |
| ○ | to raise sufficient capital to finance the construction of its production facility and obtain license to produce recreational marijuana; and |
| ○ | to raise sufficient capital to meet its general and administrative expenditures. |
The Company manages its capital structure and makes adjustments to it, based on the general economic conditions, the Company’s short-term working capital requirements, and its planned capital requirements and strategic growth initiatives.
The Company's principal source of capital is from the issuance of common shares. In order to achieve its objectives, the Company expects to spend its working capital, when applicable, and raise additional funds as required.
The Company does not have any externally imposed capital requirements.
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Grown Rogue International Inc.
Notes to the Condensed Interim Consolidated Financial Statements
For the Three and Nine Months Ended July 31, 2021 and 2020
Unaudited - Expressed in United States Dollars, unless otherwise indicated
| 24. | Segment Reporting |
Geographical information relating to the Company's activities is as follows:
| Revenue – nine months ended July 31, | 2021 | 2020 | ||||||
| United States | $ | 5,618,598 | $ | 3,182,902 | ||||
| Canada | - | - | ||||||
| Total | $ | 5,618,598 | $ | 3,182,902 | ||||
| Non-current assets as at: | July 31, 2021 | October 31, 2020 | ||||||
| United States (1) | $ | 6,382,400 | $ | 1,929,643 | ||||
| Canada | - | - | ||||||
| Total | $ | 6,264,901 | $ | 1,929,643 | ||||
(1) Includes: plant and equipment
Major customers are defined as customers that each individually account for greater than 10% of the Company’s annual revenues. During the three months ended July 31, 2021, one major customer accounted for 15% of revenues (2020 – two major customers accounted for 43% of annual revenues). During the nine months ended July 31, 2021, one major customer accounted for 16% of revenues (2020 – three major customers accounted for 49% of sales).
| 25. | Non-controlling Interests |
The changes to the non-controlling interest for the nine months ended July 31, 2021 and the year ended October 31, 2020 are as follows:
| July 31, 2021 | October 31, 2020 | |||||||
| Balance, beginning of period | $ | (33,383 | ) | $ | 19,538 | |||
| Elimination of GRD Cali, LLC non-controlling interest | - | 22,128 | ||||||
| Non-controlling interest's 40% share of GRD Cali, LLC | - | (36,366 | ) | |||||
| Non-controlling interest's 40% share of Idalia, LLC | (4,092 | ) | (129 | ) | ||||
| Non-controlling interest's 13% share of GR Michigan, LLC | 5,743 | (38,554 | ) | |||||
| Non-controlling interest's 100% share of Canopy Management, LLC | 942,876 | - | ||||||
| Balance, end of period | $ | 911,144 | $ | (33,383 | ) | |||
| 25.1 | Non-controlling interest in Idalia, LLC |
The following is summarized financial information for Idalia, LLC:
| July 31, 2021 | October 31, 2020 | |||||||
| Non-current assets | $ | - | $ | 10,230 | ||||
| Net loss for the period | 8,720 | 322 | ||||||
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Grown Rogue International Inc.
Notes to the Condensed Interim Consolidated Financial Statements
For the Three and Nine Months Ended July 31, 2021 and 2020
Unaudited - Expressed in United States Dollars, unless otherwise indicated
| 25.2 | Non-controlling interest in GR Michigan, LLC (“GR Michigan”): |
| July 31, 2021 | October 31, 2020 | |||||||
| Current assets | $ | 1,753 | $ | 74,961 | ||||
| Non-current assets | - | 603,895 | ||||||
| Current liabilities | - | 489,266 | ||||||
| Non-current liabilities | - | 68,994 | ||||||
| Net loss for the period | 48,867 | 296,570 | ||||||
Nine percent (9%) of GR Michigan is owned by officers and directors of the Company; this ownership is pursuant to an agreement that included their loans made to GR Michigan (Note 20.4), and 4% of GR Michigan owned by a third party. The total non-controlling ownership, including ownership by officers and directors, is 13%.
| 25.3 | Non-controlling interest in Canopy Management, LLC |
| July 31, 2021 | October 31, 2020 | |||||||
| Current assets | $ | 1,593,226 | $ | - | ||||
| Non-current assets | 3,357,488 | - | ||||||
| Current liabilities | 1,190,944 | - | ||||||
| Non-current liabilities | 1,152,873 | - | ||||||
| Net income for the period | 583,997 | - | ||||||
Ninety-six percent (96%) of Canopy is owned by officers and directors of the Company, and four percent (4%) is owned by a third party. Ownership by officers and directors, excluding the CEO, is pursuant to agreements which caused their ownership of Canopy to be equal to their ownership in GR Michigan (Note 25.2), which total 3.5%. The CEO owns 92.5% of Canopy, noting that this analogous to the CEO’s 5.5% ownership of GR Michigan, and an additional 87% of Canopy, which is equal to the Company’s ownership of GR Michigan of 87%. After the Company executes its option to acquire Canopy, the Company’s ownership of Canopy will be the same as its ownership of GR Michigan.
| 25.4 | Non-controlling interest in Grown Rogue Distribution, LLC |
During the nine months ended July 31, 2021, the Company sold an aggregate total of an approximately 10.6% interest in Grown Rogue Distribution, LLC (“GR Distribution”) for $475,000. The interest was comprised of 11.875 newly issued equity units (“GR Distribution Units”) and each GR Distribution Unit was sold for $40,000. After the issuances, 111.875 GR Distribution Units were issued and outstanding. Of the 11.875 GR Distribution units issued, 6.25 were issued to a director of the Company, for proceeds of $250,000. On April 30, 2021, the Company purchased 11.875 GR Distribution Units in exchange for 3,711,938 common shares with an aggregate fair value of $664,816. After the Company’s purchase of 11.875 GR Distribution Units, Grown Rogue Distribution, LLC was a 100% owned subsidiary.
| 26. | Subsequent Events |
| 26.1 | On August 16, 2021, the Company, through its subsidiary Golden Harvests, executed an agreement to form a joint venture with Pure Extracts Technologies Corp. (“Pure Extracts”) to expand Grown Rogue’s product offering and bring Pure Extracts’ portfolio of products to Michigan. The joint venture will be owned 50% by Golden Harvests and 50% by Pure Extracts. |
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Grown Rogue International Inc.
Notes to the Condensed Interim Consolidated Financial Statements
For the Three and Nine Months Ended July 31, 2021 and 2020
Unaudited - Expressed in United States Dollars, unless otherwise indicated
Pure Extracts will obtain a 50% interest in the joint venture, following certain regulatory approvals, by contributing processing equipment with an approximate fair value of $515,000, and an allowance for fixtures and equipment of approximately $110,000, to Golden Harvests.
Until such time as the necessary regulatory approvals are obtained, the processing equipment is leased to Golden Harvests. The lease term commences August 16, 2021, and terminates on the earlier of (a) immediately upon the date of certain regulatory approval for change of ownership of the joint venture (the “Closing Date”); (b) if the Closing Date does not occur, in which case the equipment will be returned to Pure Extracts; or (c) default by Golden Harvests against the lease, including failure to make lease payments or fail to perform material terms of the lease agreement. The monthly payment under the lease is $4,292, to commence in the month in which the equipment is delivered, and only payable if the business has profits from which to make payments. When the Closing Date occurs, the leased equipment will be contributed to the joint venture by Pure Extracts and the lease agreement will terminate.
| 26.2 | On September 9, 2021, the Company entered into an unsecured promissory note agreement with PBIC, a related party, in the amount of $800,000 which is to be fully advanced by September 30, 2021. This note matures on December 15, 2022, with payments commencing January 15, 2022, and continuing through and including December 15, 2022. The terms of the note require the Company to make certain participation payments to the lender based on a percentage monthly sales of cannabis flower sold from the Company’s sun-grown A-flower 2021 harvest (the “Harvest”), less 15% of such amount to account for costs of sales. The percentage will be determined by dividing 2,000 by the total volume of pounds of the Harvest. A portion of these payments will be used to pay down the outstanding principal on a monthly basis. The note will automatically terminate when the full amount of any outstanding principal plus the applicable participation payments are paid prior to the maturity date. Should the participation payments fully repay the principal amount prior to the maturity date then the note will automatically terminate. The note bears no stated rate of interest, and in the event of default, the note will bear interest at 15% per annum. |
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Exhibit 5
GROWN ROGUE INTERNATIONAL INC.
FORM 51-102F1
MANAGEMENT DISCUSSION & ANALYSIS
FOR THE THREE AND NINE MONTHS ENDED JULY 31, 2021
TABLE OF CONTENTS
This Management Discussion and Analysis (“MD&A”) made as of September 29, 2021 should be read in conjunction with the unaudited condensed interim consolidated financial statements of Grown Rogue International Inc. (the “Company”, “Grown Rogue”, (“we”, “our”, or “us”) for the three and nine months ended July 31, 2021 and 2020 (the “Reporting Period”), and the related notes thereto (the “Financial Statements”). The Company’s Financial Statements are presented on a consolidated basis with its wholly-owned subsidiaries: Grown Rogue Unlimited, LLC (“GR Unlimited”) and GR Unlimited’s wholly-owned subsidiaries Grown Rogue Gardens, LLC (“GR Gardens”), GRU Properties, LLC (“GRU Properties”), GRIP, LLC (“GRIP”), and Grown Rogue Distribution, LLC (“GR Distribution”); as well as GR Unlimited’s 87% interest in GR Michigan, LLC, and GR Unlimited’s 60% interest in Idalia, LLC, and Canopy Management, LLC (“Canopy”), a company controlled by the Company’s CEO and in which the Company has a 0% ownership interest. The Company’s reporting currency is the United States dollar and all amounts in this MD&A are expressed in United States dollars unless otherwise noted. The use of “CAD$” refers to Canadian dollars.
The three months ended July 31, 2021 and 2020 are referred to herein as “Q3 2021” and “Q3 2020,” respectively.
The Company’s comparative information included in this MD&A has been prepared in accordance with International Financial Reporting Standards (“IFRS”).
Additional information relating to the Company is also available on the System for Electronic Document Analysis and Retrieval (SEDAR) at www.sedar.com. The common shares of GRIN are listed on the Canadian Securities Exchange under the symbol “GRIN”.
Management’s Responsibilities for Financial Reporting
The Financial Statements have been prepared by management in accordance with IFRS and have been approved by the Company’s board of directors (the “Board”). The integrity and objectivity of the Financial Statements are the responsibility of management. In addition, management is responsible for ensuring that the information contained in the MD&A is consistent where appropriate, with the information contained in the Financial Statements.
The Financial Statements may contain certain amounts based on estimates and judgments. Management has determined such amounts on a reasonable basis to ensure that the Financial Statements are presented fairly in all material respects.
As the Company is a Venture Issuer (as defined under under National Instrument 52-109 Certification of Disclosure in Issuers' Annual and Interim Filings) (“NI 52-109”), the Company and Management are not required to include representations relating to the evaluation, design, establishment and/or maintenance of disclosure controls and procedures (“DC&P”) and/or Internal Controls over Financial Reporting (“ICFR”), as defined in NI 52-109, nor has it completed such an evaluation. Inherent limitations on the ability of the certifying officers to design and implement on a cost-effective bases DC&P and ICFR for the issuer may result in additional risks of quality, reliability, transparency and timeliness of interim and annual filings and other reports provided under securities legislation.
This MD&A contains information and projections based on current expectations. Certain statements herein may constitute “forward-looking” statements which involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of the Company, or industry results, to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. When used in this MD&A, such statements use such words as “will”, “may”, “could”, “intends”, “potential”, “plans”, “believes”, “expects”, “projects”, “estimates”, “anticipates”, “continue”, “potential”, “predicts” or “should” and other similar terminology. These statements reflect expectations regarding future events and performance but speak only as of the date of this MD&A. Forward-looking statements include, among others, statements with respect to planned acquisitions, strategic partnerships or other transactions and expansions not yet concluded; plans to market, sell and distribute products; market competition; plans to retain and recruit personnel; the ability to secure funding; and the ability to obtain regulatory and other approvals are all forward-looking information. These statements should not be read as guarantees of future performance or results. Such statements involve known and unknown risks, uncertainties and other factors that may cause actual results, performance, or achievements to be materially different from those implied by such statements.
There can be no assurance that any intended or proposed activity or transaction will occur or that, if any such action or transaction is undertaken, it will be completed on terms currently intended by the Company. The Company assumes no responsibility to update or revise forward-looking information to reflect new events or circumstances unless required by law.
Although the Company believes that the expectations and assumptions on which the forward-looking statements are based are reasonable, undue reliance should not be placed on the forward-looking statements because the Company can give no assurance that they will prove to be correct. Since forward-looking statements address future events and conditions, by their very nature they involve inherent risks and uncertainties. The forward-looking statements herein speak only as of the date hereof. Actual results could differ materially from those anticipated due to a number of factors and risks including those described in this MD&A under “Risk Factors” and in section 17 of the Company’s Listing Statement dated November 15, 2018, which can be found under the Company’s profile on www.sedar.com.
Grown Rogue, headquartered in Medford, Oregon, is a multi-state cannabis company curating high quality and consistent flower that allows consumers to enhance life experiences. Grown Rogue is a mid-premium brand that classifies their products based on “Mind, Body & Mood” effects which resonates with consumers from the so-called canna-curious through the canna-serious. Grown Rogue is committed to educating, inspiring and empowering consumers with information about cannabis so they can “enhance experiences” by selecting the right product. We are focused on high quality, low-cost production of flower and flower-based products. Flower continues to be the leading product category in most every state as compared to other categories such as edible, vape cartridges, pre-rolls, or concentrates. With its best-in-class production methods, low-cost cultivation, award winning product, and geographic location in the famed Emerald Triangle, Grown Rogue is well positioned to become a leading flower producer in the cannabis sector.
Oregon
Grown Rogue, through its wholly owned subsidiary, GR Gardens, operates four cultivation facilities in Oregon, comprising approximately 130,000 sq ft of cultivation area, that currently service the Oregon recreational marijuana market: “Mira Vista” (sungrown, license transferred from the former “Manzanita Glen” location), “Trail’s End” (sungrown), and two state-of-the-art indoor facilities (“Rossanley” and “Airport”). GR Gardens currently holds three producer licenses in Oregon from the Oregon Liquor Control Commission (“OLCC”), one wholesaler license, and one processor license. In September 2021, GR Gardens transferred its processor license from Rossanley to a new facility to support processing operations for the Company. Airport is comprised of assets currently being operated under a management agreement that was signed during Q2 2021. We anticipate ownership transfer of the Airport assets and licenses (one cultivation, one wholesale, one processing) by October 2021, at which time the management agreement will terminate. This will bring our Oregon license count to eight (4 producer, 2 wholesaler, 2 processor).
| Pg 4 of 39 |
Grown Rogue’s Oregon business is headquartered in the world-renowned Emerald Triangle, which is known world-wide for the quality of its cannabis. The Emerald Triangle includes the southern part of Oregon and northern part of California. The company capitalizes on this ideal outdoor growing environment to produce high-quality, low-cost cannabis flower. The two sungrown farms produce one crop per year per farm, which is planted in June and harvested in October.
GR Gardens is responsible for production of recreational marijuana using outdoor and indoor production methodologies. Mira Vista and Trail’s End are both outdoor, sungrown farms, with 40,000 sq ft of flowering canopy, for a total of 80,000 square feet, sitting on a combined land package of approximately 80 acres.
Rossanley, an approximately 17,000 square-foot indoor facility, produces high-quality indoor flower through controlled atmosphere environment operations. By carefully controlling temperature, humidity, carbon dioxide levels, and other criteria, we are able to provide year-round supply of high-quality cannabis flower with multiple harvests per month. Rossanley has eight dedicated flower rooms, which will allow for approximately four harvests per month resulting in approximately 3,600lbs annually.
Airport, currently operating under a management services agreement, added 30,000 square feet of indoor production space and we estimate production of 3,000 pounds from this facility in calendar year 2021 (not a full year, having begun to operate the assets in February of 2021 with first crop harvest in May 2021). After planned improvements, annual productive capacity will be increased to as much as 5,000 pounds. Airport is a short distance from Rossanley, which is a benefit to operating efficiency, and it is equipped with state-of-the-art equipment which facilitates the implementation of best practices already developed at Rossanley.
The total annual production capacity for Grown Rogue’s Oregon operations, based on the current constructed capacity, will range between 12,000 and 14,000 pounds, depending upon various factors, including sungrown seasonality and strain performance.
Michigan
In February 2020, Grown Rogue, through its subsidiary GR Michigan, LLC, signed an Option to Purchase Agreement (the “Option Agreement”) to acquire a 60% controlling interest in Golden Harvests, LLC (“Golden Harvests”). Golden Harvests is a Michigan-based, fully licensed, and operating cultivation company located in Bay City, Michigan. Golden Harvests has an approximately 80,000 square foot facility of which approximately 40,000 square feet is operational. During the nine months ended July 31, 2021, the Company’s majority controlled subsidiary GR Michigan, LLC, terminated the Option Agreement. Simultaneously with the termination of the Option Agreement, a new entity, Canopy Management, LLC (“Canopy”), a company controlled by the Company’s CEO, signed an option agreement to purchase Golden Harvests under similar terms as the Option Agreement (the “New Option”). Canopy is majority owned by GRIN’s CEO, who has a fiduciary responsibility to the Company and is prohibited from omitting or taking certain actions relating to Canopy where to do so would be contrary to the economic benefits which the Company expects to derive from the acquisition of Golden Harvests. Canopy has already been approved by the State of Michigan for licensing and this facilitated the Company’s ability to accelerate its option exercise to obtain a 60% interest in Golden Harvests. The Company has an option to acquire 87% of Canopy from Mr. Strickler’s membership interest in Canopy which when exercised, pending approval by the State of Michigan of the Company’s application, will provide identical economic rights as the Company originally had in the Option Agreement. Canopy acquired a 60% controlling interest in Golden Harvests in May 2021, and we expect to exercise our option to acquire 87% of Canopy as soon as all regulatory requirements have been satisfied. Until we exercise the option to acquire 87% of Canopy, it will be consolidated with a 100% non-controlling interest.
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With the addition of Golden Harvests, Grown Rogue added an additional 4,000 pounds of high-quality indoor flower production capacity in 2021 and an anticipated 7,500 pounds of production capacity in 2022.
Product
Grown Rogue produces a range of cultivars for consumers to enjoy (traditionally classified as indicas, sativas, and hybrids). Grown Rogue has a mix of “core” and “limited” strains to provide consumers with consistent and unique purchasing options at their local dispensary. Grown Rogue flower has won multiple awards in Oregon, which is one of the most competitive cannabis production environments in the world, including the prestigious Growers Cup competition on two occasions. Grown Rogue also won 1st place for highest THC content, 1st place for highest terpene content, and 3rd place in the grower’s choice category 2018 and won 1st place for highest terpene content in 2019. In addition, the company believes it achieved an outdoor production potency record in the state of Oregon, when its Monkey Train cultivar tested at a THC potency of 35.13%. Consumers can enjoy both bulk flower and in Michigan our innovative nitrogen sealed 3.5gram flower jars.
Genetics
We are committed to developing unique, proprietary genetics and have allocated research and development space to develop new strains, while also phenotype hunting to identify new and exciting strain options that will resonate with consumers. Grown Rogue has developed a compelling mix of proprietary strains, along with a library of “fan favorites” to ensure that consumer and dispensary demand will remain strong for its flower and flower-derived products. All Grown Rogue genetics are rigorously tested to establish the genetic makeup of each strain in its portfolio. We continue to focus on bringing new unique genetics to bring a steady flow of innovative flower and flower products to market. Currently we carry in excess of 40 unique cultivars in our genetic library and are constantly adding to the library as we trial new genetics.
Distribution and Sales
Grown Rogue uses a multi-channel distribution strategy that includes direct-to-retail delivery and third-party delivery (Michigan regulations mandate independent third-party delivery); wholesalers, who have their own distribution channels; and processors, who utilize Grown Rogue products (e.g., trim) to create retail ready products. With regards to the direct-to-retail channel, Grown Rogue’s sales team works closely with dispensary owners and intake managers to provide consistent product, competitive prices, and service using sales techniques from other industries such as pharmaceutical and liquor. Grown Rogue’s goal is to establish and maintain the client relationship as we continue to expand our footprint in the states in which we operate.
By way of example, Grown Rogue has developed end user product marketing collateral and other educational information regarding Grown Rogue products as part of all sales with dispensaries that include strain type, testing results, information on the product and other necessary information to clearly articulate the product being provided. Each product is uniquely packaged all while maintaining brand consistency across the product suite.
Grown Rogue works with dispensary owners to develop promotional opportunities for the retail customers and bud tenders. Grown Rogue provides detailed tutorials to the staff and owners of the dispensaries around the product and how it is grown, processed, cured, packaged and other items so that they are intimately familiar with the Grown Rogue process. Grown Rogue also invites dispensary owners and operators to Grown Rogue’s operating facilities so they can see first-hand the methods and processes used to create the product.
Branding
Developing compelling branding that engages, inspires, and creates transparency and trust with consumers is one of the most important aspects of building a successful cannabis company. Cannabis product branding has been evolving from promising high-quality flower, to providing descriptions of the effect a consumer should expect from a particular product.
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Grown Rogue was one of the first brands in the United States to go to market with this type of branding as part of the ROGUE Categorization: Relax, Optimize, Groove, Uplift and Energize. The focus was to provide consumers with “The Right Experience, Every time” made easier by a simple product description that was not cannabis based, such as “sativa” or “indica”.
While other brands have shifted into the “one word” product description, Grown Rogue has leveraged consumer insights and product feedback to evolve the messaging to provide significantly more detail so consumers can make a more informed choice about which Grown Rogue products will optimally enhance their experience.
Grown Rogue’s unique “Mind, Body & Mood” product descriptions provide a level of detail about the expected cannabis experience that is much more insightful and beneficial than competitors. Instead of one word, such as “Relax,” describing a product, Grown Rogue has six words across three categories, which is easy to understand, but much more informative. Grown Rogue is refining this branding effort and intends to launch this new and innovative approach to ensuring consumers select the right experience in 2021.
In order to grow the Grown Rogue community and spread knowledge of its products, Grown Rogue leverages social media and other digital platforms. Grown Rogue aspires to eliminate the “dark mystery” historically associated with cannabis by empowering consumers to learn about the plant and then “enhance experiences” as they desire. The transition from prohibition to legal cannabis has provided the cannabis community with an opportunity to welcome a large group of new members and it is vital that product education is completed in an authentic and informative manner to ensure that everyone’s first cannabis experience is not only positive but also as expected.
Marketing and Advertising
Grown Rogue’s marketing channels include a comprehensive, fully responsive, including mobile, interactive website. The website has been search-engine optimized and includes calls to action that encourage consumers to become part of the Grown Rogue community by joining its newsletter list or following the company on social media. Grown Rogue is focused on providing education to new and existing consumers, which is available through its monthly newsletter or via the Blog section of its website. Consumers can find information about Grown Rogue, different types of cannabis products and general industry information.
We strategically leverage digital advertising, primarily on industry sites such as Leafly and Weedmaps, and have selectively advertised in endemic and non-endemic magazines including Grow, Northwest Leaf, Oregon Leaf, Dope, Portland Mercury, and Willamette Weekly.
Grown Rogue has established a social media presence that includes Facebook, Twitter, and Instagram. Grown Rogue’s social identity will be defined by delivering fresh content and keeping interaction with followers/fans prompt and positive. Grown Rogue intends to attract existing cannabis industry participants as well as people not familiar with the industry by creating a positive, inclusive environment where dialogue is encouraged. The goal is to change existing stereotypes and overcome the stigmas associated with the cannabis industry.
Trademarks and Patents
Grown Rogue actively seeks to protect its brand and intellectual property. Grown Rogue currently has three registered U.S. trademarks:
| 1. | Grown Rogue was filed on September 22, 2017 and registered on August 7, 2018 under Registration No. 5537240 |
| 2. | The Right Experience Every Time was filed on September 29, 2017 and registered on August 7, 2018 under Registration No. 5537260. |
| 3. | Sizzleberry was filed on September 29, 2017 and registered on August 7, 2018 under Registration No. 5537259. |
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Grown Rogue filed a patent for its nitrogen sealed glass containers on February 15, 2018 with the United States Patent and Trademark Office (“USPTO”). The nitrogen sealed glass containers preserve the freshness of the flower and essential terpenes to improve the “entourage effect.” The USPTO issued Grown Rogue United States Patent Number 10,358,282 on July 23, 2019. Several third parties have contacted us to request licensing information on this technology. We have introduced nitrogen sealed jars in Michigan and plan on launching them as we enter additional new markets and may license the technology to third parties operating in markets in which Grown Rogue is not currently licensed.
Social and Environmental Policies
Grown Rogue employs sustainable business models in all of its operations. Grown Rogue maintains the highest standards of environmental stewardship in cultivation. This includes sustainable water sources with optimization of reclamation and recapture from runoff and recycling of water input. We use only natural and sustainable products in all applications, including nutrients and integrated pest management. We maintain the highest level of sustainable cannabis practices through our focus on sustainable and natural cultivation methods.
Grown Rogue hires and pays living wage to all of its team members and is very involved in each of the communities where it operates.
When wildfires ravaged Oregon during the year ended October 31, 2020, particularly Jackson County, Grown Rogue quickly mobilized to support teammates and their families who lost homes or were adversely impacted, while also donating over $20,000 to community fire relief funds and organizing a Cannabis Coalition Fire Relief Fund with the United Way of Jackson County.
Plans for Expansion & Economic Outlook
Grown Rogue continues to focus on taking its learnings and experience from Oregon and Michigan into new markets across the US. During the last two years, Grown Rogue has established a platform that excels at licensing, compliance, high quality and low-cost production methods, understanding consumer purchasing preferences, and product innovation. This platform places Grown Rogue in a superior position to capitalize on new markets compared to our competitors. Oregon is arguably the most competitive cannabis market in the world, and we have excelled by implementing standard business practices that make the Company well suited for entering and building successful brand presence in newly legalized cannabis markets.
The recently completed expansion into Airport (described in the Oregon heading under Description of Business) and acquisition by Canopy of a 60% interest in Golden Harvests represent execution of management’s strategy of growth through high quality, low-cost flower production. As other growth opportunities arise under favorable financial terms, management can activate known and repeatable systems into new assets.
The future of the cannabis industry is in branded products and the best brands are being created on the west coast, which is the area that has become synonymous with high quality cannabis. Unlike many current multi-state operators who prefer to obtain just a few licenses in a large volume of states, Grown Rogue is focused on establishing a larger number of licenses in fewer states to capitalize on the economies of scale we view as optimal to maximize profits. Over the next 12 months, Grown Rogue is focused on furthering its footprint and market share in the Oregon market, continuing to add to the portfolio projects in Michigan and exploring strategic opportunities in new states.
With the recent shift in political landscape, Grown Rogue has also begun analyzing the potential for federal de-regulation and the subsequent ability to export cannabis products across state lines. We believe Oregon will be a large export state. Being located in the Emerald Triangle also provides a unique product differentiator due to the ability to produce high quality low cost sungrown flower due to the environmental conditions that occur naturally in Southern Oregon. Our strategy for how to take advantage of what is projected to be a multi-billion dollar export business is developing and we are excited to begin implementation of this business plan over the coming years.
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Going Concern
The Company’s ability to continue as a going concern is dependent upon, but not limited to, its ability to raise financing necessary to fund its development programs and general and administrative expenses, discharge its liabilities as they become due and generate positive cash flows from operations. There is no certainty that the Company will be successful in raising additional capital or generating positive cash flow from operations.
The following selected financial data for each of the three completed financial years are derived from the audited annual financial statements of the Company.
| Year Ended October 31, | 2020 | 2019 | 2018 | |||||||||
| Total revenue | $ | 4,239,604 | $ | 3,924,983 | $ | 1,932,128 | ||||||
| Loss from operations | (1,574,679 | ) | (7,622,956 | ) | (4,967,609 | ) | ||||||
| Net loss | (2,356,488 | ) | (9,476,934 | ) | (7,509,986 | ) | ||||||
| Net loss per share, basic and diluted | (0.03 | ) | (0.13 | ) | (0.22 | ) | ||||||
| Comprehensive Loss | (2,490,605 | ) | (9,355,014 | ) | (7,509,986 | ) | ||||||
| Comprehensive loss per share, basic & diluted | (0.03 | ) | (0.13 | ) | (0.22 | ) | ||||||
| Total assets | 3,764,418 | 2,932,476 | 5,366,268 | |||||||||
| Total non-current liabilities | 2,910,333 | 217,633 | 2,292,634 | |||||||||
| Cash dividends | Nil | Nil | Nil | |||||||||
Selected financial results of operations for three and nine months ended July 31, 2021 and 2020, are summarized below:
| Three months ended July 31, | 2021 ($) | 2020 ($) | Variance $ | Variance % | ||||||||||||
| Revenue | 3,028,991 | 903,994 | 2,124,997 | 235 | % | |||||||||||
| Cost of goods sold, excluding fair value adjustments | (1,239,200 | ) | (475,982 | ) | (763,218 | ) | 160 | % | ||||||||
| Gross profit before fair value adjustments | 1,789,791 | 428,012 | 1,361,779 | 318 | % | |||||||||||
| Net income (loss) | 240,294 | (794,072 | ) | 1,034,366 | n/a | |||||||||||
| Nine months ended July 31, | 2021 ($) | 2020 ($) | Variance $ | Variance % | ||||||||||||
| Revenue | 5,618,598 | 3,182,902 | 2,435,696 | 77 | % | |||||||||||
| Cost of goods sold, excluding fair value adjustments | (2,739,185 | ) | (1,817,480 | ) | (921,705 | ) | 51 | % | ||||||||
| Gross profit before fair value adjustments | 2,879,413 | 1,365,422 | 1,513,991 | 111 | % | |||||||||||
| Net loss | (2,117,289 | ) | (2,234,087 | ) | 116,798 | 5 | % | |||||||||
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Significant expense items contributing to the generation of net income versus the net loss between the three ended July 31, 2021 and 2020, and the increase in net loss between the nine months ended July 31, 2021 and 2020, are summarized in the table below.
| Three months ended July 31, | 2021 ($) | 2020 ($) | Variance $ | Variance % | ||||||||||||
| Total revenues | 3,028,991 | 903,994 | 2,124,997 | 235 | % | |||||||||||
| Cost of revenues, excluding fair value items | 1,239,200 | 475,982 | 763,218 | 160 | % | |||||||||||
| Realized fair value amounts in inventory sold | 198,540 | 626,522 | (427,982 | ) | (68 | %) | ||||||||||
| Unrealized fair value loss (gain) on growth of biological assets | (649,907 | ) | (770,724 | ) | 120,817 | (16 | %) | |||||||||
| Accretion expense | 187,493 | 321,875 | (134,382 | ) | (42 | %) | ||||||||||
| General and administrative expenses | 1,216,980 | 549,350 | 667,630 | 122 | % | |||||||||||
| Share-based compensation | 65,543 | 329,014 | (263,471 | ) | (80 | %) | ||||||||||
| Interest expense | 48,828 | 96,881 | (48,053 | ) | (50 | %) | ||||||||||
| Other expense (income) | (3,977 | ) | (125,860 | ) | 121,883 | (97 | %) | |||||||||
| Loss on debt restructure | - | 462,213 | (462,213 | ) | (100 | %) | ||||||||||
| Gain on derecognition of derivative liability | - | (244,572 | ) | 244,572 | (100 | %) | ||||||||||
| Unrealized loss (gain) on marketable securities | (422,867 | ) | 69,064 | (491,931 | ) | (712 | %) | |||||||||
Significant expense items contributing to the increase in net loss between the nine months ended July 31, 2021 and 2020, are summarized in the table below.
| Nine months ended July 31, | 2021 ($) | 2020 ($) | Variance $ | Variance % | ||||||||||||
| Total revenues | 5,618,598 | 3,182,902 | 2,435,696 | 77 | % | |||||||||||
| Costs of goods and services sold, excluding fair value items | 2,739,185 | 1,817,480 | 921,705 | 51 | % | |||||||||||
| Realized fair value amounts in inventory sold | 387,600 | 1,471,821 | (1,084,221 | ) | (74 | %) | ||||||||||
| Unrealized fair value loss (gain) on growth of biological assets | (496,855 | ) | (1,425,228 | ) | 928,373 | (65 | %) | |||||||||
| Accretion expense | 801,929 | 461,415 | 340,514 | 74 | % | |||||||||||
| General and administrative expenses | 2,659,638 | 1,814,319 | 845,319 | 47 | % | |||||||||||
More detailed analysis of the components of results of operations are described in the following sections.
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Revenues
The following tables summarizes revenues earned during the three and nine months ended July 31, 2021 and 2020.
| Three months ended July 31, | 2021 ($) | 2020 ($) | Variance ($) | Variance (%) | ||||||||||||
| Revenue from Grown Rogue production | 3,028,991 | 903,994 | 2,124,997 | 235 | % | |||||||||||
| Total revenue | 3,028,991 | 903,994 | 2,124,997 | 235 | % | |||||||||||
| Nine months ended July 31, | 2021 ($) | 2020 ($) | Variance ($) | Variance (%) | ||||||||||||
| Revenue from third-party products | 1,636 | 125,488 | (123,852 | ) | -99 | % | ||||||||||
| Revenue from Grown Rogue production | 5,272,907 | 3,057,414 | 2,215,493 | 72 | % | |||||||||||
| Revenues from product sales | 5,274,543 | 3,182,902 | 2,091,641 | 66 | % | |||||||||||
| Revenue from management services | 344,055 | - | 344,055 | -- | ||||||||||||
| Total revenue | 5,618,598 | 3,182,902 | 2,435,696 | 77 | % | |||||||||||
The following table summarizes revenues from Grown Rogue production for the three months ended July 31, 2021.
| Three months ended July 31, | 2021 ($) | 2020 ($) | Variance ($) | Variance (%) | ||||||||||||
| Indoor | 2,493,400 | 704,763 | 1,788,637 | 254 | % | |||||||||||
| Outdoor | 215,474 | 138,394 | 77.080 | 56 | % | |||||||||||
| Trim & other | 215,474 | 60,837 | 259,280 | 426 | % | |||||||||||
| Revenue from Grown Rogue production | 3,028,991 | 903,994 | 2,124,997 | 235 | % | |||||||||||
Revenues during Q3 2021 were higher than Q3 2020 revenues, due primarily to the consolidation of $1.7 million in revenues in Q3 2021 from Golden Harvests, of which the Company acquired a 60% interest at the beginning of Q3 2021. Ongoing and comparable operations also generated increased indoor and outdoor flower sold, further, which was offset by a decrease in average the selling prices of indoor and outdoor flower, excluding the impact of the newly consolidated subsidiary, Golden Harvests. The following tables summarize pounds sold, revenues from those pounds, and average selling prices. “ASP” refers to average selling price.
| Three months ended July 31, | 2021 Pounds sold | 2020 pounds sold | Pounds variance | 2021 ASP ($) | 2020 ASP ($) | ASP variance | ||||||||||||||||||
| Indoor | 1,633 | 563 | 1,070 | 1,527 | 1,253 | 274 | ||||||||||||||||||
| Outdoor | 362 | 204 | 158 | 602 | 677 | (75 | ) | |||||||||||||||||
| Total | 1,995 | 767 | 1,228 | 1,359 | 1,100 | 259 | ||||||||||||||||||
The following table summarizes revenues from Grown Rogue production for the nine months ended July 31 , 2021.
| Nine months ended July 31, | 2021 ($) | 2020 ($) | Variance ($) | Variance (%) | ||||||||||||
| Indoor | 3,633,394 | 1,788,845 | 1,844,549 | 103 | % | |||||||||||
| Outdoor | 1,211,949 | 1,134,721 | 77,228 | 7 | % | |||||||||||
| Trim & other | 427,565 | 133,848 | 290,894 | 219 | % | |||||||||||
| Revenue from Grown Rogue production | 5,272,907 | 3,057,414 | 2,215,493 | 72 | % | |||||||||||
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Revenues during the nine months ended July 31, 2021, were higher than the comparative period in 2020, due primarily to the consolidation of $1.7 million in revenues in Q3 2021 from Golden Harvests, of which the Company acquired a 60% interest at the beginning of Q3 2021. We increased indoor and outdoor flower sold from ongoing operations during the nine months ended July 31, 2021, of which indoor ASPs were substantially higher than the comparative 2020 period and outdoor ASPs were slightly lower. The following tables summarize pounds sold, revenues from those pounds, and average selling prices.
| Nine months ended July 31, | 2021 Pounds sold | 2020 pounds sold | Pounds variance | 2021 ASP ($) | 2020 ASP ($) | ASP variance | ||||||||||||||||||
| Indoor | 2,584 | 1,598 | 986 | 1,406 | 1,119 | 287 | ||||||||||||||||||
| Outdoor | 1,838 | 1,682 | 156 | 659 | 675 | (16 | ) | |||||||||||||||||
| Total | 4,422 | 3,280 | 1,142 | 1,096 | 891 | 205 | ||||||||||||||||||
Costs of goods and services sold
| Three months ended July 31, | 2021 | 2020 | Change ($) | Change (%) | ||||||||||||
| Cost of finished cannabis inventory sold | $ | 1,239,200 | $ | 475,982 | 763,218 | 160 | % | |||||||||
| Costs of service revenues | - | - | - | -- | ||||||||||||
| Costs of goods sold, excl. fair value items | $ | 1,239,200 | $ | 475,982 | 763,218 | 160 | % | |||||||||
Cost of finished cannabis inventory increased by 160% from Q3 2021 over Q3 2020, while revenues from product sales increased 235% over the same periods, reflecting operational and scale efficiencies.
| Nine months ended July 31, | 2021 | 2020 | Change ($) | Change (%) | ||||||||||||
| Cost of finished cannabis inventory sold | $ | 2,584,832 | $ | 1,817,480 | 767,352 | 42 | % | |||||||||
| Costs of service revenues | 154,353 | - | 154,353 | -- | ||||||||||||
| Costs of goods sold, excl. fair value items | $ | 2,739,185 | $ | 1,817,480 | 921,705 | 51 | % | |||||||||
Cost of finished cannabis inventory sold during the nine months ended July 31, 2021 increased by 42% from Q3 2021 over Q3 2020, while revenues for the same periods increased 72%, reflecting operational and scale efficiencies.
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Net loss
Share-based compensation
During the nine months ended July 31, 2021, we granted, or committed to grant, common shares as compensation to employees and service providers. The common shares issuances and stock options (measured at fair value using the Black-Scholes pricing model) resulted in total expense recognition of $201,553 during the nine months ended July 31, 2021 (2020 - $320,852).
General and administrative expenses
| Three months ended July 31, | 2021 ($) | 2020 ($) | Change ($) | Change (%) | ||||||||||||
| Office, banking, travel, and overheads | 455,371 | 90,515 | 364,856 | 403 | % | |||||||||||
| Professional services | 159,746 | 75,553 | 84,193 | 111 | % | |||||||||||
| Salaries and benefits | 601,863 | 383,282 | 218,581 | 57 | % | |||||||||||
| General and administrative expenses | 1,216,980 | 549,350 | 667,630 | 122 | % | |||||||||||
| Nine months ended July 31, | 2021 ($) | 2020 ($) | Change ($) | Change (%) | ||||||||||||
| Office, banking, travel, and overheads | 777,630 | 307,428 | 470,202 | 153 | % | |||||||||||
| Professional services | 542,675 | 417,124 | 125,551 | 30 | % | |||||||||||
| Salaries and benefits | 1,339,333 | 1,089,767 | 249,566 | 23 | % | |||||||||||
| General and administrative expenses | 2,659,638 | 1,814,319 | 845,319 | 47 | % | |||||||||||
Increased general and administrative costs quarter over quarter and during the nine months ended July 31, 2021, periods were in part to an increase in total overheads, from growth in facility sizes and number of facilities, a portion of which is attributed to administration. The increases are also due in part to additional staffing required to support expansion and growth, which demanded increases in management expertise in operations and corporate positions, as well as an increased utilization of professional services to support various transactions and costs of regulatory compliance and public disclosure executed during the nine months ended July 31, 2021.
Interest and interest accretion expense
| Three months ended July 31, | 2021 ($) | 2020 ($) | Change ($) | Change (%) | ||||||||||||
| Interest and accretion expense | 236,321 | 418,756 | (182,435 | ) | (44 | )% | ||||||||||
| Nine months ended July 31, | 2021 ($) | 2020 ($) | Change ($) | Change (%) | ||||||||||||
| Interest and accretion expense | 895,645 | 719,887 | 175,758 | 24 | % | |||||||||||
The decrease in interest and accretion expense for the three months ended July 31, 2021, over the comparative periods in 2020 primarily reflects the reduction in convertible debentures, where were carried in Q3 2020 but were settled prior to Q3 2021 (in Q1 2021). The increase in interest and accretion for the nine months ended July 31, 2021, over the comparative period, reflects the reduction in interest accretion from convertible debentures, offset by accretion for subsequently issued debt. Debt was issued approximately halfway through Q2 2020 with a principal amount of $600,000 issued on March 20, 2020, at an effective interest rate of 73%. Debt issuances during the nine months ended July 31, 2021 with total principal of $375,000 and effective interest rates of approximately 27%; and a debt issuance during the nine months ended July 31, 2021, of $150,000 with an annual interest rate of 10%. During the nine months ended July 31, 2021, a note payable for $100,000 was issued and accrues interest at $2,000 per month.
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The following table sets out selected quarterly results of the Company for the eight quarters ended on or before July 31, 2021. The information contained herein is drawn from the interim financial statements of the Company for each of the aforementioned eight quarters. The trend in revenues reflects the consolidation of Golden Harvests, following our acquisition of a 60% controlling interest, and its $1.7 million in revenues in Q3 2021. Revenues in any period are subject to market sales pricing, which historically has fluctuated significantly. Management has observed that pricing and sales volumes tend to be lower seasonally during winter months, in the Company’s first fiscal quarter, as compared to the preceding months, although we do not have high confidence that this will persist. Net losses have fluctuated around an average of approximately $822,000 per quarter (in those quarters presented below), and such losses include the impact of significant non-cash expenses, such as losses on the fair valuation of derivative liabilities, marketable securities, share-based payments, and interest accretion. Expenses contributing to net loss do not have significant seasonal trends, except for costs of sales, which follow trends in revenues.
| Fiscal Year | 2021 | 2021 | 2021 | 2020 | ||||||||||||
| Quarter ended | Jul | Apr | Jan | Oct | ||||||||||||
| Revenue ($) | 3,028,991 | 1,538,422 | 1,051,185 | 1,056,702 | ||||||||||||
| Net loss ($) | 240,294 | (1,442,518 | ) | (915,065 | ) | (122,401 | ) | |||||||||
| Net income (loss)/share, basic & diluted | - | (0.01 | ) | (0.01 | ) | - | ||||||||||
| Fiscal Year | 2020 | 2020 | 2020 | 2019 | ||||||||||||
| Quarter ended | Jul | Apr | Jan | Oct | ||||||||||||
| Revenue ($) | 903,994 | 1,172,612 | 1,106,296 | 431,629 | ||||||||||||
| Net loss ($) | (794,072 | ) | (1,206,828 | ) | (233,187 | ) | (2,098,742 | ) | ||||||||
| Net loss, basic & diluted ($/share) | (0.01 | ) | (0.01 | ) | - | (0.02 | ) | |||||||||
Our ability to generate cash in the short term is based upon sales from production and financing proceeds, and in the long term is based upon sales from production, including production from investments in production increases, or from growth by business acquisitions, or a combination thereof. Investments to increase production or acquire business may require further financing. The Company generates cash flows from sales of cannabis products which generate margin that contribute to coverage of other operating costs, but has not yet reached productive scale to generate net income and positive net cash flows from operations on a consistent basis. We have raised financing historically through debt and equity, which has been and will be invested in the business in order to improve production yields and increase total productive capacity, as well as cover operating costs. We raised gross proceeds of approximately $5.96 million during the nine months ended July 31, 2021 (2020 - approximately $1.7 million).
We are typically able to sell finished goods shortly after inventory reaches its final state, and sales are primarily made on cash-on-delivery terms, or with short net terms. Our ability to fund operations, to plan capital expenditures, and to plan acquisitions, depends on future operating performance and cash flows and the availability of capital by way of debt or equity investment in the Company, which are subject to prevailing economic conditions and financial, business, and other factors, some of which are beyond the Company’s control.
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Cash flows
The following table summarizes certain cash flow items for the nine months ended July 31, 2021 and 2020.
| Nine months ended July 31, | 2021 ($) | 2020($) | ||||||
| Net loss | (2,117,289 | ) | (2,234,087 | ) | ||||
| Net cash provided (used) by operating activities | (900,712 | ) | (87,576 | ) | ||||
| Net cash used in investing activities | (2,212,723 | ) | (642,696 | ) | ||||
| Net cash provided (used) by financing activities | 3,559,454 | 1,246,698 | ||||||
| Net increase in cash and cash equivalents | 446,019 | 516,426 | ||||||
| Effect of currency translation | 3,701 | (110,145 | ) | |||||
| Cash and cash equivalents, beginning | 217,788 | 74,926 | ||||||
| Cash and cash equivalents, ending | 663,807 | 591,352 | ||||||
Operating activities
During the nine months ended July 31, 2021, there was a decrease of $900,712 (2020 - $87,576) relating to cash provided by operating activities. This number was derived by adding back non-cash items to net loss, including the following significant adjustments:
| ● | $134,311 (2020 - $173,687) in amortization of property & equipment; |
| ● | $592,422 (2020 - $351,822) from depreciation expensed in costs of finished inventory sold; |
| ● | Deduction of $496,855 (2020 – $1,425,228) from the unrealized change in fair value of biological assets; |
| ● | $387,600 (2020 - $1,471,821) for changes in fair value in inventory sold; |
| ● | $310,480 (2020 - $375,957) in share-based compensation and stock option vesting expense, including expense for option grants under our stock option plan implemented during 2020, as well as shares issued directly as compensation for employees, directors, and service providers; |
| ● | $801,929 (2020 - $461,415) in accretion of interest expense on debt and convertible debentures outstanding. As a point of reference, debt outstanding at July 31, 2021 totaled approximately $1.6 million (July 31, 2020 – approximately $2.3 million), with approximately $2.6 million of convertible debenture payments and conversions to common shares having been settled during the nine months ended July 13, 2021, including cash payments of approximately $1.7 million; and |
| ● | Deduction of $133,241 (2020 – add-back of $558,223) from the unrealized gain on our investment in PBIC shares, measured at PBIC’s publicly quoted share price; |
| ● | $1,258,996 (2020 - $Nil) from the fair value remeasurement of the derivative liability component of convertible debentures; and |
| ● | $189,816 (2020 - $Nil) in the loss realized from the purchase of the non-controlling interest of GR Distribution for common shares of the Company. |
Significant to the use of cash from operations was the use of cash, facilitated by financings raised during the nine months ended July 31, 2021, to settle accounts payable carried forward from prior periods. The majority of these payables were owed to professional service providers.
| Pg 15 of 39 |
Increases in non-cash working capital are summarized in the following table.
| Nine months ended July 31, | 2021 | 2020 | ||||||
| Accounts receivable | $ | (315,570 | ) | $ | (134,793 | ) | ||
| Inventory & biological assets | (714,535 | ) | 383,283 | |||||
| Prepaid expenses and other assets | (149,486 | ) | 64,180 | |||||
| Accounts payable and accrued liabilities | (674,194 | ) | (181,245 | ) | ||||
| Interest payable | 633 | (32,728 | ) | |||||
| Unearned revenue | 8,000 | (35,000 | ) | |||||
| Total | $ | (1,845,152 | ) | $ | 63,697 | |||
Changes in accounts receivable are due to the timing and collection of sales. Changes in inventory & biological assets reflect increases due to increased productive capacity, as well as the timing of harvests, the timing of the completion growth cycles, and the timing of sales of finished inventory. Changes in liabilities, including accounts payable and accrued liabilities reflect the use of credit terms and cash flow management based upon ongoing liquidity management. We settled significant portions of accounts payable during the nine months ended July 31, 2021, which had been carried forward from prior periods. Unearned revenues reflect payments for contracts with future delivery requirements, which we use from time to time as part of our sales strategy.
Investing activities
During the nine months ended July 31, 2021, we added $4,070,077 (2020 - $902,224) to property and equipment, including non-cash right-of-use asset additions. We expended cash flows of $1,538,851 (2020 - $514,824) for property and equipment additions, driven by the expansion of our Rossanley facility; construction of a new outdoor grow location in Oregon; and expansion of our indoor grow facility in Michigan (owned by Golden Harvests).
During the nine months ended July 31, 2021, we expended $750,000 towards the acquisition of Airport (for which aggregate total consideration will be $3,000,000).
Financing activities
Net cash flows from financing activities during the nine months ended July 31, 2021 were $3,559,454 (2020 – $1,246,698). Significant financing activities included the following:
| ● | Debt proceeds of $150,000 borrowed to expand Rossanley productive capacity; |
| ● | Debt proceeds of $375,000 borrowed to advance the acquisition of Airport; |
| ● | Equity issuance by a subsidiary of $475,000, also to advance the acquisition of Airport; and |
| ● | $1,225,000 raised through a private placement of common shares and warrants; |
| ● | $3,738,564 raised through a brokered private placement of Special Warrants; |
| ● | Repayments of $1,312,722 as part of full retirement of convertible debentures; and |
| ● | Repayments of $371,040 of long-term debt, the majority of which is owed for debt raised to finance growth in Michigan, the state in which Golden Harvests, a subsidiary acquired in Q3 2021, is located. |
Financing activities during the nine months ended July 31, 2020 included the following:
| ● | $615,000 in debt proceeds; |
| ● | $1,067,745 raised through a private placement of common shares; and |
| ● | $178,480 in repayments of long-term debt. |
| Pg 16 of 39 |
Trends and expected fluctuations in liquidity
| July 31, 2021 ($) | October 31, 2020 ($) | Variance ($) | Variance (%) | |||||||||||||
| Current assets | 4,615,241 | 1,834,775 | 2,780,466 | 152 | % | |||||||||||
| Current liabilities | (2,765,387 | ) | (1,799,104 | ) | (966,283 | ) | 54 | % | ||||||||
| Working capital | 1,849,854 | 35,671 | 1,814,183 | 5086 | % | |||||||||||
| Add: derivative liabilities (not cash-settled) | - | 583,390 | (583,390 | ) | -- | |||||||||||
| Working capital excluding derivative liabilities | 1,849,854 | 619,061 | 1,230,793 | 199 | % | |||||||||||
Working capital, excluding derivative liabilities, varied from October 31, 2020 to July 31, 2021 due to the convertible debentures and associated derivative liability being settled during the nine months ended July 31, 2021, as well as the debt and equity financings, described above, providing gross cash proceeds of approximately $5.96 million. Cash was used to retire convertible debentures, settle accounts payable carried forward from prior periods, and invest in productive capacity; cash not used for these purposes remains available as part of working capital and for deployment in future business opportunities.
We expect significant ongoing fluctuations in working capital over time, as we are in the early stages of growth. We have historically raised debt with principal due on maturity, and accordingly, we expect significant one-time payments as debt matures, as opposed to smooth cash outflows over time. We have historically been able to meet commitments, modify debt maturities, and raise new financing as required in order to respond to changes in liquidity position, although there is no guarantee we will be able to do so in the future. We are exposed to market pricing for cannabis products, which materially impacts our liquidity and is out of our control. The market for cannabis products, including flower, which is our primary product, is relatively immature, having recently become legal to buy and sell in certain markets. We have observed some indications of seasonality, and in addition, we have observed that market conditions can change rapidly without apparent explanations or analyzable causes. We cannot control whether we will be able to raise financing when required or sell cannabis products at profitable prices in the future; however, part of our strategy is to produce flower at sustainable gross margins over a growing productive base, which, holding other factors constant, is expected to result in improved net loss or net income, as well as net cash flows.
Commitments and obligations
Set out below are undiscounted minimum future lease payments after July 31, 2021.
| Total future minimum lease payments | ||||
| Less than one year | $ | 456,118 | ||
| Between one and five years | 395,304 | |||
| Total | $ | 851,422 | ||
The Company has three lease contracts with extension options remaining after July 31, 2021, which were negotiated by management to provide flexibility in managing business needs. Set out below are the undiscounted potential rental payments related to periods following the date of exercise options that are not included in the lease term:
| Within five years | More than five years | |||||||
| Extension options available to be exercised | $ | 924,000 | $ | 2,117,901 | ||||
| Pg 17 of 39 |
The contractual maturities of the Company's accounts payable and accrued liabilities, debt, leases, and unearned revenue occur over the next three years as follows:
| Year 1 ($) | Years 2 – 3 ($) | |||||||
| Accounts payable and accrued liabilities | 1,387,488 | 123,413 | ||||||
| Lease liabilities | 386,941 | 1,052,079 | ||||||
| Debt | 490,921 | 1,107,534 | ||||||
| Business acquisition consideration payable | 364,537 | - | ||||||
| Interest payable | 10,000 | - | ||||||
| Unearned revenue | 8,000 | - | ||||||
| Income Tax | 117,500 | - | ||||||
| Total | 2,765,387 | 2,283,026 | ||||||
Other liquidity items
We hold shares in Plant-Based Investment Corp. (“PBIC”), which are classified as non-current. If or when we choose to sell these shares, we will be subject to market conditions for PBIC shares at the time of sale. We are not in default or arrears on our liabilities, noting that we have liabilities which have been deferred into non-current periods by creditors; such amounts were $123,413 at July 31, 2021.
Debt financing
Long-term debt
On November 23, 2020, we issued debt with a principal amount of $125,000, interest accrued at 10% per annum, and a maturity date of November 23, 2023. After the maturity date, additional interest payments are due quarterly, at amounts that cause total interest paid over the life of the debt to equal $125,000. The note is reported at amortized cost using an effective interest rate of approximately 27%.
On December 2, 2020, we issued debt with a principal amount of $150,000, interest accrued at 10% per annum, and a maturity date of December 31, 2021. Interest and principal are payable upon maturity. The maturity date can be extended by up to six-months for a $1,000 fee per $10,000 of principal extended.
On January 27, 2021, we issued debt with a principal amount of $250,000, interest accrued at 10% per annum, and a maturity date of January 27, 2024. After the maturity date, additional interest payments are due quarterly, at amounts that cause total interest paid over the life of the debt to equal $250,000. The note is reported at amortized cost using an effective interest rate of approximately 27%.
On February 4, 2021, a note payable for $100,000 was issued to satisfy a milestone payment due to GH. The note is payable 12 months from the issue date and accrues interest at $2,000 per month. This note payable was reclassified to acquisition consideration payable during the nine months ended July 31, 2021.
On May 1, 2021, the Company assumed a note payable owed by Golden Harvests with a carrying value of $227,056. The note is for a principal amount of $250,000, interest paid monthly at 10% per annum, and a maturity date of January 14, 2024. After the maturity date, additional interest payments are due quarterly, at amounts that cause total interest paid over the life of the debt to equal $250,000. The note is reported at amortized cost using an effective interest rate of approximately 33%.
| Pg 18 of 39 |
Equity financing
Issuance of non-controlling equity interest in subsidiary
During the nine months ended July 31, 2021, the Company sold an aggregate total of an approximately 10.6% interest in Grown Rogue Distribution, LLC (“GR Distribution”) for $475,000. The interest was comprised of 11.875 newly issued equity units (“GR Distribution Units”) and each GR Distribution Unit was sold for $40,000. After the issuances, 11.875 GR Distribution Units were issued and outstanding. Of the 11.875 GR Distribution units issued, 6.25 were issued to a director of the Company, for proceeds of $250,000. The Company purchased 11.875 GR Distribution Units in exchange for 3,711,938 common shares with an aggregate fair value of $664,816. After the Company’s purchase of 11.875 GR Distribution Units, Grown Rogue Distribution, LLC was a 100% owned subsidiary.
Trends and expected fluctuations in capital resources
We generated net cash flows from financing of approximately $3.6 million during the nine months ended July 31, 2021 (2020 – $1.2 million). Proceeds of $525,000 were raised from debt issuances during the nine months ended July 31, 2021 (2020 - $615,000), and gross proceeds of $ 4,963,564 were raised from equity issuances and subscriptions (2020 - $1,067,745). As described above, during the nine months ended July 31, 2021, $475,000 was received for the sale of a non-controlling interest in a subsidiary, and the same interest was repurchased for common shares of the Company.
Financing activities have been critical to our ability to continue operating, and significant portions of our financing have historically been raised from key management personnel. These individuals have not provided assurance that they will provide additional financing if we require financing but are unable to raise such financing from third parties; this highlights the importance of management’s strategy of scaling operations. Our business strategy contemplates growing cash flows from operations, which may contribute to reinvestment and growth; however, further financing may be required or utilized based upon our future capital position and future business opportunities.
Off-Balance Sheet Arrangements
The Company does not have any off-balance sheet arrangements.
Transactions with Related Parties
Transactions with key management and directors
During the nine months ended July 31, 2021, the Company completed the following related party transactions:
| 1. | Through its wholly owned subsidiary, GRU Properties, LLC, the Company leased a property located in Trail, Oregon (“Trail”) owned by the Company's President and CEO. The lease was extended during the nine months ended July 31, 2021, with a term through December 31, 2025. Lease charges of $55,000 were incurred for the nine months ended July 31, 2021 (2020 - $57,500). The Company has $Nil (October 31, 2020 - $45,000) owing under this lease at July 31, 2021 from deferred payments previously reported as non-current liabilities. The lease liability balance for Trail at July 31, 2021, was $253,680 (October 31, 2020 - $12,532). Also during the nine months ended July 31, 2021, the CEO leased equipment to the Company, which had a balance due of $38,775 at July 31, 2021. Payments of $10,173 were made against the equipment leases during the nine months ended July 31, 2021. Leases liabilities, including Trail and equipment leases, payable to the CEO were $303,612 in aggregate at July 31, 2021 (October 31, 2020 - $39,479). |
The CEO earns a royalty of 2.5% of sales of flower produced at Trail. This royalty terminates upon the final sale of flower from Trail which was planted during the year ended October 31, 2020. The CEO earned royalties of $18,215 during the nine months ended July 31, 2021 (2020 - $17,859).
| Pg 19 of 39 |
The Company settled a total of $162,899 in long-term accrued liabilities due to the CEO by way of a payment of $62,899 and $100,000 attributed to the CEO’s subscription to a non-brokered private placement on February 5, 2021.
| 2. | The Company incurred expenses of $43,020 (2020 - $48,500) for services provided by the spouse of the CEO. At July 31, 2021, accounts and accrued liabilities payable to this individual were $1,746 (October 31, 2020 - $1,946). During the year ended October 31, 2020, this individual was granted 500,000 options for employment services compensation which vested on the grant date. |
| 3. | Key management personnel consists of the President and CEO; the former Chief Strategy Officer; the CFO of GR Unlimited; the former Chief Market Officer (“CMO”); the Chief Operating Officer (“COO”)*, the Chief Accounting Officer (“CAO”)**; and the CFO of Grown Rogue International, Inc. The compensation paid to key management is presented in the following table: |
| Nine months ended July 31, | 2021 ($) | 2020($) | ||||||
| Salaries and consulting fees | 508,503 | 359,000 | ||||||
| Share-based compensation | 71,000 | 46,000 | ||||||
| Stock option expense | 75,571 | 78,028 | ||||||
| Total | 655,074 | 483,028 | ||||||
| * | COO was appointed subsequent to April 30, 2021 and was paid & compensated prior to appointment; compensation for the nine months ended July 31, 2021, is included in the table above for comparability to past & ongoing expenses. |
| ** | CAO was promoted to CFO in September 2021. |
Stock options granted to key management personnel and close family members of key management personnel include the following options, granted during the year ended October 31, 2020: 750,000 options to the CFO of GR Unlimited; 750,000 options to the CMO (which expired during the three months ended July 31, 2021, following resignation of the CMO); and 250,000 options to the CAO. During the nine months ended July 31, 2021, 500,000 options were granted to the COO.
Compensation to directors during the nine months ended July 31, 2021, was comprised of 100,908 common shares with a fair value of $14,187 (2020 – 1,200,000 common shares with a fair value of $82,094) and fees of $13,500 (2020 - $13,500).
Accounts payable and accrued liabilities due to key management at July 31, 2021, totaled $210,475 (October 31, 2020 - $441,424).
On November 23, 2020, a director (Mr. Steve Lightman) purchased 6.25 newly issued equity units of Grown Rogue Distribution, LLC for $250,000, out of the total of 11.875 such units issued during the nine months ended July 31, 2021. On April 30, 2021, the Company purchased these units for consideration of 1,953,125 common shares with a fair value of $349,809.
| Pg 20 of 39 |
Debt balances and movements with key management and directors
The following table sets out the movements and balances of debt with related parties during nine months ended July 31, 2021 and the year ended October 31, 2020. Borrowings from related parties were executed at times because we could identify very limited other sources of financing. The borrowing from the COO was transacted to accelerate expansion of an indoor growing facility at a competitive rate of interest. The names of the related parties, by designation, are as follows: CEO – Obie Strickler; CFO of GR Unlimited LLC – Adam August; Directors – Abhilash Patel; and COO – Thomas Fortner.
| CEO | CFO of GR Unlimited LLC | Directors | COO | Total | ||||||||||||||||
| Balance - October 31, 2019 | $ | - | $ | - | $ | - | $ | - | $ | - | ||||||||||
| Borrowed | 50,000 | 100,000 | 150,000 | - | 300,000 | |||||||||||||||
| Interest | 21,745 | 43,491 | 65,236 | - | 130,472 | |||||||||||||||
| Payments | (10,252 | ) | (20,504 | ) | (30,756 | ) | - | (61,512 | ) | |||||||||||
| Balance - October 31, 2020 | $ | 61,493 | $ | 122,987 | $ | 184,480 | $ | - | $ | 368,960 | ||||||||||
| Borrowed | - | - | - | 150,000 | 150,000 | |||||||||||||||
| Interest | 28,848 | 57,695 | 86,543 | 10,000 | 183,086 | |||||||||||||||
| Payments | (23,456 | ) | (46,912 | ) | (70,368 | ) | - | (140,736 | ) | |||||||||||
| Balance – July 31, 2021 | $ | 66,885 | 133,770 | 200,655 | 160,000 | $ | 561,310 | |||||||||||||
Pursuant to the loan and related agreements transacted during the year ended October 31, 2020, the CEO, CFO of GR Unlimited LLC, and a director obtained 5.5%; 1%; and 2.5% of GR Michigan LLC, respectively; third parties obtained 4% as part of the consideration for loaned funds, representing a 13% non-controlling interest in GR Michigan. Concurrent with execution of the New Option, these parties, except the CEO, obtained the same interests in Canopy, and the CEO obtained a 92.5% interest in Canopy.
Related party subscriptions to February 5, 2021, non-brokered private placement
The following table sets out related party subscriptions to the February 5, 2021, non-brokered private placement:
Subscription
| Shares | Warrants | ||||||||||
| Chief Operating Officer | 125,000 | 1,000,000 | 1,000,000 | |||||||||
| Chief Financial Officer of GR Unlimited | 250,000 | 2,000,000 | 2,000,000 | |||||||||
| Chief Executive Officer | 200,000 | 1,600,000 | 1,600,000 | |||||||||
| PBIC | 250,000 | 2,000,000 | 2,000,000 | |||||||||
| Total | $ | 825,000 | 6,600,000 | 6,600,000 | ||||||||
On March 5, 2021, under an offering of Special Warrants, Plant-Based Investment Corp. (“PBIC”) invested proceeds of $394,546 which resulted in the issuance to PBIC of 2,444,444 common shares and 2,444,444 warrants to purchase common shares. Each warrant is exercisable at CAD$0.30 for a period of two years. PBIC is considered a related party due to its ownership of over 10% of the issued and outstanding shares of the Company.
| Pg 21 of 39 |
Other Selected Financial Information
Adjusted EBITDA (non-IFRS measure)
The Company’s “Adjusted EBITDA” is a non-IFRS measure used by management that does not have any prescribed meaning by IFRS and that may not be comparable to similar measures presented by other companies. The Company defines Adjusted EBITDA as the Company’s net income or loss for a period, as reported, before interest, taxes, depreciation and amortization, and is further adjusted to remove transaction costs, stock-based compensation expense, accretion expense, gain (loss) on derecognition of derivative liabilities and the effects of fair-value accounting for biological assets and inventory. The Company believes that this is a useful metric to evaluate its operating performance.
We have included a figure within the Adjusted EBITDA reconciliation called “Adjusted Gross Margin.” Adjusted Gross Margin is calculated by removing the impact of fair value adjustments and amortization of fixed assets from net loss.
| Three months ended | Nine months ended | |||||||||||||||
| July 31, | July 31, | |||||||||||||||
| Adjusted EBITDA Reconciliation | 2021 ($) | 2020 ($) | 2021 ($) | 2020 ($) | ||||||||||||
| Net loss, as reported | 240,294 | (794,072 | ) | (2,117,289 | ) | (2,234,087 | ) | |||||||||
| Add back realized fair value amounts included in inventory sold | 198,540 | 626,522 | 387,600 | 1,471,821 | ||||||||||||
| Add back (less) unrealized fair value gain (loss) on growth of biological assets | (649,907 | ) | (770,724 | ) | (496,855 | ) | (1,425,228 | ) | ||||||||
| Add back amortization of property & equipment included in cost of sales | 186,149 | 115,331 | 592,422 | 351,822 | ||||||||||||
| (24,924 | ) | (822,943 | ) | (1,634,122 | ) | (1,835,672 | ) | |||||||||
| Add back accretion expense, as reported | 187,493 | 321,875 | 801,929 | 461,415 | ||||||||||||
| Add back amortization of intangible assets, as reported | - | 5,980 | 4,997 | 20,620 | ||||||||||||
| Add back amortization of property and equipment, as reported | 55,610 | 61,959 | 134,311 | 173,687 | ||||||||||||
| Add back share-based compensation expense, as reported | 82,492 | 329,014 | 310,480 | 329,014 | ||||||||||||
| Add back interest expense, as reported | 48,828 | 96,880 | 93,716 | 258,472 | ||||||||||||
| Add back unrealized loss on marketable securities, as reported | 422,867 | (69,064 | ) | (133,241 | ) | 558,223 | ||||||||||
| Add back unrealized gain on derivative liability | - | - | 1,258,996 | - | ||||||||||||
| Derecognition of derivative liability | - | (244,572 | ) | (244,572 | ) | |||||||||||
| Loss on debt restructure | - | 462,213 | 462,213 | |||||||||||||
| Add back unrealized foreign exchange loss | - | - | 22,927 | - | ||||||||||||
| Loss on settlement of non-controlling interest | - | - | 189,816 | - | ||||||||||||
| Adjusted EBITDA | 772,366 | 141,342 | 1,049,809 | 183,400 | ||||||||||||
| Pg 22 of 39 |
Cash margin analysis (non-IFRS measure)
“Cash Margin” is a non-IFRS measure used by management that does not have any meaning under IFRS and may not be comparable to similar measures presented by other companies. To define Cash Margin, first we define “Cash Production Costs,” pertaining to revenue from our products and third-party products, as the cost of finished cannabis inventory sold, as reported on the statement of comprehensive loss, less non-cash production costs, packaging and distribution costs, inventory write-offs and adjustments; costs for service revenues are as presented on the statement of comprehensive loss. Cash Margin is arrived at by subtracting Cash Production Costs from their corresponding revenue category, and dividing the result by revenue to arrive at a percentage of revenue. The Company believes that this is a useful metric to evaluate its operating performance.
The following table presents Cash Margin by revenue type.
| Three months ended | ||||||||||||
| July 31, 2021 | ||||||||||||
| Cash Margin analysis | Revenue ($) | Costs ($) | Margin % | |||||||||
| Grown Rogue products | 3,028,991 | 911,387 | 70 | % | ||||||||
| Indirect overhead allocations | - | 27,492 | -- | |||||||||
| Third party products | - | - | -- | |||||||||
| Service revenues | - | - | -- | |||||||||
| Asset depreciation included in COGS | - | 186,149 | -- | |||||||||
| Cost of packaging & other included in COGS | - | 114,172 | -- | |||||||||
| Totals before fair value adjustments | 3,028,991 | 1,239,200 | 59 | % | ||||||||
| Realized fair value amounts in inventory sold, as reported | -- | 198,539 | -- | |||||||||
| Unrealized fair value (gain) on growth of biological assets, as reported | -- | (649,906 | ) | -- | ||||||||
| Totals, as reported | 3,028,991 | 787,833 | 74 | % | ||||||||
| Nine months ended | ||||||||||||
| July 31, 2021 | ||||||||||||
| Cash Margin analysis | Revenue ($) | Costs ($) | Margin % | |||||||||
| Grown Rogue products | 5,272,907 | 1,770,683 | 66 | % | ||||||||
| Indirect overhead allocations | - | 62,682 | -- | |||||||||
| Third party products | 1,636 | 2,003 | (22 | %) | ||||||||
| Service revenues | 344,055 | 154,353 | 55 | % | ||||||||
| Asset depreciation included in COGS | - | 592,422 | -- | |||||||||
| Cost of packaging & other included in COGS | - | 157,094 | -- | |||||||||
| Totals before fair value adjustments | 5,618,598 | 2,739,185 | 51 | % | ||||||||
| Realized fair value amounts in inventory sold, as reported | -- | 387,599 | -- | |||||||||
| Unrealized fair value (gain) on growth of biological assets, as reported | -- | (496,854 | ) | -- | ||||||||
| Totals, as reported | 5,618,598 | 2,629,930 | 53 | % | ||||||||
| Pg 23 of 39 |
As of the date of the MD&A, the Company had 156,936,876 common shares outstanding.
As of the date of this MD&A, the Company has the following warrants outstanding, exercisable into common shares:
| Exercise price | Warrants outstanding | Life (years) | Expiry date | |||||||||
| $ | 0.16 | 8,409,091 | 0.3 | November 01, 2021 | ||||||||
| 0.13 | 5,000,000 | 0.5 | February 10, 2022 | |||||||||
| 0.13 | 10,000,000 | 0.8 | May 15, 2022 | |||||||||
| 0.20 | 8,200,000 | 1.5 | February 5, 2023 | |||||||||
| 0.30 | 23,162,579 | 1.6 | March 05, 2023 | |||||||||
| 0.44 | 2,148,117 | 1.9 | June 28, 2023 | |||||||||
| $ | 0.22 | 56,919,787 | 1.2 | |||||||||
As of the date of this MD&A, the Company has the following Agent Warrants outstanding, exercisable into compensation options (“Compensation Options”) for no additional consideration. Each Compensation Option entitles the holder thereof to purchase one unit of the Company (a “Compensation Unit”) at the Issue Price of CAD$0.225 for a period of twenty-four (24) months. Each Compensation Unit is comprised of one common share and one common share purchase warrant of the Company (a "Compensation Warrant"). Each Compensation Warrant shall entitle the holder thereof to purchase one common share in the capital of the Company at a price of CAD$0.30 for twenty-four (24) months. The following table sets out the Agent Warrants issued and outstanding at the date of this MD&A.
| Exercise price (CAD$) | Agent Warrants outstanding | Remaining contractual life (years) | Expiry date | |||||||||
| $ | 0.225 | 1,241,258 | 1.4 | March 5, 2023 | ||||||||
As of the date of this MD&A, the Company has the following stock options outstanding and exercisable into common shares:
| Exercise price (CAD$) | Options outstanding | Number exercisable | Remaining Contractual Life (years) | Expiry period | ||||||||||||
| $ | 0.44 | 500,000 | 500,000 | 0.3 | January 2022 | |||||||||||
| 0.15 | 2,215,000 | 1,925,000 | 2.8 | July 2024 | ||||||||||||
| 0.15 | 200,000 | - | 3.1 | November 2024 | ||||||||||||
| 0.15 | 500,000 | 250,000 | 3.2 | December 2024 | ||||||||||||
| 0.28 | 1,085,000 | - | 3.6 | April 2025 | ||||||||||||
| 0.16 | 1,300,000 | 500,000 | 3.7 | May 2025 | ||||||||||||
| 0.20 | 5,800,000 | 3,175,000 | 3.0 | |||||||||||||
| Pg 24 of 39 |
Critical Accounting Judgments and Estimation Uncertainties
The preparation of the consolidated financial statements in conformity with IFRS requires that the Company’s management make critical judgments, estimates and assumptions about future events that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of income and expenses during the reporting period. The estimates and associated assumptions are based on historical experience and other factors that are considered to be relevant. Actual results may differ from these estimates. The estimates and underlying assumptions are reviewed on an ongoing basis. The most significant judgments include those related to the ability of the Company to continue as a going concern, the determination of when property and equipment are available for use, and impairment of its financial and non-financial assets. The most significant estimates and assumptions include those related to the valuation of biological assets, the collectability of accounts receivable, the useful lives of property and equipment, inputs used in accounting the determination of the discount rate used to estimate the fair value of the liability component of convertible promissory notes, the discount rates used to calculate present values of lease liabilities, the inputs used in the estimate of the fair value of unit-based compensation and the inputs used in the estimate of the fair value of the unit purchase option and warrants issued.
Business combinations
A business combination is a transaction or event in which the acquirer obtains control of one or more businesses and is accounted for using the acquisition method. The total consideration paid for the acquisition is the aggregate of the fair values of assets acquired, liabilities assumed, and equity instruments issued in exchange for control of the acquiree at the acquisition date. The acquisition date is the date when the Company obtains control of the acquiree. The identifiable assets acquired and liabilities assumed are recognized at their acquisition date fair values, except for deferred taxes and share-based payment awards where IFRS provides exceptions to recording the amounts at fair values. Goodwill represents the difference between total consideration paid and the fair value of the net identifiable assets acquired. Acquisition costs incurred are expensed through the statement of comprehensive loss.
Contingent consideration is measured at its acquisition date fair value and is included as part of the consideration transferred in a business combination, subject to the applicable terms and conditions. Contingent consideration that is classified as equity is not remeasured at subsequent reporting dates and its subsequent settlement is accounted for within equity. Contingent consideration that is classified as an asset or a liability is remeasured at subsequent reporting dates in accordance with IFRS 9 Financial Instruments with the corresponding gain or loss recognized in profit or loss.
Based on the facts and circumstances that existed at the acquisition date, management will perform a valuation analysis to allocate the purchase price based on the fair values of the identifiable assets acquired and liabilities assumed on the acquisition date. Management has one year from the acquisition date to confirm and finalize the facts and circumstances that support the finalized fair value analysis and related purchase price allocation. Until such time, these values are provisionally reported and are subject to changed. Changes to fair values and allocations are retrospectively adjusted in subsequent periods.
In determining the fair value of all identifiable assets acquired and liabilities assumed, the most significant estimates generally relate to contingent consideration and intangible assets. Management exercises judgment in estimating the probability and timing of when earn-out milestones are expected to be achieved, which is used as the basis for estimating fair value. Identified intangible assets are fair valued using appropriate valuation techniques which are generally based on a forecast of the total expected future net cash flows of the acquiree. Valuations are highly dependent on the inputs used and assumptions made by management regarding the future performance of these assets and any changes in the discount rate applied.
Acquisitions that do not meet the definition of a business combination are accounted for as asset acquisitions. Consideration paid for an asset acquisition is allocated to the individual identifiable assets acquired and liabilities assumed based on their relative fair values. Asset acquisitions do not give rise to goodwill.
Management exercises judgment in determining the entities that it controls for consolidation and associated noncontrolling interests. For financial reporting purposes, an entity is considered controlled when the Company has power over an entity and its ability to affect its economic return from the entity. The Company has power over an entity when it has existing rights that give it the ability to direct the relevant activities which can significantly affect the investee’s returns. Such power can result from contractual arrangements. However, certain contractual arrangements contain rights that are designed to protect the Company’s interest, without direct equity ownership in the entity, in which case non-controlling interests are recognized.
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Intangible assets and goodwill
Intangible assets are recorded at cost less accumulated amortization and any impairment losses. Intangible assets acquired in a business combination are measured at fair value at the acquisition date. Amortization of definite life intangibles is calculated on a straight-line basis over their estimated useful lives.
Goodwill represents the excess of the purchase price paid for the acquisition of an entity over the fair value of the net tangible and intangible assets acquired. Goodwill is allocated to the cash generating unit (“CGU”) or group of CGUs which are expected to benefit from the synergies of the combination. Goodwill is not subject to amortization.
Goodwill and intangible assets with an indefinite life or not yet available for use are tested for impairment annually at year-end, and whenever events or circumstances that make it more likely than not that an impairment may have occurred, such as a significant adverse change in the business climate or a decision to sell or dispose all or a portion of a reporting unit. Finite life intangible assets are tested whenever there is an indication of impairment.
Goodwill and indefinite life intangible assets are tested for impairment by comparing the carrying value of each CGU containing the assets to its recoverable amount. Indefinite life intangible assets are tested for impairment by comparing the carrying value of each CGU containing the assets to its recoverable amount. Goodwill is tested for impairment based on the level at which it is monitored by management, and not at a level higher than an operating segment. The Company’s goodwill is allocated to the cannabis operating segment and the U.S. cannabis and hemp-derived market CGU. The allocation of goodwill to the CGUs or group of CGUs requires the use of judgment.
An impairment loss is recognized for the amount by which the CGU’s carrying amount exceeds its recoverable amount. The recoverable amounts of the CGUs’ assets are determined based on either fair value less costs of disposal or value-in-use method. There is a material degree of uncertainty with respect to the estimates of the recoverable amounts of the CGU, given the necessity of making key economic assumptions about the future. Impairment losses recognized in respect of a CGU are first allocated to the carrying value of goodwill, and any excess is allocated to the carrying value of assets in the CGU. Any impairment is recorded in profit and loss in the period in which the impairment is identified. A reversal of an asset impairment loss is allocated to the assets of the CGU on a pro rata basis. In allocating a reversal of an impairment loss, the carrying amount of an asset shall not be increased above the lower of its recoverable amount and the carrying amount that would have been determined had no impairment loss been recognized for the asset in the prior period. Impairment losses on goodwill are not subsequently reversed.
Newly Adopted Accounting Pronouncements
No new accounting pronouncements were adopted during the nine months ended July 31, 2021.
Financial Instruments and Other Risk Factors
Market Risk
Market risk is the risk that the fair value or cash flows of a financial instrument will fluctuate due to changes in market prices. Market risk reflects interest rate risk, currency risk and other price risks.
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Interest Rate Risk
At July 31, 2021 and October 31, 2020, the Company's exposure to interest rate risk relates to long-term debt, convertible debentures, and leases; each of these items bears interest at a fixed rate.
Currency Risk
As at July 31, 2021, the Company had accounts payable and accrued liabilities of CAD$310,154. The Company is exposed to the risk of fluctuation in the rate of exchange between the Canadian Dollar and the United States Dollar.
Credit Risk
Credit risk is the risk that one party to a financial instrument will cause a loss for the other party by failing to pay for its obligation.
Credit risk to the Company is derived from cash and trade accounts receivable. The Company places its cash in deposit with United States financial institutions. The Company has established a policy to mitigate the risk of loss related to granting customer credit by primarily selling on a cash-on-delivery basis.
The carrying amount of cash and trade accounts receivable represents the Company's maximum exposure to credit risk; the balances of these accounts are summarized in the following table:
| July 31, 2021 | October 31, 2020 | |||||||
| Cash | $ | 663,807 | $ | 217,788 | ||||
| Accounts Receivable | 642,758 | 172,121 | ||||||
| Total | $ | 1,306,565 | $ | 389,909 | ||||
The allowance for doubtful accounts at July 31, 2021 was $23,496 (October 31, 2020 - $7,425).
Liquidity Risk
Liquidity risk represents the risk that the Company will encounter difficulty in meeting the obligations associated with its financial liabilities. The Company's approach to managing liquidity risk is to ensure that it will have sufficient liquidity to meet liabilities when they become due. At July 31, 2021, the Company’s working capital accounts were as follows:
| July 31, 2021 | October 31, 2020 | |||||||
| Cash | $ | 663,807 | $ | 217,788 | ||||
| Current assets excluding cash | 3,951,434 | 1,616,987 | ||||||
| Total current assets | 4,615,241 | 1,834,775 | ||||||
| Current liabilities | (2,765,387 | ) | 1,799,104 | |||||
| Working capital (deficit) | $ | 1,849,854 | $ | 35,671 | ||||
The Company faces risks inherent in an agricultural business.
Cannabis is an agricultural product. There are risks inherent in the agricultural business, such as insects, plant diseases, forest fire and similar agricultural risks. Although some of the Company’s cannabis flower is grown indoors under climate-controlled conditions, with conditions monitored, there can be no assurance that natural elements will not have a material adverse effect on the production of the Company’s products.
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COVID-19 Pandemic
The Company’s business, operations and financial condition could be materially and adversely affected by the outbreak of epidemics or pandemics or other health crises, including the recent outbreak of COVID-19. On January 30, 2020, the World Health Organization declared the outbreak a global health emergency, on March 11, 2020, the World Health Organization declared the outbreak a pandemic and on March 13, 2020 the U.S. declared that the COVID-19 outbreak in the United States constitutes a national emergency. The Company will continue to evaluate the situation with respect to the COVID-19 pandemic as it develops and will implement any such changes to its business as may deemed appropriate to mitigate any potential impacts to its business. Such public health crises can result in volatility and disruptions in the supply and demand for products and financial markets, as well as declining trade and market sentiment and reduced mobility of people, all of which could affect consumer good prices, interest rates, credit ratings, credit risk and inflation. The risks to the Company of such public health crises also include risks to employee health and safety, a slowdown or temporary suspension of operations impacted by an outbreak, increased labour and fuel costs, regulatory changes, political or economic instabilities or civil unrest. At this point, COVID-19 has not had a significant impact on the Company’s supply chain nor its ability to continue operations and sustain revenues; however, it is possible that COVID-19 may in the future have a material adverse effect on the Company’s business, results of operations and financial condition.
Fair Values
The carrying amounts for the Company’s cash, accounts receivable, amounts due from a related company, short-term advance to a related party, accounts payable and accrued liabilities, amounts due to employee/director, short-term advance payable, promissory notes and convertible promissory notes approximate their fair values because of the short-term nature of these items.
Fair Value Hierarchy
A number of the Company's accounting policies and disclosures require the measurement of fair valued for both financial and nonfinancial assets and liabilities. The Company has an established framework, which includes team members who have overall responsibility for overseeing all significant fair value measurements, including Level 3 fair values. When measuring the fair value of an asset or liability, the Company uses observable market data as far as possible. The Company regularly assesses significant unobservable inputs and valuation adjustments. Fair values are categorized into different levels in a fair value hierarchy based on the inputs used in the valuation techniques as follows:
Level 1: unadjusted quoted prices in active markets for identical assets or liabilities;
Level 2: inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly; or
Level 3: inputs for the asset or liability that are not based on observable market data (unobservable inputs).
During the period ended July 31, 2021, there were no transfers of amounts between levels.
See additional risk factors relating to the Company as described in section 17 of the Company’s Listing Statement dated November 15, 2018 which can be found under the Company’s profile on www.sedar.com.
On August 16, 2021, the Company, through its subsidiary Golden Harvests, executed an agreement to form a joint venture with Pure Extracts Technologies Corp. (“Pure Extracts”) to expand Grown Rogue’s product offering and bring Pure Extracts’ portfolio of products to Michigan. The joint venture will be owned 50% by Golden Harvests and 50% by Pure Extracts.
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Pure Extracts will obtain a 50% interest in the joint venture, following certain regulatory approvals, by contributing processing equipment with an approximate fair value of $515,000, and an allowance for fixtures and equipment of approximately $110,000, to Golden Harvests.
Until such time as the necessary regulatory approvals are obtained, the processing equipment is leased to Golden Harvests. The lease term commences August 16, 2021, and terminates on the earlier of (a) immediately upon the date of certain regulatory approval for change of ownership of the joint venture (the “Closing Date”); (b) if the Closing Date does not occur, in which case the equipment will be returned to Pure Extracts; or (c) default by Golden Harvests against the lease, including failure to make lease payments or fail to perform material terms of the lease agreement. The monthly payment under the lease is $4,292, to commence in the month in which the equipment is delivered, and only payable if the business has profits from which to make payments. When the Closing Date occurs, the leased equipment will be contributed to the joint venture by Pure Extracts and the lease agreement will terminate.
On September 9, 2021, the Company entered into an unsecured promissory note agreement with PBIC in the amount of $800,000 which is to be fully advanced by September 30, 2021. This note matures on December 15, 2022, with payments commencing January 15, 2022, and continuing through and including December 15, 2022. The terms of the note require the Company to make certain participation payments to the lender based on a percentage monthly sales of cannabis flower sold from the Company’s sun-grown A-flower 2021 harvest (the “Harvest”), less 15% of such amount to account for costs of sales. The percentage will be determined by dividing 2,000 by the total volume of pounds of the Harvest. A portion of these payments will be used to pay down the outstanding principal on a monthly basis. The note will automatically terminate when the full amount of any outstanding principal plus the applicable participation payments are paid prior to the maturity date. Should the participation payments fully repay the principal amount prior to the maturity date then the note will automatically terminate. The note bears no stated rate of interest, and in the event of default, the note will bear interest at 15% per annum.
Grown Rogue derives a substantial portion of its revenues from the cannabis industry in the United States, which industry is illegal under United States federal law. Grown Rogue is indirectly involved (through subsidiaries) in the cannabis industry in the United States where local state laws permit such activities. Currently, its subsidiaries are directly engaged in the manufacture, possession, use, sale or distribution of cannabis in the recreational cannabis marketplace in the State of Oregon. Grown Rogue also intends to enter the Michigan market – we have an option to acquire a controlling interest in a Michigan operator (see subsection ‘Option to Acquire Controlling Interest In Golden Harvests,’ above).
The United States federal government regulates drugs through the Controlled Substances Act (the “CSA”), which places controlled substances, including cannabis, in a schedule. Cannabis is classified as a Schedule I drug. Under federal law, a Schedule I drug or substance has a high potential for abuse, no accepted medical use in the United States and a lack of accepted safety for the use of the drug under medical supervision. The United States Food and Drug Administration has not approved marijuana as a safe and effective drug for any indication.
In the United States cannabis is largely regulated at the state level. Notwithstanding the permissive regulatory environment of medical cannabis at the state level, and the increasing number of states with legal recreational frameworks, cannabis continues to be categorized as a Schedule I controlled substance under the CSA and as such, violates federal law in the United States. Senators Elizabeth Warren and Cory Gardner have introduced a bipartisan Senate bill titled “Strengthening the Tenth Amendment Through Entrusting States (STATES) Act” that would lift the Controlled Substance Act’s restrictions on cannabis in states that have written their own laws. However, there can be no assurances as to when this bill will pass, or if it will pass at all. The Supremacy Clause of the United States Constitution and United States federal laws made pursuant to it are paramount and in case of conflict between federal and state law in the United States, the federal law shall apply.
As a result of the conflicting views between state legislatures and the United States federal government regarding cannabis, investments in cannabis businesses in the United States are subject to inconsistent legislation and regulation. The response to this inconsistency was addressed in August 2013 when then Deputy Attorney General, James Cole, authored a memorandum (the “Cole Memorandum”) addressed to all United States district attorneys acknowledging that notwithstanding the designation of cannabis as a controlled substance at the federal level in the United States, several US states had enacted laws relating to cannabis for medical and recreational purposes. The Cole Memorandum outlined certain priorities for the Department of Justice relating to the prosecution of cannabis offenses. In particular, the Cole Memorandum noted that in jurisdictions that enacted laws legalizing cannabis in some form and that also implemented strong and effective regulatory and enforcement systems to control the cultivation, distribution, sale and possession of cannabis, conduct in compliance with those laws and regulations is less likely to be a priority at the federal level.
In March 2017, newly appointed Attorney General Jeff Sessions again noted limited federal resources and acknowledged that much of the Cole Memorandum had merit; however, he disagreed that it had been implemented effectively and, on January 4, 2018, Attorney General Jeff Sessions issued a memorandum (the “Sessions Memorandum”) that rescinded the Cole Memorandum. As a result of the Sessions Memorandum, federal prosecutors are no longer bound by the priorities in the Cole Memorandum relating to the prosecution of cannabis activities despite the existence of state-level laws that may be inconsistent with federal prohibitions.
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There is no guarantee that state laws legalizing and regulating the sale and use of cannabis will not be repealed or overturned, or that local governmental authorities will not limit the applicability of state laws within their respective jurisdictions. Unless and until the United States Congress amends the Controlled Substances Act with respect to medical and/or adult-use cannabis (and as to the timing or scope of any such potential amendments there can be no assurance), there is a risk that federal authorities may enforce current federal law. If the federal government begins to enforce federal laws relating to cannabis in states where the sale and use of cannabis is currently legal, or if existing applicable state laws are repealed or curtailed, Grown Rogue’s business, results of operations, financial condition and prospects would be materially adversely affected. Until Congress amends the federal law with respect to marijuana use, there is a risk that federal authorities may enforce current federal law against companies such as Grown Rogue for violation of federal law or they may seek to bring an action or actions against Grown Rogue and/or its investors for violation of federal law or otherwise, including, but not limited to, a claim against investors for aiding and abetting another’s criminal activities.
In light of the uncertainty surrounding the treatment of United States cannabis-related activities, including the rescission of the Cole Memorandum, the Canadian Securities Administrators published a staff notice (Staff Notice 51-352 (Revised)) on February 8, 2018 setting out certain disclosure expectations for issuers with United States cannabis-related activities. Staff Notice 51-352 (Revised) includes additional disclosure expectations that apply to all issuers with United States cannabis-related activities, including those with direct and indirect involvement in the cultivation and distribution of cannabis, as well as issuers that provide goods and services to third parties involved in the United States cannabis industry.
In accordance with the Canadian Securities Administrators Staff Notice 51-352 (Revised) – Issuers with U.S. Marijuana-Related Activities (“Staff Notice 51-352”), below is a table of concordance that is intended to assist readers in identifying the disclosure expectations outlined in Staff Notice 51-352.
In accordance with Staff Notice 51-352, this section provides a discussion of the federal and state-level U.S. regulatory regimes in the jurisdictions where Grown Rogue is currently directly involved through its subsidiaries or is planning to be directly involved in the future. Certain Grown Rogue subsidiaries are directly engaged in the manufacture, possession, use, sale or distribution of cannabis in the recreational cannabis marketplace in the State of Oregon. Grown Rogue also intends to enter the Michigan market. In accordance with Staff Notice 51-352, Grown Rogue will evaluate, monitor and reassess this disclosure, and any related risks, on an ongoing basis and the same will be supplemented and amended to investors in public filings, including in the event of government policy changes or the introduction of new or amended guidance, laws or regulations regarding marijuana regulation. Any non-compliance, citations or notices of violation which may have an impact on Grown Rogue’s licenses, business activities or operations will be promptly disclosed by Grown Rogue.
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| All Issuers with US Marijuana-Related Activities | Response |
| Describe the nature of the issuer’s involvement in the U.S. marijuana industry and include the disclosures indicates for at least one of the direct, indirect and ancillary industry involvement types. |
See above under “Description of Business”.
See below under “U.S. Regulatory Matters”
|
| Prominently state that marijuana is illegal under US federal law and that enforcement of relevant laws is a significant risk | See above |
| Discuss any statements and other available guidance made by federal authorities or prosecutors regarding the risk of enforcement action in any jurisdiction where the issuer conducts U.S. marijuana-related activities. |
See below under “U.S. Regulatory Matters”
See the following risk factors included in the Company’s Listing Statement available on www.SEDAR.com:
Section 17 – Risk Factors – Grown Rogue’s Business is Illegal under U.S. Federal Law
Section 17 – Risk Factors – Because marijuana is illegal under federal law, investing in cannabis business could be found to violate the US Federal CSA
|
| Outline related risks including, among others, the risk that third party service providers could suspend or withdraw services and the risk that regulatory bodies could impose certain restrictions on the issuer’s ability to operate in the U.S. |
See the following risk factors included in the Company’s Listing Statement available on www.SEDAR.com:
Section 17 – Risk Factors – Grown Rogue’s Business is Illegal under U.S. Federal Law
Section 17 – Risk Factors – Because marijuana is illegal under federal law, investing in cannabis business could be found to violate the US Federal CSA
Section 17 – Risk Factors – Risks Relating to Other Laws and Regulations
Section 17 – Risk Factors – Current and Future Consumer Protection Regulatory Requirements
Section 17 – Risk Factors – Operational Risks
Section 17 – Risk Factors – Grown Rogue will not be able to deduct many normal business expenses
Section 17 – Risk Factors – External Factors
Section 17 – Risk Factors – Failure to Protect Intellectual Property
|
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| All Issuers with US Marijuana-Related Activities | Response |
|
Section 17 – Risk Factors – Agricultural Operations
Section 17 – Risk Factors – Liability, Enforcement Complaints etc.
Section 17 – Risk Factors – Grown Rogue’s business is highly regulated and it may not be issued necessary licenses, permits, and cards
Section 17 – Risk Factors – Licenses
Section 17 – Risk Factors – Local Laws and Ordinances
Section 17 – Risk Factors – Third party service providers to Grown Rogue may withdraw or suspend their service
Section 17 – Risk Factors – Grown Rogue may not be able to obtain or maintain a bank account
Section 17 – Risk Factors – Grown Rogue’s contracts may be unenforceable and property may be subject to seizure
Section 17 – Risk Factors – The protections of US bankruptcy law may be unavailable
Section 17 – Risk Factors – Grown Rogue may have a difficult time obtaining insurance which may expose Grown Rogue to additional risk and financial liabilities
Section 17 – Risk Factors – Grown Rogue’s websites are accessible in jurisdictions where medicinal or recreational use of marijuana is not permitted and, as a result Grown Rogue may be found to be violating the laws of those jurisdictions
Section 17 – Risk Factors – The marijuana industry faces significant opposition in the United States
| |
| Given the illegality of marijuana under US federal law, discuss the issuer’s ability to access both public and private capital and indicate what financing options are/are not available in order to support continuing operations. |
See above under “Description of Business”.
See the following risk factor included in the Company’s Listing Statement available on www.SEDAR.com:
Section 17 – Risk Factors – Grown Rogue may not be able to obtain or maintain a bank account
|
| Quantify the issuer’s balance sheet and operating statement exposure to U.S. marijuana-related activities. | 100% of Grown Rogue’s balance sheet and operating statements are exposed to U.S. marijuana-related activities. |
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| All Issuers with US Marijuana-Related Activities | Response |
| Disclose if legal advice has not been obtained, either in the form of a legal opinion or otherwise, regarding (a) compliance with applicable state regulatory frameworks and (b) potential exposure and implications arising from U.S. federal law. | Grown Rogue has received legal advice from multiple attorneys regarding (a) compliance with applicable state regulatory frameworks and (b) potential exposure and implications arising from U.S. federal law. |
| CSA Requirement – US Marijuana Issuers with direct involvement in cultivation or distribution | Response |
| Outline the regulations for U.S. states in which the issuer operates and confirm how the issuer complies with applicable licensing requirements and the regulatory framework enacted by the applicable U.S. state. |
See below under “U.S. Regulatory Matters”
|
| Discuss the issuer's program for monitoring compliance with U.S. state law on an ongoing basis, outline internal compliance procedures and provide a positive statement indicating that the issuer is in compliance with U.S. state law and the related licensing framework. Promptly disclose any non-compliance, citations or notices of violation which may have an impact on the issuer's licence, business activities or operations. |
See below under “U.S. Regulatory Matters”
See the following risk factors included in the Company’s Listing Statement available on www.SEDAR.com:
Section 17 – Risk Factors – Grown Rogue’s Business is Illegal under U.S. Federal Law
Section 17 – Risk Factors – Risks Relating to Other Laws and Regulations
Section 17 – Risk Factors – Grown Rogue’s business is highly regulated and it may not be issued necessary licenses, permits, and cards
Section 17 – Risk Factors – Licenses
Section 17 – Risk Factors – Liability, Enforcement Complaints etc.
|
| US Marijuana Issuers with indirect involvement in cultivation or distribution | Response |
| Outline the regulations for U.S. states in which the issuer's investee(s) operate. | N/A |
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| US Marijuana Issuers with indirect involvement in cultivation or distribution | Response |
| Provide reasonable assurance, through either positive or negative statements, that the investee's business is in compliance with applicable licensing requirements and the regulatory framework enacted by the applicable U.S. state. Promptly disclose any non-compliance, citations or notices of violation, of which the issuer is aware, that may have an impact on the investee's licence, business activities or operations. | N/A |
| US Marijuana Issuers with material ancillary involvement | Response |
| Provide reasonable assurance, through either positive or negative statements, that the applicable customer's or investee's business is in compliance with applicable licensing requirements and the regulatory framework enacted by the applicable U.S. state. | N/A |
U.S. Regulatory Matters
Grown Rogue (through its subsidiaries) has direct involvement in the cultivation and distribution of marijuana in the United States. Grown Rogue and its subsidiaries are primarily involved in the U.S. marijuana industry as a seed to retail company with operations currently in Oregon (a state that has legalized recreational marijuana). Currently Grown Rogue through its subsidiaries produces recreational marijuana and distributes it to dispensaries throughout Oregon.
Producing, manufacturing, processing, possessing, distributing, selling, and using marijuana is a federal crime in the United States. The United States federal government regulates drugs through the Controlled Substances Act (the “Federal CSA”), which places controlled substances, including cannabis, on one of five schedules. Cannabis is currently classified as a Schedule I controlled substance, which is viewed as having a high potential for abuse and having no currently accepted medical use in treatment in the United States. No prescriptions may be written for Schedule I substances, and such substances are subject to production quotas imposed by the United States Drug Enforcement Administration (the “DEA”). Schedule I drugs are the most tightly restricted category of drugs under the Federal CSA.
State and territorial laws that allow the use of medical cannabis or legalize cannabis for adult recreational use are in conflict with the Federal CSA, which makes cannabis use and possession illegal at the federal level. Because cannabis is a Schedule I controlled substance, however, the development of a legal cannabis industry under the laws of these states is in conflict with the Federal CSA, which makes cannabis use and possession illegal on a federal level. Additionally, the Supremacy Clause of the United States Constitution establishes that the Constitution, federal laws made pursuant to the Constitution, and treaties made under the Constitution’s authority constitute the supreme law of the land. The Supremacy Clause provides that state courts are bound by the supreme law; in case of conflict between federal and state law, including Oregon and other state law legalizing certain cannabis uses, the federal law must be applied.
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Until Congress amends the Federal CSA with respect to marijuana use, there is a risk that federal authorities may enforce current federal law against companies such as Grown Rogue for violation of federal law or they may seek to bring an action or actions against Grown Rogue and/or its investors for violation of federal law or otherwise, including, but not limited to, a claim against investors for aiding and abetting another’s criminal activities. The US federal aiding and abetting statute provides that anyone who commits an offense against the United States or aids, abets, counsels, commands, induces or procures its commission, is punishable as a principal. Additionally, even if the U.S. federal government does not prove a violation of the Federal CSA, the U.S. federal government may seize, through civil asset forfeiture proceedings, certain assets such as equipment, real estate, moneys and proceeds, or your assets as an investor in the Company, if the U.S. federal government can prove a substantial connection between these assets or your investment and marijuana distribution or cultivation.
Because many states in the United States have approved certain medical or recreational uses of cannabis, the U.S. Department of Justice, through the Cole Memorandum, had previously described a set of priorities for federal prosecutors operating in states that had legalized the medical or other adult use of cannabis. The Cole Memorandum represented a significant shift in U.S. federal government priorities away from strict enforcement of federal cannabis prohibition.
However, the Cole Memorandum was merely a directive regarding enforcement and did not overturn or invalidate the Federal CSA or any other federal law or regulation.
The Cole Memorandum was rescinded in January 2018 by Jeff Sessions, the former U.S. Attorney General, who deemed it “unnecessary”. This is based on Mr. Sessions’s belief, which was also expressed in the Cole Memorandum that each state’s federal prosecutor should “follow the well-established principles that govern all federal prosecutions. These principles require federal prosecutors deciding which cases to prosecute to weigh all relevant considerations, including federal law enforcement priorities set by the Attorney General, the seriousness of the crime, the deterrent effect of criminal prosecution, and the cumulative impact of particular crimes on the community.” The rescission of the Cole Memorandum, and comments made publicly by Mr. Sessions and other members of the Trump Administration, signal a significant shift by the U.S. federal government back to more strict enforcement of federal law.
On January 4, 2018, Billy J. Williams, the current United States Attorney for the District of Oregon and former Multnomah County (Oregon) Deputy District Attorney who handled major violent crimes and later served as a Chief of the Violent Crimes Unit and as the Indian Country AUSA/Tribal Liaison for the Department of Justice prior to being appointed as the federal prosecutor for Oregon, Mr. Williams provided the below statement on marijuana enforcement in the District of Oregon: “As noted by Attorney General Sessions, today’s memo on marijuana enforcement directs all U.S. Attorneys to use the reasoned exercise of discretion when pursuing prosecutions related to marijuana crimes. We will continue working with our federal, state, local and tribal law enforcement partners to pursue shared public safety objectives, with an emphasis on stemming the overproduction of marijuana and the diversion of marijuana out of state, dismantling criminal organizations and thwarting violent crime in our communities.”
In an editorial published on January 12, 2018, Mr. Williams wrote: “In sum, I have significant concerns about the state’s current regulatory framework and the resources allocated to policing marijuana in Oregon.”
At a meeting on February 2, 2018, Mr. Williams told Oregon’s top politicians and law enforcement officials that there’s more cannabis being produced in the state than can legally be consumed. “And make no mistake about it, we’re going to do something,” Williams told dozens of politicians, tribal leaders, sheriffs as well as representatives of the FBI and the U.S. Drug Enforcement Administration. “Here’s what I know, in terms of the landscape here in Oregon: We have an identifiable and formidable marijuana over-production and diversion problem,” Williams said. “That’s the fact. My responsibly is to work with our state partners to do something about it.”
Because producing, manufacturing, processing, possessing, distributing, selling, and using marijuana is illegal under U.S. federal law, investing in cannabis business could be found to violate the Federal CSA. As a result, individuals involved with cannabis business, including but not limited to investors and lenders, may be indicted under U.S. federal law. An investment in the Company may: (a) expose an investor personally to criminal liability under U.S. federal law, resulting in monetary fines and jail time; and (b) expose any real and personal property used in connection with Grown Rogue’s business to seizure and forfeiture to the U.S. federal government.
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Active enforcement of the current federal law on cannabis may thus directly and adversely affect revenues and profits of Grown Rogue. The risk of strict enforcement of the Federal CSA remains uncertain.
U.S. Federal Laws Applicable to Banking
Because producing, manufacturing, processing, possessing, distributing, selling, and using marijuana is a crime under the Federal CSA, most U.S. banks and other financial institutions are unwilling to provide banking services to marijuana businesses due to concerns about criminal liability under the Federal CSA as well as concerns related to federal money laundering rules under the U.S. Bank Secrecy Act. Canadian banks are also hesitant to deal with cannabis companies, due to the uncertain legal and regulatory framework of the industry. 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. In both Canada and the United States transactions by cannabis businesses involving banks and other financial institutions are both difficult and unpredictable under the current legal and regulatory landscape. Though guidelines issued in past years allow financial institutions to provide bank accounts to certain cannabis businesses, few U.S. banks have taken advantage of those guidelines and many U. S. cannabis businesses still operate on an all-cash basis.
Oregon State Regulation
The Oregon Medical Marijuana Program (“OMMP”) is a state registry program within the Public Health Division, Oregon Health Authority (“OHA”). The role of the OHA is to administer the Oregon Medical Marijuana Act. The OMMP allows individuals with a medical history of one or more qualifying illnesses and a doctor’s written statement to apply for registration with the OMMP. Qualified applicants are issued a medical marijuana card that entitles them to legally possess and cultivate cannabis, subject to certain limitations.
On November 4, 2014, Oregon voters passed Measure 91, known as the Control, Regulation, and Taxation of Marijuana and Industrial Hemp Act (the “Act”), effectively ending the state’s prohibition of recreational marijuana and legalizing the possession, use, and cultivation of marijuana within legal limits by adults 21 years and older. The Act did not amend or effect the Oregon Medical Marijuana Act and the OMMP. The Act empowered the Oregon Liquor Control Commission (“OLCC”) with regulating sales of recreational marijuana in Oregon. It is possible that the voters could potentially repeal the law that permits both the medical and recreational marijuana industry to operate under state law.
Under current Oregon law, possession and home cultivation by adults at least 21 years old is allowed within legal limits. Public sales of marijuana and marijuana products may be done only through licensed retailers. The OLCC has the authority to decide how many licenses to allow in a specific area or location and may refuse granting a license if there are reasonable grounds to believe there are sufficient licenses in the area or if the granting of a license is not demanded by public interest or convenience. The OLCC may disqualify applicants for a number of reasons, including for lacking a good moral character, for lacking sufficient financial resources or responsibility, for relevant past convictions, and for using marijuana, alcohol, or drugs “to excess.”
Grown Rogue has a comprehensive compliance program administered through its Director of Compliance, which tracks all aspects of operations through the METRC program (an online software tool mandated through the State of Oregon that tracks seed to retail purchases), as well as compliance with all state and federal employment and other safety regulations.
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Grown Rogue is periodically advised by various outside attorneys about the requirements for compliance with Oregon law.
Grown Rogue is in compliance with Oregon state law and its related licensing framework.
Michigan State Regulation
As part of its business plan, Grown Rogue intends to enter the Michigan state market.
In November 2008, Michigan residents approved the Michigan Medical Marihuana Act20 (the “MMMA”) to provide a legal framework for a safe and effective medical marijuana program. In September 2016, the Michigan Senate passed the Medical Marihuana Facilities Licensing Act21 (the “MMFLA”) and the Marihuana Tracking Act (the “MTA” and together with the MMMA and the MMFLA, the “Michigan Cannabis Regulations”) to provide a comprehensive licensing and tracking scheme, respectively, for the medical marijuana program. Additionally, the Michigan Department of Licensing and Regulatory Affairs and its licensing board (“LARA”) has supplemented the Michigan Cannabis Regulations with “Emergency Rules” to further clarify the regulatory landscape surrounding the medical marijuana program. LARA is the main regulatory authority for the licensing of marijuana businesses.
Under the MMFLA, LARA administrates five types of “state operating licenses” for medical marijuana businesses: (a) a “grower” license, (b) a “processor” license, (c) a “secure transporter” license, (d) a “provisioning center” license and (e) a “safety compliance facility” license. There are no stated limits on the number of licenses that can be made available on a state level; however, LARA has discretion over the approval of applications and municipalities can pass additional restrictions.
On November 6, 2018, Michigan voters approved Proposal 1, to make marihuana legal under state and local law for adults 21 years of age or older and to control the commercial production and distribution of marihuana under a system that licenses, regulates, and taxes the businesses involved. The act will be known as the Michigan Regulation and Taxation of Marihuana Act24. According to Proposal 1, LARA is required to art accepting applications for retail (recreational) dispensaries within 12 months of the measure’s effective date.
Michigan License
State operating licenses for marijuana businesses have a 1 year term and are annually renewable if certain conditions are met: (a) the renewal application is submitted prior to the date the license expires, or within sixty (60) days of expiration if all other conditions are met and a late fee is paid, (b) the licensee pays the regulatory assessment fee set by LARA and (c) the licensee continues to meet the requirements to be a licensee under the Michigan Cannabis Regulations. Each renewal application is reviewed by LARA, but there is no guarantee of a timely renewal. There is no ultimate expiry after which no renewals are permitted.
Michigan Regulations
Michigan Marijuana Products may be purchased in a retail setting from a provisioning center by a registered qualified patient or registered primary caregivers connected to a registered qualifying patient (“Michigan Qualified Purchaser”); in each case, Michigan Qualified Purchasers must present a valid registry identification card issued by LARA (a “Michigan Registry ID”). For a Michigan Qualified Purchaser to receive Michigan Marijuana Products, provision centers must deploy an inventory control and tracking system that is capable of interfacing with the statewide monitoring system to determine (a) whether a Michigan Qualified Purchaser holds a Michigan Registry ID and (b) whether the sale or transfer will exceed the then-current daily and monthly purchasing limit for the holder of the Michigan Registry ID.
In order to receive a Michigan Registry ID, an applicant must provide: a completed application dated within one year of submission, a written certification from a physician with a bona-fide physician-patient relationship to the underlying patient, the application or renewal fee, contact information for the patient, caregiver (if applicable) and physician, as well as proof of Michigan residency.
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For registered qualifying patients, the daily purchasing limit is 2.5 ounces, and for registered primary caregivers, the daily purchasing limit is 2.5 ounces per underlying registered qualifying patient that the registered primary caregiver is connected with through the registration process. Finally, the licensee shall verify in the statewide monitoring system that the sale or transfer does not exceed the monthly purchasing limit of ten (10) ounces of marihuana product per month to a qualifying patient, either directly or through the qualifying patient’s registered primary caregiver.
Allowable forms of medical marihuana includes smokable dried flower, dried flower for vaporizing and marihuana infused products, which are defined under the Act to include topical formulations, tinctures, beverages, edible substances or similar products containing usable marijuana that is intended for human consumption in a matter other than smoke inhalation. Under the Michigan Cannabis Regulations, marijuana-infused products shall not be considered food.
Qualifying conditions for the medical marijuana program in Michigan are the following:
| ● | Cancer, glaucoma, positive status for human immunodeficiency virus, acquired immune deficiency syndrome, hepatitis C, amyotrophic lateral sclerosis, Crohn's disease, agitation of Alzheimer's disease, nail patella or the treatment of these conditions; |
| ● | A chronic or debilitating disease or medical condition or its treatment that produces 1 or more of the following: cachexia or wasting syndrome; severe and chronic pain; severe nausea; seizures, including but not limited to those characteristic of epilepsy; or severe and persistent muscle spasms, including but not limited to those characteristic of multiple sclerosis; |
| ● | Post-Traumatic Stress Disorder (PTSD); and/or |
| ● | Any other medical condition or its treatment approved by the department under the Michigan Cannabis Regulations. |
Reporting Requirements
Pursuant to the requirements of the MTA, Michigan selected Franwell’s METRC software as the state’s third-party solution for integrated marijuana industry verification. Using METRC, regulators are able to track third party inventory, permissible sales and seed-to-sale information. Additionally, provisioning centers can use the METRC API to connect their own inventory management and/or point-of-sale systems to verify the identity as well as permissible sales for Michigan Qualified Purchasers.
Storage and Security
To ensure the safety and security of cannabis business premises and to maintain adequate controls against the diversion, theft, and loss of cannabis or cannabis products, a provisioning center is required to:
Maintain and submit a security operations plan that includes the following at a minimum:
| ● | Escorts for all non-employee personnel in limited access areas. |
| ● | Secure locks for all interior rooms, windows and points of entry and exits with commercial grade, nonresidential door locks. |
| ● | An alarm system. Licensees will make all information related to the alarm system including monitoring and alarm activity available to LARA. |
| ● | A video surveillance system that, at a minimum, consists of digital or network video recorders, cameras, video monitors, digital archiving devices and a color printer capable of delivering still photos. |
| ● | 24-hour surveillance footage with fixed, mounted cameras, tamper/theft proof secured storage mediums and a notification system for interruption or failure of surveillance footage or storage of surveillance footage. All surveillance footage must be of sufficient resolution to identify individuals, have accurate time/date stamps and be stored for a minimum of 14 days unless state regulators notify that such recordings may be destroyed. |
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| ● | State access to view and obtain copies of any surveillance footage through LARA or related investigators, agents, auditors and/or state police. A facility shall also provide copies of recordings to LARA upon request. |
| ● | Logs of the following: the identities of the employee or employees responsible for monitoring the video surveillance system, the identity of the employee who removed the recording from the video surveillance system storage device and the time and date removed and the identity of the employee who destroyed any recording. |
Maintain marijuana storage plan for provisioning centers that includes the following at a minimum:
| ● | A secured limited access area for inventories of Michigan Marijuana Products. |
| ● | Clearly labeled containers (a) marked, labeled or tagged, (b) enclosed on all sides and (c) latched or locked to keep all contents secured within. All such containers must be identified and tracked in accordance with the MTA. |
| ● | A locked area for chemical and solvents separate from Michigan Marijuana Products. |
| ● | Separation of marijuana-infused products from toxic or flammable materials. |
| ● | A sales or transfer counter or barrier separated from stock rooms to ensure registered qualifying patients or registered primary caregivers do not have direct access to Michigan Marijuana Products. |
There are significant risks associated with the business of the Company, as described above and in Section 17 – Risk Factors of the Company’s Listing Statement as filed on www.sedar.com. Readers are strongly encouraged to carefully read all of the risk factors contained in Section 17 – Risk Factors of the Company’s Listing Statement.
Internal Control over Financial Reporting and Disclosure Controls
Management, including the President and Chief Executive Officer (“CEO”) and the Chief Financial Officer (“CFO”), is responsible for designing, establishing, and maintaining a system of internal controls over financial reporting (“ICFR”) to provide reasonable assurance that all information prepared by the Company for external purposes is reliable and timely. Internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the consolidated financial statements for external purposes in accordance with IFRS.
The Company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately reflect the transactions of the Company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with IFRS, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the Company’s consolidated Financial Statements. Due to its inherent limitations, internal control over financial reporting and disclosure may not prevent or detect all misstatements.
The CEO and CFO have evaluated whether there were changes to the ICFR during the period ended July 31, 2021, that have materially affected, or are reasonably likely to materially affect, the ICFR. As a result, no such significant changes were identified through their evaluation.
There have been no material changes in the Company’s internal control over financial reporting during the period ended July 31, 2021, that have materially affected, or are reasonably likely to materially affect, internal control over financial reporting.
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Exhibit 6
Grown Rogue Reports Record Q3 2021 Results, 73% Gross Margin and
55% aEBITDA1 Margin in Michigan
| ● | Positive Net Income of $0.24M for the first time in company history |
| ● | Q3 2021 Sales Revenue of $3.03M versus $1.37M in Q2 2021, an increase of 121% |
| ● | Q3 2021 aEBITDA1 margin of 25% ($0.77M), versus 12% ($0.18M) in Q2 2021, an increase of 330% ($0.59M) |
| ● | Indoor Revenue of $2.81M, versus $0.75M in Q2 2021, an increase of 277% |
| ● | Michigan operations (through Golden Harvests, LLC) report industry leading gross margins of 73% (before fair value adjustments) and aEBITDA1 margins of 55% |
| ● | Fiscal Q4 guidance of 18-22% sequential revenue growth |
Medford, Oregon, September 30, 2021 – Grown Rogue International Inc. (“Grown Rogue” or the “Company”) (CSE: GRIN) (OTC: GRUSF), a multi-state cannabis company with operations and assets in Oregon and Michigan, reports its financial and operating results for the third quarter ended July 31, 2021. All financial information is provided in U.S. dollars unless otherwise indicated.
Financial and Business Highlights
| ● | Seventh consecutive quarter, including pro-forma results, of positive aEBITDA1 |
| ● | Company-record 59% gross margin before fair value adjustments |
| ● | Increased indoor production run rates from 200 pounds/month in Q2 2021 to 1,000 pounds/month in Q3 2021 |
| ● | Grown Rogue partner, Canopy Management, LLC, exercised option and acquired 60% controlling interest of Golden Harvests, LLC (“Golden Harvests”) |
| ● | Subsequent to quarter-end, Grown Rogue appointed Ryan Kee as Chief Financial Officer |
| ● | Subsequent to quarter-end, Golden Harvests and Pure Extracts Inc. formed a Joint Venture to Expand Product Offerings in Michigan |
| ● | Subsequent to quarter-end, Grown Rogue issued an unsecured promissory note for $800,000. |
“Just over a year ago, Grown Rogue doubled down on our business strategy of being the leading low cost, high quality cultivator by investing heavily in production, team, and systems,” said Obie Strickler, CEO of Grown Rogue. “These investments have resulted in efficiency metrics, like our 73% gross margins and 55% aEBITDA margins in Michigan, that are unmatched by public operators. I am very proud of our team and where our efficiency metrics are trending in both states, but especially Michigan. Michigan is one of the lowest priced wholesale flower states in the country so reporting industry leading metrics for both gross margin and aEBITDA margin, is encouraging. We believe our costs per pound will continue to move lower with additional economies of scale and expect to continue the trend of cost improvements in fiscal Q4 and in fiscal 2022.”
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Highlights by State
Oregon Operations
| ● | Revenue of $1.28M, a year over year increase of 42% |
| ● | Indoor Revenue of $1.06M, a sequential increase of 42% |
| ● | Product sale gross margins (before fair value adjustments) of 40% vs 36% in Q2 2021 |
| ● | aEBITDA1 of approximately $0.1M |
| ● | Production run rate expected to increase from Q3 2021 of 600 pounds/month to 700 pounds/month in Q4 2021 |
| ● | Expect a record outdoor harvest in Q4 of 4,000 to 4,500 pounds, compared to 2,300 pounds in the previous outdoor harvest |
| ● | Expect to end 2021 fiscal year with a cultivation run rate of approximately 12,000-14,000 pounds annually |
Michigan Operations (through Golden Harvests, LLC)
| ● | Revenues of $1.75M, a sequential increase of 27% versus pro-forma2 Q2 2021 |
| ● | aEBITDA 1 of $0.96M, a sequential increase of 185% versus pro-forma2 Q2 2021 |
| ● | aEBITDA 1 margin of 55% versus pro-forma2 24% in Q2 2021 |
| ● | Continued construction to maximize output from the 80,000 square foot facility. 45,000 square feet are now in operation, with another 20,000 square feet expected to be online by June 2022 |
| ● | Added two new flower rooms during Q3 2021 which will produce approximately 1,400 pounds per year |
| ● | Production run rate expected to increase from Q3 2021 of 400 pounds/month to 550 pounds/month in Q4 2021 |
| ● | Improved wholesale position in bulk flower sales from 20th in Q2 2021 to 16th in Q3 2021 and 12th for Q4 to date, according to MarketScape |
| ● | Pre-packaged flower accounted for approximately 30% of Grown Rogue sales, a 50% increase, versus 20% for the state pre-packaged flower sales, according to MarketScape |
| ● | Grown Rogue proprietary, nitrogen sealed, pre-packaged flower pricing averaged $2,700 per pound vs market average sales price of $2,250 (according to MarketScape) a 20% premium illustrating our strong brand presence |
| ● | Expect state market share to increase in fiscal 2022 as additional cultivation capacity comes online and the Company enters new product categories |
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Selected Financial Information (Complete financial tables have been filed on www.sedar.com)
| (Dollars in $000s, share amounts in 000s) | ||||||||
| Three Months Ended July 31, | 2021 | 2020 | ||||||
| Reported Revenue | $ | 3,029 | 904 | |||||
| Gross profit, excluding fair value items, as reported | $ | 1,790 | 428 | |||||
| aEBITDA1 | $ | 772 | 141 | |||||
| Net income (loss) per share | $ | - | (0.01 | ) | ||||
| Weighted Common Shares Outstanding -basic | 155,219 | 104,821 | ||||||
| Three months ended | ||||||||
| July 31, | ||||||||
| aEBITDA Reconciliation | 2021 ($) | 2020 ($) | ||||||
| Net income, as reported | 240,294 | (794,072 | ) | |||||
| Add back realized fair value amounts included in inventory sold | 198,540 | 626,522 | ||||||
| Add back (less) unrealized fair value gain (loss) on growth of biological assets | (649,907 | ) | (770,724 | ) | ||||
| Add back amortization of property & equipment included in cost of sales | 186,149 | 115,331 | ||||||
| Subtotal | (24,924 | ) | (822,943 | ) | ||||
| Add back accretion expense, as reported | 187,493 | 321,875 | ||||||
| Add back amortization of intangible assets, as reported | - | 5,980 | ||||||
| Add back amortization of property and equipment, as reported | 55,610 | 61,959 | ||||||
| Add back share-based compensation | 82,492 | 329,014 | ||||||
| Add back interest expense, as reported | 48,828 | 96,880 | ||||||
| Add back unrealized loss on marketable securities, as reported | 422,867 | (69,064 | ) | |||||
| Add back unrealized gain on derivative liability | - | - | ||||||
| Derecognition of derivative liability | - | (244,572 | ) | |||||
| Loss on debt restructure | - | 462,213 | ||||||
| Add back unrealized foreign exchange loss | - | - | ||||||
| Loss on settlement of non-controlling interest | - | - | ||||||
| aEBITDA | 772,366 | 141,342 | ||||||
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| Three months ended | ||||||||||||
| July 31, 2021 | ||||||||||||
| Cash Margin analysis | Revenue $ | Costs $ | Margin % | |||||||||
| Grown Rogue products | 3,028,991 | 911,387 | 70 | % | ||||||||
| Indirect overhead allocations | - | 27,492 | -- | |||||||||
| Third party products | - | - | -- | |||||||||
| Service revenues | - | - | -- | |||||||||
| Asset depreciation included in COGS | - | 186,149 | -- | |||||||||
| Cost of packaging & other included in COGS | - | 114,172 | -- | |||||||||
| Total costs of finished cannabis inventory sold, as reported | 3,028,991 | 1,239,200 | 59 | % | ||||||||
| Realized fair value amounts in inventory sold, as reported | -- | 198,539 | -- | |||||||||
| Unrealized fair value (gain) on growth of biological assets, as reported | -- | (649,906 | ) | -- | ||||||||
| Totals, as reported | 3,028,991 | 787,833 | 74 | % | ||||||||
| Three months ended | ||||||||||||
| July 31, 2021 | ||||||||||||
| Cash Margin analysis - Michigan | Revenue $ | Costs $ | Margin % | |||||||||
| Grown Rogue products | 1,746,991 | 330,251 | 81 | % | ||||||||
| Indirect overhead allocations | - | - | -- | |||||||||
| Third party products | - | - | -- | |||||||||
| Service revenues | - | - | -- | |||||||||
| Asset depreciation included in COGS | - | 49,645 | -- | |||||||||
| Cost of packaging & other included in COGS | - | 92,167 | -- | |||||||||
| Total costs of finished cannabis inventory sold, as reported | 1,746,991 | 472,063 | 73 | % | ||||||||
| Realized fair value amounts in inventory sold, as reported | -- | 242,966 | -- | |||||||||
| Unrealized fair value (gain) on growth of biological assets, as reported | -- | (547,838 | ) | -- | ||||||||
| Totals, as reported | 1,746,991 | 167,191 | 90 | % | ||||||||
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| Three months ended | ||||||||||||
| July 31, 2021 | ||||||||||||
| Cash Margin analysis - Oregon | Revenue $ | Costs $ | Margin % | |||||||||
| Grown Rogue products | 1,282,000 | 581,136 | 55 | % | ||||||||
| Indirect overhead allocations | - | 27,492 | -- | |||||||||
| Third party products | - | - | -- | |||||||||
| Service revenues | - | - | -- | |||||||||
| Asset depreciation included in COGS | - | 136,504 | -- | |||||||||
| Cost of packaging & other included in COGS | - | 22,005 | -- | |||||||||
| Totals before fair value adjustments | 1,282,000 | 767,137 | 40 | % | ||||||||
| Realized fair value amounts in inventory sold, as reported | -- | (44,427 | ) | -- | ||||||||
| Unrealized fair value (gain) on growth of biological assets, as reported | -- | (102,068 | ) | -- | ||||||||
| Totals, as reported | 1,282,000 | 620,642 | 52 | % | ||||||||
NOTES:
| 1. | The Company’s “aEBITDA” is a non-IFRS measure used by management that does not have any prescribed meaning by IFRS and that may not be comparable to similar measures presented by other companies. The Company defines aEBITDA as the Company’s net income (loss) for a period, as reported, before interest, taxes, depreciation and amortization, and is further adjusted to remove transaction costs, stock-based compensation expense, accretion expense, gain (loss) on derecognition of derivative liabilities and the effects of fair-value accounting for biological assets and inventory. The Company believes that this is a useful metric to evaluate its operating performance. |
| 2. | The Company has provided Cash Margin Analysis to demonstrate the methodology for calculating its non-IFRS production cost and margin metrics. Cash production costs of Grown Rogue products is calculated by taking the cost of finished cannabis inventory sold and deducting non-cash production costs, packaging and distribution costs, inventory write-offs and adjustments, and cost of products purchased from other Licensed Producers that were sold. Cash cost of sales per gram of dried cannabis sold is calculated by taking cash production costs of Grown Rogue products by total grams of dried cannabis sold in the period. Management believes these measures provide useful information as they remove noncash amortization and packaging costs and provide a benchmark of the Company against its competitors. |
| 3. | The Company has provided unaudited pro-forma revenue information, which assumes that closed and pending mergers and acquisitions in 2020 are included in the Company’s financial results as of the beginning of the quarterly and annual periods in 2020 for the Company and target companies. |
NON-IFRS FINANCIAL MEASURES
Cash production costs of Grown Rogue products, EBITDA and aEBITDA are non-IFRS measures and do not have standardized definitions under IFRS. The Company has also provided unaudited pro-forma financial information, which assumes that closed and pending mergers and acquisitions in 2020 are included in the Company’s financial results as of the beginning of the quarterly and annual periods in 2020. The Company has provided the non-IFRS financial measures, which are not calculated or presented in accordance with IFRS, as supplemental information and in addition to the financial measures that are calculated and presented in accordance with IFRS. These supplemental non-IFRS financial measures are presented because management has evaluated the financial results both including and excluding the adjusted items and believe that the supplemental non-IFRS financial measures presented provide additional perspective and insights when analyzing the core operating performance of the business. These supplemental non-IFRS financial measures should not be considered superior to, as a substitute for or as an alternative to, and should only be considered in conjunction with, the IFRS financial measures presented herein. Accordingly, the following information provides reconciliations of the supplemental non-IFRS financial measures, presented herein to the most directly comparable financial measures calculated and presented in accordance with IFRS.
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About Grown Rogue
Grown Rogue International (CSE: GRIN | OTC: GRUSF) is a vertically-integrated, multi-state Cannabis family of brands on a mission to inspire consumers to “enhance experiences” through cannabis. We have combined an expert management team, award winning grow team, state of the art indoor and outdoor manufacturing facilities, and consumer insight based product categorization, to create innovative products thoughtfully curated from “seed to experience.” The Grown Rogue family of products include sungrown and indoor premium flower, along with nitro sealed indoor and sungrown pre-rolls and jars.
FORWARD-LOOKING STATEMENTS
This press release contains statements which constitute “forward-looking information” within the meaning of applicable securities laws, including statements regarding the plans, intentions, beliefs and current expectations of the Company with respect to future business activities. Forward- looking information is often identified by the words “may,” “would,” “could,” “should,” “will,” “intend,” “plan,” “anticipate,” “believe,” “estimate,” “expect” or similar expressions and include information regarding: (i) statements regarding the future direction of the Company (ii) the ability of the Company to successfully achieve its business and financial objectives, (iii) plans for expansion of the Company into Michigan and securing applicable regulatory approvals, and (iv) expectations for other economic, business, and/or competitive factors. Investors are cautioned that forward-looking information is not based on historical facts but instead reflect the Company’s management’s expectations, estimates or projections concerning the business of the Company’s future results or events based on the opinions, assumptions and estimates of management considered reasonable at the date the statements are made. Although the Company believes that the expectations reflected in such forward-looking information are reasonable, such information involves risks and uncertainties, and undue reliance should not be placed on such information, as unknown or unpredictable factors could have material adverse effects on future results, performance or achievements of the combined company. Among the key factors that could cause actual results to differ materially from those projected in the forward-looking information are the following: changes in general economic, business and political conditions, including changes in the financial markets; and in particular in the ability of the Company to raise debt and equity capital in the amounts and at the costs that it expects; adverse changes in the public perception of cannabis; decreases in the prevailing prices for cannabis and cannabis products in the markets that the Company operates in; adverse changes in applicable laws; or adverse changes in the application or enforcement of current laws; compliance with extensive government regulation and related costs, and other risks described in the Company’s public disclosure documents filed on www.sedar.com.
Should one or more of these risks or uncertainties materialize, or should assumptions underlying the forward-looking information prove incorrect, actual results may vary materially from those described herein as intended, planned, anticipated, believed, estimated or expected. Although the Company has attempted to identify important risks, uncertainties and factors which could cause actual results to differ materially, there may be others that cause results not to be as anticipated, estimated or intended. The Company does not intend, and does not assume any obligation, to update this forward-looking information except as otherwise required by applicable law.
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SAFE HARBOR STATEMENT
This press release may contain forward-looking information within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), including all statements that are not statements of historical fact regarding the intent, belief or current expectations of the Company, its directors or its officers with respect to, among other things: (i) the Company’s financing plans; (ii) trends affecting the Company’s financial condition or results of operations; (iii) the Company’s growth strategy and operating strategy; and (iv) the declaration and payment of dividends. The words “may,” “would,” “will,” “expect,” “estimate,” “anticipate,” “believe,” “intend” and similar expressions and variations thereof are intended to identify forward-looking statements. Also, forward-looking statements represent our management’s beliefs and assumptions only as of the date hereof. Except as required by law, we assume no obligation to update these forward-looking statements publicly, or to update the reasons actual results could differ materially from those anticipated in these forward-looking statements, even if new information becomes available in the future. Investors are cautioned that any such forward-looking statements are not guarantees of future performance and involve risks and uncertainties, many of which are beyond the Company’s ability to control, and that actual results may differ materially from those projected in the forward-looking statements as a result of various factors including the risk disclosed in the Company’s Form 20-F and 6-K filings with the Securities and Exchange Commission.
The Company is indirectly involved in the manufacture, possession, use, sale and distribution of cannabis in the recreational cannabis marketplace in the United States through its indirect operating subsidiaries. Local state laws where its subsidiaries operate permit such activities however, these activities are currently illegal under United States federal law. Additional information regarding this and other risks and uncertainties relating to the Company’s business are disclosed in the Company’s Listing Statement filed on its issuer profile on SEDAR at www.sedar.com. Should one or more of these risks, uncertainties or other factors materialize, or should assumptions underlying the forward-looking information or forward-looking statements prove incorrect, actual results may vary materially from those described herein as intended, planned, anticipated, believed, estimated or expected.
No stock exchange, securities commission or other regulatory authority has approved or disapproved the information contained herein.
For further information on Grown Rogue International please visit www.grownrogue.com or contact:
Obie Strickler
Chief Executive Officer
obie@grownrogue.com
Investor Relations Desk
Inquiries
invest@grownrogue.com
(458) 226-2100
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