Grown Rogue International Inc 6-K, filed May 11, 2020
Grown Rogue International Inc. (GRUSF)
About this 6-K
Grown Rogue International Inc filed this 6-K on May 11, 2020.
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: May 8, 2020
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: May 8, 2020 | GROWN ROGUE INTERNATIONAL INC. | |
| (FORMERLY: NOVICIUS CORP.) | ||
| By: | /s/ Obie Strickler | |
| Name: | Obie Strickler | |
| Title: | President & Chief Executive Officer | |
2
Exhibit 1
Consolidated Financial Statements
Grown Rogue International Inc.
As at and For the Years Ended October 31, 2019 and 2018
(Expressed in United States Dollars)
INDEPENDENT AUDITOR’S REPORT
To the Shareholders of Grown Rogue International Inc.
Opinion
We have audited the consolidated financial statements of Grown Rogue International Inc. (the “Company”), which comprise the consolidated statement of financial position as at October 31, 2019, and the consolidated statements of loss and comprehensive loss, changes in equity holders’ deficit and cash flow for the year then ended, and notes to the consolidated financial statements, including a summary of significant accounting policies (collectively referred to as the “financial statements”).
In our opinion, the accompanying financial statements present fairly, in all material respects, the financial position of the Company as at October 31, 2019, and its financial performance and its cash flow for the year then ended in accordance with International Financial Reporting Standards.
Basis for Opinion
We conducted our audit in accordance with Canadian generally accepted auditing standards. Our responsibilities under those standards are further described in the Auditor’s Responsibilities for the Audit of the Financial Statements section of our report. We are independent of the Company in accordance with the ethical requirements that are relevant to our audit of the financial statements in Canada, and we have fulfilled our other ethical responsibilities in accordance with these requirements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.
Material Uncertainty Related to Going Concern
We draw attention to Note 1 to the financial statements, which describes events or conditions that indicate that a material uncertainty exists that may cast significant doubt on the Company’s ability to continue as a going concern. Our opinion is not modified in respect of this matter.
Other Matter
The financial statements of the Company for the years ended October 31, 2018 and 2017 were audited by another auditor who expressed an unmodified opinion on those statements on February 28, 2019.
Other Information
Management is responsible for the other information. The other information comprises the information included in Management’s Discussion and Analysis.
Our opinion on the financial statements does not cover the other information and we do not express any form of assurance conclusion thereon.
In connection with our audit of the financial statements, our responsibility is to read the other information identified above and, in doing so, consider whether the other information is materially inconsistent with the financial statements or our knowledge obtained in the audit, or otherwise appears to be materially misstated. If, based on the work we have performed, we conclude that there is a material misstatement of this other information, we are required to report that fact. We have nothing to report in this regard.
Responsibilities of Management and Those Charged with Governance for the Financial Statements
Management is responsible for the preparation and fair presentation of the financial statements in accordance with International Financial Reporting Standards, and for such internal control as management determines is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error.
In preparing the financial statements, management is responsible for assessing the Company’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless management either intends to liquidate the Company or to cease operations, or has no realistic alternative but to do so.
Those charged with governance are responsible for overseeing the Company’s financial reporting process.
Auditor’s Responsibilities for the Audit of the Financial Statements
Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with Canadian generally accepted auditing standards will always detect a material misstatement when it exists.
Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these financial statements. As part of an audit in accordance with Canadian generally accepted auditing standards, we exercise professional judgment and maintain professional skepticism throughout the audit. We also:
| ● | Identify and assess the risks of material misstatement of the financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control. |
| ● | Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control. |
| ● | Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by management. |
| ● | Conclude on the appropriateness of management’s use of the going concern basis of accounting and based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Company’s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor’s report to the related disclosures in the financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor’s report. However, future events or conditions may cause the Company to cease to continue as a going concern. |
| ● | Evaluate the overall presentation, structure and content of the financial statements, including the disclosures, and whether the financial statements represent the underlying transactions and events in a manner that achieves fair presentation. |
We communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit.
We also provide those charged with governance with a statement that we have complied with relevant ethical requirements regarding independence, and to communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, related safeguards.
The engagement partner on the audit resulting in this independent auditor’s report is David Goertz.
DALE MATHESON CARR-HILTON LABONTE LLP
CHARTERED PROFESSIONAL ACCOUNTANTS
Vancouver, BC
March 19, 2020
Grown Rogue International Inc.
Consolidated Statements of Financial Position
Expressed in United States Dollars
| October 31, | October 31, | |||||||
| As at | 2019 | 2018 | ||||||
| Assets | ||||||||
| Current Assets | ||||||||
| Cash | $ | 74,926 | $ | 826,643 | ||||
| Accounts receivable (note 23) | 99,188 | 252,908 | ||||||
| Other receivable | 35,235 | 52,843 | ||||||
| Biological assets (note 5) | 156,589 | 149,617 | ||||||
| Inventory (note 6) | 940,715 | 1,380,101 | ||||||
| Prepaid expenses | 126,309 | 207,582 | ||||||
| 1,432,962 | 2,869,694 | |||||||
| Property and equipment (note 7) | 1,464,917 | 1,575,921 | ||||||
| Intangible assets | 34,597 | 64,974 | ||||||
| Deferred transaction costs (note 2) | - | 855,679 | ||||||
| $ | 2,932,476 | $ | 5,366,268 | |||||
| Liabilities | ||||||||
| Current Liabilities | ||||||||
| Accounts payable and accrued liabilities | $ | 1,526,855 | $ | 2,382,694 | ||||
| Finance leases payable (note 9) | 129,876 | 99,134 | ||||||
| Convertible promissory notes (note 11) | - | 265,277 | ||||||
| Convertible debentures (note 12) | 1,995,609 | - | ||||||
| Due to employee/director (note 22) | - | 104,000 | ||||||
| Current portion of long-term debt (note 10) | 150,000 | - | ||||||
| Unearned Revenue | 35,000 | - | ||||||
| Interest payable (note 10, 11, and 12) | 55,829 | 470,134 | ||||||
| Derivative liabilities (note 12) | 249,320 | - | ||||||
| 4,142,489 | 3,321,239 | |||||||
| Accrued liabilities (note 8) | 180,799 | - | ||||||
| Finance leases payable (note 9) | 12,329 | 97,680 | ||||||
| Convertible promissory notes (note 11) | - | 1,034,099 | ||||||
| Convertible debentures (note 12) | - | 931,099 | ||||||
| Long-term debt (note 10) | - | 50,000 | ||||||
| Deferred rent | 24,505 | 31,256 | ||||||
| Derivative liabilities (note 11) | - | 148,500 | ||||||
| 4,360,122 | 5,613,873 | |||||||
| Equity Holder’s Deficit | ||||||||
| Members’ capital (note 13) | - | 4,701,773 | ||||||
| Share capital (note 14) | 12,647,930 | - | ||||||
| Shares to be issued (note 16) | 5,136 | 720,516 | ||||||
| Equity component of convertible debentures (note 12) | - | 132,000 | ||||||
| Contributed surplus | 2,890,435 | 2,010,489 | ||||||
| Accumulated other comprehensive income | 121,920 | - | ||||||
| Accumulated deficit | (17,112,605 | ) | (7,812,383 | ) | ||||
| Equity attributable to shareholders of the Company | (1,447,184 | ) | (247,605 | ) | ||||
| Non-controlling interest (note 29) | 19,538 | - | ||||||
| (1,427,646 | ) | (247,605 | ) | |||||
| $ | 2,932,476 | $ | 5,366,268 | |||||
Going Concern (Note 1)
Commitments (Note 26)
Subsequent Events (Note 30)
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 consolidated financial statements.
1
Grown Rogue International Inc.
Consolidated Statements of Loss and Comprehensive Loss
Expressed in United States Dollars
Year ended October 31,
| 2019 | 2018 | 2017 | ||||||||||
| Revenue | $ | 3,924,983 | $ | 1,932,128 | $ | 156,066 | ||||||
| Cost of finished cannabis inventory sold (note 6) | (2,935,934 | ) | (1,889,229 | ) | (151,663 | ) | ||||||
| Gross profit, excluding fair value items | 989,049 | 42,899 | 4,403 | |||||||||
| Realized fair value amounts included in inventory sold | (622,804 | ) | (997,744 | ) | - | |||||||
| Unrealized fair value gain on growth of biological assets (note 5) | 486,354 | 541,352 | 985,515 | |||||||||
| Gross profit (loss) | 852,599 | (413,493 | ) | 989,918 | ||||||||
| Expenses | ||||||||||||
| Accretion expense (notes 11 and 12) | 153,195 | 317,827 | 33,191 | |||||||||
| Amortization of intangible assets | 31,373 | 18,762 | - | |||||||||
| Amortization of property and equipment (note 7) | 63,295 | 460,046 | 45,926 | |||||||||
| General and administrative (note 22 and 24) | 4,660,675 | 2,707,886 | 1,049,655 | |||||||||
| Equity based compensation (note 13 and 19) | 113,227 | 1,049,595 | - | |||||||||
| Transaction costs (note 2) | 3,453,790 | - | - | |||||||||
| 8,475,555 | 4,554,116 | 1,128,772 | ||||||||||
| Loss from operations | (7,622,956 | ) | (4,967,609 | ) | (138,854 | ) | ||||||
| Interest expense (note 10, 11, and 12) | (245,549 | ) | (965,285 | ) | (163,543 | ) | ||||||
| Other income | 16,733 | - | - | |||||||||
| Finance charge expense (note 14) | - | (1,510,489 | ) | - | ||||||||
| Gain/(Loss) on derecognition of derivative liability (note 11) | 39,500 | (57,500 | ) | - | ||||||||
| Loss on disposal of property and equipment | (70,403 | ) | (9,103 | ) | - | |||||||
| Acquisition costs (note 27) | (126,202 | ) | - | - | ||||||||
| Impairment of technology license (note 13) | (1,574,761 | ) | - | - | ||||||||
| Debt issuance costs (note 12) | (10,165 | ) | - | - | ||||||||
| Change in fair value of derivative liability (note 12) | 121,811 | - | - | |||||||||
| Loss on debt settlement (note 14) | (4,942 | ) | - | - | ||||||||
| Net Loss | (9,476,934 | ) | (7,509,986 | ) | (302,397 | ) | ||||||
| Other Comprehensive Income | ||||||||||||
| Currency translation adjustment | 121,920 | - | - | |||||||||
| Comprehensive Loss | $ | (9,355,014 | ) | $ | (7,509,986 | ) | $ | (302,397 | ) | |||
| Loss per Share - basic and diluted | $ | (0.13 | ) | $ | (0.22 | ) | $ | (0.01 | ) | |||
| Weighted Average Number of Common Shares Outstanding - basic and diluted | 70,928,833 | 33,437,503 | 22,432,446 | |||||||||
| Net Loss Attributable to: | ||||||||||||
| Non-controlling Interest | $ | (176,712 | ) | $ | - | $ | - | |||||
| Equity shareholders of the Company | (9,300,222 | ) | (7,509,986 | ) | (302,397 | ) | ||||||
| $ | (9,476,934 | ) | $ | (7,509,986 | ) | $ | (302,397 | ) | ||||
| Comprehensive Loss Attributable to: | ||||||||||||
| Non-controlling Interest | $ | (176,712 | ) | $ | - | $ | - | |||||
| Equity shareholders of the company | (9,178,302 | ) | (7,509,986 | ) | (302,397 | ) | ||||||
| $ | (9,355,014 | ) | $ | (7,509,986 | ) | $ | (302,397 | ) | ||||
The accompanying notes form an integral part of these consolidated financial statements.
2
Grown Rogue International Inc.
Consolidated Statements of Changes in Equity Holders’ Deficit
Expressed in United States Dollars
| Seed | Equity | |||||||||||||||||||||||||||||||||||||||
| Number of | Round | Total | Component | Total Equity | ||||||||||||||||||||||||||||||||||||
| Common | Common | Incentive | Preferred | Members’ | Shares to be | of Convertible | Contributed | Accumulated | Holders’ | |||||||||||||||||||||||||||||||
| Shares | Units | Units | Units | Capital | issued | Debentures | Surplus | Deficit | Deficit | |||||||||||||||||||||||||||||||
| Balance – October 31, 2016 | - | $ | - | $ | - | $ | - | $ | - | $ | - | $ | - | $ | - | $ | - | $ | - | |||||||||||||||||||||
| Common units issued for cash | 22,432,446 | 100 | - | - | 100 | - | - | - | - | 100 | ||||||||||||||||||||||||||||||
| Net loss | - | - | - | - | - | (302,397 | ) | (302,297 | ) | |||||||||||||||||||||||||||||||
| Balance - October 31, 2017 | 22,432,446 | 100 | - | - | 100 | - | - | - | (302,397 | ) | (302,297 | ) | ||||||||||||||||||||||||||||
| Common units issued pursuant to conversion of notes payable | 9,159,871 | 2,152,134 | - | - | 2,152,134 | - | - | - | - | 2,152,134 | ||||||||||||||||||||||||||||||
| Seed Round Preferred Units issued for cash | 4,007,236 | - | - | 1,300,345 | 1,300,345 | - | - | - | - | 1,300,345 | ||||||||||||||||||||||||||||||
| Common units issued for cash | 925,000 | 225,000 | - | - | 225,000 | - | - | - | - | 225,000 | ||||||||||||||||||||||||||||||
| Common units issued to service providers | 4,182,320 | 1,049,595 | - | - | 1,049,595 | - | - | - | - | 1,049,595 | ||||||||||||||||||||||||||||||
| Unit purchase options granted | - | - | - | - | - | - | - | 1,510,489 | - | 1,510,489 | ||||||||||||||||||||||||||||||
| Unit purchase option purchased | - | - | - | - | - | - | - | 500,000 | - | 500,000 | ||||||||||||||||||||||||||||||
| Issuance of convertible debentures | - | - | - | - | - | - | 132,000 | - | - | 132,000 | ||||||||||||||||||||||||||||||
| Subscription proceeds | - | - | - | - | - | 720,516 | - | - | - | 720,516 | ||||||||||||||||||||||||||||||
| Issuance costs | - | - | - | (25,401 | ) | (25,401 | ) | - | - | - | - | (25,401 | ) | |||||||||||||||||||||||||||
| Net loss | - | - | - | - | - | - | - | - | (7,509,986 | ) | (7,509,986 | ) | ||||||||||||||||||||||||||||
| Balance - October 31, 2018 | 40,706,873 | $ | 3,426,829 | $ | - | $ | 1,274,944 | $ | 4,701,773 | $ | 720,516 | $ | 132,000 | $ | 2,010,489 | $ | (7,812,383 | ) | $ | (247,605 | ) | |||||||||||||||||||
The accompanying notes form an integral part of these consolidated financial statements.
3
Grown Rogue International Inc.
Consolidated Statements of Changes in Equity Holders’ Deficit
Expressed in United States Dollars
| Equity | ||||||||||||||||||||||||||||||||||||||||||||||||
| Seed | Component | Total | ||||||||||||||||||||||||||||||||||||||||||||||
| Number of | Round | Total | of | Currency | Non-Contro | Equity | ||||||||||||||||||||||||||||||||||||||||||
| Common | Share | Common | Preferred | Members’ | Subscriptions | Convertible | Contributed | Translation | Accumulated | lling | Holders’ | |||||||||||||||||||||||||||||||||||||
| Shares | Capital | Units | Units | Capital | Payable | Debentures | Surplus | Reserve | Deficit | Interest | Deficit | |||||||||||||||||||||||||||||||||||||
| Balance - October 31, 2018 | 40,706,873 | $ | - | $ | 3,426,829 | $ | 1,274,944 | $ | 4,701,773 | $ | 720,516 | $ | 132,000 | $ | 2,010,489 | $ | - | $ | (7,812,383 | ) | $ | - | $ | (247,605 | ) | |||||||||||||||||||||||
| Common units issued pursuant to conversion of notes payable | 5,465,877 | - | 1,451,400 | - | 1,451,400 | - | - | - | - | - | - | 1,451,400 | ||||||||||||||||||||||||||||||||||||
| Common units issued pursuant to technology license agreement | 6,600,000 | - | 1,574,761 | - | 1,574,761 | - | - | - | - | - | - | 1,574,761 | ||||||||||||||||||||||||||||||||||||
| Common units issued pursuant to exercise of purchase option | 4,202,429 | - | 1,218,784 | - | 1,218,784 | - | - | (1,218,784 | ) | - | - | - | - | |||||||||||||||||||||||||||||||||||
| Subscription receipts | - | - | - | - | - | 554,000 | - | - | - | - | - | 554,000 | ||||||||||||||||||||||||||||||||||||
| Common units issued pursuant to subscription receipts | 3,771,023 | - | 913,698 | - | 913,698 | (1,274,516 | ) | - | 360,818 | - | - | - | - | |||||||||||||||||||||||||||||||||||
| Exchange of Units for common shares pursuant to the Transaction | - | 9,860,416 | (8,585,472 | ) | (1,274,944 | ) | (9,860,416 | ) | - | - | - | - | - | - | - | |||||||||||||||||||||||||||||||||
| Common units issued to existing shareholders of the Company pursuant to the Transaction | 3,773,689 | 900,403 | - | - | - | - | - | - | - | - | - | 900,403 | ||||||||||||||||||||||||||||||||||||
| Common shares issued to former debt holders of the Company | 839,790 | 200,651 | - | - | - | - | - | 79,237 | - | - | - | 279,888 | ||||||||||||||||||||||||||||||||||||
| Common shares pursuant to acquisition of Grown Rogue Canada | 100,000 | 23,860 | - | - | - | - | - | - | - | - | - | 23,860 | ||||||||||||||||||||||||||||||||||||
| Common shares issued pursuant to subscription receipts | 6,193,917 | 1,479,947 | - | - | - | - | - | 584,430 | - | - | - | 2,064,377 | ||||||||||||||||||||||||||||||||||||
| Fair value of broker warrants | - | (50,508 | ) | - | - | - | - | - | 50,508 | - | - | - | - | |||||||||||||||||||||||||||||||||||
| Issuance costs | - | (143,786 | ) | - | - | - | - | - | (56,781 | ) | - | - | - | (200,567 | ) | |||||||||||||||||||||||||||||||||
| Fair value of Grown Rogue Canada replacement warrants | - | - | - | - | - | - | - | 893,646 | - | - | - | 893,646 | ||||||||||||||||||||||||||||||||||||
| Debt settlements | - | - | - | - | - | 5,136 | - | - | - | - | - | 5,136 | ||||||||||||||||||||||||||||||||||||
| Common shares issued for services | 1,035,500 | 255,360 | - | - | - | - | - | - | - | - | - | 255,360 | ||||||||||||||||||||||||||||||||||||
| Common shares issued for debt | 530,818 | 121,587 | - | - | - | - | - | - | - | - | - | 121,587 | ||||||||||||||||||||||||||||||||||||
| Stock based compensation expenses | - | - | - | - | - | - | - | 112,080 | - | - | - | 112,080 | ||||||||||||||||||||||||||||||||||||
| Issuance of common share purchase warrants | - | - | - | - | - | - | - | 74,792 | - | - | - | 74,792 | ||||||||||||||||||||||||||||||||||||
| Derivative Liability | - | - | - | - | - | - | (132,000 | ) | - | - | - | - | (132,000 | ) | ||||||||||||||||||||||||||||||||||
| Currency Translation Adjustment | - | - | - | - | - | - | - | - | 121,920 | - | - | 121,920 | ||||||||||||||||||||||||||||||||||||
| Non-controlling interest | - | - | - | - | - | - | - | - | - | - | 196,250 | 196,250 | ||||||||||||||||||||||||||||||||||||
| Net loss | - | - | - | - | - | - | - | - | - | (9,300,222 | ) | (176,712 | ) | (9,476,934 | ) | |||||||||||||||||||||||||||||||||
| Balance - October 31, 2019 | 73,219,916 | $ | 12,647,930 | $ | - | $ | - | $ | - | $ | 5,136 | $ | - | $ | 2,890,435 | $ | 121,920 | $ | (17,112,605 | ) | $ | 19,538 | $ | (1,427,646 | ) | |||||||||||||||||||||||
The accompanying notes form an integral part of these consolidated financial statements.
4
Grown Rogue International Inc.
Consolidated Statements of Cash Flow
Expressed in United States Dollars
Year ended October 31,
| 2019 | 2018 | 2017 | ||||||||||
| Cash provided by (used in) | ||||||||||||
| Operating Activities | ||||||||||||
| Net loss | $ | (9,476,934 | ) | $ | (7,509,986 | ) | $ | (302,397 | ) | |||
| Adjustments for non-cash items in net loss | ||||||||||||
| Amortization of property and equipment | 63,295 | 460,046 | 45,926 | |||||||||
| Amortization of intangible assets | 31,373 | 18,762 | - | |||||||||
| Unrealized gain on changes in fair value of biological assets | (486,354 | ) | (541,352 | ) | (985,515 | ) | ||||||
| Equity based compensation | 113,227 | 1,049,595 | - | |||||||||
| Services paid in shares or membership units | 322,985 | |||||||||||
| Amortization of debt issuance costs | 64,914 | - | 1,151 | |||||||||
| Change in fair value of derivative liability | (121,811 | ) | - | - | ||||||||
| Accretion expense | 153,195 | 317,827 | 33,191 | |||||||||
| Finance charge expense | - | 1,510,489 | - | |||||||||
| Loss on disposal of property and equipment | 70,403 | 9,103 | - | |||||||||
| Transaction costs | 3,453,790 | - | - | |||||||||
| Services settled by issuance of long-term debt | - | 26,487 | - | |||||||||
| (Gain)/Loss on recognition of derivative liability | (39,500 | ) | 57,500 | - | ||||||||
| Acquisition costs | 126,202 | - | - | |||||||||
| Impairment of technology license | 1,574,761 | - | - | |||||||||
| Bad debt expense | 54,892 | - | - | |||||||||
| Effects of foreign exchange | 153,003 | - | - | |||||||||
| Loss on debt settlement | 4,509 | - | - | |||||||||
| (3,938,050 | ) | (4,601,529 | ) | (1,207,644 | ) | |||||||
| Changes in non-cash balances related to operations (note 20) | 511,214 | 2,251,172 | 511,136 | |||||||||
| Net cash used in operating activities | (3,426,836 | ) | (2,350,357 | ) | (696,508 | ) | ||||||
| Investing Activities | ||||||||||||
| Purchase of intangible assets | (996 | ) | (44,363 | ) | (39,373 | ) | ||||||
| Purchase of property and equipment | (216,088 | ) | (1,055,874 | ) | (724,807 | ) | ||||||
| Payment upon execution of Letter of Intent | (50,000 | ) | - | - | ||||||||
| Cash acquired upon close of Transaction | 5,875 | - | - | |||||||||
| Net cash used in investing activities | (261,209 | ) | (1,100,237 | ) | (764,180 | ) | ||||||
| Financing Activities | ||||||||||||
| Members’ contributions | - | 1,525,345 | - | |||||||||
| Subscription receivable | - | 720,516 | - | |||||||||
| Option proceeds | - | 500,000 | - | |||||||||
| Proceeds from long-term debt | 100,000 | 2,649,253 | 1,931,755 | |||||||||
| Repayment of long-term debt | (250,145 | ) | (578,250 | ) | (17,868 | ) | ||||||
| Proceeds of subscription receipts | 2,514,377 | - | - | |||||||||
| Convertible debenture proceeds | 1,105,126 | - | - | |||||||||
| Proceeds of finance lease | - | - | - | |||||||||
| Payment of finance lease | (117,125 | ) | - | - | ||||||||
| Payment of equity and debenture issuance costs | (200,567 | ) | (25,401 | ) | - | |||||||
| Payment of debt issuance costs | (47,975 | ) | (111,746 | ) | - | |||||||
| Deferred Transaction costs | (167,363 | ) | (855,679 | ) | - | |||||||
| Net cash provided by financing activities | 2,936,328 | 3,824,038 | 1,913,887 | |||||||||
| Change in cash | (751,717 | ) | 373,444 | 453,199 | ||||||||
| Cash - beginning of period | 826,643 | 453,199 | - | |||||||||
| Cash - end of period | $ | 74,926 | $ | 826,643 | $ | 453,199 | ||||||
Supplemental cash flow disclosure (note 21)
The accompanying notes form an integral part of these consolidated financial statements.
5
Grown Rogue International Inc.
Notes to the Consolidated Financial Statements
For the Years Ended October 31, 2019 and 2018
Expressed in United States Dollars
| 1. | Nature of Operations and Going Concern |
Grown Rogue International Inc. (the “Company”), formerly “Novicius Corp.”, was amalgamated under the Business Corporations Act (Ontario) on November 30, 2009 (the “Company”). The Company’s registered office is located at 340 Richmond Street West, Toronto, Ontario, M5V 1X2. The Company’s common shares trade on the Canadian Securities Exchange (“CSE”) under the symbol GRIN.
These consolidated financial statements for the years ended October 31, 2019 and 2018, include the Company, its wholly-owned subsidiaries Grown Rogue Canada Corp. (“GRC”), and Grown Rogue Unlimited, LLC (“GR Unlimited”) and GR Unlimited’s wholly-owned subsidiaries and subsidiaries in which it has a controlling interest (collectively referred to as the “Subsidiaries”). GR Unlimited’s wholly-owned subsidiaries include Grown Rogue Gardens, LLC; Grown Rogue Distribution, LLC; GRU Properties, LLC; and GRIP, LLC. GR Unlimited also has 60% ownership interests in GRD Cali, LLC and Idalia, LLC.
Grown Rogue Gardens, LLC is engaged in cannabis cultivation activities. Grown Rogue Distribution, LLC is engaged in wholesale activities; GRU Properties, LLC is engaged in real estate activities; and GRIP, LLC is engaged in intellectual property activities.
These consolidated financial statements are prepared on the basis of accounting principles applicable to a going concern, which assumes that the Company will continue in operation for the foreseeable future and will be able to realize its assets and discharge its liabilities in the normal course of the business.
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. During the year ended October 31, 2019, the Company incurred a net loss of $9,476,934 (2018 - $7,509,986) and as of that date, the Company’s deficit was $17,112,605 (2018 - $7,812,383). As at October 31, 2019, the Company had a working capital deficit of $2,709,527 (2018 - $451,545). These aforementioned 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 consolidated 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 consolidated financial statements.
6
Grown Rogue International Inc.
Notes to the Consolidated Financial Statements
For the Years Ended October 31, 2019 and 2018
Expressed in United States Dollars
| 2. | Reverse Takeover |
The Company entered into a definitive transaction agreement (the “Definitive Agreement”) dated October 31, 2018 with GR Unlimited and Grown Rogue Canada Inc. (“Grown Rogue Canada”) and Novicius Acquisition Corp. (“Novicius Subco”) which resulted, through a series of transactions, in the acquisition of all of the equity interests of GR Unlimited and Grown Rogue Canada by the Company (the “Transaction”), such that, immediately following completion of the Transaction on November 15, 2018, approximately 86% of the issued and outstanding shares of the Company were owned by the former unitholders of GR Unlimited. Prior to close of the Transaction the Company completed a consolidation of its common shares on the basis of 1.4 pre-consolidated common shares for 1 post-consolidated common share. Upon close of the Transaction, the Company issued, in aggregate, 60,746,202 common shares to the GR Unlimited unitholders for all of the outstanding units of GR Unlimited, 100,000 common shares to a director of Grown Rogue Canada and 839,790 common shares to former debtholders of the Company. Holders of warrants and convertible debentures of GR Unlimited and Grown Rogue Canada exchanged such securities for warrants and convertible debentures, with substantially the same terms, of the Company on a one for one basis.
The Transaction constituted a reverse takeover of the Company by the shareholders of GR Unlimited but did not meet the definition of a business combination under IFRS 3. As such, the Transaction is accounted for under IFRS 2, where the difference between the consideration given to acquire the Company and the net asset value of the Company is recorded as a transaction expense. Since GR Unlimited is deemed to be the accounting acquirer for accounting purposes, these financial statements present the historical financial information of GR Unlimited up to the date of the Transaction.
The allocation of the consideration transferred is as follows:
| 3,773,689 shares at a price of CAD$0.315 per share | $ | 900,403 | ||
| Net assets (liabilities) of the Company acquired | (604,107 | ) | ||
| Transaction costs | $ | 1,504,510 |
The acquisition-date fair value of the consideration transferred by the existing equity holders of GR Unlimited is based on the number of shares of the combined entity that are held by the existing shareholders of the Company. The fair value of the consideration was based on the private placement transactions entered into by GR Unlimited.
Upon completion of the Transaction, the former shareholder of Grown Rogue Canada controlled less than 1% of the issued and outstanding common shares of the Company (not including holders of subscription receipts of Grown Rogue Canada). For accounting purposes, the Company has been identified as the acquirer and Grown Rogue Canada the acquired company. Since Grown Rogue Canada’s operations do not constitute a business, this transaction has been accounted for as a share-based payment. As such, Grown Rogue Canada’s balances are accounted for at fair value, with the balance of the purchase price in excess of the fair value of the acquired assets and liabilities of Grown Rogue Canada accounted for as transaction costs. Grown Rogue Canada’s historical share capital, deficit and contributed surplus have been eliminated.
7
Grown Rogue International Inc.
Notes to the Consolidated Financial Statements
For the Years Ended October 31, 2019 and 2018
Expressed in United States Dollars
| 2. | Business Acquisition (continued) |
The allocation of the consideration transferred is as follows:
| 100,000 common shares at a price of CAD$0.315 per share | $ | 23,860 | ||
| Fair value of warrants of the Company issued (note 15vii) | 893,646 | |||
| Total consideration transferred | 917,506 | |||
| Net assets of Grown Rogue Canada acquired | 61,447 | |||
| Transaction costs | $ | 856,059 |
In addition to the costs mentioned above, the Company incurred cash transaction costs of $1,093,221.
| 3. | Basis of Presentation |
| a) | Statement of Compliance |
The Company’s consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board.
These consolidated financial statements were approved and authorized for issuance by the Company’s Board of Directors on March 19, 2020.
| b) | Basis of Measurement |
The consolidated 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.
| c) | 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 consolidated 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 statement 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.
8
Grown Rogue International Inc.
Notes to the Consolidated Financial Statements
For the Years Ended October 31, 2019 and 2018
Expressed in United States Dollars
| 3. | Basis of Presentation (continued) |
| c) | Functional and Presentation Currency (continued) |
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.
| d) | Basis of Consolidation |
The Subsidiaries are 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 of all of the issued and outstanding common shares. The financial statements of subsidiaries are included in these consolidated financial statements from the date that control commences until the date control ceases. All inter-company balances and transactions have been eliminated upon consolidation.
| 4. | Significant Accounting Policies and Significant Judgements |
| a) | Revenue |
Revenue from the sale of cannabis is recognized when the Company transfers control of the good to the customer. Control of the product transfers at a point in time either upon shipment to or receipt by the customer, depending on the contractual terms. The Company recognizes revenue in an amount that reflects the consideration that the Company expects to receive taking into account any variation that may result from rights of return. The pattern and timing of revenue recognition under the new standard is consistent with prior year practice. There were no adjustments recognized on the adoption of IFRS 15 in the year ended October 31, 2019.
| b) | Inventory |
Inventory is valued at the lower of cost and net realizable value. Harvested cannabis included in inventory is recognized at the fair value of the biological asset at the point of harvest, which becomes the deemed cost. Any subsequent post-harvest costs are capitalized to inventory to the extent that the cost is less than net realizable value. Manufactured inventory and work-in-progress includes an allocation of production overhead, which is based on normal operating capacity. The Company reviews inventories for obsolete, redundant and slow moving goods and any such inventories identified are written down to net realizable value.
| c) | Cost of goods sold |
Cost of goods sold includes the cost of finished goods inventory sold during the year, as well as inventory write-downs during the year.
9
Grown Rogue International Inc.
Notes to the Consolidated Financial Statements
For the Years Ended October 31, 2019 and 2018
Expressed in United States Dollars
| 4. | Significant Accounting Policies and Significant Judgements (continued) |
| d) | Biological assets |
The Company’s biological assets consist of cannabis plants. The Company capitalizes all the direct and indirect costs as incurred related to the biological transformation of the biological assets between the point of initial recognition and the point of harvest. Subsequent to harvest, the recognized biological asset amount becomes the cost basis of finished goods inventory. Seeds are measured at fair value. Unrealized gains or losses arising from changes in fair value less costs to sell during the period are included in the consolidated results of operations of the appropriate year.
| e) | Accounts Payable and Accrued Liabilities |
Liabilities are recognized for amounts to be paid in the future for goods or services received, whether billed by the supplier or not. Provisions are recognized when the Company has an obligation (legal or constructive) arising from a past event, and the costs to settle this obligation are both probable and able to be reliably measured.
| f) | Related Party Transactions |
Parties are considered to be related if one party has the ability, directly or indirectly, to control the other party or exercise significant influence over the other party in making financial and operating decisions. Parties are also considered to be related if they are members of key management, subject to common control, or can exert significant influence over the company. Related parties may be individuals or corporate entities. A transaction is considered to be a related party transaction when there is a transfer of resources or obligations between related parties.
| g) | Property and Equipment |
Property and equipment are stated at cost less accumulated amortization and accumulated impairment losses, if any. Costs include borrowing costs for assets that require a substantial period of time to become ready for use.
Amortization is recognized so as to recognize the cost of assets less their residual values over their useful lives, using the straight-line method. Amortization begins when an asset is available for use, meaning that it is in the location and condition necessary for it to be used in the manner intended by management. The estimated useful lives, residual values and method of amortization are reviewed at each period end, with the effect of any changes in estimated useful lives and residual values accounted for on a prospective basis.
As at October 31, 2019, the Company was in the process of completing construction of its warehouse facility in order to expand its cultivation and wholesale activities. The Company has capitalized the costs incurred to date on the construction-in-process asset, as the assets were not available for use as intended by management as at October 31, 2019, amortization expense was not recorded.
10
Grown Rogue International Inc.
Notes to the Consolidated Financial Statements
For the Years Ended October 31, 2019 and 2018
Expressed in United States Dollars
| 4. | Significant Accounting Policies and Significant Judgements (continued) |
| g) | Property and Equipment (continued) |
Amortization is calculated applying the following useful lives:
| Furniture and fixtures | 7 - 10 years on a straight line basis |
| Computer and office equipment | 3 - 5 years on a straight line basis |
| Production equipment and other | 5 - 10 years on a straight line basis |
| Leasehold improvements | 15 - 40 months on a straight line basis |
The carrying values of property and equipment are reviewed for impairment when events or changes in circumstances indicate that the carrying value may not be recoverable. If any such indication exists, and where the carrying values exceed the estimated recoverable amount, the assets are written down to their recoverable amount, being the higher of their fair value less costs of disposal and their value in use. Fair value is the price at which the asset could be bought or sold in an orderly transaction between market participants. In assessing value in use, the estimated cash flows are discounted to their present value using a pre-tax discount rate that reflects the current market assessments of the time value of money and the risks specific to the asset.
| h) | Leased Assets |
Leases are classified as finance leases whenever substantially all the risks and rewards of ownership of the leased asset are transferred to the Company. Leased assets are measured initially at an amount equal to the lower of fair value and present value of minimum lease payments. Subsequent to initial recognition, the assets are accounted for in accordance with the accounting policy applicable to the asset.
Leases in which a significant portion of the risks and rewards of ownership are retained by the lessor are classified as operating leases. Payments made under operating leases (net of any incentives received from the lessor) are charged to the statement of loss and comprehensive loss on a straight line basis over the period of the lease.
| i) | Intangible Assets |
Intangible assets are initially measured at cost. The useful life of intangible assets is assessed as either finite or indefinite. Following the initial recognition, intangible assets with finite useful lives are carried at cost less accumulated amortization and accumulated impairment losses, if any. If impairment indicators are present, these assets are subject to an impairment review. Amortization is calculated using the straight-line method over the estimated useful lives of the intangible assets of two to three years.
11
Grown Rogue International Inc.
Notes to the Consolidated Financial Statements
For the Years Ended October 31, 2019 and 2018
Expressed in United States Dollars
| 4. | Significant Accounting Policies and Significant Judgements (continued) |
| j) | Impairment of Long-lived Assets |
For all long-lived assets, except for intangible assets with indefinite useful lives and intangible assets not yet available for use, the Company reviews its carrying amount at the end of each reporting period to determine whether there is any indication that those assets have suffered an impairment loss. Where such impairment exists, the recoverable amount of the asset is estimated in order to determine the extent of the impairment loss.
An impairment loss is recognized for the amount by which the asset’s carrying amount exceeds its recoverable amount. The recoverable amount is the greater of fair value less costs of disposal and value in use. In assessing value in use, estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. Impairment losses are recognized in profit or loss.
Impairment losses may be reversed in a subsequent period where the impairment no longer exists or has decreased. The carrying amount after a reversal must not exceed the carrying amount (net of depreciation) that would have been determined had no impairment loss been recognized. A reversal of impairment loss is recognized in profit or loss.
| k) | Deferred transaction costs |
Deferred transaction costs represents professional fees incurred with respect to a contemplated transaction that is to be completed in a future period. The transaction costs will be recognized in profit and loss in the period in which the transaction is completed.
12
Grown Rogue International Inc.
Notes to the Consolidated Financial Statements
For the Years Ended October 31, 2019 and 2018
Expressed in United States Dollars
| 4. | Significant Accounting Policies and Significant Judgements (continued) |
| l) | Unit/ Share Based Compensation |
Unit/ Share Based Payment Transactions
Transactions with non-employees that are settled in equity instruments of the Company are measured at the fair value of the goods or services rendered. In situations where the fair value of the goods or services received by the entity as consideration cannot be reliably measured, transactions are measured at fair value of the equity instruments granted. The fair value of the share based payments is recognized together with a corresponding increase in equity over a period that services are provided or goods are received.
Equity Settled Transactions
The costs of equity settled transactions with employees are measured by reference to the fair value of the equity instruments at the date on which they are granted, using the Black-Scholes option pricing model.
The costs of equity settled transactions are recognized, together with a corresponding increase in equity, over the period in which the performance and/or service conditions are fulfilled, ending on the date on which the relevant employees become fully entitled to the award (“the vesting date”). The cumulative cost is recognized for equity-settled transactions at each reporting date until the vesting date reflects the Company’s best estimate of the number of equity instruments that will ultimately vest. The profit or loss charge or credit for a period represents the movement in cumulative expense recognized as at the beginning and end of that period and the corresponding amount is represented in contributed surplus. No expense is recognized for awards that do not ultimately vest.
The dilutive effect of outstanding options, if any, is reflected as additional dilution in the computation of loss per unit / share.
Unit/ Share Issuance Costs
Costs incurred in connection with the issuance of members’ equity are netted against the proceeds received net of tax. Costs related to the issuance of members’ equity and incurred prior to issuance are recorded as deferred members’ equity issuance costs and subsequently netted against proceeds when they are received.
| m) | Member’s Capital |
Member’s capital consists of common units, which are classified as equity on the statements of financial position. Incremental costs attributable directly to the issuance of member’s capital are recognized as deduction from equity, net of any tax effects.
13
Grown Rogue International Inc.
Notes to the Consolidated Financial Statements
For the Years Ended October 31, 2019 and 2018
Expressed in United States Dollars
| 4. | Significant Accounting Policies and Significant Judgements (continued) |
| n) | Income Taxes |
No provision for federal or state income taxes is included in the Company’s consolidated financial statements because the tax effects of GR Unlimited’s income or loss for the period from inception to December 31, 2017 were passed on to the Members. Effective January 1, 2018, Grown Rogue Gardens, LLC and Grown Rogue Distribution, LLC elected to be taxed as corporations. Following the Transaction, GR Unlimited also elected to be taxed as a corporation. As such, these three entities will follow the asset and liability method of accounting for income taxes. Under this method, deferred income tax assets and liabilities are determined based on the differences between the carrying amount of assets and liabilities on the statement of financial position and their corresponding tax value, using the substantively enacted tax rates expected to apply when these temporary differences are reversed. Deferred income tax assets are recorded to recognize tax benefits only to the extent that, based on available evidence, it is probable that they will be realized. Income tax expense is recognized in profit or loss except to the extent that it relates to a business combination, or items recognized directly in equity.
Deferred tax liabilities are recognized for all temporary differences except when the deferred income tax liability arises from the initial recognition of goodwill or of an asset or liability in a transaction that is not a business combination and, at the time of the transaction, affects neither the accounting profit nor taxable profit or loss.
| o) | Significant Accounting Judgements, Estimates and Assumptions |
The preparation of these consolidated financial statements in conformity with IFRS requires management to make judgments, estimates and assumptions 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 inputs used in the estimate of the fair value of unit-based and share-based compensation, the inputs and valuation methodologies used to estimate the fair value of derivative liabilities and the inputs used in the estimate of the fair value of the unit purchase options and warrants issued. In calculating the value of biological assets and inventory, the Company’s management is required to make a number of estimates including the following: the stage of growth of cannabis compared to point of harvest; yield of saleable flower produced at harvest date; and selling price at harvest date. In calculating inventory values, management is required to determine an estimate of the obsolete inventory and compare the inventory cost to estimated net realizable value.
14
Grown Rogue International Inc.
Notes to the Consolidated Financial Statements
For the Years Ended October 31, 2019 and 2018
Expressed in United States Dollars
| 4. | Significant Accounting Policies and Significant Judgements (continued) |
| p) | Newly Adopted Accounting Policies |
The Company adopted the following accounting policies as of November 1, 2018:
Financial Instruments
IFRS 9 uses a single approach to determine whether a financial asset is measured at amortized cost or fair value, replacing the multiple rules in IAS 39, Financial Instruments: Recognition and Measurement (“IAS 39”). The classification is based on two criteria: the Company’s business objectives for managing the assets; and whether the financial instruments’ contractual cash flows represent “solely payments of principal and interest” on the principal amount outstanding (the “SPPI test”). Financial assets are required to be reclassified only when the business model under which they are managed has changed. All reclassifications are to be applied prospectively from the reclassification date. Financial liabilities are classified in a similar manner as under IAS 39.
The assessment of the Company’s business models for managing its financial assets was made as of the date of initial application of November 1, 2018 or on initial recognition. The assessment of whether contractual cash flows on debt investments meet the SPPI test was made based on the facts and circumstances as at the initial recognition of the financial assets.
i) Classification and measurement of financial assets and financial liabilities
Financial assets
Initial Recognition
The Company initially recognizes financial assets at fair value on the date that the Company becomes a party to the contractual provisions of the instrument. The Company derecognizes a financial asset when the contractual rights to the cash flows from the asset expire, or it transfers the rights to receive the contractual cash flows on the financial asset in a transaction in which substantially all the risks and rewards of ownership of the financial asset are transferred.
15
Grown Rogue International Inc.
Notes to the Consolidated Financial Statements
For the Years Ended October 31, 2019 and 2018
Expressed in United States Dollars
| 4. | Significant Accounting Policies and Significant Judgements (continued) |
| p) | Newly Adopted Accounting Policies (continued) | |
| Financial assets (continued) |
Classification and measurement
Under IFRS 9, financial assets are initially measured at fair value. In the case of a financial asset not categorized as fair value through profit or loss (“FVTPL”), transaction costs are included. Transaction costs of financial assets carried at FVTPL are expensed in net income (loss).
Subsequent classification and measurement of financial assets depends on the Company’s business objective for managing the asset and the cash flow characteristics of the asset:
| i. | Amortized cost – Financial assets held for collection of contractual cash flows that meet the SPPI test are measured at amortized cost. Interest income is recognized as Other income (expense) in the consolidated financial statements, and gains/losses are recognized in net income (loss) when the asset is derecognized or impaired. | |
| ii. | Fair value through other comprehensive income (“FVOCI”) – Financial assets held to achieve a particular business objective other than short-term trading are designated at FVOCI. IFRS 9 also provides the ability to make an irrevocable election at initial recognition of a financial asset, on an instrument-by-instrument basis, to designate an equity investment that would otherwise be classified as FVTPL and that is neither held for trading nor contingent consideration arising from a business combination to be classified as FVOCI. There is no recycling of gains or losses through net income (loss). Upon derecognition of the asset, accumulated gains or losses are transferred from Other comprehensive income (“OCI”) directly to Deficit. |
| iii. | FVTPL – Financial assets that do not meet the criteria for amortized cost or FVOCI are measured at FVTPL. |
Financial liabilities
The Company initially recognizes financial liabilities at fair value on the date at which the Company becomes a party to the contractual provisions of the instrument. The Company derecognizes a financial liability when its contractual obligations are discharged or cancelled or expire. The subsequent measurement of financial liabilities is determined based on their classification as follows:
| i. | FVTPL – Derivative financial instruments entered into by the Company that do not meet hedge accounting criteria are classified as FVTPL. Gains or losses on these types of financial liabilities are recognized in net income (loss). |
| ii. | Amortized cost – All other financial liabilities are classified as amortized cost using the effective interest method. Gains and losses are recognized in net income (loss) when the liabilities are derecognized as well as through the amortization process. |
16
Grown Rogue International Inc.
Notes to the Consolidated Financial Statements
For the Years Ended October 31, 2019 and 2018
Expressed in United States Dollars
| 4. | Significant Accounting Policies and Significant Judgements (continued) |
| p) | Newly Adopted Accounting Policies (continued) |
The following table summarizes the original measurement categories under IAS 39 and the new measurement categories under IFRS 9 for each class of the Company’s financial assets and financial liabilities:
| Asset/Liability | Classification under IAS 39 | Classification under IFRS 9 | ||
| Accounts receivable, net | Loans and receivables | Amortized cost | ||
| Other receivables | Loans and receivables | Amortized cost | ||
| Cash and cash equivalents | Loans and receivables | Amortized cost | ||
| Accounts payable and accrued liabilities | Other liabilities at amortized cost | Amortized cost | ||
| Finance lease payable | Other liabilities at amortized cost | Amortized cost | ||
| Convertible promissory notes | Other liabilities at amortized cost | Amortized cost | ||
| Long-term debt | Other liabilities at amortized cost | Amortized cost | ||
| Interest payable | Other liabilities at amortized cost | Amortized cost | ||
| Convertible debentures | Other liabilities at amortized cost | Amortized cost | ||
| Due to employee/ director | Other liabilities at amortized cost | Amortized cost | ||
| Derivative liabilities | FVTPL | FVTPL |
| ii) | Impairment |
IFRS 9 introduces a three-stage expected credit loss (“ECL”) model for determining impairment of financial assets. The expected credit loss model does not require the occurrence of a triggering event before an entity recognizes credit losses. IFRS 9 requires an entity to recognize expected credit losses upon initial recognition of a financial asset and to update the quantum of expected credit losses at the end of each reporting period to reflect changes to credit risk of the financial asset. The adoption of the ECL model did not have a material impact on the Company’s consolidated financial statements.
The Company recognizes a loss allowance for expected credit losses on financial assets that are measured at amortized cost. At each reporting date, the loss allowance for the financial asset is measured at an amount equal to the lifetime expected credit losses if the credit risk on the financial asset has increased significantly since initial recognition. If at the reporting date, the financial asset has not increased significantly since initial recognition, the loss allowance is measured for the financial asset at an amount equal to twelve month expected credit losses. For trade receivables the Company applies the simplified approach to providing for expected credit losses, which allows the use of a lifetime expected loss provision. Impairment losses on financial assets carried at amortized cost are reversed in subsequent periods if the amount of the loss decreases and the decrease can be objectively related to an event occurring after the impairment was recognized.
17
Grown Rogue International Inc.
Notes to the Consolidated Financial Statements
For the Years Ended October 31, 2019 and 2018
Expressed in United States Dollars
| 4. | Significant Accounting Policies and Significant Judgements (continued) |
| p) | Newly Adopted Accounting Policies (continued) |
Share-based Payments (Amendments to IFRS 2)
In June 2016, the IASB issued amendments to IFRS 2 that clarify how to account for certain types of share-based payment transactions.
The amendments provide requirements related to accounting for:
| ● | the effects of vesting and non-vesting conditions on the measurement of cash-settled share-based payments; |
| ● | share-based payment transactions with a net settlement feature for withholding tax obligations; and |
| ● | the effect of a modification of the terms and conditions of a share-based payment that changes the classification of the transaction from cash-settled to equity settled. |
Adoption of the amendments to IFRS 2 as of November 1, 2018 did not have an impact on the Company’s financial statements.
Revenue
IFRS 15 Revenue from Contracts with Customers, (“IFRS 15”) replaced all preexisting guidance, including, but not limited to IAS 11 Construction Contracts, IAS 18 Revenue, and IFRIC 15 Agreements for the Construction of Real Estate in IFRS related to revenue. IFRS 15 contains a single control based model (the “model”) that applies to contracts with customers and allows entities to recognize revenue at a point in time or overtime. The model consists of a 5 step analysis of transactions to determine whether, how much, and when revenue is recognized. IFRS 15 also includes additional requirements for revenue accounted for under the standard. Adoption of IFRS 15 as of November 1, 2018 did not have an impact on the Company’s financial statements.
| q) | Future Accounting Pronouncements |
IFRS 16 Leases (“Leases”) was issued in January 2016 and replaces IAS 17 Leases. Under IAS 17, lessees were required to make a distinction between a finance lease and an operating lease. If the lease was classified as a finance lease, a lease liability was included on the statement of financial position. IFRS 16 now requires lessees to recognize a right of use asset and lease liability reflecting future lease payments for virtually all lease contracts. The right of use asset is treated similarly to other non-financial assets and depreciated accordingly. The lease liability accrues interest. The IASB has included an optional exemption for certain short term leases and leases of low value assets; however, this exemption can only be applied by lessees. Under IFRS 16, a contract is, or contains, a lease if the contract conveys the right to control the use of an identified asset for a period of time in exchange for consideration. Control is conveyed where the customer has both the right to direct the identified asset’s use and obtain substantially all the economic benefits from that use. IFRS 16 will be effective for the Company’s year ended October 31, 2020. The Company is currently evaluating the impact adopting IFRS 16 will have on its consolidated financial statements.
18
Grown Rogue International Inc.
Notes to the Consolidated Financial Statements
For the Years Ended October 31, 2019 and 2018
Expressed in United States Dollars
| 5. | Biological Assets |
Biological assets consists of cannabis seeds and cannabis plants. The reconciliation of changes in the carrying amounts of biological assets as at October 31, 2019 and October 31, 2018 are as follows:
| Balance - October 31, 2017 | $ | 10,436 | ||
| Add: Purchased cannabis plants | 521,949 | |||
| Change in fair value less costs to sell due to biological transformation | 541,352 | |||
| Transferred to inventory upon harvest | (924,120 | ) | ||
| Balance - October 31, 2018 | 149,617 | |||
| Add: Purchased cannabis plants | 308,324 | |||
| Change in fair value less costs to sell due to biological transformation | 486,354 | |||
| Allocation of operational overhead | 438,859 | |||
| Transferred to inventory upon harvest | (1,226,565 | ) | ||
| Balance - October 31, 2019 | $ | 156,589 |
When determining the fair value of biological assets, the Company makes estimates and uses assumptions as follows:
| ● | Expected costs required to grow the cannabis up to the point of harvest |
| ● | Estimated selling price per Kg |
| ● | 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 basis according to the stage of growth and estimated costs to complete cultivation. |
The estimates and assumptions used are subject to volatility in uncontrollable market conditions, may significantly impact the fair value of biological assets. Biological assets represent a level 3 assets in the fair value hierarchy. The following table quantifies each significant unobservable input and provides the impact of a 20% increase or decrease that each input would have on the fair value of biological assets:
| October 31, 2019 | October 31, 2018 | Impact
of 20% change – October 31, 2019 | Impact
of 20% change - October 31, 2018 | |||||||||||||
| Estimated selling price per lb | $ | 840 | $ | 591 | $ | 37,747 | $ | 39,702 | ||||||||
| Estimated stage of growth | 60 | % | 72 | % | $ | 30,970 | $ | 31,658 | ||||||||
| Estimated flower yield per harvest (lb) | 263 | 278 | $ | 30,970 | $ | 31,358 | ||||||||||
19
Grown Rogue International Inc.
Notes to the Consolidated Financial Statements
For the Years Ended October 31, 2019 and 2018
Expressed in United States Dollars
| 6. | Inventory |
As at October 31, 2019, the Company’s inventory consists raw materials $27,860 (2018 - $46,802), work in progress of $819,675 (2018- $ 823,730) and finished goods of $93,180 (2018 - $ 509,569).
| Balance - October 31, 2018 | $ | 1,380,101 | ||
| Balance - October 31, 2019 | $ | 940,715 |
The cost of inventories included as an expense and included in cost of goods sold, for the year ended October 31, 2019 was $2,935,934 (2018 - $1,889,229).
| 7. | Property and Equipment |
| Furniture and | Computer and Office | Production Equipment | Construction in Progress - | Leasehold | ||||||||||||||||||||
| Fixtures | Equipment | and Other | Warehouse | Improvements | Total | |||||||||||||||||||
| Cost | ||||||||||||||||||||||||
| Balance - October 31, 2017 | $ | 750 | $ | 2,230 | $ | 169,403 | $ | 536,008 | $ | 326,731 | $ | 1,035,122 | ||||||||||||
| Additions | - | 73,653 | 199,827 | 772,746 | 740,994 | 1,787,220 | ||||||||||||||||||
| Disposals | (750 | ) | - | (12,115 | ) | (730,596 | ) | - | (743,461 | ) | ||||||||||||||
| Balance - October 31, 2018 | - | 75,883 | 357,115 | 578,158 | 1,067,725 | 2,078,881 | ||||||||||||||||||
| Additions | - | 50,481 | 86,483 | 17,308 | 242,745 | 397,017 | ||||||||||||||||||
| Disposals | - | (70,403 | ) | - | (118,683 | ) | - | (189,086 | ) | |||||||||||||||
| Balance - October 31, 2019 | $ | - | $ | 55,961 | $ | 443,598 | $ | 476,783 | $ | 1,310,470 | $ | 2,286,812 | ||||||||||||
| Accumulated Amortization | ||||||||||||||||||||||||
| Balance - October 31, 2017 | $ | 6 | $ | 145 | $ | 13,133 | $ | - | $ | 32,642 | $ | 45,926 | ||||||||||||
| Transfers | (6 | ) | - | - | - | 6 | - | |||||||||||||||||
| Amortization | - | 1,762 | 61,036 | - | 397,248 | 460,046 | ||||||||||||||||||
| Disposals | - | - | (3,012 | ) | - | - | (3,012 | ) | ||||||||||||||||
| Balance - October 31, 2018 | - | 1,907 | 71,157 | - | 429,896 | 502,960 | ||||||||||||||||||
| Amortization | - | 17,794 | 61,322 | - | 239,819 | 318,935 | ||||||||||||||||||
| Balance - October 31, 2019 | $ | - | $ | 19,701 | $ | 132,479 | $ | - | $ | 669,715 | $ | 821,895 | ||||||||||||
| Net Book Value | ||||||||||||||||||||||||
| As at October 31, 2018 | $ | - | $ | 73,976 | $ | 285,958 | $ | 578,158 | $ | 637,829 | $ | 1,575,921 | ||||||||||||
| As at October 31, 2019 | $ | - | $ | 36,260 | $ | 311,119 | $ | 476,783 | $ | 640,755 | $ | 1,464,917 | ||||||||||||
At October 31, 2019, $129,202 in amortization costs were included in cost of sales, $18,365 in amortization costs were included in biological assets, and $108,073 in amortization costs were included in inventory.
20
Grown Rogue International Inc.
Notes to the Consolidated Financial Statements
For the Years Ended October 31, 2019 and 2018
Expressed in United States Dollars
| 8. | Accrued Liabilities |
During the year ended October 31, 2019, the Company entered into an agreement with a vendor to defer payment of $180,799 beyond one year from October 31, 2019.
| 9. | Finance Leases Payable |
| i) | Effective July 11, 2017, and as amended on July 28, 2017, the Company entered into an agreement with a third party to lease equipment at a cost $134,289 over a thirty-six month period for monthly payments of $4,778. The terms and conditions of the lease predicate that substantially all of the risks and rewards of ownership of the leased asset transfer to the Company. Therefore, the Company has classified the agreement as a finance lease. |
| ii) | Effective November 8, 2017, the Company entered into an agreement with a third party to lease equipment at a cost $158,193 over a thirty-six month period for monthly payments of $5,630. The terms and conditions of the lease predicate that substantially all of the risks and rewards of ownership of the leased asset transfer to the Company. Therefore, the Company has classified the agreement as a finance lease. |
| iii) | Effective February 20, 2019, the Company entered into an agreement with a third party to lease equipment at a cost $62,516 over a twenty-four month period for monthly payments of $3,220. The terms and conditions of the lease predicate that substantially all of the risks and rewards of ownership of the leased asset transfer to the Company. Therefore, the Company has classified the agreement as a finance lease. |
As at October 31, 2019, the related lease liabilities are payable as follow:
| Future minimum lease payments | Interest | Total | ||||||||||
| Less than one year | $ | 129,876 | $ | 14,535 | $ | 144,411 | ||||||
| Between one and five years | 12,329 | 551 | 12,880 | |||||||||
| $ | 142,205 | $ | 15,086 | $ | 157,291 | |||||||
As at October 31, 2019, the net book value of the growing equipment under finance lease is $187,886.
21
Grown Rogue International Inc.
Notes to the Consolidated Financial Statements
For the Years Ended October 31, 2019 and 2018
Expressed in United States Dollars
| 10. | Long-term Debt |
Transactions related to GR Unlimited’s unsecured promissory notes during the year ended October 31, 2019, include the following:
| Face | Carrying | Interest | ||||||||||
| value | amount | payable | ||||||||||
| Balance - October 31, 2018 | $ | 50,000 | $ | 50,000 | $ | 10,444 | ||||||
| 60% - October 2, 2019 (iii) | 50,000 | 50,000 | - | |||||||||
| 60% - October 17, 2019 (iv) | 50,000 | 50,000 | - | |||||||||
| Interest expense on long-term debt | - | - | 9,535 | |||||||||
| Debt repayments | - | - | (12,000 | ) | ||||||||
| Balance - October 31, 2019 | 150,000 | 150,000 | 7,979 | |||||||||
| Less: current portion | 150,000 | 150,000 | 7,979 | |||||||||
| Balance - October 31, 2019, net of current portion | $ | - | $ | - | $ | - | ||||||
Transactions related to GR Unlimited’s unsecured promissory notes during the period ended October 31, 2018, include the following:
| Face | Carrying | Interest | ||||||||||
| value | amount | payable | ||||||||||
| Balance - October 31, 2017 | $ | 552,173 | $ | 552,173 | $ | 14,860 | ||||||
| Amortization of deferred financing costs | 642 | 642 | - | |||||||||
| Settled in exchange for convertible promissory note (note 11) | (500,000 | ) | (500,000 | ) | (10,416 | ) | ||||||
| Interest expense on long-term debt | - | - | 6,000 | |||||||||
| Debt repayments | (2,815 | ) | (2,815 | ) | - | |||||||
| Balance - October 31, 2018 | 50,000 | 50,000 | 10,444 | |||||||||
| Less: current portion | - | - | 10,444 | |||||||||
| Balance - October 31, 2018, net of current portion | $ | 50,000 | $ | 50,000 | $ | - | ||||||
| i) | On February 1, 2017: Principal of $50,000 with simple interest accrued at a rate of 12% per annum. Interest only payments due on the following: (i) $6,000 on each of July 1, 2018 and July 1, 2019 and interest and principal payment, $56,000 due on July 1, 2020. As at October 31, 2019, accrued interest of $4,444 (October 31, 2018 - $10,444) was incurred. |
| ii) | On October 1, 2017: Principal of $500,000 with simple interest accrued at a rate of 25% per annum. During the period ended October 31, 2018, this Company formalized this debt by way of a convertible promissory note (see note 11 (iii)). |
| iii) | On October 2, 2019: Principal of $50,000 with simple interest accrued at a rate of 60% per annum and a maturity of 90 days. As at October 31, 2019, accrued interest of $2,384 was incurred. This amount is owed to a director and officer of the Company. |
| iv) | On October 17, 2019: Principal of $50,000 with simple interest accrued at a rate of 60% per annum and a maturity of 90 days. As at October 31, 2019, accrued interest of $1,151 was incurred. This amount is owed to a key member of management. |
22
Grown Rogue International Inc.
Notes to the Consolidated Financial Statements
For the Years Ended October 31, 2019 and 2018
Expressed in United States Dollars
| 11. | Convertible Promissory Notes |
Transactions related to GR Unlimited’s convertible promissory notes during the year ended October 31, 2019, include the following:
| Face | Carrying | Interest | ||||||||||
| value | amount | payable | ||||||||||
| Balance - October 31, 2018 | $ | 1,343,171 | $ | 1,299,376 | $ | 454,775 | ||||||
| Amortization of deferred financing costs | 22,106 | 23,759 | - | |||||||||
| Interest expense on long-term debt | - | - | 2,154 | |||||||||
| Interest accretion | - | 5,502 | - | |||||||||
| Repaid | (265,277 | ) | (265,277 | ) | (137,889 | ) | ||||||
| Converted to common units | (1,100,000 | ) | (1,063,360 | ) | (279,040 | ) | ||||||
| Balance - October 31, 2019 | - | - | 40,000 | |||||||||
| Less: current portion | - | - | 40,000 | |||||||||
| Balance - net of current portion | $ | - | $ | - | $ | - | ||||||
23
Grown Rogue International Inc.
Notes to the Consolidated Financial Statements
For the Years Ended October 31, 2019 and 2018
Expressed in United States Dollars
| 11. | Convertible Promissory Notes (continued) |
Transactions related to GR Unlimited’s convertible promissory notes during the period ended October 31, 2018, include the following:
| Face | Carrying | Interest | ||||||||||
| value | amount | payable | ||||||||||
| Balance - October 31, 2017 | $ | 1,518,391 | $ | 1,394,582 | $ | 140,118 | ||||||
| 50% - November 7, 2017 (i) | 300,000 | 300,000 | - | |||||||||
| 50% - November 14, 2017 (ii) | 190,000 | 190,000 | - | |||||||||
| 50% - November 14, 2017 (ii) | 125,000 | 125,000 | - | |||||||||
| 50% - November 14, 2017 (ii) | 90,000 | 90,000 | - | |||||||||
| 50% - November 14, 2017 (ii) | 25,000 | 25,000 | - | |||||||||
| 50% - November 14, 2017 (ii) | 70,000 | 70,000 | - | |||||||||
| 50% - November 14, 2017 (ii) | 25,000 | 25,000 | - | |||||||||
| 50% - November 14, 2017 (ii) | 25,000 | 25,000 | - | |||||||||
| 25% - December 15, 2017 (iii) | 1,000,000 | 1,000,000 | - | |||||||||
| 12.5% - August 1, 2018 (vii) | 57,500 | 57,500 | - | |||||||||
| 3,425,891 | 3,302,082 | 140,118 | ||||||||||
| Deferred financing costs | (55,008 | ) | (55,008 | ) | - | |||||||
| Amortization of deferred financing costs | 52,286 | 52,286 | - | |||||||||
| Interest expense on long-term debt | - | - | 822,165 | |||||||||
| Fair value of conversion option | - | (298,000 | ) | - | ||||||||
| Interest accretion | - | 284,042 | - | |||||||||
| Exchanged | (50,000 | ) | (50,000 | ) | (7,500 | ) | ||||||
| Repaid | (492,223 | ) | (492,223 | ) | (205,678 | ) | ||||||
| Converted to common units | (1,537,775 | ) | (1,443,803 | ) | (294,330 | ) | ||||||
| Balance - October 31, 2018 | 1,343,171 | 1,299,376 | 454,775 | |||||||||
| Less: current portion | 265,277 | 265,277 | 454,775 | |||||||||
| Balance - net of current portion | $ | 1,077,894 | $ | 1,034,099 | $ | - | ||||||
24
Grown Rogue International Inc.
Notes to the Consolidated Financial Statements
For the Years Ended October 31, 2019 and 2018
Expressed in United States Dollars
| 11. | Convertible Promissory Notes (continued) |
During the period ended October 31, 2018, the Company issued the following unsecured convertible promissory notes:
| i) | Effective November 7, 2017, GR Unlimited entered into an agreement with the Company’s Marketing Consultant (the “Consultant”) whereby the Consultant purchased a convertible promissory note for the total principal of $300,000 with simple interest accrued at a rate of 50%. Accrued interest shall be paid in monthly installments of $12,500 until maturity. A balloon interest payment of $15,000 was due to the Consultant on day 180 and has been accrued as of April 30, 2018. The note, which includes any unpaid principal and accrued interest, unless converted in accordance with provisions stated in the agreement shall be due and payable on the earlier of the following: (a) 12 months from the effective date of the note; or (b) the occurrence of a change of control of GR Unlimited. The note does not have a prepayment option under the agreement, unless agreed to in writing by the purchaser. |
At any time prior to the maturity of the agreement, the Consultant has the right to convert all (but not less than all) of the outstanding principal amount and all accrued and unpaid interest into the number of fully paid and non-assessable common units of GR Unlimited at a price per unit equal to the applicable conversion price calculated immediately before the closing of a going public event or qualified transaction.
The conversion price represents an amount equal to the applicable conversion valuation divided by the number of units outstanding at the time of conversion. The Conversion valuation represents the following a) $15,000,000 if the holder converts the note within 6 months of the effective date of the note and b) $18,000,000 if the holder converts the note after 6 months of the effective date of the note, but prior to the note’s maturity. On June 1, 2018, the principle of $300,000 was converted into 285.70 common units of GR Unlimited (1,585,714 common shares of the Company) as described in note 13(viii).
| ii) | Effective November 14, 2017, GR Unlimited entered into an agreement with certain purchasers (collectively the “Purchasers” and individually the “Purchaser”), to issue a series of notes with substantially similar terms, including maturity, interest rates, and conversion terms. Under the agreements, the Purchasers purchased convertible promissory notes with aggregate principal of $550,000. The notes accrue simple interest as follows: |
| a) | Interest will accrue on the outstanding principal at an annual rate of 50% calculated on the basis of a year of 365 days. |
| b) | Should the Purchasers extend the maturity date due to a Public Event prior to the end of the period, the Purchaser has the right to extend the Maturity date by up to 3 months after the consummation of the Public Event at an annual rate of 0% following the initial period. A Public Event means a transaction or other action that causes GR Unlimited’s membership units or securities for which such membership units are exchanged or substituted, to become publicly traded on a United States or Canadian stock exchange through which GR Unlimited (or its publicly held parent entity) raises aggregate proceeds net of any costs of not less than $5,000,000 (excluding these convertible promissory notes and the principal and accrued interest under any other promissory notes that are convertible into equity securities of GR Unlimited. |
25
Grown Rogue International Inc.
Notes to the Consolidated Financial Statements
For the Years Ended October 31, 2019 and 2018
Expressed in United States Dollars
| 11. | Convertible Promissory Notes (continued) |
| ii) | (continued) |
| c) | Should purchasers extend the Maturity Date by 6 months on all but not less than all of the then-outstanding principal; provided, however GR Unlimited shall pay Holder all principal not so extended, and all accrued but unpaid interest at the end of the initial period at an annual rate of 30% calculated on the basis of a year of 365 days. |
| d) | Should the Purchaser extend the maturity date of this note by 18 months on not less than $10,000 of the then-outstanding principal and unpaid interest accrued under the Note at the end of the initial period; provided, however GR Unlimited shall pay Purchaser all principal and/or interest for which the maturity date is not so extended at an annual rate of 20% calculated on the basis of a year of 365 days. |
The notes, which includes any unpaid principal and accrued interest, unless converted in accordance with provisions stated in the agreement shall be due and payable on the earlier of the following: (a) the date on which the initial period ends (the Maturity Date) unless the Maturity Date is extended by Purchaser by 3, 6, or 18 months after the Public Event. The notes may not be prepaid, in whole or in part, prior to the Maturity Date without the prior written consent of a majority of the Purchasers.
If at any time prior to the maturity of the notes a qualified equity financing occurs, each Purchaser has the right to convert not less than $10,000 of the outstanding principal amount and all accrued and unpaid interest into the number of fully paid and non-assessable common membership units of GR Unlimited at a price per unit equal to the applicable conversion price. If the Purchaser has extended the maturity date and the qualified equity financing occurs during the 18 months following the initial period, the Purchaser shall have the obligation to convert all of the outstanding principal amount and all accrued and unpaid interest into the number of fully paid and non-assessable common membership until of GR Unlimited at a price per unit equal to the applicable conversion price. The conversion price represents the following:
| a) | In the event of a qualified equity financing, the lower of (i) the valuation cap divided by issued and outstanding share count immediately prior to the qualified equity financing, or (ii) eighty percent (80%) of the price per unit paid in cash by purchasers of New Units issued in such qualified equity financing; provided, however, that such percentage shall decline by two percent (2%) for each month an event of default occurs and is continuing after the end of the initial period, up to a maximum of ten percent (10%) (e.g., if such an event of default continues for five months, the conversion price under this paragraph (a) will be a price equal to seventy (70%) of the applicable price set forth in clause (ii) above); or |
| b) | In the event of a public event the lower of (i) the valuation cap divided by the issued and outstanding share count immediately prior to the public event, or (ii) eighty percent (80%) of the price per unit paid in cash by purchasers of new units issued in such Public Event; provided, however, that such percentage shall decline by two percent (2%) for each month an event of default occurs and is continuing after the end of the Initial Period, up to a maximum of ten percent (10%) (e.g., if such an event of default continues for five months, the conversion Price under this paragraph (b) will be a price equal to seventy (70%) of the applicable price set forth in clause (ii) above); or |
26
Grown Rogue International Inc.
Notes to the Consolidated Financial Statements
For the Years Ended October 31, 2019 and 2018
Expressed in United States Dollars
| 11. | Convertible Promissory Notes (continued) |
| ii) | (continued) |
| c) | In the event of a change of control transaction, the lower of (i) the valuation cap divided by the change of control issued and outstanding share count immediately prior to the qualified equity financing, or (ii) eighty percent (80%) of the price per unit paid by the purchaser(s) in such change of control transaction; provided, however, that such percentage shall decline by two percent (2%) for each month an event of default occurs and is continuing after the end of the initial period, up to a maximum of ten percent (10%) (e.g., if such an event of default continues for five months, the conversion price under this paragraph (c) will be a price equal to seventy (70%) of the applicable price set forth in clause (ii) above); provided, further, that if a transaction or event can be characterized both as a public event and as a change of control transaction, the conversion price shall be established as if such transaction or event were a change of control transaction; or |
| d) | In the event of a nonqualified equity financing, the lower of (i) the valuation cap divided by Issued and outstanding share count immediately prior to the nonqualified equity financing, or (ii) eighty percent (80%) of the price per unit paid in cash by purchasers of new units issued in such nonqualified equity financing; provided, however, that such percentage shall decline by two percent (2%) for each month an event of default occurs and is continuing after the end of the initial period, up to a maximum of ten percent (10%) (e.g., if such an event of default continues for five months, the conversion price under this paragraph (a) will be a price equal to seventy (70%) of the applicable price set forth in clause (ii) above). |
During the year ended October 31, 2018, GR Unlimited made aggregate principal repayments of $442,223. During the year ended October 31, 2019, GR Unlimited repaid the remaining aggregate principal of $107,777. As at October 31, 2018, accrued interest of $127,915 remained unpaid, which was subsequently paid during the year ended October 31, 2019.
| iii) | Effective December 15, 2017, GR Unlimited entered into an agreement whereby the holder purchased a convertible promissory note for the total principal of $1,000,000 with simple interest accrued at a rate of 25%, payable as follows: |
| a) | As at October 31, 2018 interest accrued to $105,556 on the sum of $500,000, of debt previously held by the holder. |
| b) | Interest shall accrue from the effective date of the note on the total sum of $1,000,000 and paid in monthly installments of $20,833 to the holder beginning on January 15, 2018. As at October 31, 2018, none of the monthly instalments had been paid. |
| c) | A one-time additional interest payment equal to 5% of the unpaid principal balance payable concurrent with when the 12th scheduled monthly installment payment is otherwise due. In the event the holder completed a full or partial conversion within 12 months of the effective date, the one-time interest payment shall be pro-rated as at the date of the full or partial conversion. |
27
Grown Rogue International Inc.
Notes to the Consolidated Financial Statements
For the Years Ended October 31, 2019 and 2018
Expressed in United States Dollars
| 11. | Convertible Promissory Notes (continued) |
| iii) | (continued) |
The note, which includes any unpaid principal and accrued interest, unless converted in accordance with provisions stated in the agreement shall be due and payable on the earlier of the following: (a) 36 months from the effective date of the note; or (b) the occurrence of a change of control of GR Unlimited. Within the first 24 months from the effective date of the note, no prepayment will occur, except for payments of accrued interest or other payments as outlined above.
At any time prior to the 24 month anniversary of the effective date of the note, the holder has the right to fully or partially convert the outstanding principal and all accrued and unpaid interest into the number of fully paid and non-assessable common membership units of GR Unlimited at a price per unit equal to the applicable conversion price. The Conversion price represents an amount equal to the applicable conversion valuation divided by the number of issued and outstanding units of GR Unlimited at the time of conversion calculated immediately before the closing of a qualified equity financing event if the conversion is in conjunction with a qualified equity financing event.
If GR Unlimited consummates a going public event within the 12 months anniversary date of the note, the holder has the right to fully or partially convert the total principal outstanding at a price per unit equal to the applicable conversion price by providing written notice to GR Unlimited of its election to convert within 7 days after receipt from GR Unlimited of the financing notice. If the holder so converts, GR Unlimited will offer the holder a position as a strategic advisor to GR Unlimited for a 12 month term, which commences on the date of conversion. The holder will receive gross monthly compensation equal to $10,000 if the holder fully converts or a portion of the $10,000 equal to the ratio of the amount converted.
The conversion valuation represents the following a) $20,000,000 if the holder converts the note within 12 months of the effective date of the note and b) $40,000,000 if the holder converts the note after 12 months of the effective date of the note, but before 24 months of the effective date of the note. As at October 31, 2018, accrued interest of $248,958 was incurred. During the year ended October 31, 2019, the principle of $1,000,000 and unpaid interest of $272,991 were converted into 1,144.15 common units of GR Unlimited (4,782,284 common shares of the Company) as described in note 13 (xiii).
During the period ended October 31, 2017, GR Unlimited issued the following unsecured convertible promissory notes:
| iv) | Effective February 1, 2017: Principal of $100,000 with simple interest accrued at a rate of 15%. Principal and interest due and payable on the three year anniversary of the promissory note, February 1, 2020. In the event GR Unlimited completes a qualified equity financing transaction on or before the maturity date of the promissory note, the holder has the right to convert in whole or in part the unpaid principal and interest balance into fully paid non-assessable shares of common stock of GR Unlimited. The conversion price per unit will equal 80% of the price per unit paid in cash by purchasers of new units in a qualified equity transaction. As at October 31, 2018, accrued interest of $26,219 was incurred. The fair value of the conversion option was estimated as $Nil. During the year ended October 31, 2019, the principle of $100,000 and unpaid interest of $22,438 were converted into 126.13 common units of GR Unlimited (485,379 common shares of the Company) as described in note 13(xii). |
28
Grown Rogue International Inc.
Notes to the Consolidated Financial Statements
For the Years Ended October 31, 2019 and 2018
Expressed in United States Dollars
| 11. | Convertible Promissory Notes (continued) |
| v) | Effective February 1, 2017: Principal of $100,000 with simple interest accrued at a rate of 15%. Principal and interest due and payable on the three year anniversary of the promissory note, February 1, 2020. In the event GR Unlimited completes a qualified equity financing transaction on or before the maturity date of the promissory note, the holder has the right to convert in whole or in part the unpaid principal and interest balance into fully paid non-assessable shares of common stock of GR Unlimited. The conversion price per unit will equal 80% of the price per unit paid in cash by purchasers of new units in a qualified equity transaction. As at October 31, 2018, accrued interest of $22,438 (2017 - $11,209) was incurred. The fair value of the conversion option was estimated as $Nil. On June 15, 2018, the principle of $100,000 and unpaid interest of $20,465 were converted into 115 common units of GR Unlimited (557,151 common shares of the Company) as described in note 13(x). |
| vi) | Effective June 1, 2017: GR Unlimited entered into an agreement with its President and CEO and the President and CEO’s spouse (the “Holder”), whereby the Holder purchased a convertible non-negotiable promissory note for total principal of $637,775 with simple interest calculated at a rate of 25% per annum. The note, which includes any unpaid principal and accrued interest, unless converted in accordance with provisions stated in the agreement shall be due and payable on the earlier of the following: (a) 36 months from the effective date of the note; or (b) the occurrence of a change of control of GR Unlimited. A balloon interest payment of $30,000 is due to the Holder on June 1, 2018. The note does not have a prepayment option under the agreement, unless agreed to in writing by the Holder. |
In the event GR Unlimited completes a qualified equity financing transaction on or before the maturity date of the promissory note, the holder has the right to convert in whole or in part the unpaid principal and interest balance into fully paid non-assessable shares of common stock of GR Unlimited at a price per unit equal to the applicable conversion price calculated immediately before the closing of a going public event or qualified transaction. At any time prior to the maturity of the agreement, the Holder has the right to convert a portion of the outstanding principal amount and all accrued and unpaid interest into the number of fully paid and non-assessable common membership units of GR Unlimited.
The conversion price represents an amount equal to the applicable conversion valuation divided by the number of units outstanding at the time of conversion. The Conversion valuation represents the following a) $10,000,000 if the holder converts the note within 12 months of the effective date of the note and b) $15,000,000 if the holder converts the note after 12 months of the effective date of the note, but prior to the note’s maturity. On June 1, 2018, the principle of $637,775 and unpaid interest of $146,157 were converted into 922.70 common units of GR Unlimited (4,350,823 common shares of the Company) as described in note 13(vii).
The fair value of the conversion option was estimated as $54,000 using the following inputs, assumptions and estimates:
| Risk-free interest rate | 1.68 | % | ||
| Expected life | 2.6 years | |||
| Expected volatility | 70 | % | ||
| Share price | $ | 612 | ||
| Units outstanding at time of conversion | 10,000 | |||
| Conversion price at time of conversion | $ | 1,000 - $1,500 |
29
Grown Rogue International Inc.
Notes to the Consolidated Financial Statements
For the Years Ended October 31, 2019 and 2018
Expressed in United States Dollars
| 11. | Convertible Promissory Notes (continued) |
| vii) | Effective July 26, 2017, GR Unlimited through its wholly owned subsidiary GRU Properties, LLC entered into an agreement whereby the holder purchased a convertible promissory note for the total principal of $100,000 with simple interest calculated at a rate of 50% per annum for the first 6 months. The note became due on February 1, 2018 and was extendable for another 6 months at the holder’s option. If the holder extends the term an additional 6 months the rate of simple interest will change to 30%, such that at the end of the 12 month period, the total outstanding principal and interest amount would not exceed $140,000. |
The holder of the convertible promissory note has the unrestricted right, at the holder’s option to convert a maximum of $125,000 of the outstanding balances into common units of GR Unlimited at a price per unit agreed upon by GR Unlimited and the holder, or if a conversion price per unit cannot be agreed upon, the price per unit will be determined by appraisal. The right to convert may be exercised after the extended maturity date of the convertible promissory note. The number of common shares into which the convertible promissory notes may or will be converted shall be determined by dividing the unpaid principal balance, together with all accrued and unpaid interest thereon, by the conversion price. On January 31, 2018, $50,000 of the outstanding principal was repaid and the remaining principal of $50,000 was extended to August 1, 2018. In addition, $7,406 of accrued and unpaid interest was converted into 52.06 common units of GR Unlimited (198,214 common shares of the Company) as described in note 13(xiv). On August 1, 2018, the holder of the convertible promissory note accepted a new convertible promissory note in the amount of $57,500 in exchange for the current note and $7,500 of accrued interest. The new convertible promissory note has a maturity date to August 1, 2019, with interest at 12.5% per annum, payable monthly. During the year ended October 31, 2019, the principal and accrued interest was paid in full. As at October 31, 2018, accrued interest of $1,197 (2017 - $13,185) was incurred.
The fair value of the conversion option was estimated as $23,000 using the following inputs, assumptions and estimates:
| Risk-free interest rate | 1.36 | % | ||
| Expected life | 0.75 years | |||
| Expected volatility | 70 | % | ||
| Share price | $ | 612 | ||
| Conversion price at time of conversion | $ | 612 |
During the year ended October 31, 2019, the Company derecognized the corresponding derivative liability resulting in a gain on derecognition of $39,500 included in the statement of loss and comprehensive loss.
30
Grown Rogue International Inc.
Notes to the Consolidated Financial Statements
For the Years Ended October 31, 2019 and 2018
Expressed in United States Dollars
| 11. | Convertible Promissory Notes (continued) |
| viii) | Effective July 26, 2017, GR Unlimited through its wholly owned subsidiary GRU Properties, LLC entered into an agreement whereby the holder purchased a convertible promissory note for the total principal of $100,000 with simple interest calculated at a rate of 50% per annum for the first 6 months. The note became due on February 1, 2018 and was extendable for another 6 months at the holder’s option. If the holder extends the term an additional 6 months the rate of simple interest will change to 30%, such that at the end of the 12 month period, the total outstanding principal and interest amount would not exceed $140,000. |
The holder of the convertible promissory note has the unrestricted right, at the holder’s option to convert a maximum of $125,000 of the outstanding balances into common units of the GR Unlimited at a price per unit agreed upon by GR Unlimited and the holder, or if a conversion price per unit cannot be agreed upon, the price per unit will be determined by appraisal. The right to convert may be exercised after the extended maturity date of the convertible promissory note. The number of common shares into which the convertible promissory notes may or will be converted shall be determined by dividing the unpaid principal balance, together with all accrued and unpaid interest thereon, by the conversion price. As at October 31, 2017, accrued interest of $13,185 was incurred. On January 31, 2018, the principle of $100,000 and unpaid interest of $50,000 were converted into 89.8 common units of GR Unlimited (462,500 common shares of the Company) as described in note 13(v).
The fair value of the conversion option was estimated as $23,000 using the following inputs, assumptions and estimates:
| Risk-free interest rate | 1.36 | % | ||
| Expected life | 0.75 years | |||
| Expected volatility | 70 | % | ||
| Share price | $ | 612 | ||
| Conversion price at time of conversion | $ | 612 |
| ix) | Effective July 26, 2017: Principal of $100,000 with simple interest calculated at a rate of 50% per annum for the first 6 months. The note becomes due and payable on the earlier of a) February 1, 2018 unless extended for another 6 months at the holder’s option and b) the occurrence of a change of control of the GR Unlimited. At the maturity date, the holder has the right to either a) convert the total unpaid principal and accrued interest balance into other convertible notes then being offered or b) extend the original term of the note for an additional 6-month period. If the holder extends the term an additional 6-months the rate of simple interest will change to 30% per annum. As at October 31, 2017, accrued interest of $13,185 was incurred. Effective January 31, 2018, the principal and unpaid interest of $25,000 were converted into 74.8 common units of GR Unlimited (385,417 common shares of the Company) as described in note 13(iv). |
The fair value of the conversion option was estimated as $15,000 using the following inputs, assumptions and estimates:
| Risk-free interest rate | 1.15 | % | ||
| Expected life | 0.25 years | |||
| Expected volatility | 60 | % | ||
| Share price | $ | 612 | ||
| Conversion price at time of conversion | $ | 612 |
31
Grown Rogue International Inc.
Notes to the Consolidated Financial Statements
For the Years Ended October 31, 2019 and 2018
Expressed in United States Dollars
| 11. | Convertible Promissory Notes (continued) |
| x) | Effective October 1, 2017: GR Unlimited entered into an agreement with its President and CEO and the President and CEO’s spouse (the “Holder”), whereby the Holder purchased two convertible non-negotiable promissory notes for total principal of $250,000 with simple interest calculated at a rate of 50% per annum. The notes, which include any unpaid principal and accrued interest, unless converted in accordance with provisions stated in the agreement shall be due and payable on the earlier of the following: (a) 12 months from the effective date of the notes; or (b) the occurrence of a change of control of the Company. A balloon interest payment of $15,000 is due to the Holder on day 180. The notes do not have a prepayment option under the agreement, unless agreed to in writing by the Holder. Effective March 31, 2018, the principal and unpaid interest of $46,250 were converted into 332.4 common units of GR Unlimited (1,644,188 common shares of the Company) as described in note 13(vi). |
At any time prior to the maturity of the agreement, the Holder had the right to convert a portion of the outstanding principal amount and all accrued and unpaid interest into the number of fully paid and non-assessable common membership units of GR Unlimited at a price per unit equal to the applicable conversion price calculated immediately before the closing of a going public event or qualified transaction.
The conversion price represents an amount equal to the applicable conversion valuation divided by the number of units outstanding at the time of conversion. The Conversion valuation represents the following a) $10,000,000 if the holder converts the note within 6 months of the effective date of the note and b) $15,000,000 if the holder converts the note after 6 months of the effective date of the note, but prior to the note’s maturity. As at October 31, 2017, accrued interest of $10,274 was incurred.
The fair value of the conversion option was estimated as $8,000 using the following inputs, assumptions and estimates:
| Risk-free interest rate | 1.41 | % | ||
| Expected life | 0.92 years | |||
| Expected volatility | 70 | % | ||
| Share price | $ | 612 | ||
| Units outstanding at time of conversion | 10,000 | |||
| Conversion price at time of conversion | $ | 1,000 - $1,500 |
32
Grown Rogue International Inc.
Notes to the Consolidated Financial Statements
For the Years Ended October 31, 2019 and 2018
Expressed in United States Dollars
| 11. | Convertible Promissory Notes (continued) |
| xi) | Effective October 20, 2017, Principal of $100,000 with simple interest accrued at a rate of 50% per annum. All unpaid principal and accrued interest become due and payable on the earlier of a) the 6 month anniversary of the note, unless extended at the sole discretion of the holder and b) the occurrence of a change in control of GR Unlimited. At the Maturity date, the holder has the right to either a) convert the total unpaid principal and accrued interest into other convertible notes then being offered by GR Unlimited or b) extend the maturity of the note by 6 months. Should the holder extend the note, interest will accrue on the original principal at a rate of 30% per annum. As the maturity date, October 31, 2017, the maturity date was extended by 6 months and fully matured on April 30, 2018. On April 20, 2018, the maturity was extended by 6 months to October 20, 2018 with interest accrued at a rate of 30% during the extension period. The maturity date was then extended further to November 8, 2018. During the year ended October 31, 2019, GR Unlimited repaid the principal of $100,000. As at October 31, 2019, and October 31, 2018, accrued interest of $40,000 was outstanding. |
The fair value of the conversion option was estimated as $23,000 using the following inputs, assumptions and estimates:
| Risk-free interest rate | 1.27 | % | ||
| Expected life | 0.47 years | |||
| Expected volatility | 70 | % | ||
| Share price | $ | 612 | ||
| Conversion price at time of conversion | $ | 612 |
| xii) | On October 23, 2017, Principal of $50,000 with simple interest accrued at a rate of 50% per annum. All unpaid principal and accrued interest become due and payable on the earlier of a) the 6 month anniversary of the note, unless extended at the sole discretion of the holder and b) the occurrence of a change in control of GR Unlimited. At the Maturity date, the holder has the right to either a) convert the total unpaid principal and accrued interest into other convertible notes then being offered by GR Unlimited or b) extend the maturity of the note by 6 months. Should the holder extend the note, interest will accrue on the original principal at a rate of 30% per annum. As at October 31, 2017, accrued interest of $548 was incurred. On January 26, 2018, the holder converted the original principal amount and accrued and unpaid interest of $6,458 into 34 uncertified common units of GR Unlimited (174,079 common shares of the Company) as described in note 13(iii). |
The fair value of the conversion option was estimated as $11,000 using the following inputs, assumptions and estimates:
| Risk-free interest rate | 1.27 | % | ||
| Expected life | 0.48 years | |||
| Expected volatility | 70 | % | ||
| Share price | $ | 612 | ||
| Conversion price at time of conversion | $ | 612 |
33
Grown Rogue International Inc.
Notes to the Consolidated Financial Statements
For the Years Ended October 31, 2019 and 2018
Expressed in United States Dollars
| 12. | Convertible Debentures |
Transactions related to GR Unlimited’s convertible debentures during the year ended October 31, 2019, include the following:
| Face | Carrying | Interest | ||||||||||
| value | amount | payable | ||||||||||
| Balance - October 31, 2018 | $ | 1,029,314 | $ | 931,099 | $ | 7,758 | ||||||
| Issued during the period | 1,105,127 | 1,105,127 | - | |||||||||
| Fair value of derivative liability | - | (232,925 | ) | - | ||||||||
| Issuance costs | (38,064 | ) | (38,064 | ) | - | |||||||
| Amortization of issuance costs | 54,748 | 54,748 | - | |||||||||
| Interest accretion | - | 147,693 | - | |||||||||
| Interest expense | - | - | 126,901 | |||||||||
| Interest payments | - | - | (126,809 | ) | ||||||||
| Effects of foreign exchange | 27,931 | 27,931 | - | |||||||||
| Balance - October 31, 2019 | 2,179,056 | 1,995,609 | 7,850 | |||||||||
| Less: current portion | 2,179,056 | 1,995,609 | 7,850 | |||||||||
| Balance - net of current portion | $ | - | $ | - | $ | - | ||||||
34
Grown Rogue International Inc.
Notes to the Consolidated Financial Statements
For the Years Ended October 31, 2019 and 2018
Expressed in United States Dollars
| 12. | Convertible Debentures (continued) |
Transactions related to GR Unlimited’s convertible debentures during the year ended October 31, 2018, include the following:
| Face | Carrying | Interest | ||||||||||
| value | amount | payable | ||||||||||
| Balance - October 31, 2016 and 2017 | $ | - | $ | - | $ | - | ||||||
| Issued during the year | 1,141,060 | 1,141,060 | 7,758 | |||||||||
| Fair value of conversion option | - | (132,000 | ) | - | ||||||||
| Interest accretion | - | 33,785 | - | |||||||||
| Less: issuance costs | (111,746 | ) | (111,746 | ) | - | |||||||
| Balance - October 31, 2018 | 1,029,314 | 931,099 | 7,758 | |||||||||
| Less: current portion | - | - | 7,758 | |||||||||
| Balance - net of current portion | $ | 1,029,314 | $ | 931,099 | $ | - | ||||||
| (i) | During the year ended October 31, 2019, the Company issued secured convertible debentures with aggregate principal of CAD$1,500,000 ($1,105,127). The convertible debentures bear interest at 2% quarterly payable on the last day of March, June, September, and December. The convertible debentures mature on August 10, 2020. The debentures will be secured by a general security agreement granting a security interest in the Company’s property and assets. The debentures can be converted by the holder into common shares of the Company at a conversion price of CAD$0.44 per share. If at any time while the debentures are outstanding, the Company issues securities at a price per security lower than CAD$0.44 per share, the conversion price for any unconverted portion of the convertible debentures will be reduced to such lower price per security. If within 90 days of the issuance of the convertible debentures, the Company fails to complete a Qualified Financing of not less than CAD$1,000,000, the conversion price of the convertible debentures will be adjusted to CAD$0.30. If any common shares of the company are issued or sold for a price less than $0.44 per common share the conversion price will be adjusted downward to the price of such issuance. The adjustment to the conversion price is considered a derivative as it changes in relation to the share price of the Company and does not meet the fixed for fixed criteria. In connection with the issuance of the convertible debentures, the Company paid issuance costs of $47,975. The Company also issued 3,409,091 warrants to the convertible debenture holders, as described in note 15(vi), the fair value of was estimated to be $Nil. Of the total debt issuance costs of $47,975, $10,165 has been allocated to the derivative liability and included as expenses in the statement of loss and comprehensive loss. |
GR Unlimited has allocated the proceeds from the issuance of the convertible debentures as follows:
| Convertible debentures, principal | $ | 872,202 | ||
| Derivative liability | 232,925 | |||
| $ | 1,105,127 |
The fair value of the derivative liability was calculated by way of a Monte Carlo simulation which utilized Geometric Brownian Motion to simulate share prices over the term of the convertible debenture. Estimates included in the Monte Carlo simulation included a market interest rate of 20% and share price volatility of 126.9%. The estimated fair value of the derivative liability upon initial recognition was estimated to be CAD$316,151 ($232,925).
35
Grown Rogue International Inc.
Notes to the Consolidated Financial Statements
For the Years Ended October 31, 2019 and 2018
Expressed in United States Dollars
| 12. | Convertible Debentures (continued) |
| (i) | (continued) |
As at October 31, 2019, the Company estimated the fair value of the derivative liability using the same methodologies as described above and an estimated market interest rate of 20% and a share price volatility of 105.4%. As at October 31, 2019, the estimated fair value of the derivative liability was CAD$164,053 ($124,660), and the change in the fair value since initial recognition of $121,811 has been included as income in the Company’s statement of loss and comprehensive loss. As at October 31, 2019, if the volatility, or discount rate used was increased by 10%, the impact would be an increase to the derivative of $5,000, with a corresponding increase to loss.
(ii) During the period ended October 31, 2018, GR Unlimited issued a series of secured convertible debentures with aggregate principal of CAD$1,500,000 ($1,141,060). This series of convertible debentures bear interest at 2% quarterly payable on the last day of March, June, September, and December. The convertible debentures mature twenty four months from the effective date of the agreement or December 1, 2018 if a change in ownership has not occurred. The debentures are secured by a general security agreement granting a security interest in all of GR Unlimited’s property and assets. The debentures can be converted by the holder into common units of GR Unlimited at a conversion price of CAD$0.44 per share. In the event of a default, the Conversion Price shall be reduced to CAD$0.05 per share. In connection with the issuance of the convertible debentures, GR Unlimited incurred issuance costs of $111,746.
GR Unlimited has allocated the proceeds from the issuance of the convertible debentures as follows:
| Convertible debentures, principal | $ | 1,009,060 | ||
| Conversion option | 132,000 | |||
| $ | 1,141,060 |
The value of the conversion option was calculated by subtracting the net present value of the debenture from the face value of the convertible debentures. The net present value of the debenture was calculated using a discount rate of 15% over a period of 24 months.
Upon close of the Transaction, these debentures were replaced by convertible debentures of the Company with similar terms.
As at October 31, 2019, the Company estimated the fair value of the derivative liability by way of a Monte Carlo simulation which utilized Geometric Brownian Motion to simulate share prices over the term of the convertible debenture. Estimates included in the Monte Carlo simulation included a market interest rate of 20% and share price volatility of 105.4%. As at October 31, 2019, the estimated fair value of the derivative liability was CAD$164,053 ($124,660). As at October 31, 2019, if the volatility, or discount rate used was increased by 10%, the impact would be an increase to the derivative of $5,000, with a corresponding increase to loss.
36
Grown Rogue International Inc.
Notes to the Consolidated Financial Statements
For the Years Ended October 31, 2019 and 2018
Expressed in United States Dollars
| 13. | Members’ Capital |
GR Unlimited is authorized to issue up to 20,000 common units, up to 750 Seed Round Preferred Units and up to 3,000 Incentive Units.
The following table summarizes the activities of GR Unlimited for the years ended October 31, 2019 and October 31, 2018:
| Number of | Member’s | |||||||
| Common Shares* | Capital | |||||||
| Balance, October 31, 2017 | 22,432,446 | $ | 100 | |||||
| Issued pursuant to conversion of promissory notes | 9,159,871 | 2,152,134 | ||||||
| Issued for cash proceeds (ii) and (ix) | 4,932,236 | 1,525,345 | ||||||
| Issued to service providers (i) and (xiii) | 4,182,320 | 1,049,595 | ||||||
| Issuance costs | - | (25,401 | ) | |||||
| Balance, October 31, 2018 | 40,706,873 | 4,701,773 | ||||||
| Issued pursuant to conversion of promissory notes (xii), (xiii) and (xiv) | 5,465,877 | 1,451,400 | ||||||
| Issued in connection with Technology License Agreement (xi) | 6,600,000 | 1,574,761 | ||||||
| Issued upon exercise of unit purchase Options (xv), (xvi) and (xvii) | 4,202,429 | 1,218,784 | ||||||
| Issued pursuant to Subscription Receipts (xviii) | 3,771,023 | 913,698 | ||||||
| Balance, October 31, 2019 | 60,746,202 | $ | 9,860,416 | |||||
| * | The number of common shares per the table above represents the number of common shares exchanged for the common units, Seed Round Preferred Units and Incentive Units in connection with completion of the Transaction. |
| i) | On November 27, 2017, GR Unlimited issued 300 Incentive Units to an employee of GR Unlimited. Immediately prior to the Transaction, these Incentive Units were exchanged for 150 common units (380,211 common shares of the Company). |
| ii) | During the year ended October 31, 2018 GR Unlimited entered into a Seed Round Preferred Unit Subscription Agreement (the “Units”) at a purchase price of $1,773 per Unit. Under the Agreement GR Unlimited issued 733 Units (4,007,236 common shares of the Company) for total proceeds of $1,300,345. Each Unit will have one vote per unit and will be subject to automatic conversion into common units rounded to the nearest whole common unit, at the then effective conversion rate immediately prior to the closing of a public event. The conversion rate shall be determined by dividing the original issue price for a single Unit by the conversion price effective at the time of conversion. The Conversion price will change upon the occurrence of an event which changes the number of outstanding and issued common units at the time of conversion. |
37
Grown Rogue International Inc.
Notes to the Consolidated Financial Statements
For the Years Ended October 31, 2019 and 2018
Expressed in United States Dollars
| 13. | Members’ Capital (continued) |
| iii) | Effective January 26, 2018, the holder of a convertible promissory note converted the original principal amount of $50,000 and all accrued and unpaid interest of $6,458 into 34 uncertified common units of GR Unlimited (174,079 common shares of the Company). |
| iv) | Effective January 31, 2018, the holder of a note payable assigned 100% principal and accrued and unpaid interest to a limited liability company (the “Entity”), which is wholly owned by the holder. Through the execution of the assignment agreement, the terms within, the Entity converted the original principal amount of $100,000 and all accrued and unpaid interest of $25,000 into 74.8 uncertified common units of GR Unlimited (385,417 common shares of the Company). |
| v) | Effective January 31, 2018, the holder of two convertible promissory notes in the original principal amount of $100,000 took the following actions: |
| (i) | Received a return of principal of $50,000 from one of the convertible promissory notes. |
| (ii) | Extended the maturity date of the continuing convertible promissory note for the principal amount of $50,000 to August 1, 2018 with a coupon interest rate of 30% per annum. All principal and accrued and unpaid interest, shall become due on the earlier of a) August 1, 2018 or b) the occurrence of a change of control of the Company; and |
| (iii) | Converted the original principal of the second convertible promissory note and accrued and unpaid interest of $50,000 into 89.8 uncertified common units of the GR Unlimited (462,500 common shares of the Company). |
| vi) | Effective March 31, 2018, the holder of a convertible promissory note converted the original principal amount of $250,000 and all accrued and unpaid interest of $46,250 into 332.4 uncertified common units of GR Unlimited (1,644,188 common shares of the Company). |
| vii) | Effective June 1, 2018, the holder of a convertible promissory note converted the original principal amount of $637,775 and all accrued and unpaid interest of $146,157 into 922.70 uncertified common units of GR Unlimited (4,350,823 common shares of the Company). |
| viii) | Effective June 1, 2018, the holder of a convertible promissory note converted the original principal amount of $300,000 into 285.70 uncertified common units of GR Unlimited (1,585,714 common shares of the Company). |
| ix) | Between June 13, 2018 and June 15, 2018, GR Unlimited issued 190.8 common units of GR Unlimited for proceeds of $225,000 (925,000 common shares of the Company). |
| x) | Effective June 15, 2018, the holder of a convertible promissory note converted the original principal amount of $100,000 and all accrued and unpaid interest of $20,465 into 115 uncertified common units of GR Unlimited (557,151 common shares of the Company). |
38
Grown Rogue International Inc.
Notes to the Consolidated Financial Statements
For the Years Ended October 31, 2019 and 2018
Expressed in United States Dollars
| 13. | Members’ Capital (continued) |
| xi) | During the year ended October 31, 2018, GR Unlimited entered into a technology license agreement pursuant to which, GR Unlimited was granted the exclusive license to certain intellectual property in the field of development, breeding, cultivation, growing, harvesting, processing and commercializing cannabis, hemp and related plants and products (the “Technology”) in exchange for 6,600,000 common units of GR Unlimited (6,600,000 common shares of the Company). Immediately prior to the Transaction disclosed in note 2, GR Unlimited issued the common units. As at October 31, 2019, the Company determined that the license was impaired as the development of underlying technology had been halted. As such, the Company reduced the carrying amount to the estimated recoverable amount of $Nil, resulting in a loss on impairment of $1,574,761. |
| xii) | Immediately prior to the Transaction disclosed in note 2, the holder of a convertible promissory note converted the original principal amount of $100,000 and all accrued and unpaid interest of $22,438 into 126.13 uncertified common units of GR Unlimited (485,379 common shares of the Company). |
| xiii) | Immediately prior to the Transaction disclosed in note 2, the holder of a convertible promissory note converted the original principal amount of $1,000,000 and accrued and unpaid interest of $248,958 into 1,144.15 uncertified common units of GR Unlimited (4,782,284 common shares of the Company). |
| xiv) | Immediately prior to the Transaction disclosed in note 2, the holder of a convertible promissory note converted the original principal amount of $50,000 and accrued and unpaid interest of $7,644 into 52.06 uncertified common units of GR Unlimited (198,214 common shares of the Company). |
| xv) | Immediately prior to the Transaction disclosed in note 2, GR Unlimited issued 1,475,179 common units (1,475,179 common shares of the Company) pursuant to the exercise of the unit purchase option disclosed in note 18(ii). |
| xvi) | Immediately prior to the Transaction disclosed in note 2, GR Unlimited issued 2,000,000 common units (2,000,000 common shares of the Company) pursuant to the exercise of the unit purchase option disclosed in note 18(iii). |
| xvii) | Immediately prior to the Transaction disclosed in note 2, GR Unlimited issued 727,250 common units (727,250 common shares of the Company) pursuant to a partial exercise of the unit purchase option disclosed in note 18(i). |
| xviii) | In connection with the Transaction, GR Unlimited issued and sold on a subscription receipt basis, 3,771,023 units (the “GR Units”) containing one Common Unit and one GR Unlimited purchase warrant (the “GR Warrant”) for gross proceeds of CAD$1,646,050 ($1,274,516), of which $360,818 was allocated to the GR Warrants. Upon close of the Transaction, the GR Units were automatically converted into 3,771,023 common units of GR Unlimited (3,771,023 common shares of the Company) and 3,771,023 warrants of GR Unlimited (3,771,023 warrants of the Company). |
39
Grown Rogue International Inc.
Notes to the Consolidated Financial Statements
For the Years Ended October 31, 2019 and 2018
Expressed in United States Dollars
| 14. | Share Capital |
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 year ended October 31, 2019, the following share transactions occurred:
| i) | In connection with the Transaction disclosed in note 2, the Company completed a consolidation of its common shares on the basis of 1.4 pre-consolidated common shares for 1 post-consolidated common shares. Following this consolidation, the Company had 3,773,689 common shares outstanding. |
| ii) | In connection with the Transaction disclosed in note 2, the Company issued 60,746,202 common shares in exchange for the issued and outstanding common units and seed round preferred units of GR Unlimited. |
| iii) | In connection with the Transaction disclosed in note 2, the Company assigned CAD$369,508 ($279,888) of indebtedness to Novicius Subco which was subsequently converted (the “Debt Conversion”) into 839,790 units of Novicius Subco at CAD$0.44 per unit (the “Debt Conversion Units”). Each Debt Conversion Unit was comprised of one common share of Novicius Subco (a “Debt Conversion Share”) and one Novicius Subco purchase warrant (“Novicius Subco Warrants”). In accordance with the Definitive Agreement, upon close of the Transaction, the Debt Conversion Shares were exchanged for 839,790 common shares of the Company and the 839,790 Novicius Subco Warrants were exchanged, without additional consideration or action, for the same number of warrants of the Company. Of the deemed proceeds of the Debt Conversion Units of $279,888 related to the assigned indebtedness, $200,651 were assigned to the common shares of Novicius Subco and $79,237 were allocated to the Novicius Subco Warrants. |
| iv) | In connection with the Transaction disclosed in note 2, Grown Rogue Canada, completed a brokered private placement of 6,193,917 subscription receipts (the “Brokered Subscription Receipts”) for gross proceeds of CAD$2,725,323 ($2,064,377). Under its terms, each Brokered Subscription Receipt is automatically converted and immediately cancelled, without any further action by the holder of such Brokered Subscription Receipt, and for no additional consideration, into one unit of Grown Rogue Canada (the “Grown Rogue Canada Units”) upon the satisfaction of the following conditions, among others: (a) the completion of the acquisition of all outstanding units of Grown Rogue by the Company; (b) requisite shareholder and regulatory approvals of the Transaction including, but not limited to, conditional approval of the Exchange for the listing of the Shares issuable in connection thereto; and (c) all documents and instruments have been tabled for the concurrent closing of the Transaction (the “Closing”). Each Grown Rogue Canada Unit consists of one share in the capital of Grown Rogue Canada (the “Grown Rogue Canada Shares”) and one Grown Rogue Canada common share purchase warrant (the “Grown Rogue Canada Warrants”).The Grown Rogue Canada Shares and Grown Rogue Canada Warrants issued upon conversion of the Brokered Subscription Receipts were immediately exchanged, without additional consideration or action, for common shares and warrants of the Company upon close of the Transaction. Of the gross proceeds of $2,064,377, $584,430 was allocated to the Grown Rogue Canada Warrants. |
40
Grown Rogue International Inc.
Notes to the Consolidated Financial Statements
For the Years Ended October 31, 2019 and 2018
Expressed in United States Dollars
| 14. | Share Capital (continued) |
| iv) | (continued) |
The fair value of the Grown Rogue Canada Warrants of $584,430 was estimated at the grant date based on the Black-Scholes pricing model, using the following assumptions:
| Expected dividend yield | Nil | |||
| Risk-free interest rate | 1.710 | % | ||
| Expected life | 2.0 years | |||
| Expected volatility | 100 | %* |
| * | Based on the volatility of comparable publicly traded companies |
In connection with the issuance of the Grown Rogue Canada Units, Grown Rogue Canada paid cash commissions and expenses of $200,567, of which $143,786 was allocated to the Grown Rogue Canada shares and $56,781 was allocated to the Grown Rogue Canada Warrants. Grown Rogue also issued 757,125 Grown Rogue Canada Broker Warrants with each Grown Rogue Canada Broker Warrant entitling the holder to acquire one Grown Rogue Canada Unit at an exercise price of CAD$0.44 per Grown Rogue Canada Unit for a period of 24 months. Of the fair value of the Grown Rogue Canada Broker Warrants of $133,690, $50,508 was allocated to the Grown Rogue Canada shares and $19,871 was allocated to the Grown Rogue Canada Warrants. The remaining $63,311 was expensed as a transaction cost in relation to the Transaction.
| v) | In connection with the Transaction disclosed in note 2, the Company issued 100,000 common shares to a director of Grown Rogue Canada a payment for services rendered. The fair value of the common shares was estimated to by $23,860. |
| vi) | In connection with various service agreements, the Company issued 1,035,500 common shares to officers and directors resulting in an aggregate fair value of $255,360. |
| vii) | In connection with various debt settlement agreements, the Company issued 530,818 common shares to service providers with an aggregate fair value of $121,587. In connection with the debt settlements, the Company incurred a loss on debt settlement of $4,942. |
41
Grown Rogue International Inc.
Notes to the Consolidated Financial Statements
For the Years Ended October 31, 2019 and 2018
Expressed in United States Dollars
| 15. | Warrants |
The following table summarizes the warrant activities for the year ended October 31, 2019:
| Weighted | ||||||||
| Average Exercise | ||||||||
| Number | Price | |||||||
| Balance - November 1, 2018 | 148,722 | $ | 7.39 | |||||
| Issued in connection with the Transaction (i, ii, vi, vii) | 11,288,149 | 0.55 | ||||||
| Issued pursuant to subscription receipts (iii, iv) | 9,964,940 | 0.55 | ||||||
| Issued in connection with convertible debentures (vii) | 3,409,091 | 0.55 | ||||||
| Issued to brokers (v) | 757,125 | 0.44 | ||||||
| Issued to terminate purchase agreement (viii) | 2,148,117 | 0.44 | ||||||
| Expired | (131,539 | ) | (6.52 | ) | ||||
| Issuance costs | - | - | ||||||
| Balance - October 31, 2019 | 27,584,605 | $ | 0.53 | |||||
During the year ended October 31, 2019, the Company:
| i) | Issued 839,790 warrants in exchange for the same amount of Novicius Subco Warrants as disclosed in note 14(iii). Each Novicius Subco Warrant was exercisable into one common share at an exercise price of CAD$0.55 per share for 24 months. |
The fair value of the Novicius Subco Warrants of $79,237 was estimated at the grant date based on the Black-Scholes pricing model, using the following assumptions:
| Expected dividend yield | Nil | |||
| Risk-free interest rate | 1.710 | % | ||
| Expected life | 2.0 years | |||
| Expected volatility | 100 | %* |
| * | Based on the volatility of comparable publicly traded companies |
42
Grown Rogue International Inc.
Notes to the Consolidated Financial Statements
For the Years Ended October 31, 2019 and 2018
Expressed in United States Dollars
| 15. | Warrants (continued) |
| ii) | Issued 1,675,179 warrants in exchange for the same amount of GR Unlimited warrants disclosed in note 17(ii). Each warrant shall be exercisable period of two years following the date of option exercise (“the Expiration Date”); provided, however, that the expiration date shall be automatically extended for an additional three years (the “Extended Period”) if, during the initial two-year term the Company does not raise at least $18,000,000 in additional equity capital at an effective price per common unit at or above $0.70 (a “Qualified Offering”); and provided further, that the Company has the right, only during the Extended Period, if any, and only following the exercise of the Option, to accelerate the expiration date to forty-five days following written notice to the holder if during the Extended Period the Company closes a Qualified Offering. |
The fair value of the warrants of $152,798 was charged to contributed surplus and was estimated at the grant date based on the Black-Scholes pricing model, using the following assumptions:
| Expected dividend yield | Nil | |||
| Risk-free interest rate | 1.710 | % | ||
| Expected life | 2.0 years | |||
| Expected volatility | 100 | %* |
| * | Based on the volatility of comparable publicly traded companies |
| iii) | Issued 3,771,023 warrants in exchange for the same amount of GR Unlimited warrants disclosed in note 13(xviii). Each warrant allows the holder to purchase one common share of the Company at an exercise price of CAD$0.55 per unit for a period of 24 months. |
The fair value of the warrants of $360,818 was estimated at the grant date based on the Black-Scholes pricing model, using the following assumptions:
| Expected dividend yield | Nil | |||
| Risk-free interest rate | 1.710 | % | ||
| Expected life | 2.0 years | |||
| Expected volatility | 100 | %* |
| * | Based on the volatility of comparable publicly traded companies |
| iv) | Issued 6,193,917 warrants in exchange for the same amount of Grown Rogue Canada warrants disclosed in note 14(iv). Each warrant allows the holder to purchase one common share of the Company at an exercise price of CAD$0.55 per unit for a period of 24 months. |
The fair value of the warrants of $584,430 was estimated at the grant date based on the Black-Scholes pricing model, using the following assumptions:
| Expected dividend yield | Nil | |||
| Risk-free interest rate | 1.710 | % | ||
| Expected life | 2.0 years | |||
| Expected volatility | 100 | %* |
* Based on the volatility of comparable publicly traded companies
43
Grown Rogue International Inc.
Notes to the Consolidated Financial Statements
For the Years Ended October 31, 2019 and 2018
Expressed in United States Dollars
| 15. | Warrants (continued) |
| v) | Issued 757,125 broker warrants in exchange for the same amount of Grown Rogue Canada broker warrants disclosed in note 14(iv). Each warrant allows the holder to purchase one unit of the Company at an exercise price of CAD$0.44 per unit for a period of 24 months. Each unit contains one common share of the Company and one warrant entitling the holder to acquire one common share of the Company at an exercise price of CAD$0.55 per unit for a period of 24 months. |
The fair value of the GR Broker Warrants of $133,690 was accounted for as equity issuance costs with $121,354 and $12,336 allocated against the proceeds of the shares and warrants, respectively. The fair value was estimated at the grant date based on the Black-Scholes pricing model, using the following assumptions:
| Expected dividend yield | Nil | |||
| Risk-free interest rate | 1.710 | % | ||
| Expected life | 2.0 years | |||
| Expected volatility | 100 | %* |
| * | Based on the volatility of comparable publicly traded companies |
| vi) | Issued 3,409,091 warrants in exchange for the same amount of Grown Rogue Canada warrants that were issued to subscribers of the GR Unlimited convertible debenture offering disclosed in note 12 (ii). Each warrant entitles the holder to acquire one common share of the Company at an exercise price of CAD$0.55 per unit for a period of 24 months. |
The fair value of the warrants of $321,654 was expensed as transaction costs and was estimated at the grant date based on the Black-Scholes pricing model, using the following assumptions:
| Expected dividend yield | Nil | |||
| Risk-free interest rate | 1.710 | % | ||
| Expected life | 2.0 years | |||
| Expected volatility | 100 | %* |
| * | Based on the volatility of comparable publicly traded companies |
| vii) | Issued 5,364,089 warrants in exchange for the same amount of Grown Rogue Canada warrants that were issued to certain investors prior to the acquisition of Grown Rogue Canada. Each warrant entitles the holder to acquire one common share of the Company at an exercise price of CAD$0.55 per unit for a period of 24 months. In the event that the share price of the Company closes at or above CAD$0.70 per share for a period of ten (10) consecutive trading days on the CSE, the Company has the right to accelerate the expiry of the warrants to a date that is not less than 30 days from the date of delivery of a notice to the holder announcing the exercise of the acceleration right. |
The fair value of the warrants of $893,646 was estimated at the grant date based on the Black-Scholes pricing model, using the following assumptions:
| Expected dividend yield | Nil | |||
| Risk-free interest rate | 1.710 | % | ||
| Expected life | 2.0 years | |||
| Expected volatility | 100 | %* |
| * | Based on the volatility of comparable publicly traded companies |
44
Grown Rogue International Inc.
Notes to the Consolidated Financial Statements
For the Years Ended October 31, 2019 and 2018
Expressed in United States Dollars
| 15. | Warrants (continued) |
| vii) | Issued 3,409,091 warrants to subscribers of the convertible debenture offering disclosed in note 12(i). Each warrant entitles the holder to acquire one common share of the Company at an exercise price of CAD$0.55 per unit for a period of 24 months. |
The fair value of the warrants of $376,594 was estimated at the grant date based on the Black-Scholes pricing model, using the following assumptions:
| Expected dividend yield | Nil | |||
| Risk-free interest rate | 1.710 | % | ||
| Expected life | 2.0 years | |||
| Expected volatility | 101 | %* |
| * | Based on the volatility of comparable publicly traded companies |
| viii) | Issued 2,148,117 warrants to finalize a termination agreement (note 27). Each warrant entitles the holder to acquire one common share of the Company at an exercise price of CAD$0.44 per unit for a period of 48 months. Of these warrants, 859,247 vest immediately, with the remaining 1,288,870 vesting upon certain events relating to the activities of another party in the Michigan cannabis industry. |
The fair value of the warrants of $193,438 was estimated at the grant date based on the Black-Scholes pricing model, using the following assumptions:
| Expected dividend yield | Nil | |||
| Risk-free interest rate | 1.640 | % | ||
| Expected life | 4.0 years | |||
| Expected volatility | 101 | %* |
| * | Based on the volatility of comparable publicly traded companies |
The fair value of the warrants that vested of $77,014 have been expensed as an acquisition cost on the statement of loss and comprehensive loss.
As at October 31, 2019, the following Warrants were issued and outstanding:
| Remaining | ||||||||||||
| Warrants | Contractual Life | |||||||||||
| Exercise Price | Outstanding | (Years) | Expiry Date | |||||||||
| $ | 14.00 | 17,183 | 0.08 | November 30, 2019 | ||||||||
| $ | 0.44 | 757,125 | 1.04 | November 15, 2020 | ||||||||
| $ | 0.55 | 21,253,089 | 1.04 | November 15, 2020 | ||||||||
| $ | 0.55 | 3,409,091 | 1.50 | May 1, 2021 | ||||||||
| $ | 0.44 | 2,148,177 | 3.66 | June 28, 2023 | ||||||||
| 27,584,665 | 1.13 | |||||||||||
45
Grown Rogue International Inc.
Notes to the Consolidated Financial Statements
For the Years Ended October 31, 2019 and 2018
Expressed in United States Dollars
| 16. | Shares to be issued |
| i) | During the year ended October 31, 2018, GR Unlimited received aggregate proceeds of CAD$923,630 ($720,516) for 2,099,159 Subscription Receipts related to the financing disclosed in note 15(xxvi). Each Subscription Receipt includes one common unit of GR Unlimited, and one purchase warrant of GR Unlimited. Each purchase warrant is exercisable at the option of the holder to purchase one common unit of GR Unlimited at a price of CAD$0.55 per common unit for a period of two years from the time GR Unlimited completes a transaction whereby all of the equity instruments of the issuer are acquired by a Reporting Issuer in exchange for common shares of the Reporting Issuer. During the year ended October 31, 2019, GR Unlimited received additional proceeds of CAD$735,620 ($554,000) in connection with the financing. During the year ended October 31, 2019, GR Unlimited issued the Subscription Receipts. |
| ii) | During the year ended October 31, 2019, the Company and one of its vendors agreed to settle outstanding accounts payable of $5,136 through the issuance of common shares of the Company. As at October 31, 2019, these shares had yet to be issued. |
| 17. | Unit Purchase Options |
| i) | During the year ended October 31, 2018, GR Unlimited granted an option to purchase 2,727,250 common units of the Company for an aggregate amount of CAD$54,545 at any point prior to December 31, 2018. The exercise of the option is contingent upon the optionee having invested a minimum of CAD$1,050,000 of cash in securities of another party. As at October 31, 2018, this minimum investment had been completed. During the year ended October 31, 2019, GR Unlimited issued 727,250 common units in connection with the partial exercise of the option. The remaining portion of the option expired. |
The fair value of the option of $871,230 was expensed as a finance charge expense during the year ended October 31, 2018 and was estimated at the grant date based on the Black-Scholes pricing model, using the following assumptions:
| Expected dividend yield | Nil | % | ||
| Risk-free interest rate | 1.710 | % | ||
| Expected life | 5.5 months | |||
| Expected volatility | 99 | %* |
| * | Based on the volatility of comparable publicly traded companies |
| ii) | During the year ended October 31, 2018, GR Unlimited received proceeds of CAD$649,351 ($500,000) in exchange for an option to acquire 1,475,979 common units and warrants to purchase a further 1,675,979 common units. Each warrant shall be exercisable period of two years following the date of option exercise (“the Expiration Date”); provided, however, that the expiration date shall be automatically extended for an additional three years (the “Extended Period”) if, during the initial two-year term GR Unlimited does not raise at least $18,000,000 in additional equity capital at an effective price per common unit at or above $0.70 (a “Qualified Offering”); and provided further, that GR Unlimited has the right, only during the Extended Period, if any, and only following the exercise of the Option, to accelerate the expiration date to forty-five days following written notice to the holder if during the Extended Period GR Unlimited closes a Qualified Offering. During the year ended October 31, 2019, GR Unlimited issued the common units and warrants pursuant to the exercise of the option. |
46
Grown Rogue International Inc.
Notes to the Consolidated Financial Statements
For the Years Ended October 31, 2019 and 2018
Expressed in United States Dollars
| 17. | Unit Purchase Options (continued) |
| iii) | During the year ended October 31, 2018, GR Unlimited granted an option to purchase 2,000,000 common units of GR Unlimited for an aggregate amount of CAD$40,000 at any point prior to December 31, 2018. The exercise of the option is contingent upon the optionee having invested a minimum of CAD$1,050,000 of cash in securities of another party. As at October 31, 2018, this minimum investment had been completed. During the year ended October 31, 2019, GR Unlimited issued 2,000,000 common units pursuant to the exercise of the option. |
The fair value of the option of $639,259 was expensed as a finance charge expense during the year ended October 31, 2018 and was estimated at the grant date based on the Black-Scholes pricing model, using the following assumptions:
| Expected dividend yield | Nil% | |||
| Risk-free interest rate | 1.710 | % | ||
| Expected life | 2.0 years | |||
| Expected volatility | 100 | %* |
| * | Based on the volatility of comparable publicly traded companies |
| 18. | Income Taxes |
| i) | Income Tax Expense |
The following table reconciles income taxes calculated at combined United States Federal/state tax rates with the income tax recovery in the consolidated financial statements:
| 2019 | 2018 | 2017 | ||||||||||
| Income (loss) before income taxes | $ | (9,476,934 | ) | $ | (7,509,986 | ) | $ | (302,397 | ) | |||
| Effective income tax rate (%) | 27.25 | 27.60 | 27.60 | |||||||||
| Expected income tax recovery | $ | (2,582,166 | ) | $ | (2,072,756 | ) | $ | (83,462 | ) | |||
| Loss (income) related to entities taxed as partnerships | - | 1,648,189 | 83,462 | |||||||||
| Temporary differences related to inventory valuation | (142,025 | ) | (24,262 | ) | - | |||||||
| Temporary differences related to start-up costs | 99,029 | |||||||||||
| Temporary differences related to Transaction costs | 320,709 | |||||||||||
| Non-deductible expenses | 1,059,283 | 29,378 | - | |||||||||
| Temporary differences related to cost of goods sold | 172,517 | 245,410 | - | |||||||||
| Unrealized gain on biological assets | (134,720 | ) | (149,413 | ) | - | |||||||
| Share issuance costs | (13,457 | ) | - | - | ||||||||
| Losses and other deductions for which no benefit has been recognized | 1,220,830 | 323,454 | - | |||||||||
| Income tax expense (recovery) | $ | - | $ | - | $ | - | ||||||
47
Grown Rogue International Inc.
Notes to the Consolidated Financial Statements
For the Years Ended October 31, 2019 and 2018
Expressed in United States Dollars
| 18. | Income Taxes (continued) |
| ii) | Deferred Taxes |
The temporary differences that give rise to deferred income tax assets and deferred income tax liabilities are presented below:
| 2019 | 2018 | |||||||
| Deferred Tax Assets | ||||||||
| Start up costs | $ | 299,259 | 200,231 | |||||
| Inventory | 24,349 | 48,498 | ||||||
| Biological asset fair value adjustment | - | (149,955 | ) | |||||
| Net operating loss carry-forwards | 2,307,529 | 335,701 | ||||||
| Share issuance costs | 10,226 | - | ||||||
| Transaction costs | 331,164 | - | ||||||
| Allowance for doubtful accounts | - | 29,485 | ||||||
| 2,972,527 | 463,960 | |||||||
| Deferred taxes not recognized | (2,972,527 | ) | (463,960 | ) | ||||
| Net deferred tax assets | $ | - | $ | - | ||||
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Deferred income tax liabilities result primarily from amounts not deductible for accounting purposes until future periods. Deferred income tax assets result primarily from operating tax loss carry forwards and have been offset against deferred income tax liabilities.
As the Company operates in the cannabis industry, it is subject to the limits of United States Internal Revenue Code Section 280E under which the Company is only allowed to deduct expenses directly related to sales of product. This results in permanent differences between ordinary and necessary business expenses deemed non-allowable under United States Internal Revenue Code Section 280E.
Federal and Oregon tax laws impose restrictions on net operating loss carryforwards in the event of a change in ownership of the Company, as defined by the United States Internal Revenue Code Section 382. The Company does not believe that a change in ownership, as defined by United States Internal Revenue Code Section 382, has occurred but a formal study has not been completed.
48
Grown Rogue International Inc.
Notes to the Consolidated Financial Statements
For the Years Ended October 31, 2019 and 2018
Expressed in United States Dollars
| 19. | Stock Options |
| i) | During the period ended October 31, 2019, the Company granted options to purchase 150,000 common shares of the Company to two consultants. Each option allows the holder to purchase one common share of the Company at a price of CAD$0.44 at any point prior to November 30, 2021. |
The fair value of the options of $25,587 was estimated at the grant date based on the Black-Scholes pricing model, using the following assumptions:
| Expected dividend yield | Nil | % | ||
| Risk-free interest rate | 1.710 | % | ||
| Expected life | 3.0 years | |||
| Expected volatility | 100 | %* | ||
| * | Based on the volatility of comparable publicly traded companies |
| ii) | During the period ended October 31, 2019, the Company granted options to purchase 500,000 common shares of the Company to two consultants. Each option allows the holder to purchase one common share of the Company at a price of CAD$0.44 at any point prior to January 1, 2022. |
The fair value of the options of $86,493 was estimated at the grant date based on the Black-Scholes pricing model, using the following assumptions:
| Expected dividend yield | Nil | % | ||
| Risk-free interest rate | 1.710 | % | ||
| Expected life | 3.0 years | |||
| Expected volatility | 100 | %* |
| * | Based on the volatility of comparable publicly traded companies |
As at October 31, 2019, the following Stock Options were issued and outstanding (all prices are in Canadian Dollars unless otherwise noted):
| Remaining | ||||||||||||
| Stock Options | Contractual Life | |||||||||||
| Exercise Price | Outstanding | (Years) | Expiry Date | |||||||||
| $ | 0.44 | 150,000 | 2.08 | November 30, 2021 | ||||||||
| $ | 0.44 | 500,000 | 2.17 | January 1, 2022 | ||||||||
| 650,000 | 2.15 | |||||||||||
49
Grown Rogue International Inc.
Notes to the Consolidated Financial Statements
For the Years Ended October 31, 2019 and 2018
Expressed in United States Dollars
| 20. | Changes in Non-cash Working Capital |
The changes to the Company’s non-cash working capital for the periods ended October 31, 2019, 2018 and 2017 are as follows:
| 2019 | 2018 | 2017 | ||||||||||
| Accounts receivable | $ | 98,828 | $ | (221,158 | ) | $ | (31,750 | ) | ||||
| Other receivable | 20,645 | (52,843 | ) | - | ||||||||
| Inventory | 1,174,678 | 364,667 | (367,518 | ) | ||||||||
| Prepaid expenses and other assets | 211,982 | (136,129 | ) | (43,228 | ) | |||||||
| Accounts payable and accrued liabilities | (887,903 | ) | 1,676,027 | 669,742 | ||||||||
| Due to employee/director | - | - | 104,000 | |||||||||
| Unearned revenue | 35,000 | - | - | |||||||||
| Interest payable | (135,265 | ) | 614,264 | 154,978 | ||||||||
| Deferred rent | (6,751 | ) | 6,344 | 24,912 | ||||||||
| $ | 511,214 | $ | 2,251,172 | $ | 511,136 | |||||||
| 21. | Supplemental Cash Flow Disclosure |
| 2019 | 2018 | 2017 | ||||||||||
| Interest paid | $ | 310,217 | $ | 128,042 | $ | 7,414 | ||||||
| Fair value of common shares and units issued for services | 255,360 | 720,516 | - | |||||||||
| Fair value of common shares issued as settlement of debt | 121,587 | 500,000 | - | |||||||||
| Purchase of property and equipment on account | - | - | 37,025 | |||||||||
| Property and equipment acquired through convertible note payable | - | - | 139,001 | |||||||||
| Conversion of notes payable to common units | 1,342,400 | 1,909,134 | - | |||||||||
| Prepayment of finance lease | - | - | 4,712 | |||||||||
50
Grown Rogue International Inc.
Notes to the Consolidated Financial Statements
For the Years Ended October 31, 2019 and 2018
Expressed in United States Dollars
| 22. | Related Party Transactions |
During the year ended October 31, 2019, the Company incurred the following related party transactions:
| i) | Through its wholly owned subsidiary, GRU Properties, LLC leased a property located in Trail, Oregon owned by the Company’s President and CEO. The lease expires on December 31, 2020. Rent of $60,500 was included in facility expense for the year ended October 31, 2019 (2018 - $65,000). The Company had $63,000 (October 31, 2018 - $5,500) owing in accounts payable and accrued liabilities at October 31, 2019. |
| ii) | The Company incurred employee/director fees of $22,000 (2018 - $48,000) with an individual related to the Company’s President and CEO. At October 31, 2019, due to employee/director includes $Nil (October 31, 2018 - $14,000) and accounts payable and accrued liabilities includes $8,000 (October 31, 2018 - $12,000) payable to this individual. |
| iii) | The Company incurred fees related to marketing and promotion services of $183,674 (2018 - $239,568) from two companies owned by the Company’s Chief Strategy Officer (“CSO”). At October 31, 2019, accounts payable and accrued liabilities includes $6,000 (October 31, 2018 - $25,054) payable to these companies. |
| iv) | Key management personnel consists of the President and CEO; the CSO; and the CFO of GR Unlimited. The compensation paid or payable to key management for services for the periods ended October 31, 2019 and 2018 is as follows: |
| 2019 | 2018 | |||||||
| Salaries and consulting fees | $ | 408,500 | $ | 533,568 | ||||
| Share-based compensation | $ | 118,840 | $ | - | ||||
Accounts payable and accrued liabilities at October 31, 2019 includes $90,000 (October 31, 2018 - $94,000) and due to employee/directors includes $Nil (October 31, 2018 - $90,000) payable to these parties.
Additional related party transactions are disclosed in notes 10(iii), 10(iv), 11(vi), 11(x), 13(vi) and 13(vii)
The transactions are in the normal course of operations and are measured at the exchange amounts being the amounts agreed to by the parties.
51
Grown Rogue International Inc.
Notes to the Consolidated Financial Statements
For the Years Ended October 31, 2019 and 2018
Expressed in United States Dollars
| 23. | Financial Instruments |
Market Risk
| i) | Currency Risk |
As at October 31, 2019, the Company has accounts payable of CAD$564,663, accrued liabilities of CAD$100,435 and convertible debentures of CAD$3,000,000. The Company is exposed to the risk of fluctuation in the rate of exchange between the Canadian Dollar and the United States Dollar. It is management’s opinion that this risk is not material.
| ii) | Interest Rate Risk |
At October 31, 2019 and October 31, 2018, the Company’s exposure to interest rate risk relates to long-term debt, convertible promissory notes, and finance lease obligations, but its interest rate risk is limited as the aforementioned financial instruments are fixed interest rate instruments.
| iii) | Credit Risk |
Credit risk 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.
The carrying amount of cash and trade accounts receivable represents the Company’s maximum exposure to credit risk, which amounted to $174,114 (October 31, 2018 - $1,079,551) as at October 31, 2019. The allowance for doubtful accounts at October 31, 2019 is $129,131 (October 31, 2018 - $106,443).
As at October 31, 2019 and October 31, 2018, the Company’s trade accounts receivable were aged as follows:
| October 31, 2019 | October 31, 2018 | |||||||
| Current | $ | 51,672 | $ | 129,157 | ||||
| 1-30 days | 500 | 114,821 | ||||||
| 31 days- older | 176,147 | 115,373 | ||||||
| Allowance for doubtful accounts | (129,131 | ) | (106,443 | ) | ||||
| $ | 99,188 | $ | 252,908 | |||||
52
Grown Rogue International Inc.
Notes to the Consolidated Financial Statements
For the Years Ended October 31, 2019 and 2018
Expressed in United States Dollars
| 23. | Financial Instruments (continued) |
| iii) | Credit Risk (continued) |
The change in the provision for expected credit losses is as follows:
| October 31, 2019 | October 31, 2018 | |||||||
| Balance, beginning of year | $ | 106,443 | $ | - | ||||
| Additional allowance | 121,793 | 111,528 | ||||||
| Amounts collected | (66,902 | ) | ||||||
| Amounts used | (32,203 | ) | (5,085 | ) | ||||
| Balance, end of year | $ | 129,131 | $ | 106,443 | ||||
| iv) | Liquidity Risk |
Liquidity risk is the risk that the Company will not be able to meet its current obligations as they become due. The majority of the Company’s accounts payable and accrued liabilities are payable in less than 90 days. The Company prepares annual budgets and monitors expenditures to manage short-term liquidity. Due to the nature of the Company’s activities, funding for long-term liquidity needs is dependent on the Company’s ability to obtain additional financing through various means, including equity financing. At October 31, 2019, the Company has current assets of $1,432,962 (October 31, 2018 - $2,869,694) and current liabilities of $4,142,489 (October 31, 2018 - $3,321,239), which resulted in working deficit of $2,709,527 (October 31, 2018 - working capital deficit of $451,545). At October 31, 2019 the Company had cash of $74,926.
The contractual maturities of the Company’s accounts payable and accrued liabilities, convertible promissory notes, long-term debt, and finance lease payable occurs over the next three years as follows:
| Year 1 | Years 2 - 3 | |||||||
| Accounts payable and accrued liabilities | $ | 1,526,855 | $ | 180,799 | ||||
| Current portion of long-term debt | 150,000 | - | ||||||
| Convertible debentures | 1,995,609 | - | ||||||
| Unearned revenue | 35,000 | - | ||||||
| Interest payable | 55,829 | - | ||||||
| Deferred rent | - | 24,505 | ||||||
| Finance leases payable | 129,876 | 12,329 | ||||||
| Derivative liabilities | 249,320 | - | ||||||
| $ | 4,142,489 | $ | 217,633 | |||||
| v) | Fair Values |
The carrying amounts for the Company’s cash, accounts receivable, accounts payable and accrued liabilities, amounts due to employee/director, promissory notes and convertible promissory notes approximate their fair values because of the short-term nature of these items.
53
Grown Rogue International Inc.
Notes to the Consolidated Financial Statements
For the Years Ended October 31, 2019 and 2018
Expressed in United States Dollars
| 23. | Financial Instruments (continued) |
| vi) | Fair Value Hierarchy |
A number of the Company’s accounting policies and disclosures require the measurement of fair valued for both financial and non-financial 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). |
The carrying values of the financial instruments at October 31, 2019 are summarized in the following table:
| Financial Assets | Amortized cost | FVTPL | Total | |||||||||
| Cash and cash equivalents | $ | 74,926 | $ | - | $ | 74,926 | ||||||
| Accounts receivable, net | 99,188 | - | 99,188 | |||||||||
| Other receivable | 35,235 | - | 35,235 | |||||||||
| Financial Liabilities | ||||||||||||
| Accounts payable and accrued liabilities | $ | 1,707,654 | $ | - | $ | 1,707,654 | ||||||
| Finance lease payable | 142,205 | - | 142,205 | |||||||||
| Convertible debentures | 1,995,609 | - | 1,995,609 | |||||||||
| Short-term debt | 150,000 | - | 150,000 | |||||||||
| Interest payable | 55,829 | - | 55,829 | |||||||||
| Derivative liabilities | - | 249,320 | 249,320 | |||||||||
During the period ended October 31, 2019 there were no transfers of amounts between levels.
54
Grown Rogue International Inc.
Notes to the Consolidated Financial Statements
For the Years Ended October 31, 2019 and 2018
Expressed in United States Dollars
| 24. | General and Administrative Expenses |
General and administrative expenses for the years ended October 31, 2019, 2018 and 2017 are as follows:
| 2019 | 2018 | 2017 | ||||||||||
| Bad debt | $ | 54,892 | $ | 113,028 | $ | - | ||||||
| Bank fees and foreign exchange | 87,621 | 17,270 | 2,156 | |||||||||
| Business license and fees | 42,930 | 35,904 | 19,362 | |||||||||
| Commissions | - | - | 4,133 | |||||||||
| Consultants | - | - | 9,088 | |||||||||
| Facility expense | 184,774 | 215,922 | 123,703 | |||||||||
| Insurance | 10,309 | 9,194 | - | |||||||||
| Investor relations | 127,248 | - | - | |||||||||
| Legal and professional | 1,550,316 | 898,599 | 525,810 | |||||||||
| Marketing and promotion | 209,470 | 302,401 | 90,673 | |||||||||
| Miscellaneous | 89,036 | 56,491 | - | |||||||||
| Office expense | 83,509 | 36,535 | 30,845 | |||||||||
| Repairs and maintenance | 18,702 | 4,243 | - | |||||||||
| Research and development | 28,250 | 5,233 | - | |||||||||
| Salaries and benefits | 1,938,022 | 791,518 | 200,274 | |||||||||
| Supplies | 27,711 | 11,748 | - | |||||||||
| Travel | 185,570 | 159,848 | 43,611 | |||||||||
| Utilities | 22,315 | 49,952 | - | |||||||||
| $ | 4,660,675 | $ | 2,707,886 | $ | 1,049,655 | |||||||
55
Grown Rogue International Inc.
Notes to the Consolidated Financial Statements
For the Years Ended October 31, 2019 and 2018
Expressed in United States Dollars
| 25. | 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:
| (i) | to safeguard the Company’s assets and ensure the Company’s ability to continue as a going concern; |
| (ii) | to raise sufficient capital to finance the construction of its production facility and obtain license to produce recreational marijuana; and |
| (iii) | 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.
| 26. | Commitments |
| a) | The Company has commitments under operating leases for its facilities and commitments under a finance lease for equipment. The minimum lease payments due are as follows: |
| Fiscal Year | Amount | |||
| 2020 | $ | 144,412 | ||
| 2021 | $ | 12,880 | ||
56
Grown Rogue International Inc.
Notes to the Consolidated Financial Statements
For the Years Ended October 31, 2019 and 2018
Expressed in United States Dollars
| 26. | Commitments (continued) |
| b) | During the period ended October 31, 2019, the Company entered into a letter of intent (the Agreement”) with another party whose assets include the local approval for one retail dispensary in the state of Michigan and a 24,000 square foot indoor manufacturing facility that will include both cultivation and processing when fully constructed. The terms of the Agreement include the following provisions: |
| ● | The Company obtains the option to acquire a 51% interest in the other party, subject to state and regulatory approval, for a one-time payment of $250,000 due upon signing of the Agreement; |
| ● | The Company will provide up to $2,000,000 in financing by way of a loan for development and operational build-out of the cultivation, processing and dispensary centers of which the Company will be paid back under an established schedule; |
| ● | The Company will have the right to purchase the remaining 49% of the other party for either stock or cash or a combination of both at the earlier of the Company’s stock reaching CAD$1.00 per share on the CSE for a period of ten consecutive days or 24 months from the signing of the Agreement. Unless the other party permits, the Company may not exercise this option for a period of 12 months following the signing of the Agreement; and |
| ● | The Company will also issue 900,000 common shares to the other party based on milestones including signing of the Agreement, production of 500 pounds of dried cannabis flower and achieving $3,000,000 in top-line revenue. |
The completion of the terms of the Agreement were subject to Michigan regulatory approval and full licensing of the Company at the state level. Subsequent to the year ended October 31, 2019, the Company decided to terminate this agreement.
| 27. | Acquisition Costs |
During the year ended October 31, 2019, the Company entered into a binding letter of intent (the “LOI”) pursuant to which the Company was to acquire assets including real estate, intellectual property and other assets for aggregate consideration of $3,000,000, subject to certain adjustments. The Company decided to terminate the LOI and, in doing so, incurred acquisition costs of $49,188 which have been expensed in the statement of loss and comprehensive loss.
During the year ended October 31, 2019, the Company entered into a binding agreement for the option to acquire operational control of certain assets in Michigan. The Company decided not to move forward with this acquisition and, pursuant to a termination agreement, issued 2,148,177 warrants as disclosed in note 15(viii). The fair value of the vested warrants of $77,014 has been expensed as an acquisition cost in the statement of loss and comprehensive loss.
57
Grown Rogue International Inc.
Notes to the Consolidated Financial Statements
For the Years Ended October 31, 2019 and 2018
Expressed in United States Dollars
| 28. | Geographical Information |
Geographical information relating to the Company’s activities is as follows:
| Revenue | ||||||||
| Year ended October 31, | ||||||||
| 2019 | 2018 | |||||||
| United States | $ | 3,924,983 | $ | 1,932,128 | ||||
| Canada | — | — | ||||||
| $ | 3,924,983 | $ | 1,932,128 | |||||
| Long-Term Assets | ||||||||
| Year ended October 31, | ||||||||
| 2019 | 2018 | |||||||
| United States | $ | 1,499,514 | $ | 2,496,574 | ||||
| Canada | — | — | ||||||
| $ | 1,499,514 | $ | 2,496,574 | |||||
| (1) | Includes: Plant and equipment |
| 29. | Non-Controlling Interests |
The changes to the non-controlling interest for the years ended October 31, 2019 and 2018 are as follows:
| October 31, 2019 | October 31, 2018 | |||||||
| Balance, beginning of year | $ | - | $ | - | ||||
| Net assets contributed | 196,250 | |||||||
| Non-controlling interest’s 40% share of GRD | ||||||||
| Cali, LLC | (153,762 | ) | - | |||||
| Non-controlling interest’s 40% share of Idalia, | ||||||||
| LLC | (22,950 | ) | - | |||||
| Balance, end of year | $ | 19,538 | $ | - | ||||
The following is summarized financial information for GRD Cali, LLC:
| October 31, 2019 | October 31, 2018 | |||||||
| Current assets | $ | 93,460 | $ | - | ||||
| Long-term assets | $ | 41,642 | $ | - | ||||
| Current liabilities | $ | 25,801 | $ | - | ||||
| Advances from parent | $ | 73,705 | $ | - | ||||
| Net Loss for the year | $ | 384,404 | $ | - | ||||
58
Grown Rogue International Inc.
Notes to the Consolidated Financial Statements
For the Years Ended October 31, 2019 and 2018
Expressed in United States Dollars
| 29. | Non-Controlling Interests |
The following is summarized financial information for Idalia, LLC:
| October 31, 2019 | October 31, 2018 | |||||||
| Current assets | $ | - | $ | - | ||||
| Long-term assets | $ | 13,248 | $ | - | ||||
| Current liabilities | $ | - | $ | - | ||||
| Advances from parent | $ | - | $ | - | ||||
| Net Loss for the year | $ | 57,376 | $ | - | ||||
| 30. | Subsequent Events |
Subsequent to the period ended October 31, 2019, the Company
| a) | Issued a total of 1,058,750 common shares to certain directors, officers, and consultants of the Company as compensation for services previously provided to the Company. The shares were issued at a deemed price of $0.21 per share and are subject to a four month hold period. Insiders of the Company received an aggregate of 1,015,000 common shares of the Company. |
| b) | Entered into a purchase agreement to acquire an option to acquire a 60% controlling interest (the “Option”) of a fully-licensed Michigan based operator pending Municipal and State regulatory approval. In order to exercise the Option, the Company will pay $810,000 in cash and issue 800,000 common shares of the Company in four tranches: |
| (i) | Payment of $150,000 within five days of signing the Option and the issuance of 200,000 common shares of the Company within 60 days after signing the Option. As of the date of these financial statements, the Company had made the required payment but had yet to issue the common shares. |
| (ii) | Payment of $200,000 and the issuance of 200,000 common shares of the Company on the sixth-month anniversary of signing the Option. The Company can elect to extend the due date of this tranche of the purchase consideration for an additional six months by paying an additional $25,000 and issuing an additional 25,000 common shares of the Company. |
| (iii) | Payment of $260,000 and the issuance of 200,000 common shares of the Company on the twelve-month anniversary of signing the Option. The Company can elect to extend the due date of this tranche of the purchase consideration for an additional six months by paying an additional $25,000 and issuing an additional 25,000 common shares of the Company. |
| (iv) | Payment of $200,000 and the issuance of 200,000 common shares of the Company due upon exercise of the Option, pending Municipal and State regulatory approval. |
| c) | Received a binding commitment to invest up to CAD$1,500,000 in a non-brokered private placement offering of units ( the “Units”) with each Unit comprising one common share of the Company and one common share purchase warrant (the “Warrants”). Each warrant entitles the holder to purchase one common share of the Company at a price equal to a 25% premium to the Unit price for a period of 24 months. The Company has the right to accelerate the expiry of the warrants to thirty days following written notice to the holder if the common shares of the Company close at or above CAD$0.25 per share for a period of ten consecutive trading days on the Canadian Securities Exchange. As of the date of these financial statements, the Company has issued 5,000,000 Units for gross proceeds of CAD$500,000. |
| d) | Entered into a subscription agreement to issue 15,000,000 common shares of the Company in exchange for 2,362,204 common shares of Cannabis Growth Opportunity Corporation at a deemed exchange price of approximately CAD $1,500,000. |
59
Exhibit 2
FORM 51-102F1
GROWN ROGUE INTERNATIONAL INC.
(the “Company” or “Grown Rogue”)
MANAGEMENT DISCUSSION & ANALYSIS
FOR THE YEAR ENDED OCTOBER 31, 2019
(the “Reporting Period”)
This Management Discussion and Analysis (“MD&A”) made as of March 19, 2020, should be read in conjunction with the audited consolidated financial statements of the Company for the years ended October 31, 2019 and 2018 and the related notes thereto (the “Financial Statements”). The Company’s audited financial statements are presented on a consolidated basis with its wholly-owned subsidiaries: Grown Rogue Canada Corp. (“GRC”), Grown Rogue Unlimited, LLC (“GR Unlimited”) and GR Unlimited’s wholly-owned subsidiaries Grown Rogue Gardens, LLC (“GR Gardens”); Grown Rogue Distribution, LLC (“GR Distribution”); GRU Properties, LLC (“GRU Properties”); GRIP, LLC (“GRIP”); as well as the GR Unlimited’s 60% ownership in GRD Cali, LLC and Idalia, LLC. 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 Company’s comparative information included in this MD&A has been prepared in accordance with 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 these 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.
1
Forward-Looking Statements
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 Listing Statement, 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 and under “Risk Factors” 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.
Description of Business
Grown Rogue, headquartered in Medford, Oregon, is a multi-state cannabis company curating innovative products that allow consumers to enhance life experiences. Grown Rogue currently has two brands in its portfolio – Grown Rogue and GRAM. Grown Rogue is a mid-premium brand that describes products based on “Mind, Body & Mood” effects which resonates with consumers from the canna curious through the canna serious, while GRAM provides quality product at a value price. Grown Rogue is committed to educating, inspiring and empowering consumers with information about cannabis so they can “enhance experiences” by selecting the right product. The Grown Rogue portfolio of brands have a diverse cannabis product suite that includes premium flower (indoor and sungrown), flower pre-rolls, and chocolate edibles created in concert with an award-winning chocolatier.
Grown Rogue is strategically 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 products such as edible, vape cartridges, pre-rolls, or concentrates. With its best-in-class production methods, low costs cultivation, award winning product, and geographic location in the famed Emerald Triangle, Grown Rogue is well positioned to execute on becoming a leader in flower production in the cannabis sector.
2
Oregon
Grown Rogue, through its wholly owned subsidiary, GR Gardens, operates three cultivation facilities, in Oregon comprising approximately 100,000 sq ft of cultivation area, that currently service the Oregon recreational marijuana market: “Manzanita Glen” (sungrown), “Trail’s End” (sungrown), and a state-of-the-art indoor facility (the “Warehouse”). GR Gardens currently holds three producer licenses in Oregon from the Oregon Liquor Control Commission (“OLCC”), for the three properties described above and GR Distribution holds one wholesaler license. GR Distribution and GR Gardens jointly hold the producer license and the wholesale license at the Warehouse as the licenses are co-located in the same facility. GR Distribution and GR Gardens have also applied for a processor license for the Warehouse.
GR Gardens is responsible for production of recreational marijuana using outdoor and indoor production methodologies. “Manzanita Glen” and “Trails End” are both outdoor, sungrown farms, with 40,000 sq ft of flowering canopy, for a total of 80,000 sq ft, sitting on a combined land package of approximately 45 acres.
Grown Rogue is located in the world-renowned Emerald Triangle, which is well-known for the quality of its cannabis. The company is able to capitalize on an ideal outdoor growing environment where it can produce high-quality, low-cost cannabis flower. The two sungrown farms produce one crop per year, planted in June and harvested in October.
With its approximately 17,000 sq ft indoor Warehouse, Grown Rogue is additionally able to produce high-quality indoor flower through controlled atmosphere environment (CAE) operations. By carefully controlling temperature, humidity, C02 levels and other criteria, Grown Rogue is able to provide year-round supply of high-quality cannabis flower with multiple harvests per month. The Warehouse is currently 85% constructed for production and distribution of Grown Rogue indoor cultivation and distribution. The remaining 15% is utilized for centralized drying, curing, and processing of Grown Rogue’s sungrown farms allowing us to centrally locate key components of the cultivation process allowing for reduced costs and superior products. Grown Rogue is currently converting this remaining space into a partial vegetative area allowing the Company to increase flowering square footage in the other areas of the Warehouse for 8 months out of the year, thus increasing production capacity. The Warehouse is also the location of GR Distribution, the sales division of Grown Rogue.
The total annual production capacity for Grown Rogue’s Oregon operations, based on the current constructed capacity, ranges between 5,000 and 6,000 pounds based on sungrown seasonality and strain performance.
California
Grown Rogue, through its 60% ownership in GRDCali, LLC, has a 16,000 sq ft facility located in Eureka, California (“Eureka Facility”). Grown Rogue has completed licensing and construction of the Eureka Facility to house distribution, while both volatile and non-volatile manufacturing, and retail licensing are part of the future opportunity for this asset. Grown Rogue is constructing the facility in phases with the distribution component of the business having received license approval in May 2019. The non-volatile manufacturing license is pending completion of construction and final approval by the local jurisdiction.
Due to overall cannabis capital markets and the lack of capital resources and the current regulatory environment in California, Grown Rogue has paused development of this asset. Many large companies in California have experienced missed revenue targets and completed significant employee layoffs due to a slower than anticipated regulatory rollout of licensed facilities limiting the growth and opportunity in California. Grown Rogue is currently focusing efforts on Oregon and Michigan.
3
Michigan
Subsequent to year end, Grown Rogue, through its newly-incorporated subsidiary GR Michigan, LLC, signed an Option to Purchase Agreement (“Option”) to acquire a 60% ownership 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 sq ft facility of which approximately 10,000 sq ft is operational.
With the addition of Golden Harvests, Grown Rogue will be adding an additional 1,500 pounds of high-quality indoor flower production capacity in 2020 and an anticipated 3,500 pounds of production capacity in 2021. Grown Rogue will oversee this capacity under the terms of a management services agreement prior to exercising its purchase option upon regulatory approval.
Product
The Grown Rogue portfolio of brands produce a range of strains for consumers to enjoy (indicas, sativas, and hybrids), along with “Certified Fresh” Nitrogen Sealed Pre-Rolls and edibles. Grown Rogue has a mix of “core” and “select” strains to provide consumers with consistent and unique purchasing options at their local dispensary. Grown Rogue flower has won multiple awards in one of the most competitive cannabis production environments in the world. Grown Rogue has twice won the prestigious Growers Cup competition where a select number of reputable producers are all provided the identical genetic which tests the grower’s techniques. Grown Rogue 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 (there was no growers choice in category in 2019). In addition, Grown Rogue believes that it has achieved an outdoor production, potency record in the state of Oregon achieving a THC potency of 35.13% for its Monkey Train strain.
In addition, Grown Rogue’s product suite includes the following:
| ● | The majority of Grown Rogue’s revenue is driven through sales of its award winning sungrown and indoor flower. |
| ● | Grown Rogue 1-gram “Certified Fresh” Nitrogen Sealed pre-rolls which are produced from the company’s award-winning indoor flower (no trim) and are packaged in environmentally responsible, patented, nitrogen sealed, glass tubes to ensure only the freshest products for the customer. Grown Rogue also provides, through its GRAM brand, a chocolate edible, produced in concert with a world-renowned chocolatier, and pre-rolls that are produced to provide quality products at an affordable price. |
Grown Rogue has partnered with Hemp Press to produce all of its paper derived packaging which is 75% Recycled and 25% Hemp. This ensures not only best in class packaging quality, but environmental sustainability which is very important to the majority of cannabis consumers.
Genetics
Grown Rogue is committed to developing unique, proprietary genetics and have allocated R&D 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. Grown Rogue continues to focus on bringing new unique genetics into the markets it operates to ensure a steady flow of innovative flower and VAPs.
4
Distribution and Sales
Grown Rogue distributes product through its wholly owned subsidiary, GR Distribution which works directly with Oregon dispensaries to provide quality, consistency, and product variety year-round. Grown Rogue’s sales team works directly 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.
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.
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. Still 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 2020.
In order to grow the Grown Rogue community and spread knowledge of its products, Grown Rogue leverages social media and other digital platforms. Grown Rouge 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.
5
Marketing and Advertising
Grown Rogue’s marketing channels include a comprehensive, fully responsive (mobile) interactive website. The website has been search engine optimized (SEO) and includes calls to action (CTA) 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.
Grown Rogue strategically leverages digital advertising, primarily on industry sites such as Leafly and Weedmaps, and has 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 eleven different trademarks that have been submitted with three that have been Registered
| ● | Grown Rogue was filed on September 22, 2017 and registered on August 7, 2018 under Registration No. 5537240 |
| ● | The Right Experience Every Time was filed on September 29, 2017 and registered on August 7, 2018 under Registration 5537260. |
| ● | Sizzleberry was filed on September 29, 2017 and registered on August 7, 2018 under Registration 5537259. |
| ● | Groove; Relax; Optimize; Uplift; Energize, and GRAM are all under review by the United States Patent Office. |
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 reached out to Grown Rogue requesting licensing information on this technology. Grown Rogue plans on introducing the nitrogen sealed containers in each of the new markets the company enters with wholly owned operations 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. On the cultivation side, Grown Rogue maintains the highest standards of environmental stewardship. This includes sustainable water sources with reclamation and recapture as much as possible from runoff and recycling of water input. Grown Rogue uses only natural and sustainable products in all of their applications from nutrients to integrated pest management. Grown Rogue maintains the highest level of sustainable cannabis practices through its focus on sustainable and natural cultivation methods.
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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.
Plans for Expansion & Economic Outlook
Grown Rogue continues to focus on taking its learnings and experience from Oregon into new markets across the US. During the last two years, Grown Rogue has established a platform that excels at licensing, compliance, understanding consumer purchasing preferences, and product innovation that places Grown Rogue in a unique position as compared to its peers to capitalize on new markets. Oregon is arguably the most competitive cannabis market in the world and Grown Rogue has excelled by implementing standard business practices that make the Company well suited for entering and building successful brand presence in newly legalized cannabis markets.
Grown Rogue intends to expand its current operating facilities in Oregon and continue its multi-state expansion strategy focused on best-in-class production methods with primary focus on the Golden Harvests Option. Grown Rogue is rapidly pursuing full licensing with Michigan State regulatory agencies and fulfilling its management services contract with Golden Harvests in the interim.
The future of the cannabis industry is in the branded products and the best brands are being created in 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 very focused on establishing a larger number of licenses in fewer states to capitalize on the economies of scale necessary 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, looking at strategic opportunities in new states, and monitoring the regulatory environment in California to determine the correct course of action for its Eureka asset.
Definitive Transaction Agreement and Reverse Take-over Transaction
On October 31, 2018, the GR Unlimited, Novicius Corp. (“Novicius”), Grown Rogue Canada Inc. and Novicius Acquisition Corp. entered into a definitive transaction agreement which set out the terms for the reverse take-over of Novicius by GR Unlimited and the related transactions (the “Transaction”). The Transaction was completed on November 15, 2018 and the Company began trading its common shares through the facilities of the Canadian Securities Exchange under the symbol “GRIN” on November 26, 2018.
As part of the Transaction, the Company changed its name from “Novicius Corp.” to “Grown Rogue International Inc.” and consolidated its existing common shares on the basis of one common share for each 1.4 existing common shares. The unitholders of GR Unlimited exchanged their equity membership interests in GR Unlimited for common shares of the Company on a one-for-one basis. The Transaction resulted in the Company becoming the owner all of the equity membership interests in GR Unlimited. In connection with the Transaction, GR Unlimited, directly and through Grown Rogue Canada Inc., raised approximately CAD$6.5 million through brokered and non-brokered private placements.
For further details regarding the Transaction and related financings, please refer to the Company’s Listing Statement filed on SEDAR on November 23, 2018.
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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 creating positive cash flow from operations.
Selected Annual Information
The following selected financial data for each of the two completed financial years are derived from the audited annual financial statements of the Company.
| Year Ended October 31 | 2019 | 2018 | ||||||
| $ | $ | |||||||
| Total revenue | 3,924,983 | 1,932,128 | ||||||
| Loss from operations | (7,622,956 | ) | (4,967,609 | ) | ||||
| Net loss | (9,476,934 | ) | (7,509,986 | ) | ||||
| Comprehensive Loss | (9,355,014 | ) | (7,509,986 | ) | ||||
| Total assets | 2,932,476 | 5,366,268 | ||||||
| Total non-current financial liabilities | 217,633 | 2,292,634 | ||||||
| Cash dividends | Nil | Nil | ||||||
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Results of Operations
Grown Rogue’s net losses from operations amounted to $7,622,956 for the year ended October 31, 2019, an increase of $2,655,347 when compared to losses from operations of $4,967,609 for the year ended October 31, 2018. The main component driving the increased loss for the year ended October 31, 2019 are transaction costs of $3,453,790, the majority of which relate to the fair value of shares issued to effect the Transaction. These expenses are not expected to recur in the future.
Revenue for the year ended October 31, 2019 increased by $1,992,855 to $3,924,983. This increase of 103% is a result of the addition of a sales team, selective third-party distribution, an increase in the awareness of the Grown Rogue brand and retail partnerships with several of the best multi-door operators in Oregon
Cost of finished cannabis inventory sold for the year ended October 31, 2019 amounted to $2,935,934 compared to $1,889,229 for the year ended October 31, 2018, resulting in gross profit excluding fair value items of $989,049 and $42,899 for the 2019 and 2018 fiscal years respectively. Gross profit for the year ended October 31, 2019 was reduced to $852,599 following the added expense of the realized fair value amounts included in inventory sold of $622,804, less the gain on the unrealized fair value on the growth of the Company’s biological assets of $486,354. The Company had a gross loss of $413,493 once the realized fair value amounts included in inventory sold of $997,744 were deducted, which was partially offset by the unrealized fair value on the growth of the Company’s biological assets of $541,352. These fair value adjustments related to the growth of the Company’s biological assets relate to increasing the fair value (less costs to sell) of the cannabis crops in various stages of growth prior to harvest and any further processing required to produce inventory available for sale. The valuation of Grown Rogue’s biological assets, and the resulting fair market adjustment, includes several estimates made by management based on inputs that, by their nature, are unobservable as at October 31, 2019 and 2018. These include the average harvest yield, average selling prices, standard costs to bring the plants to harvest, as well as the stage of growth. Changes in these estimates could result in changes to the fair value of the biological assets, as well as the unrealized gain on changes in the fair value of these biological assets.
For the year ended October 31, 2019, the Company realized a gross margin of $852,599. A negative gross margin of $413,493 was incurred during the year ended October 31, 2018. This negative gross margin was a function of a decrease in the sale price of certain products and its effect on the carrying value of the Company’s biological assets and resulting inventory, as well as higher labor costs included in cost of sales as the Company scaled up and trained its labor force in proper cultivation and packaging processes. The higher estimated sale prices for some of the Company’s products over the course of the growth cycle resulted in increased values being ascribed to some of the Company’s inventory based on the valuation methodology for the Company’s biological assets as described above. As the market price was higher during the growth process, a higher fair value was assigned to these assets. Once the growth stage was complete, however, the market price had decreased, such that the carrying value of the inventory was higher than the sales price at the time the product was ready for sale. The Company has since refined its cultivation processes to be more efficient resulting in lower cost of sales and a better gross margin.
Operating expenses for the year ended October 31, 2019 were $8,475,555, an increase of $3,921,439 when compared to expenses of $4,554,116 for the year ended October 31, 2018. The main component driving the increase are transaction costs of $3,453,790, the majority of which relate to the fair value of shares issued to effect the Transaction. In addition, there was a $1,952,789 increase in general and administrative expenses as the Company increased the scope of its operations. Most significant was higher spending related to salaries as the Company continued to increase its number of staff, legal and professional fees related to the evaluation of financings and strategic acquisitions, as well as increased costs related to being a publicly-traded entity, including investor relations and audit fees.
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During the years ended October 31, 2017 and 2018, GR Unlimited issued convertible promissory notes with an aggregate face value of $3,395,275. While all of the convertible promissory notes had been repaid or converted by October 31, 2019, the Company continued to incur interest expense and accretion expense during the year ended October 31, 2019. GR Unlimited has also entered into three finance leases for $354,998, in aggregate, and issued convertible debentures with aggregate principal of CAD$1,500,000. Finally, during the year ended October 31, 2019, the Company issued a convertible debenture with a face value of CAD$1,500,000. The result of these various debt financings is interest expense of $245,549 for the year ended October 31, 2019. These amounts represent significant reductions in interest expense when compared to expense of $965,285 for the year ended October 31, 2018. These convertible promissory notes and convertible debentures also gave rise to accretion expense of $153,195 for the year ended October 31, 2019, which represent a decrease when compared to accretion expense of $317,827 incurred during the year ended October 31, 2018.
During the year ended October 31, 2019, the Company issued 650,000 stock options to two consultants, the fair value of which was $113,227. This amount has been expensed as stock-based compensation for the year ended October 31, 2019.
As discussed previously, during the year ended October 31, 2019, the Company incurred transaction costs of $3,453,790 which is mainly comprised of the fair value of shares issued to effect the Transaction, as well as professional fees that were specifically related to the Transaction and would not have been incurred otherwise. These expenses are not expected to recur in the future.
In connection with the Transaction, the Company issued 6,600,000 common shares to a company in exchange for the exclusive license to certain intellectual property in the field of development, breeding, cultivating, growing, harvesting, processing and commercializing cannabis, hemp and related plants and products. During the year ended October 31, 2019, the Company wrote-off the value of the license as development of the underlying technology had halted, the result of which a loss on impairment of $1,574,761.
Capital Resources
As at October 31, 2018, GR Unlimited had issued debt consisting of convertible and promissory notes and convertible debentures for aggregate proceeds of $4,539,150, the proceeds of which were used to purchase property and equipment and fund working capital requirements. In addition, GR Unlimited raised $225,000 through subscriptions for common units and $1,300,345 through subscriptions for seed round preferred units. In connection with the Transaction, GR Unlimited and Grown Rogue Canada Inc. raised gross proceeds of $3,338,893 through the issuance of subscription receipts that were eventually converted into common shares and warrants of the Company upon closing of the Transaction.
During the year ended October 31, 2019, the Company issued secured convertible debentures with aggregate principal of CAD$1,500,000 ($1,105,127) which bear interest at 2% per quarter payable on the last day of March, June, September and December. The debentures mature August 10, 2020 and are convertible into common shares of the Company at a conversion price of CAD$0.44 per share, subject to certain adjustments resulting from future events. As the Company failed to complete a financing as contemplated in the debenture agreement, and issued other shares to employees, the conversion price has decreased from the original price of $0.44 per share. As such, the conversion price will be set equal to the price of a subsequent issuance of shares of the Company. The Company is in negotiations with the holder of the debenture to extend the maturity date beyond August 10, 2020.
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Summary of Quarterly Results
The following table sets out selected quarterly results of the Corporation for the eight quarters ended on or before October 31, 2019. The information contained herein is drawn from the interim financial statements of the Corporation for each of the aforementioned eight quarters.
| Fiscal Year | 2019 | 2018 | ||||||||||||||||||||||||||||||
| Quarter | Oct | Jul | Apr | Jan | Oct | Jul | Apr | Jan | ||||||||||||||||||||||||
| $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||
| Revenue | 431,629 | 773,930 | 1,885,115 | 834,309 | 790,236 | 679,906 | 291,026 | 170,960 | ||||||||||||||||||||||||
| Net income (loss) | (2,098,742 | ) | (931,184 | ) | (1,648,446 | ) | (4,798,562 | ) | (2,512,110 | ) | (1,460,380 | ) | (2,146,869 | ) | (1,390,627 | ) | ||||||||||||||||
| Net income (loss), per unit basic and diluted | (0.02 | ) | (0.01 | ) | (0.02 | ) | (0.08 | ) | (0.08 | ) | (0.04 | ) | (0.06 | ) | (0.04 | ) | ||||||||||||||||
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 (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.
Adjusted EBITDA Reconciliation 1
| Twelve months ended | ||||||||
| October 31, | October 31, | |||||||
| 2019 | 2018 | |||||||
| $ | $ | |||||||
| Net loss, as reported | (9,476,934 | ) | (7,509,896 | ) | ||||
| Add back realized fair value amounts included in inventory sold | 622,804 | 997,744 | ||||||
| Less unrealized fair value gain on growth of biological assets | (486,354 | ) | (541,352 | ) | ||||
| (9,340,484 | ) | (7,053,504 | ) | |||||
| Add back accretion expense, as reported | 153,195 | 317,827 | ||||||
| Add back amortization of intangible assets, as reported | 31,373 | 18,762 | ||||||
| Add back amortization of property and equipment, as reported | 63,295 | 460,046 | ||||||
| Add back stock-based compensation expense, as reported | 113,227 | 1,049,595 | ||||||
| Add back interest expense (recovery), as reported | 245,549 | 965,285 | ||||||
| Add back finance charges | - | 1,510,489 | ||||||
| Add back transaction costs | 3,453,790 | - | ||||||
| Add back acquisition costs | 126,202 | - | ||||||
| Add back impairment of technology license | 1,574,761 | - | ||||||
| Add back debt issuance costs | 10,165 | - | ||||||
| Less change in fair value of derivative liability | (121,811 | ) | - | |||||
| Add back (less) loss (gain) on derecognition of derivative liability, as reported | (39,500 | ) | 57,500 | |||||
| Adjusted EBITDA | (3,730,238 | ) | (2,674,000 | ) | ||||
| 1 | “Adjusted EBITDA” is the Company’s net income (loss) for a period, as reported, before interest, taxes, depreciation and amortization, and is further adjusted to remove finance charges, 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 |
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Liquidity and Capital Resources
The Company’s cash and cash equivalents position was $74,926 as at October 31, 2019 (October 31, 2018 - $826,643). The Company had working capital deficiency of $2,709,527 as at October 31, 2019 compared to a working capital deficiency of $451,545 as at October 31, 2018.
During the year ended October 31, 2019, Grown Rogue spent $3,426,836 on operating activities, compared to cash spent on similar activities of $2,350,357 for the year ended October 31, 2018. These funds were primarily spent on operating expenses and the repayment of trade debt. The Company invested $217,084 in property and equipment and intangible assets during the year ended October 31, 2019, a decrease compared to investment in similar assets of $1,100,237 during the year ended October 31, 2018. Finally, Grown Rogue was able to generate cash of $2,936,328 through financing activities during the year ended October 31, 2019 by way of the issuance of subscription receipts of $2,514,377 and proceeds of the issuance of convertible debentures of $1,105,126, which was offset by other debt repayments and transaction and equity issuance costs. Cash generated during the year ended October 31, 2018 from financing activities was $3,824,038 and was related to the issuance of members’ equity by way of partnership units and the proceeds from long-term debt.
The Company’s capital requirements to maintain its properties and fund exploration and general overhead expenses have been met primarily through the completion of private placements.
Commitments
As at October 31, 2019, Grown Rogue has commitments under operating leases for its facilities and commitments under finance lease for equipment. The minimum lease payments due are as follows:
| Fiscal Year | Amount | |||
| 2020 | $ | 144,412 | ||
| 2021 | $ | 12,880 | ||
During the period ended October 31, 2019, Company entered into a binding agreement to acquire Michigan operator “Inferno Gardens Inc.” which includes one retail dispensary (referred to as provisional centers in Michigan), a 24,000 sq ft indoor cultivation facility, and a processing/manufacturing center. The terms of the Agreement include the following provisions:
| ● | The Company obtains the option to acquire a 51% interest in the other party, subject to state and regulatory approval, for a one-time payment of $250,000 due upon signing of the Agreement; |
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| ● | The Company will provide up to $2,000,000 in financing by way of a loan for development and operational build-out of the cultivation, processing and dispensary centers of which the Company will be paid back under an established schedule; |
| ● | The Company will have the right to purchase the remaining 49% of the other party for either stock or cash or a combination of both at the earlier of the Company’s stock reaching CAD$1.00 per share on the CSE for a period of ten consecutive days or 24 months from the signing of the Agreement. Unless the other party permits, the Company may not exercise this option for a period of 12 months following the signing of the Agreement; and |
| ● | The Company will also issue 900,000 common shares to the other party based on milestones including signing of the Agreement, production of 500 pounds of dried cannabis flower and achieving $3,000,000 in top-line revenue. |
The completion of the terms of the Agreement were subject to Michigan regulatory approval and full licensing of the Company at the state level. Subsequent to the year ended October 31, 2019, the Agreement was terminated.
Off-Balance Sheet Arrangements
The Company does not have any off-balance sheet arrangements.
Outstanding Share Data
As of the date of the MD&A, the Company has 94,518,897 common shares outstanding.
As of the date of this MD&A, the Company has the following warrants outstanding:
| Remaining | ||||||||||||
| Warrants | Contractual Life | |||||||||||
| Exercise Price | Outstanding | (Years) | Expiry Date | |||||||||
| $ | 0.44 | 757,125 | 0.72 | November 15, 2020 | ||||||||
| $ | 0.55 | 21,253,089 | 0.72 | November 15, 2020 | ||||||||
| $ | 0.55 | 3,409,091 | 1.17 | May 1, 2021 | ||||||||
| $ | 0.44 | 2,148,117 | 3.33 | June 28, 2023 | ||||||||
| $ | 0.125 | 5,000,000 | 1.95 | February 10, 2022 | ||||||||
| 32,567,422 | 1.12 | |||||||||||
As of the date of this MD&A, the Company has the following stock options outstanding:
| Remaining | ||||||||||||
| Stock Options | Contractual Life | |||||||||||
| Exercise Price | Outstanding | (Years) | Expiry Date | |||||||||
| $ | 0.44 | 150,000 | 1.76 | November 30, 2021 | ||||||||
| $ | 0.44 | 500,000 | 1.84 | January 1, 2022 | ||||||||
| 650,000 | 1.82 | |||||||||||
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Transactions with Related Parties
During the Reporting Period, the Company was involved in the following transactions with related parties:
| a) | Through its wholly owned subsidiary, GRU Properties, LLC leased 41.92 acres of real property located in Trail, Oregon owned by J. Obie Strickler, the Company’s President and CEO. The lease expires on December 31, 2020. Rent of $60,500 was included in facility expense for the period ended October 31, 2019 (2018 - $65,000). The Company had $63,000 (October 31, 2018 - $5,500) owing in accounts payable and accrued liabilities at October 31, 2019. |
| b) | The Company incurred employee/director fees of $22,000 (2018 - $48,000) with an individual related to J. Obie Strickler, the Company’s President and CEO. At October 31, 2019, due to employee/ director includes $Nil (October 31, 2018 - $14,000) and accounts payable and accrued liabilities includes $8,000 (October 31, 2018 - $12,000) payable to this individual. |
| c) | The Company incurred fees related to marketing and promotion services of $183,674 (2018 - $239,568) from two companies owned by Jacques Habra, the Company’s Chief Strategy Officer (“CSO”). At October 31, 2019, accounts payable and accrued liabilities includes $6,000 (October 31, 2018 - $25,054) payable to these companies. |
| d) | Key management personnel consists of the President and CEO; the CSO; the CMO; and the CFO of GR Unlimited. The compensation paid or payable to key management for services for the periods ended October 31, 2019 and 2018 is as follows: |
| 2019 | 2018 | |||||||
| Salaries and consulting fees | $ | 408,500 | $ | 533,568 | ||||
| Share-based compensation | $ | 118,840 | $ | - | ||||
Accounts payable and accrued liabilities at October 31, 2019 includes $90,000 (October 31, 2018 - $94,000) and due to employee/ directors includes $Nil (October 31, 2018 - $90,000) payable to these parties.
During the year ended October 31, 2019, the director and officer of the Company advanced $50,000 to the Company. The amount is payable on demand and bears interest at a rate of 60% per annum. As at October 31, 2019, interest of $2,384 was accrued.
During the year ended October 31, 2019, a key member of the Company’s management advanced $50,000 to the Company. The amount is payable on demand and bears interest at a rate of 60% per annum. As at October 31, 2019, interest of $1,151 was accrued.
The transactions are in the normal course of operations and are measured at the exchange amounts being the amounts agreed to by the parties.
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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 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.
Newly Adopted Accounting Pronouncements
The Company adopted the following accounting policies as of November 1, 2018:
Financial Instruments
IFRS 9 financial instruments (“IFRS 9”) replaced IAS 39, Financial Instruments: recognition and Measurement. IFRS 9 includes guidance on classification and measurement of financial instruments, a new expected credit loss model for calculating impairment on financial assets and new general hedging requirements.
| i) | Classification and measurement of financial assets and financial liabilities |
IFRS 9 requires financial assets to be classified into three measurement categories on initial recognition: fair value through profit and loss (“FVTPL”), fair value through other comprehensive income (“FVOCI”), and amortized cost. Investments in equity instruments are required to be measured by default at FVTPL. IFRS 9 permit entities to elect into an irrevocable option for equity instruments to report changes in fair value in other comprehensive income.
Classification and measurement of financial assets is dependent on the entity’s business model for managing the financial assets and related contractual cash flows. IFRS 9 retains most of the requirements of IAS 39 related to classification and measurement of financial liabilities.
The following table summarizes the original measurement categories under IAS 39 and the new categories under IFRS 9 for each class of the Company’s financial assets and liabilities:
| Asset/Liability | Classification under IAS 39 | Classification under IFRS 9 | ||
| Accounts receivable, net | Loans and receivables | Amortized cost | ||
| Other receivables | Loans and receivables | Amortized cost | ||
| Cash and cash equivalents | Loans and receivables | Amortized cost | ||
| Accounts payable and accrued liabilities | Other liabilities at amortized cost | Amortized cost | ||
| Finance lease payable | Other liabilities at amortized cost | Amortized cost | ||
| Convertible promissory notes | Other liabilities at amortized cost | Amortized cost | ||
| Long-term debt | Other liabilities at amortized cost | Amortized cost | ||
| Interest payable | Other liabilities at amortized cost | Amortized cost | ||
| Convertible debentures | Other liabilities at amortized cost | Amortized cost | ||
| Due to employee / director | Other liabilities at amortized cost | Amortized cost | ||
| Derivative liabilities | FVTPL | FVTPL |
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| ii) | Impairment |
IFRS 9 introduces a three-stage expected credit loss (“ECL”) model for determining impairment of financial assets. The expected credit loss model does not require the occurrence of a triggering event before an entity recognizes credit losses. IFRS 9 requires an entity to recognize expected credit losses upon initial recognition of a financial asset and to update the quantum of expected credit losses at the end of each reporting period to reflect changes to credit risk of the financial asset. The adoption of the ECL model did not have a material impact on the Company’s condensed consolidated interim financial statements.
The Company recognizes a loss allowance for expected credit losses on financial assets that are measured at amortized cost. At each reporting date, the loss allowance for the financial asset is measured at an amount equal to the lifetime expected credit losses if the credit risk on the financial asset has increased significantly since initial recognition. If at the reporting date, the financial asset has not increased significantly since initial recognition, the loss allowance is measured for the financial asset at an amount equal to twelve month expected credit losses. For trade receivables the Company applies the simplified approach to providing for expected credit losses, which allows the use of a lifetime expected loss provision. Impairment losses on financial assets carried at amortized cost are reversed in subsequent periods if the amount of the loss decreases and the decrease can be objectively related to an event occurring after the impairment was recognized.
Share-based Payments (Amendments to IFRS 2)
In June 2016, the IASB issued amendments to IFRS 2 that clarify how to account for certain types of share-based payment transactions.
The amendments provide requirements related to accounting for:
| ● | the effects of vesting and non-vesting conditions on the measurement of cash-settled share-based payments; |
| ● | share-based payment transactions with a net settlement feature for withholding tax obligations; and |
| ● | the effect of a modification of the terms and conditions of a share-based payment that changes the classification of the transaction from cash-settled to equity settled. |
Adoption of the amendments to IFRS 2 as of November 1, 2018 did not have an impact on the Company’s financial statements.
Revenue
IFRS 15 Revenue from Contracts with Customers, (“IFRS 15”) replaced all preexisting guidance, including, but not limited to IAS 11 Construction Contracts, IAS 18 Revenue, and IFRIC 15 Agreements for the Construction of Real Estate in IFRS related to revenue. IFRS 15 contains a single control based model (the “model”) that applies to contracts with customers and allows entities to recognize revenue at a point in time or overtime. The model consists of a 5 step analysis of transactions to determine whether, how much, and when revenue is recognized. IFRS 15 also includes additional requirements for revenue accounted for under the standard. There were no adjustments recognized on the adoption of IFRS 15 in the year ended October 31, 2019.
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Recent Accounting Pronouncements
The accounting pronouncements detailed below have been issued but are not yet effective.
IFRS 16, Leases (“IFRS 16”) was issued by the IASB in January 2016, and will replace IAS 17 Leases. IFRS 16 specifies the methodology to recognize, measure, present and disclose leases. The standard provides a single lessee accounting model, requiring lessees to recognize assets and liabilities for all leases except for short-term leases and leases with low value assets. IFRS 16 substantially carries forward the lessor accounting requirements in IAS 17. IFRS 16 is effective for annual periods beginning on or after January 1, 2019, with early adoption permitted if IFRS 15 has also been adopted. A lessee will apply IFRS 16 to its leases either retrospectively to each prior Reporting Period presented; or retrospectively with the cumulative effect of initially applying IFRS 16 being recognized at the date of initial application. The Company is currently evaluating the impact of IFRS 16 on its consolidated financial statements.
Financial Instruments and Other Risk Factors
| i) | Market Risk |
| a) | Currency Risk |
As at October 31, 2019, the Company had accounts payable and accrued liabilities of CAD$665,098 and convertible debentures of CAD$3,000,000. The Company is exposed to the risk of fluctuation in the rate of exchange between the Canadian Dollar and the United States Dollar. It is management’s opinion that this risk is not material.
| b) | Interest Rate Risk |
At October 31, 2019 and October 31, 2018, the Company’s exposure to interest rate risk relates to long-term debt, convertible promissory notes, and finance lease obligations, but its interest rate risk is limited as the aforementioned financial instruments are fixed interest rate instruments.
| c) | Credit Risk |
Credit risk is derived from cash and trade accounts receivable. The Company places its cash in deposit with major United States financial institutions. The Company has established a policy to mitigate the risk of loss related to granting customer credit.
The carrying amount of cash and trade accounts receivable represents the Company’s maximum exposure to credit risk, which amounted to $174,114 (October 31, 2018 - $1,079,551) as at October 31, 2019. The allowance for doubtful accounts at October 31, 2019 is $129,131 (October 31, 2018 - $106,443)
| d) | Liquidity Risk |
Liquidity risk is the risk that the Company will not be able to meet its current obligations as they become due. The majority of the Company’s accounts payable and accrued liabilities are payable in less than 90 days. The Company prepares annual budgets and monitors expenditures to manage short-term liquidity. Due to the nature of the Company’s activities, funding for long-term liquidity needs is dependent on the Company’s ability to obtain additional financing through various means, including equity financing. At October 31, 2019, the Company has current assets of $1,432,962 and current liabilities of $4,142,489 which resulted in working capital deficiency of $2,709,527.
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| e) | 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.
| f) | Fair Value Hierarchy |
A number of the Company’s accounting policies and disclosures require the measurement of fair valued for both financial and non-financial 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: quoted prices (unadjusted) 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
Level 3: inputs for the asset or liability that are not based on observable market data (unobservable inputs).
During the period ended October 31, 2019 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.
Subsequent Events
Subsequent to the period ended October 31, 2019, the Company:
| a) | Issued a total of 1,058,750 common shares to certain directors, officers, and consultants of the Company as compensation for services previously provided to the Company. The shares were issued at a deemed price of $0.21 per share and are subject to a four month hold period. Insiders of the Company received an aggregate of 1,015,000 common shares of the Company. |
| b) | Entered into a purchase agreement to acquire a 60% controlling interest (the “Option”) of a fully-licensed Michigan based operator pending Municipal and State regulatory approval. In order to exercise the Option, the Company will pay $810,000 in cash and issue 800,000 common shares of the Company in four tranches. |
| i. | Payment of $150,000 within five days of signing the Option and the issuance of 200,000 common shares of the Company within 60 days after signing the Option. As of the date of this MD&A, the Company had made the payment but the shares had yet to be issued. |
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| ii. | Payment of $200,000 and the issuance of 200,000 common shares of the Company on the sixth-month anniversary of signing the Option. The Company can elect to extend the due date of this tranche of the purchase consideration for an additional six months by paying an additional $25,000 and issuing an additional 25,000 common shares of the Company. |
| iii. | Payment of $260,000 and the issuance of 200,000 common shares of the Company on the twelve-month anniversary of signing the Option. The Company can elect to extend the due date of this tranche of the purchase consideration for an additional six months by paying an additional $25,000 and issuing an additional 25,000 common shares of the Company. |
| iv. | Payment of $200,000 and the issuance of 200,000 common shares of the Company due upon exercise of the Option, pending Municipal and State regulatory approval. |
| c) | Received a commitment to invest up to CAD$1,500,000 in a non-brokered private placement offering of units ( the “Units”) with each Unit comprising one common share of the Company and one common share purchase warrant (the “Warrants”). Each warrant entitles the holder to purchase one common share of the Company at a price equal to a 25% premium to the Unit price for a period of 24 months. The Company has the right to accelerate the expiry of the warrants to thirty days following written notice to the holder if the common shares of the Company close at or above CAD$0.25 per share for a period of ten consecutive trading days on the Canadian Securities Exchange. As of the date of these financial statements, the Company has issued 5,000,000 Units for gross proceeds of CAD$500,000. |
| d) | Entered into a subscription agreement to issue 15,000,000 common shares of the Company in exchange for 2,362,204 common shares of Cannabis Growth Opportunity Corporation at a deemed exchange price of approximately CAD $1,500,000. |
Regulatory Disclosure
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 California and Michigan markets.
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.
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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.
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 California and Michigan markets. 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.
| 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 |
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| All Issuers with US Marijuana- Related Activities |
Response | |
| 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
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 |
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|
All Issuers with US Marijuana- Related Activities |
Response | |
| 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. | |
| 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. |
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| 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 | |
| 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 |
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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.
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.
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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.
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.
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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.
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.
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California State Regulation
As part of its business plan, Grown Rogue intends to enter the California market.
In 1996, California voters passed a medical marijuana law allowing physicians to recommend cannabis for an inclusive set of qualifying conditions including chronic pain. The law established a not-for-profit patient/caregiver system but there was no state licensing authority to oversee the businesses that emerged as a result of the system. In September of 2015, the California legislature passed three bills, collectively known as the “Medical Marijuana Regulation and Safety Act” (“MCRSA”). In 2016, California voters passed “The Adult Use of Marijuana Act” (“AUMA”), which legalized adult-use cannabis for adults 21 years of age and older and created a licensing system for commercial cannabis businesses. On June 27, 2017, Governor Brown signed SB-94 into law. SB-94 combines California’s medicinal and adult-use cannabis regulatory frameworks into one licensing structure under the Medicinal and Adult-Use of Cannabis Regulation and Safety Act (“MAUCRSA”).
Pursuant to MAUCRSA: (1) the California Department of Food and Agriculture, via CalCannabis, issues licenses to cannabis cultivators: (2) the California Department of Public Health, via the Manufactured Cannabis Safety Branch (the “MCSB”), issues licenses to cannabis manufacturers and (3) the California Department of Consumer Affairs, via the Bureau of Cannabis Control (the “BCC”), issues licenses to cannabis distributors, testing laboratories, retailers, and micro-businesses. These agencies also oversee the various aspects of implementing and maintaining California’s cannabis landscape, including the statewide track and trace system.
To operate legally under state law, cannabis operators must obtain a state license and local approval. Local authorization is a prerequisite to obtaining state licensure, and local governments are permitted to prohibit or otherwise regulate the types and number of cannabis businesses allowed in their locality. The state license approval process is not competitive and there is no limit on the number of state licenses an entity may hold. Although vertical integration across multiple license types is allowed under MAUCRSA, testing laboratory licensees may not hold any other licenses aside from a laboratory license. There are also no residency requirements for ownership under MAUCRSA.
California has implemented a robust regulatory system designed to ensure, monitor, and enforce compliance with all aspects of a cannabis operator’s licensed operations. Compliance with local law is a prerequisite to obtaining and maintaining state licensure, and all three state regulatory agencies require confirmation from the locality that the operator is operating in compliance with local requirements and was granted authorization to continue or commence commercial cannabis operations within the locality’s jurisdiction.
License types are designated into two classes: Type M (medical) or Type A (adult use). There are 20 types of licenses, and a single entity may possess both Type M and Type A licenses, across six different categories:
| ● | Cultivation Facility: license to cultivate, process and package cannabis; and to sell cannabis to cannabis distributors, but not to consumers. |
| ● | Distributor: license to purchase cannabis from cultivators, manufacturers and other distributors; to store cannabis; to have cannabis tested by a testing facility; to sell cannabis to other distributors and to retailers; and to transport cannabis from a cannabis licensee’s premises to another cannabis licensee’s premises. |
| ● | Product Manufacturing Facility: license to purchase cannabis from distributors; to manufacture, process, and package cannabis and cannabis products; and to sell cannabis and cannabis products to distributors but not to consumers. Pursuant to this category, cannabis products include edibles, ointments, tinctures, oils and other concentrates. |
| ● | Testing Laboratory: license to test cannabis and cannabis products for potency and contaminants. |
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| ● | Retailer: license to purchase cannabis and cannabis products from distributors, as well as to sell cannabis and cannabis products directly to consumers. |
| ● | Microbusiness: license to cultivate cannabis on an area less than 10,000 square feet; to purchase cannabis from cultivators, manufacturers and distributors; to store cannabis; to have cannabis tested by a testing facility; to sell cannabis to retailers and distributors; to transport cannabis from one cannabis licensee’s premises to another; to manufacture, process and package cannabis and cannabis products; and to sell cannabis and cannabis products directly to consumers. |
The MAUCRSA permits vertical integration by licensees to hold licenses in more than two separate licensing categories. Licensees must conduct their commercial cannabis activity within a single-premises, which must be contiguous. Although multiple premises are allowed on a given parcel, each premises must be sufficiently separate from any other premises, i.e., having separate entrances and exits and no shared common areas. Importantly, licensees may not sublet any portion of their licensed premises, and therefore, a licensee cannot lease a multi-unit building and sublease one of the units to an affiliated licensee.
Only businesses engaged in “commercial cannabis activity” are required to have a license – ancillary services, technology, and know-how are not included unless their interests in the licensee amount to “ownership” or a “financial interest.”
Under MAUCRSA, an “owner” no longer distinguishes between public and private companies. An owner is: (1) anyone with an aggregate ownership interest of 20% or more in the applicant, unless the interest is solely a security, lien, or encumbrance, (2) the chief executive officer of a non-profit or other entity, (3) a member of the board of directors for a non-profit, or (4) an individual participating in the direction, control, or management of the applicant. Each owner of the entity applying for a cannabis license is required to submit fingerprint images and background checks. Such fingerprinting requirement extends to shareholders holding 5% or more of the equity of the applicant’s public company owner.
Under California state law, all state licensed cannabis businesses were entitled to rely on certain transition provisions until December 6, 2018. These provisions were included to ease the transition of businesses into the new regulatory regime introduced on January 1, 2018 in California. The transition provisions grandfathered the sale of certain products compliantly produced prior to January 1, 2018, and, among other things, also allow state licensees to transact with other state licensees regardless of the parties’ Type M (medical) or Type A (adult use) license.
Retail cannabis businesses must pay tax on gross receipts (i.e., all revenues in whatever form and before any deductions whatsoever). A cannabis tax return is required whether or not taxes are owed during the month. Failure to submit timely tax returns and payments result in a penalty equal to 25% of the amount of the tax in addition to the amount of the tax, plus interest on the unpaid tax calculated from the original due date.
Zoning and Land Use Requirements
Applicants are required to comply with all local zoning and land use requirements and provide written authorization from the property owner where the commercial cannabis operations are proposed to take place, which must dictate that the applicant has the property owner’s authorization to engage in the specific state-sanctioned commercial cannabis activities proposed to occur on the premises.
Record-Keeping and Continuous Reporting Requirements
California’s state license application process additionally requires comprehensive criminal history, regulatory history, financial and personal disclosures, coupled with stringent monitoring and continuous reporting requirements designed to ensure only good actors are granted licenses and that licensees continue to operate in compliance with the State regulatory program.
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Operating Procedure Requirements
Applicants must submit standard operating procedures describing how the operator will, among other requirements, secure the facility, manage inventory, comply with the State’s seed-to-sale tracking requirements, dispense cannabis, and handle waste, as applicable to the license sought. Once the standard operating procedures are determined compliant and approved by the applicable state regulatory agency, the licensee is required to abide by the processes described and seek regulatory agency approval before any changes to such procedures may be made. Licensees are additionally required to train their employees on compliant operations and are only permitted to transact with other legal and licensed businesses.
Site-Visits & Inspections
All licencees will not be able to obtain or maintain state licensure, and thus engage in commercial cannabis activities in the state of California without satisfying and maintaining compliance with state and local law. As a condition of state licensure, operators must consent to random and unannounced inspections of the commercial cannabis facility as well as all of the facility’s books and records to monitor and enforce compliance with state law. Many localities have also enacted similar standards for inspections, and the state has already commenced site-visits and compliance inspections for operators who have received state temporary or annual licensure.
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.
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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.
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. |
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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. |
| ● | 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.
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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 year ended October 31, 2019 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 October 31, 2019 that have materially affected, or are reasonably likely to materially affect, internal control over financial reporting.
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Exhibit 3
FORM 52-109FV1
CERTIFICATION OF ANNUAL 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 AIF, if any, annual financial statements and annual MD&A, including, for greater certainty, all documents and information that are incorporated by reference in the AIF (together, the “annual filings”) of Grown Rogue International Inc. (the “issuer”) for the financial year ended October 31, 2019. |
| 2. | No misrepresentations: Based on my knowledge, having exercised reasonable diligence, the annual 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, for the period covered by the annual filings. |
| 3. | Fair presentation: Based on my knowledge, having exercised reasonable diligence, the annual financial statements together with the other financial information included in the annual 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 annual filings. |
Date: March 20, 2020
| (signed) “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 4
FORM 52-109FV1
CERTIFICATION OF ANNUAL FILINGS
VENTURE ISSUER BASIC CERTIFICATE
I, Michael Johnston, Chief Financial Officer and Corporate Secretary of Grown Rogue International Inc., certify the following:
| 1. | Review: I have reviewed the AIF, if any, annual financial statements and annual MD&A, including, for greater certainty, all documents and information that are incorporated by reference in the AIF (together, the “annual filings”) of Grown Rogue International Inc. (the “issuer”) for the financial year ended October 31, 2019. |
| 2. | No misrepresentations: Based on my knowledge, having exercised reasonable diligence, the annual 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, for the period covered by the annual filings. |
| 3. | Fair presentation: Based on my knowledge, having exercised reasonable diligence, the annual financial statements together with the other financial information included in the annual 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 annual filings. |
Date: March 20, 2020
| (signed) “Michael Johnston” | |
| Michael Johnston | |
| 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 5
Grown Rogue Announces Closing of Debt Financing by its
Michigan Subsidiary
NOT FOR DISTRIBUTION IN THE U.S. OR OVER U.S. NEWSWIRES
Medford, Oregon, March 20, 2020 – Grown Rogue International Inc. (the “Company”) (CSE: GRIN) (OTCQX: GRUSF), a multi-state cannabis company with operations and assets in Oregon, California and Michigan, today announced that its majority held subsidiary GR Michigan, LLC (“GR Michigan” and together with Grown Rogue International Inc. “Grown Rogue”) has closed a secured debt investment of USD $600,000 (the “Debt Financing”). The debt carries a two-year term, with monthly payments of principal commencing on June 15th. Once the principal is repaid, each investor will receive a gross revenue royalty of 1% per $100,000 invested based on any cannabis business that is majority owned by GR Michigan (“Royalty”). The Royalty has a term of 2 years with maximum amount of 2x of principal invested in the Debt Financing. Grown Rogue has the right, but not the obligation, to purchase the Royalty from any investor by paying the principal invested by such investor in the Debt Financing.
Grown Rogue has also agreed to pledge 100% of its ownership interests in GR Michigan to the investors in the Debt Financing until the principal is repaid in full, 50% during year 1 of the royalty payments and 33% during year 2 of the royalty payments.
Each investor in the Debt Financing will also receive 1% of the membership units in GR Michigan for every $100,000 invested, representing a value of USD$5,000. In exchange for services rendered, certain investors in the Debt Financing will receive an additional 1% of the membership units, one of which is a director of Grown Rogue. The President and Chief Executive Officer of Grown Rogue will receive 5% of the membership units in GR Michigan as part of his compensation for the structuring of the Debt Financing and leading Grown Rogue’s expansion into the Michigan market.
“We are excited to secure this non-dilutive debt financing for Grown Rogue to continue executing our expansion strategy into the Michigan market”, said Obie Strickler, Chief Executive Officer of Grown Rogue. “We remained committed to finding the right fully-licensed partner in Michigan, and these funds will allow us to move forward and execute upon our agreement with our operational partner Golden Harvests and continue to provide value to our shareholders.”
Insiders of Grown Rogue invested an aggregate of USD$300,000 in the Debt Financing and will receive a 3% Royalty and 9% of the membership units in GR Michigan. Such insider participation represents a related-party transaction under Multilateral Instrument 61-101 - Protection of Minority Security Holders in Special Transactions (“MI 61-101”), but the transaction is exempt from the formal valuation and minority shareholder approval requirements of MI 61-101 as neither the fair market value of the subject matter of the transaction, nor the consideration paid, exceed 25% of Grown Rogue’s market capitalization. The Company did not file a material change report more than 21 days before the expected closing of the Debt Financing as the details of the participation by such insiders was not settled until shortly prior to closing of the Debt Financing.
For more information visit grownrogue.com, or follow us at facebook.com/grownrogue, instagram.com/grownrogue, twitter.com/grownrogue, or linkedin.com/company/grown-rogue
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 cultivation 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 includes sungrown and indoor premium flower, patented nitrogen sealed pre-rolls along with chocolate edibles featuring a partnership with world-renowned chocolatier.
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.
Contacts:
Obie Strickler
Chief Executive Officer
obie@grownrogue.com
Investor Relations Desk Inquiries
invest@grownrogue.com
(458) 226-2100
Exhibit 6
Grown Rogue Reports Record Growth—Doubles
Revenue Year over Year
Cannabis company increases margins and expands into new markets during first year being publicly traded
MEDFORD, OREGON – March 20, 2020 -- Grown Rogue International Inc. (CSE: GRIN | OTC: GRUSF) (“Grown Rogue” or the “Company”), a multi-state cannabis company, with operations and assets in Oregon, California, and Michigan, has released its financial and operating results for its fiscal year ended October 31, 2019. The Company’s financial statements and management’s discussion and analysis for the period are available on the Company’s SEDAR profile at www.sedar.com or through the Company’s website at www.grownrogue.com. All amounts are expressed in United States Dollars unless otherwise indicated. Certain metrics, including those expressed on an adjusted basis, are non-IFRS measures.
Financial and Business Highlights
| ● | Fiscal Year End 2019 revenue was $3.9 million, a 103% increase over the prior year. |
| ● | Gross Profit, excluding fair value items was $1.0 million for the year (25%) representing significant improvement over the prior year (2%). |
| ● |
Indoor cultivation yields increased by nearly 30% in FYE 2019 as compared to FYE 2018, ~1,300lbs compared to 1,000lbs, respectively. |
| ● | Organizational structure was streamlined, product line was focused on high margin flower, improved processes and efficiencies were established, and the underperforming distribution business was eliminated which all contributed to strong margin gains |
| ● | Subsequent to year end signed an option to acquire 60% of Golden Harvests a fully licensed and operational cultivation company located in Bay City, Michigan. |
| ● | Completed a reverse take-over transaction and began trading its common shares on the Canadian Securities Exchange under the ticker symbol GRIN and listed on the Over the Counter Markets under the ticker symbol GRUSF. |
Management Commentary
In its first year as a publicly traded company, Grown Rogue doubled revenue and increased margin from 2% to 25%. Grown Rogue accomplished this by streamlining its organization and supply chain while focusing on producing premium flower products that were sold to best in class single and multi-door dispensaries. Consistent quarter over quarter production increases at its southern Oregon indoor facility, along with steady improvements in product go to market efficiency, have led to a reduction in production costs. The enhanced focus on profitability and strategic growth has established a solid foundation for improved financial performance.
“We are very pleased with our continued growth and efficiency as evident in the doubling of our revenue and increasing our margin from 2% to 25%,” said Obie Strickler, CEO Grown Rogue. “Cannabis is still a new industry so we are constantly learning, and Oregon is one of the most competitive markets in the country which accelerates the need for us to evolve plans to drive success. For example, in Q4 2019 we started executing our ‘Futures’ strategy in which we sign lucrative contracts today for future harvests of our premium cannabis. The timing was excellent, as sungrown prices for the 2019 harvest were double those of 2018, which allowed us to lock in a consistent revenue stream and reduce volatility in monthly cash flow. This approach to cannabis sales is unique and an element of our business that we will be able to transport to other states along with our tried and tested SOPs.”
The early unpredictability of recreational cannabis pricing in Oregon presented Grown Rogue with a compelling opportunity to evaluate every aspect of the business to optimize efficiency across the organization in order to maximize profitability. This included analysis and streamlining across the Company’s cultivation components, sales focus and strategy, and sourcing key human talent from other mature industries. “The rapidly evolving nature of the cannabis industry presents a unique challenge where the ideal team must possess an expertise in cultivation, while also integrating talent with diverse background in more established industries, particular those who have experience at leading global organizations,” said Obie Strickler, CEO of Grown Rogue. “Over the past year we have built a strong organization with cannabis and ‘traditional’ industry experience which has allowed us to take best practices and strategies from more established companies. We are leveraging those to drive ideas and efficiencies resulting in significant increases to revenue and margin in the states we operate.”
Grown Rogue current multi-state presence
Finding a licensed and operational partner in Michigan was Grown Rogue’s key expansion focus for 2019 which led to the evaluation of several partnerships throughout the year. In Q4, the Company began discussions with Golden Harvests, a fully licensed producer, to purchase a controlling interest in their 80,000 sq ft facility in Bay City, MI. Subsequent to year end, Grown Rogue signed the option to purchase Golden Harvests and also signed a management agreement to begin implementing Grown Rogue SOPs while proceeding through the licensing process with the State. The other main priority was a renewed focus on optimization of efficient operations and financial controls in Oregon, along with identifying the best dispensary partners in the state, which has allowed the company to streamline Oregon operations which remains one of the most competitive cannabis markets in the world. In California, where legislation and regulation have created an unpredictable marketplace, Grown Rogue maintains a distribution license as part of its 16,000 square-foot microbusiness in Eureka and is carefully evaluating various strategic opportunities in the state.
Oregon Operations
| ● | Operate ~90,000 sq. ft. of canopy in Oregon including two outdoor farms and a state-of-the-art indoor facility with annual production rates of approximately 6,000 pounds increasing to 7,000 pounds at full construction of the indoor facility |
| ● | Increased indoor yields in 2019 and reduced growing costs positively, increasing margins |
| ● | Focused on profitability and low-cost production |
Michigan Operations
| ● | Subsequent to year end, Company signed option to acquire controlling interest of fully licensed and operating Michigan operator “Golden Harvests” |
| ● | Golden Harvests operates an 80,000 sq ft indoor cultivation facility, with ~10,000 sq ft currently producing. Grown Rogue signed an exclusive management agreement with Golden Harvest to oversee production to increase efficiencies and quality during the option period |
| ● | Grown Rogue has begun the licensing process with the State of Michigan, whose approval is required prior to exercising the option. Grown Rogue expects this to be complete during calendar year 2020 |
California Operations
| ● | Market instability due to legislative and regulatory confusion has developed a negative incentive to enter a hyper-competitive state with significant illicit sales |
| ● | The company in the process of evaluating its future plans for this market |
Selected Financial Information (Complete financial tables have been filed on www.sedar.com)
| (in $000s except per share amounts) | Twelve Months | |||||||
| Year Ended October 31, | 2019 | 2018 | ||||||
| Revenue | 3,925 | 1,932 | ||||||
| Gross Profit, excluding fair value items | 989 | 43 | ||||||
| Adjusted EBITDA1 | (3,730 | ) | (2,674 | ) | ||||
| Loss from operations | (7,622 | ) | (4,968 | ) | ||||
| Net loss per share | (0.13 | ) | (0.22 | ) | ||||
| Weighted Common Shares Outstanding | 70,929 | 33,437 | ||||||
Fiscal Year 2019 Financial Overview
Grown Rogue revenue increased by 103% over the prior year period as a result of the addition of a larger sales team, additional production capacity, as well as an increase in the awareness of the Grown Rogue brand. The 3rd party distribution service, while accretive to top line revenue, was determined to be unprofitable to Grown Rogue and the company is no longer actively pursuing sales from that channel. Grown Rogue is also starting to observe revenue seasonality that coincides with the outdoor harvest resulting in larger revenue numbers during Q1 and Q2 as that product is sold into the Oregon market.
FY2019 Gross Profit, excluding fair value items was $1.0 million, or 25% of revenues, a substantial improvement from $0.04 million for the prior year (2%). Improvements over the prior year were primarily a result of a reduction in start-up and training costs combined with cultivation efficiencies resulting in lower cost of sales, along with a recovery in market pricing versus the prior year. The Company anticipates continued improvement in this metric in FY2020.
General and administrative expenses were $4.7 million for the year, compared to similar expenses of $2.7 million for the prior year. The increase in expenses was primarily related to the expanded scope of operations and associated sales, general and administrative support.
Grown Rogue’s Adjusted EBITDA1 amounted to ($3.7) million for the year ended October 31, 2019, compared to ($2.7) million for the year ended October 31, 2018. The increased loss was primarily attributable to the support costs noted above as the company built a foundation for future growth.
The Company’s cash and cash equivalents position was $0.1 million as at October 31, 2019. Cash and equivalents are higher as of the date of this press release with subsequent to year end events including the completion and monetization of the 2019 sungrown harvest along with the CAD $1.5M private placement announced February 10, 2020. Management is confident that current liquidity, inclusive of the private placement, is sufficient to fund operations through 2020 and beyond.
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NOTES:
| 1. | 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 (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. The following is a reconciliation of the Company’s net income (loss) to Adjusted EBITDA. |
Adjusted EBITDA Reconciliation 1
| Twelve months ended | ||||||||
| October 31, | October 31, | |||||||
| 2019 | 2018 | |||||||
| $ | $ | |||||||
| Net loss, as reported | (9,476,934 | ) | (7,509,896 | ) | ||||
| Add back realized fair value amounts included in inventory sold | 622,804 | 997,744 | ||||||
| Less unrealized fair value gain on growth of biological assets | (486,354 | ) | (541,352 | ) | ||||
| (9,340,484 | ) | (7,053,504 | ) | |||||
| Add back accretion expense, as reported | 153,195 | 317,827 | ||||||
| Add back amortization of intangible assets, as reported | 31,373 | 18,762 | ||||||
| Add back amortization of property and equipment, as reported | 63,295 | 460,046 | ||||||
| Add back stock-based compensation expense, as reported | 113,227 | 1,049,595 | ||||||
| Add back interest expense (recovery), as reported | 245,549 | 965,285 | ||||||
| Add back finance charges | - | 1,510,489 | ||||||
| Add back transaction costs | 3,453,790 | - | ||||||
| Add back acquisition costs | 126,202 | |||||||
| Add back impairment of technology license | 1,574,761 | |||||||
| Add back debt issuance costs | 10,165 | |||||||
| Less change in fair value of derivative liability | (121,811 | ) | ||||||
| Add back (less) loss (gain) on derecognition of derivative liability, as reported | (39,500 | ) | 57,500 | |||||
| Adjusted EBITDA | (3,730,238 | ) | (2,674,000 | ) | ||||
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, indoor and sungrown pre-rolls along with chocolate edibles created in partnership with a world-renowned Chocolatier.
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