Grown Rogue International Inc 6-K, filed Oct 2, 2020
Grown Rogue International Inc. (GRUSF)
About this 6-K
Grown Rogue International Inc filed this 6-K on October 2, 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: October 1, 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: October 1, 2020 | GROWN ROGUE INTERNATIONAL INC. | |
| (FORMERLY: NOVICIUS CORP.) | ||
| By: | /s/ Obie Strickler | |
| Name: | Obie Strickler | |
| Title: | President & Chief Executive Officer | |
2
Exhibit 1
Grown Rogue Hires Director of Sales in Michigan; Golden Harvests Receives Adult Use License and Continues Bay City Expansion; Announces Conversion of Debenture
Medford, Oregon, August 11, 2020 – Grown Rogue International Inc. (“Grown Rogue” or the “Company”) (CSE: GRIN) (OTC: GRUSF), a multi-state cannabis company with operations and assets in Oregon and Michigan, announced that it has hired a Director of Sales for Michigan, while its partner Golden Harvests, LLC (“Golden Harvests”) has received state and local approval for its first Class-C Adult Use License and continues its Bay City facility expansion with construction moving ahead for an additional 2,500 sq. feet of growing capacity.
The Class-C Adult-Use (Recreational) license will allow Golden Harvests to grow an additional 2,000 plants while selling its high quality and consistent indoor flower to cannabis retailers approved for adult use sales across the state. Golden Harvests also has two Class C Licenses under the Medical Marijuana Facilities Licensing Act (Medical) that permits up to 3,000 plants in the facility and sales to medical cannabis retailers, resulting in an increase of 40% in plant count in the 80,000 sq. foot Bay City facility. In the current market environment, average adult use wholesale pounds of flower are selling for US$3,500 to US$4,000, while medical wholesale pounds are selling for US$2,500 to US$3,000. In order to capitalize on the increased plant count under the Class-C Adult Use license, GR Michigan has committed an additional US$250,000 towards facility expansion which will add 2,500 sq. feet of flower canopy.
“Approval of the adult use license is very exciting as it will allow our partner Golden Harvests to provide high quality flower to meet the demands of the many retail locations who have been reaching out to our sales team in Michigan,” said Obie Strickler, Grown Rogue’s Chief Executive Officer, “The progress that has been made at the Bay City facility thus far has resulted in increased yields and quality of the product and we are excited to continue adding capacity to try and keep up with overwhelming flower demand.”
With the rapid expansion of the business and continued cannabis market growth in Michigan, Grown Rogue has made a key strategic hire with the addition of Meredith Miller as Director of Sales. Ms. Miller brings over 20 years of sales, marketing and leadership experience to the company, having spent the majority of her career at Red Bull North America where she helped establish the brand and widespread distribution in Michigan. She then moved into mid-west regional management sales and marketing roles, and was ultimately promoted to GM of Michigan and Ohio where she drove approximately $150M in sales annually. Ms. Miller will be responsible for implementing the sales strategy across the state, while formally launching the brand at retail and managing its expanding sales team.
“We are beyond excited to have Meredith join the Grown Rogue team as sales expands into adult use dispensaries across Michigan,” said Rob Rigg, Grown Rogue’s Chief Marketing Officer. “She is an experienced and respected sales and marketing leader with an extensive background at one of the world’s leading brands where she spent over a decade building relationships with retailers, while inspiring consumers, in order to strategically scale the business and establish quality market share.”
“I am thrilled to have the opportunity to join and contribute to the Grown Rogue team and partnership with Golden Harvests,” said Meredith Miller, Director of Sales. “I look forward to bringing my experience in product and brand marketing and passion for selling and developing partnerships to the Michigan cannabis market. My goal is to build upon the brand’s success in other markets as we aspire to become the premier flower brand in my home state with both consumers and retail partners.”
Grown Rogue also announced that, in connection with the option agreement relating to the acquisition of Golden Harvests dated February 6, 2020, it has exercised its option to delay for six months the payment on the next instalment of US$200,000 in cash and 200,000 in common shares of Grown Rogue that is owed to the owners of Golden Harvests. In exchange for the delay, Grown Rogue will pay to the owners of Golden Harvests US$25,000 in cash and 25,000 common shares of Grown Rogue.
Conversion of Debenture
A holder of a Grown Rogue debenture has elected to convert a principal amount of $100,000 in exchange for 800,000 common shares of Grown Rogue at a price of $0.125 per share. The conversion was completed and the common shares were issued pursuant to the terms of the debenture certificate that was issued on May 7, 2019 and amended on July 10, 2020.
About Grown Rogue
Grown Rogue International (CSE: GRIN | OTC: GRUSF) is a vertically-integrated, multi-state Cannabis family of brands on a mission to inspire consumers to “enhance experiences” through cannabis. We have combined an expert management team, award winning grow team, state of the art indoor and outdoor manufacturing facilities, and consumer insight based product categorization, to create innovative products thoughtfully curated from “seed to experience.” The Grown Rogue family of products include sungrown and indoor premium flower, along with nitro sealed indoor and sungrown pre-rolls and jars.
2
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
3
Exhibit 2
Grown Rogue Experiences Record Prices in Oregon; Adult Use Sales Commencing at US$4,000/lb in Michigan; Announces Hiring of Chief Accounting Officer
Medford, Oregon, September 1, 2020 – Grown Rogue International Inc. (“Grown Rogue” or the “Company”) (CSE: GRIN) (OTC: GRUSF), a multi-state cannabis company with operations and assets in Oregon and Michigan, announced a continued upward trend and record prices for its indoor flower in Oregon. Also, after the Company’s Michigan partner Golden Harvests, LLC (“Golden Harvests”) obtained the Class-C Adult-Use (“Recreational”) license in Michigan, its initial sales are averaging US$4,000/lb. versus US$3,000/lb. for medical. Additionally, the company announced the hiring of a Chief Accounting Officer (CAO) to place additional focus on financial efficiencies.
In August 2020, Grown Rogue benefited from record average sales prices, for its high-quality indoor flower, of US$1,750/lb. with high testing flower selling for US$2,000/lb. This is a 61% increase from US$1,082/lb. in Q2 and a 37% increase from US$1,276/lb. in Q3. The continued increase in Oregon indoor prices has been driven by the significant rise in cannabis sales across the state in 2020, as reported by the Oregon Liquor Control Commission (OLCC). The addition of a seventh grow room at its Oregon indoor facility has allowed the company to drive increased revenue and profitability at these record price points.
In Michigan, the Recreational license recently granted to Golden Harvests has resulted in US$332,000 of sales in the first week, at an average price point of US$4,000/lb. Sales to medical marijuana dispensaries remain strong at an average price point of US$3,000/lb., which is consistent with July sales. In order to maximize revenue and profitability, Grown Rogue’s Michigan subsidiary is completing work next week on a fifth grow room at Golden Harvests 80,000 square foot Bay City facility and is planning to commence construction on a sixth grow room to further increase capacity. The sixth grow room is expected to be completed in the next 90 to 120 days and is expected to cost approximately US$250,000.
“We are excited to see the tremendous demand and record prices for our products in both Oregon and Michigan,” said Obie Strickler, Grown Rogue’s Chief Executive Officer, “The lack of flower supply in both states has resulted in rapid product turns for our award-winning flower at record prices. We are excited to continue expanding our production capacity in both markets as quickly as possible.”
Grown Rogue also announced the addition of Ryan Kee to its executive team as Chief Accounting Officer, bringing high-level accounting expertise to ensure the efficient and accurate maintenance of financial records and timely filing of the company’s financial results. Mr. Kee initially joined the company as a part-time contractor in May and transitioned to full-time employee effective September 1st. He is a Certified Public Accountant with over a decade in accounting and financial reporting experience, primarily with Canadian entities reporting under IFRS. Mr. Kee’s previous experience includes leading a finance team for a mining company where he implemented a variety of financial reporting and financial planning systems, and working in public accounting assurance for a regional public accounting firm.
“We are excited to have Ryan join our team and we look forward to the many contributions he’ll make at both a tactical and a strategic level,” said Adam August, Grown Rogue’s Chief Financial Officer for US Operations. “Ryan brings an extensive background in companies with public reporting requirements similar to ours and he is already elevating our Accounting function to the level that our business requires. He also has a passion for generating actionable management reports that will help us make better decisions as a company, maximizing profitability and building shareholder value.”
“I’m honored to join Grown Rogue and contribute to a company that is in such an exciting industry,” said Mr. Kee, “I look forward to leveraging my background to realize efficiencies in the accounting process and find costs savings across the organization, while working with the executive team on long term strategy.”
About Grown Rogue
Grown Rogue International (CSE: GRIN | OTC: GRUSF) is a vertically-integrated, multi-state Cannabis family of brands on a mission to inspire consumers to “enhance experiences” through cannabis. We have combined an expert management team, award winning grow team, state of the art indoor and outdoor manufacturing facilities, and consumer insight based product categorization, to create innovative products thoughtfully curated from “seed to experience.” The Grown Rogue family of products include sungrown and indoor premium flower, along with nitro sealed indoor and sungrown pre-rolls and jars.
FORWARD LOOKING STATEMENTS
This press release contains statements which constitute “forward-looking information” within the meaning of applicable securities laws, including statements regarding the plans, intentions, beliefs and current expectations of the Company with respect to future business activities. Forward- looking information is often identified by the words “may,” “would,” “could,” “should,” “will,” “intend,” “plan,” “anticipate,” “believe,” “estimate,” “expect” or similar expressions and include information regarding: (i) statements regarding the future direction of the Company (ii) the ability of the Company to successfully achieve its business and financial objectives, (iii) plans for expansion of the Company into Michigan and securing applicable regulatory approvals, and (iv) expectations for other economic, business, and/or competitive factors. Investors are cautioned that forward-looking information is not based on historical facts but instead reflect the Company’s management’s expectations, estimates or projections concerning the business of the Company’s future results or events based on the opinions, assumptions and estimates of management considered reasonable at the date the statements are made. Although the Company believes that the expectations reflected in such forward-looking information are reasonable, such information involves risks and uncertainties, and undue reliance should not be placed on such information, as unknown or unpredictable factors could have material adverse effects on future results, performance or achievements of the combined company. Among the key factors that could cause actual results to differ materially from those projected in the forward-looking information are the following: changes in general economic, business and political conditions, including changes in the financial markets; and in particular in the ability of the Company to raise debt and equity capital in the amounts and at the costs that it expects; adverse changes in the public perception of cannabis; decreases in the prevailing prices for cannabis and cannabis products in the markets that the Company operates in; adverse changes in applicable laws; or adverse changes in the application or enforcement of current laws; compliance with extensive government regulation and related costs, and other risks described in the Company’s public disclosure documents filed on www.sedar.com.
2
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
3
Exhibit 3
GROWN ROGUE INTERNATIONAL INC.
Unaudited Condensed Interim Consolidated Financial Statements
For the Three and Nine Month Periods ended July 31, 2020 and 2019
Expressed in United States Dollars
NOTICE TO READER
The accompanying unaudited condensed consolidated interim financial statements have been prepared by the Company’s management and the Company’s independent auditors have not performed a review of these interim financial statements.
Grown Rogue International Inc.
Condensed Interim Consolidated Statements of Financial Position
Unaudited & expressed in United States Dollars
| July 31, 2020 | October 31, 2019 | |||||||||
| (Unaudited) | (Audited) | |||||||||
| ASSETS | ||||||||||
| Current assets | ||||||||||
| Cash | $ | 591,352 | $ | 74,926 | ||||||
| Accounts receivable | (Note 26) | 211,932 | 99,188 | |||||||
| Other receivables | 57,284 | 35,235 | ||||||||
| Biological assets | (Note 5) | 629,346 | 156,589 | |||||||
| Inventory | (Note 6) | 355,440 | 940,715 | |||||||
| Prepaid expenses and other assets | 62,129 | 126,309 | ||||||||
| Total current assets | $ | 1,907,483 | $ | 1,432,962 | ||||||
| Property and equipment | (Note 11) | $ | 1,292,666 | $ | 1,464,917 | |||||
| Intangible assets | 13,977 | 34,597 | ||||||||
| Right-of-use assets | (Note 12) | 96,671 | - | |||||||
| Marketable securities | (Note 7) | 559,343 | - | |||||||
| Other investments | (Note 8) | 162,812 | - | |||||||
| TOTAL ASSETS | $ | 4,032,952 | $ | 2,932,476 | ||||||
| LIABILITIES | ||||||||||
| Current liabilities | ||||||||||
| Accounts payable and accrued liabilities | (Note 26) | $ | 1,022,642 | $ | 1,526,855 | |||||
| Finance lease payable | (Note 10) | 72,908 | 129,876 | |||||||
| Convertible debentures | (Note 16) | - | 1,995,609 | |||||||
| Current portion of long-term debt | (Note 14) | 315,139 | 150,000 | |||||||
| Unearned revenue | - | 35,000 | ||||||||
| Current portion of lease liabilities | (Note 13) | 97,808 | - | |||||||
| Interest payable | (Notes 14, 15, 16) | 23,101 | 55,829 | |||||||
| Derivative liabilities | (Note 16) | 697,381 | 249,320 | |||||||
| Total current liabilities | $ | 2,228,979 | $ | 4,142,489 | ||||||
| Accrued liabilities | (Note 9) | 414,816 | 180,799 | |||||||
| Finance lease payable | (Note 10) | 25,930 | 12,329 | |||||||
| Long-term debt | (Note 14) | 485,855 | - | |||||||
| Convertible debentures | (Note 16) | 1,530,887 | - | |||||||
| Deferred rent | 19,690 | 24,505 | ||||||||
| TOTAL LIABILITIES | $ | 4,706,157 | $ | 4,360,122 | ||||||
| EQUITY | ||||||||||
| Share capital | (Note 18) | $ | 14,770,644 | $ | 12,647,930 | |||||
| Shares to be issued | (Note 20) | 5,136 | 5,136 | |||||||
| Contributed surplus | (Notes 19, 21, 22) | 3,844,266 | 2,890,435 | |||||||
| Accumulated other comprehensive income (loss) | 11,775 | 121,920 | ||||||||
| Accumulated deficit | (19,310,251 | ) | (17,112,605 | ) | ||||||
| Equity attributable to shareholders | $ | (678,430 | ) | $ | (1,447,184 | ) | ||||
| Non-controlling interest | (Notes 1, 32) | 5,225 | 19,538 | |||||||
| TOTAL EQUITY | $ | (673,205 | ) | $ | (1,427,646 | ) | ||||
| TOTAL LIABILITIES AND EQUITY | $ | 4,032,952 | $ | 2,932,476 | ||||||
| Going Concern (Note 1) |
| Commitments (Note 29) |
| Subsequent Events (Note 33) |
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 unaudited condensed interim consolidated financial statements.
Pg 2 of 50
Grown Rogue International Inc.
Condensed Interim Consolidated Statements of Operations
Unaudited & expressed in United States Dollars
| Three months ended | Nine months ended | |||||||||||||||||
| July 31, | July 31, | |||||||||||||||||
| 2020 | 2019 | 2020 | 2019 | |||||||||||||||
| Revenue | $ | 903,994 | $ | 773,930 | $ | 3,182,902 | $ | 3,493,354 | ||||||||||
| Cost of goods sold | ||||||||||||||||||
| Cost of finished cannabis inventory sold | (Note 6) | (475,982 | ) | (531,304 | ) | (1,817,480 | ) | (2,486,643 | ) | |||||||||
| Gross profit, excluding fair value items | $ | 428,012 | $ | 242,626 | $ | 1,365,422 | $ | 1,006,711 | ||||||||||
| Realized fair value amounts in inventory sold | (626,522 | ) | (498,542 | ) | (1,471,821 | ) | (1,103,493 | ) | ||||||||||
| Unrealized fair value gain on growth of biological assets | (Note 5) | 770,724 | 1,060,550 | 1,425,228 | 1,140,472 | |||||||||||||
| Gross profit (loss) | $ | 572,214 | $ | 804,634 | $ | 1,318,829 | $ | 1,043,690 | ||||||||||
| Expenses | ||||||||||||||||||
| Accretion expense | $ | 321,875 | $ | 32,977 | $ | 461,415 | $ | 63,827 | ||||||||||
| Amortization of intangible assets | 5,980 | 7,660 | 20,620 | 23,714 | ||||||||||||||
| Amortization of property and equipment | (Note 11) | 48,725 | 157,867 | 103,535 | 480,482 | |||||||||||||
| Amortization of right-of-use assets | (Note 12) | 13,233 | - | 70,152 | - | |||||||||||||
| General and administrative | (Note 27) | 549,350 | 1,477,321 | 1,814,319 | 3,828,995 | |||||||||||||
| Share-based compensation | 329,014 | - | 320,852 | 112,080 | ||||||||||||||
| Transaction costs | (Notes 2, 30) | - | - | - | 3,723,724 | |||||||||||||
| Total expenses | $ | 1,268,177 | $ | 1,675,825 | $ | 2,790,893 | $ | 8,232,822 | ||||||||||
| Loss from operations | $ | (695,963 | ) | $ | (871,191 | ) | $ | (1,472,064 | ) | $ | (7,189,132 | ) | ||||||
| Interest expense | $ | (96,881 | ) | $ | (60,051 | ) | $ | (258,472 | ) | $ | (214,131 | ) | ||||||
| Other income | 125,860 | 58 | 235,860 | 10,071 | ||||||||||||||
| Gain on disposal of subsidiary | (Note 1) | 1,574 | - | 1,574 | - | |||||||||||||
| Loss on debt restructure | (Note 16.i) | (462,213 | ) | - | (462,213 | ) | - | |||||||||||
| Gain on debt settlement | 23,939 | - | 23,939 | - | ||||||||||||||
| Gain on derecognition of derivative liability | 244,572 | - | 244,572 | 15,000 | ||||||||||||||
| Unrealized gain (loss) on marketable securities | 69,064 | - | (558,223 | ) | - | |||||||||||||
| Gain (loss) on disposal of property and equipment | (4,024 | ) | - | 10,940 | - | |||||||||||||
| Net loss | $ | (794,072 | ) | $ | (931,184 | ) | $ | (2,234,087 | ) | $ | (7,378,192 | ) | ||||||
| Other comprehensive income | ||||||||||||||||||
| Currency translation loss | (3,420 | ) | - | (110,145 | ) | - | ||||||||||||
| Total comprehensive income (loss) | $ | (797,492 | ) | $ | (931,184 | ) | $ | (2,344,232 | ) | $ | (7,378,192 | ) | ||||||
| Loss per share - basic & diluted | $ | (0.01 | ) | $ | (0.01 | ) | $ | (0.02 | ) | $ | (0.11 | ) | ||||||
| Weighted average shares outstanding - basic | 104,821,009 | 72,465,916 | 90,596,827 | 68,523,689 | ||||||||||||||
| Net loss for the period attributable to: | ||||||||||||||||||
| Non-controlling interest | $ | 708 | $ | (165,454 | ) | $ | (36,441 | ) | $ | (165,454 | ) | |||||||
| Shareholders | (794,780 | ) | (765,730 | ) | (2,197,646 | ) | (7,212,738 | ) | ||||||||||
| Net loss | $ | (794,072 | ) | $ | (931,184 | ) | $ | (2,234,087 | ) | $ | (7,378,192 | ) | ||||||
| Comprehensive loss for the period attributable to: | ||||||||||||||||||
| Non-controlling interest | $ | 708 | $ | (165,454 | ) | $ | (36,441 | ) | $ | (165,454 | ) | |||||||
| Shareholders | (798,200 | ) | (765,730 | ) | (2,307,791 | ) | (7,212,738 | ) | ||||||||||
| Net loss | $ | (797,492 | ) | $ | (931,184 | ) | $ | (2,344,232 | ) | $ | (7,378,192 | ) | ||||||
The accompanying notes form an integral part of these unaudited condensed interim consolidated financial statements.
Pg 3 of 50
Grown Rogue International Inc.
Condensed Interim Consolidated Statements of Changes in Equity Holders’ Equity (Deficit)
Unaudited & expressed in United States Dollars
| Number
of Common | Share | Common | Seed
Round Preferred | Total Members’ | Subscriptions | Equity Component of Convertible | Contributed | Currency Translation | Accumulated | Non-Controlling | Total | |||||||||||||||||||||||||||||||||||||
| Shares | Capital | Units | Units | Capital | Payable | Debentures | Surplus | Reserve | Deficit | Interest | equity | |||||||||||||||||||||||||||||||||||||
| Balance at October 31, 2019 | 73,219,916 | $ | 12,647,930 | $ | - | $ | - | $ | - | $ | 5,136 | $ | - | $ | 2,890,435 | $ | 121,920 | $ | (17,112,605 | ) | $ | 19,538 | $ | (1,427,646 | ) | |||||||||||||||||||||||
| Issuance pursuant to private placement (Notes 18.i, 19.i, 19.ii) | 15,000,000 | 733,434 | - | - | - | - | - | 350,901 | - | - | - | 1,084,335 | ||||||||||||||||||||||||||||||||||||
| Common shares issued pursuant to share swap (Note 18.i) | 15,000,000 | 1,121,848 | - | - | - | - | - | - | - | - | - | 1,121,848 | ||||||||||||||||||||||||||||||||||||
| Share issuance costs (Note 18.i) | - | (11,508 | ) | - | - | - | - | - | (5,083 | ) | - | - | - | (16,591 | ) | |||||||||||||||||||||||||||||||||
| Common shares issued for compensation (Note 18.iv) | 684,386 | 55,106 | - | - | - | - | - | - | - | - | - | 55,106 | ||||||||||||||||||||||||||||||||||||
| Common shares issued for services (Note 18.iv) | 2,300,000 | 163,543 | - | - | - | - | - | - | - | - | - | 163,543 | ||||||||||||||||||||||||||||||||||||
| Common shares issued for investment (Notes 18.ii, 8.i) | 200,000 | 12,812 | - | - | - | - | - | - | - | - | - | 12,812 | ||||||||||||||||||||||||||||||||||||
| Conversion of debt into common shares (Note 16.i, 18.iii) | 238,095 | 37,733 | - | - | - | - | - | - | - | - | - | 37,733 | ||||||||||||||||||||||||||||||||||||
| Issuances pursuant to convertible agreements (Note 18.iii, 19.iii) | 115,000 | 9,746 | - | - | - | - | - | 424,645 | - | - | - | 434,391 | ||||||||||||||||||||||||||||||||||||
| Stock option grants (Notes 22.iii and 22.iv) | - | - | - | - | - | - | - | 183,368 | - | - | - | 183,368 | ||||||||||||||||||||||||||||||||||||
| Elimination of non-controlling interest of sold subsidiary (Notes 1, 23) | - | - | - | - | - | - | - | - | - | 22,128 | 22,128 | |||||||||||||||||||||||||||||||||||||
| Currency translation adjustment | - | - | - | - | - | - | - | - | (110,145 | ) | - | - | (110,145 | ) | ||||||||||||||||||||||||||||||||||
| Net loss | - | - | - | - | - | - | - | - | - | (2,197,646 | ) | (36,441 | ) | (2,234,087 | ) | |||||||||||||||||||||||||||||||||
| Balance at July 31, 2020 | 106,757,397 | $ | 14,770,644 | $ | - | $ | - | $ | - | $ | 5,136 | $ | - | $ | 3,844,266 | $ | 11,775 | $ | (19,310,251 | ) | $ | 5,225 | $ | (673,205 | ) | |||||||||||||||||||||||
The accompanying notes form an integral part of these unaudited condensed interim consolidated financial statements.
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Grown Rogue International Inc.
Condensed Interim Consolidated Statements of Changes in Equity Holders’ Equity (Deficit)
Unaudited & expressed in United States Dollars
| Number
of Common | Share | Common | Seed
Round Preferred | Total Members’ | Subscriptions | Equity Component of Convertible | Contributed | Accumulated | Non-controlling | Total
Equity Holders’ | ||||||||||||||||||||||||||||||||||
| Shares | Capital | Units | Units | Capital | Payable | Debentures | Surplus | Deficit | Interest | Deficit | ||||||||||||||||||||||||||||||||||
| Balance - October 31, 2018 | - | $ | - | $ | 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 (Note 17) | - | - | 1,374,317 | - | 1,374,317 | - | - | - | - | - | 1,374,317 | |||||||||||||||||||||||||||||||||
| Common units issued pursuant to technology license agreement(Note 17) | - | - | 2,199,667 | - | 2,199,667 | - | - | - | - | - | 2,199,667 | |||||||||||||||||||||||||||||||||
| Common units issued pursuant to exercise of purchase option (Note 17) | - | - | 1,258,784 | - | 1,258,784 | - | - | (1,218,784 | ) | - | - | 40,000 | ||||||||||||||||||||||||||||||||
| Subscription receipts (Note 17) | - | - | - | - | - | 554,000 | - | - | - | - | 554,000 | |||||||||||||||||||||||||||||||||
| Common units issued pursuant to subscription receipts (Note 17.ix) | - | - | 913,698 | - | 913,698 | (1,274,516 | ) | - | 360,818 | - | - | - | ||||||||||||||||||||||||||||||||
| Exchange of Units for common shares pursuant to the Transaction (Note 16) | 60,746,202 | 10,448,239 | (9,173,295 | ) | (1,274,944 | ) | (10,448,239 | ) | - | - | - | - | - | - | ||||||||||||||||||||||||||||||
| Common units issued to existing shareholders of the Company pursuant to the Transaction (Note 18.vi) | 3,773,689 | 1,257,706 | - | - | - | - | - | - | - | - | 1,257,706 | |||||||||||||||||||||||||||||||||
| Common shares issued to former debt holders of the Company (Note 18.viii) | 839,790 | 279,888 | - | - | - | - | - | - | - | - | 279,888 | |||||||||||||||||||||||||||||||||
| Common shares pursuant to acquisition of Grown Rogue Canada (Note 18.x) | 100,000 | 33,328 | - | - | - | - | - | - | - | - | 33,328 | |||||||||||||||||||||||||||||||||
| Common shares issued pursuant to subscription receipts (Note 18.ix, 19.vii) | 6,193,917 | 1,479,947 | - | - | - | - | - | 584,430 | - | - | 2,064,377 | |||||||||||||||||||||||||||||||||
| Fair value of broker warrants (Note 19) | - | (85,931 | ) | - | - | - | - | - | 85,931 | - | - | - | ||||||||||||||||||||||||||||||||
| Issuance costs (Note 18.ix) | - | (143,786 | ) | - | - | - | - | - | (56,781 | ) | - | - | (200,567 | ) | ||||||||||||||||||||||||||||||
| Fair value of warrants issued to debenture holders (Note 19) | - | - | - | - | - | - | - | 830,335 | - | - | 830,335 | |||||||||||||||||||||||||||||||||
| Debt settlements | - | - | - | - | - | 85,136 | - | - | - | - | 85,136 | |||||||||||||||||||||||||||||||||
| Common shares issued for services rendered | 812,318 | 268,737 | - | - | - | (80,000 | ) | - | - | - | - | 188,737 | ||||||||||||||||||||||||||||||||
| Stock based compensation expenses | - | - | - | - | - | - | - | 112,080 | - | - | 112,080 | |||||||||||||||||||||||||||||||||
| Issuance of convertible debentures (Note 16) | - | - | - | - | - | - | 49,863 | 56,649 | - | - | 106,512 | |||||||||||||||||||||||||||||||||
| Non-controlling interest | - | - | - | - | - | - | - | - | - | 400,000 | 400,000 | |||||||||||||||||||||||||||||||||
| Net loss | - | - | - | - | - | - | - | - | (7,212,738 | ) | (165,454 | ) | (7,378,192 | ) | ||||||||||||||||||||||||||||||
| Balance, July 31, 2019 | 72,465,916 | $ | 13,538,128 | $ | - | $ | - | $ | - | $ | 5,136 | $ | 181,863 | $ | 2,765,167 | $ | (15,025,121 | ) | $ | 234,546 | $ | 1,699,719 | ||||||||||||||||||||||
The accompanying notes form an integral part of these unaudited condensed interim consolidated financial statements.
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Grown Rogue International Inc.
Unaudited Condensed Interim Consolidated Cash Flow Statements
Expressed in United States Dollars
| Nine months ended July 31, | ||||||||||
| Cash provided by (used in) | 2020 | 2019 | ||||||||
| Operating activities | ||||||||||
| Net loss | $ | (2,234,087 | ) | $ | (7,378,192 | ) | ||||
| Adjustments for non-cash items in net loss | ||||||||||
| Amortization of property and equipment | (Note 11) | 103,535 | 480,482 | |||||||
| Amortization of right-of-use assets | 70,152 | - | ||||||||
| Amortization of intangible assets | 20,620 | 23,714 | ||||||||
| Unrealized gain on changes in fair value of biological assets | 46,593 | (1,140,472 | ) | |||||||
| Share-based compensation | (Note 18) | 163,543 | 112,080 | |||||||
| Stock option expense | (Note 22) | 157,309 | - | |||||||
| Services paid in shares or membership units | 55,105 | 284,389 | ||||||||
| Amortization of deferred financing costs | - | 40,949 | ||||||||
| Accretion expense | 461,415 | 63,827 | ||||||||
| Gain on liability settlement | (23,939 | ) | - | |||||||
| Loss on disposal of property & equipment | 10,940 | - | ||||||||
| Transaction costs | - | 3,723,724 | ||||||||
| Loss from debt restructuring | (Note 16.i) | 462,213 | - | |||||||
| Unrealized loss on marketable securities | (Note 7) | 558,223 | - | |||||||
| Gain on derecognition of derivative liability | (Note 16.i) | (244,572 | ) | (15,000 | ) | |||||
| Effects of foreign exchange | (110,145 | ) | - | |||||||
| $ | (503,095 | ) | $ | (3,804,499 | ) | |||||
| Changes in non-cash working capital | (Note 23) | 415,519 | 541,708 | |||||||
| Net cash used in (provided by) operating activities | $ | (87,576 | ) | $ | (3,262,791 | ) | ||||
| Investing activties | ||||||||||
| Purchase of intangible assets | $ | - | $ | (37,999 | ) | |||||
| Purchase of property and equipment | (Note 11) | (514,824 | ) | (247,784 | ) | |||||
| Other investment | (150,000 | ) | - | |||||||
| Receipt from sale of subsidiary | (Note 1) | 85,000 | - | |||||||
| Loss on sale of subsidiary | (62,872 | ) | - | |||||||
| Cash acquired upon close of Transaction | - | 5,875 | ||||||||
| Net cash used in investing activities | $ | (642,696 | ) | $ | (279,908 | ) | ||||
| Financing activities | ||||||||||
| Subscription receivable | $ | - | $ | (720,516 | ) | |||||
| Option proceeds | - | 40,000 | ||||||||
| Proceeds from long-term debt | (Note 14) | 615,000 | - | |||||||
| Repayment of long-term debt | (Note 14) | (178,480 | ) | (250,145 | ) | |||||
| Proceeds of subscription receipts | - | 3,234,893 | ||||||||
| Convertible debenture proceeds | - | 1,105,127 | ||||||||
| Proceeds of finance lease | - | 62,516 | ||||||||
| Payment of finance lease | (43,367 | ) | (83,720 | ) | ||||||
| Payment of lease liability | (Note 13) | (214,200 | ) | - | ||||||
| Payment of equity and debenture issuance costs | - | (247,781 | ) | |||||||
| Proceeds from private placement | (Note 18) | 1,067,745 | - | |||||||
| Payment of debt issuance costs | - | - | ||||||||
| Transaction costs | - | (167,363 | ) | |||||||
| Net cash provided by financing activities | $ | 1,246,698 | $ | 2,973,011 | ||||||
| Change in cash | $ | 516,426 | $ | (569,688 | ) | |||||
| Cash balance, beginning of period | 74,926 | 826,643 | ||||||||
| Cash balance, end of period | $ | 591,352 | $ | 256,955 | ||||||
The accompanying notes form an integral part of these unaudited condensed interim consolidated financial statements.
Pg 6 of 50
Grown Rogue International Inc.
Notes to the condensed interim consolidated financial statements
For the three and nine months ended July 31, 2020 and 2019
Unaudited & expressed in United States Dollars, unless otherwise indicated
1. Nature of Operations
These unaudited condensed consolidated interim financial statements (the “Financial Statements”) for the nine months ended July 31, 2020 and 2019, 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 a 60% ownership interests in Idalia, LLC and an 87% ownership interest in GR Michigan, LLC; during the three months ended July 31, 2020, the Company disposed of its 60% interest in GRD Cali, LLC for $85,000 in cash consideration. 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 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 nine months ended July 31, 2020, the Company incurred a net loss of $2,234,087 (2019 - $7,378,192) and as of that date, the Company’s accumulated deficit was $19,310,251 (October 31, 2019 - $17,112,605). As at July 31, 2020, the Company had a working capital deficit of $321,496 (October 31, 2019 - $2,709,527). 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 unaudited condensed 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 unaudited condensed consolidated financial statements.
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, 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.
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Grown Rogue International Inc.
Notes to the condensed interim consolidated financial statements
For the three and nine months ended July 31, 2020 and 2019
Unaudited & expressed in United States Dollars, unless otherwise indicated
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 equity interests GR Unlimited would have had to issue to give the owners of the Company the same percentage equity interest in the combined entity that results from the transaction described above. The fair value of the number of equity interests calculated 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.
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 19x) | 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 during the year ended October 31, 2019.
Pg 8 of 50
Grown Rogue International Inc.
Notes to the condensed interim consolidated financial statements
For the three and nine months ended July 31, 2020 and 2019
Unaudited & expressed in United States Dollars, unless otherwise indicated
3. Basis of Presentation
Statement of Compliance
The Company’s Financial Statements have been prepared in accordance with IAS 34 “Interim Financial Reporting”. These unaudited consolidated interim financial statements should be read in conjunction with the Company’s audited financial statements for the year ended October 31, 2019, which were prepared in accordance with International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board.
These Financial Statements were prepared following the same accounting policies used in the preparation of the Company’s audited financial statements with the exception of certain amendments to accounting standards or new interpretations issued by the IASB as described in Note 4. These Financial Statements have not been subject to audit and were approved and authorized for issuance by the Company’s Board of Directors on September 29, 2020.
Basis of Measurement
These Financial Statements have been prepared on a historical cost basis except for certain financial instruments and biological assets, which are measured at fair value as described herein.
Functional and Presentation Currency
The Company’s functional currency is the Canadian dollar and the functional currency of its Subsidiaries is the United States (“U.S.”) dollar. These unaudited condensed 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.
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.
Pg 9 of 50
Grown Rogue International Inc.
Notes to the condensed interim consolidated financial statements
For the three and nine months ended July 31, 2020 and 2019
Unaudited & expressed in United States Dollars, unless otherwise indicated
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 unaudited condensed consolidated financial statements from the date that control commences until the date control ceases. All intercompany balances and transactions have been eliminated upon consolidation.
Estimation Uncertainty due to COVID-19
On March 11, 2020, the World Health Organization declared a global outbreak of COVID-19 (coronavirus) to be a pandemic, which has had a significant impact on businesses through the restrictions put in place by the federal, state, provincial and municipal governments regarding travel, business operations and isolation/quarantine orders in Canada and the United States. Government measures imposed to limit the spread of COVID-19 did not have a material impact on the Company’s operations during the period ended July 31, 2020, and the Company has not observed any material impairments, or significant changes in the fair value of its assets as a result of COVID-19.
At this time, it is unknown the extent of the impact the COVID-19 outbreak may have on the Company as this will depend on future developments that are highly uncertain and that cannot be predicted with confidence. These uncertainties arise from the inability to predict the ultimate geographic spread of the disease, and the duration of the outbreak, including the duration of travel restrictions, business closures or disruptions, and quarantine/isolation measures that are currently, or may be put in place by Canada, the United States and other countries to fight the virus. While the extent of the impact is unknown, it remains possible that this outbreak may cause reduced customer demand, supply chain disruptions, staff shortages, and increased government regulations, all of which may negatively impact the Company’s business, results of operations and financial condition. The Company will continue to evaluate the situation with respect to the COVID-19 pandemic as it develops and will implement any such changes to its business as may deemed appropriate to mitigate any potential impacts to its business.
4. Significant Accounting Policies and Significant Judgements
These Financial Statements have been prepared using the same accounting policies, significant accounting judgements and estimates, and methods of computation as the annual consolidated financial statements of the Company as at and for the year ended October 31, 2019 as described in Note 4 of those financial statements, with the exception of certain amendments to accounting standards or new interpretations issued by the IASB with are applicable for annual periods beginning on or after November 1, 2019.
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Grown Rogue International Inc.
Notes to the condensed interim consolidated financial statements
For the three and nine months ended July 31, 2020 and 2019
Unaudited & expressed in United States Dollars, unless otherwise indicated
Changes in accounting standards effective November 1, 2019:
IFRS 16 Leases (“IFRS 16”) 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. In applying IFRS 16, for all leases, the Company:
| ● | Recognizes right-of-use assets and lease liabilities in the statement of financial position, initially measured at the present value of the future lease payments; |
| ● | Recognizes depreciation of right-of-use assets and interest expense on lease liabilities in the statements of income and comprehensive income; and |
| ● | Separates the total amount of cash paid into a principal portion (presented within financing activities) and interest (presented within operating activities) in the statement of cash flows. |
On November 1, 2019, the Company adopted IFRS 16. As such, the Company reviewed all leases and assessed whether these contracts are or contains a lease. The Company has accounted for its leases upon adoption of IFRS 16 using a modified retrospective approach whereby it recognizes a lease liability and a right-of-use asset at the date of initial application, being November 1, 2019. The lease liability is measured at the present value of the remaining lease payments, discounted using the Company’s incremental borrowing rate. The Company has measured the right-of-use asset at an amount equal to the lease liability.
5. Biological Assets
Biological assets consist of cannabis seeds and cannabis plants. The reconciliation of changes in the carrying amounts of biological assets as at July 31, 2020 and October 31, 2019 are as follows:
| 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 | ||
| Add: purchased cannabis plants | 477,293 | |||
| Change in fair value less costs to sell due to biological transformation | 1,382,162 | |||
| Allocation of operational overhead | 811,628 | |||
| Transferred to inventory upon harvest | (2,198,326 | ) | ||
| Balance - July 31, 2020 | $ | 629,346 |
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. |
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Grown Rogue International Inc.
Notes to the condensed interim consolidated financial statements
For the three and nine months ended July 31, 2020 and 2019
Unaudited & expressed in United States Dollars, unless otherwise indicated
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 asset 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:
| Impact of 20% change | ||||||||||||||||
| July 31, 2020 | October 31, 2019 | July 31, 2020 | October 31, 2019 | |||||||||||||
| Estimated selling price per lb | $ | 743 | $ | 840 | $ | 132,879 | $ | 37,747 | ||||||||
| Estimated stage of growth | 32 | % | 60 | % | $ | 110,955 | $ | 30,970 | ||||||||
| Estimated flower yield per harvest (lb) | 805 | 263 | $ | 110,955 | $ | 30,970 | ||||||||||
6. Inventory
As at July 31, 2020 and October 31, 2019, the Company’s inventory composition is as follows:
| Raw materials | $ | 27,860 | ||
| Work in process | 819,675 | |||
| Finished goods | 93,180 | |||
| Balance - October 31, 2019 | $ | 940,715 | ||
| Raw materials | $ | 13,225 | ||
| Work in process | 167,565 | |||
| Finished goods | 174,650 | |||
| Balance - July 31, 2020 | $ | 355,440 |
The cost of inventories included as an expense and included in cost of goods sold for the nine month period ended July 31, 2020, was $1,817,480 (2019 - $2,486,643).
7. Marketable Securities
During the period ended July 31, 2020, the Company received 2,362,204 common shares of Cannabis Growth Opportunity Corporation as part of a subscription agreement to exchange approximately CAD$1,500,000 worth of each other’s shares. As at July 31, 2020, the fair value of the shares was $559,343. The Company has recorded an unrealized loss on the shares in the amount of $558,223 during the period ended July 31, 2020.
Pg 12 of 50
Grown Rogue International Inc.
Notes to the condensed interim consolidated financial statements
For the three and nine months ended July 31, 2020 and 2019
Unaudited & expressed in United States Dollars, unless otherwise indicated
8. Other Investments
By agreement effective February 6, 2020, the Company 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. The optionee is called Golden Harvests, LLC (“GH”). 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. During the period ended July 31, 2020, the company made a cash payment of $150,000 and issued 200,000 shares valued at $12,812. |
| 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. |
| 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. |
9. 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 July 31, 2020. During the nine month period ended July 31, 2020, the Company entered into agreements with two other vendors to defer payment of an additional $286,256 beyond one year from July 31, 2020, such that total deferrals totaled $467,055. During the period ended July 31, 2020, the company applied payments against the liabilities, leaving a balance of $414,816.
10. Finance Leases Payable
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. The lease liability was settled in full during the period ended July 31, 2020.
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.
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.
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Grown Rogue International Inc.
Notes to the condensed interim consolidated financial statements
For the three and nine months ended July 31, 2020 and 2019
Unaudited & expressed in United States Dollars, unless otherwise indicated
Effective March 2, 2020, the Company entered into an agreement with a third party to lease equipment at a cost of $68,035 over a twenty-four month period for monthly payments of $3,505. 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 July 31, 2020, the related lease liabilities are payable as follows:
| Future minimum lease | Total future lease | |||||||||||
| principal | Interest | payments | ||||||||||
| Less than one year | $ | 72,908 | $ | 11,799 | $ | 84,707 | ||||||
| Between one and five years | 25,930 | 2,110 | 28,040 | |||||||||
| Total | $ | 98,838 | $ | 13,909 | $ | 112,747 | ||||||
As at July 31, 2020, the net book value of the growing equipment under finance lease is approximately $178,000, based up depreciation of the capital equipment at useful lives of three years.
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Grown Rogue International Inc.
Notes to the condensed interim consolidated financial statements
For the three and nine months ended July 31, 2020 and 2019
Unaudited & expressed in United States Dollars, unless otherwise indicated
11. Property and Equipment
| Production | ||||||||||||||||||||
| Computer and Office | Equipment and | Construction in | Leasehold | |||||||||||||||||
| Equipment | Other | Progress | Improvements | Total | ||||||||||||||||
| COST | ||||||||||||||||||||
| Balance - October 31, 2018 | $ | 75,883 | $ | 357,115 | $ | 578,158 | $ | 1,067,725 | $ | 2,078,881 | ||||||||||
| Additions | 50,480 | 86,483 | 17,308 | 242,746 | 397,017 | |||||||||||||||
| Disposals | (70,403 | ) | - | (118,683 | ) | - | (189,086 | ) | ||||||||||||
| Balance - October 31, 2019 | $ | 55,960 | $ | 443,598 | $ | 476,783 | $ | 1,310,471 | $ | 2,286,812 | ||||||||||
| Additions | - | 252,073 | 227,797 | 34,954 | 514,824 | |||||||||||||||
| Transfers | - | - | (595,466 | ) | 595,466 | - | ||||||||||||||
| Disposals | (1,473 | ) | (22,495 | ) | - | - | (23,968 | ) | ||||||||||||
| Balance - July 31, 2020 | $ | 54,487 | $ | 673,176 | $ | 109,114 | $ | 1,940,891 | $ | 2,777,668 | ||||||||||
| ACCUMULATED AMORTIZATION | ||||||||||||||||||||
| Balance - October 31, 2018 | $ | 1,907 | $ | 71,157 | $ | - | $ | 429,896 | $ | 502,960 | ||||||||||
| Amortization for the period | 17,794 | 61,322 | - | 239,819 | 318,935 | |||||||||||||||
| Balance - October 31, 2019 | $ | 19,701 | $ | 132,479 | $ | - | $ | 669,715 | $ | 821,895 | ||||||||||
| Amortization for the period | 65,195 | - | - | 597,912 | 663,107 | |||||||||||||||
| Balance - July 31, 2020 | $ | 84,896 | $ | 132,479 | $ | - | $ | 1,267,627 | $ | 1,485,002 | ||||||||||
| NET BOOK VALUE | ||||||||||||||||||||
| As at October 31, 2019 | $ | 36,259 | $ | 311,119 | $ | 476,783 | $ | 640,756 | $ | 1,464,917 | ||||||||||
| As at July 31, 2020 | $ | (30,409 | ) | $ | 540,697 | $ | 109,114 | $ | 673,264 | $ | 1,292,666 | |||||||||
For the nine month period ended July 31, 2020, $351,822 in amortization costs were included in cost of sales. As at July 31, 2020, $190,028 in amortization costs were included in biological assets, and $54,862 in amortization costs were included in inventory. Depreciation expense not capitalized left net depreciation expense of $103,535 on the statement of comprehensive loss for the nine months ended July 31, 2020.
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Grown Rogue International Inc.
Notes to the condensed interim consolidated financial statements
For the three and nine months ended July 31, 2020 and 2019
Unaudited & expressed in United States Dollars, unless otherwise indicated
12. Right-of-Use Assets
In connection with the adoption of IFRS 16 as disclosed in Note 4, the Company has recognized a right-of-use asset for its office premises with a corresponding lease liability (see Note 13) which are initially measured at the present value of the future lease payments. In accordance with IFRS 16, the Company then recognizes depreciation of right-of-use assets and interest expense on lease liabilities in the statements of income and comprehensive income.
| Land and Buildings | ||||
| Balance - October 31, 2019 | $ | - | ||
| Additions | 276,431 | |||
| Amortization for the period | (179,760 | ) | ||
| Balance - July 31, 2020 | $ | 96,671 | ||
One of these leases was transacted with a related party of the Company (Note 25.i). Amortization expense after capitalization was $70,152 for the nine months ended July 31, 2020 (nine months ended July 31, 2019 - $Nil).
13. Lease Liabilities
In connection with the adoption of IFRS 16 as disclosed in Note 4, the Company has recognized a right-of-use asset (see Note 12) for its office premises with a corresponding lease liability which are initially measured at the present value of the future lease payments. In accordance with IFRS 16, the Company then recognizes depreciation of right-of-use assets and interest expense on lease liabilities in the statements of income and comprehensive income.
The Company has entered into four leases for office and growing space. In order to calculate the present value of the future lease payments, the Company has used a discount rate of 20% which represents its current borrowing rate. Prior to the adoption of IFRS 16, these leases were accounted for as operating leases. Changes to the Company’s lease liabilities for the nine months ended July 31, 2020 are as follows:
| Land and Buildings | ||||
| Balance - October 31, 2019 | $ | - | ||
| Additions | 276,431 | |||
| Interest expense | 35,577 | |||
| Lease payment | (214,200 | ) | ||
| Balance - July 31, 2020 | $ | 97,808 | ||
One of these leases represents the liability associated with a right-of-use asset which was transacted with a related party of the Company (Note 25.i).
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Grown Rogue International Inc.
Notes to the condensed interim consolidated financial statements
For the three and nine months ended July 31, 2020 and 2019
Unaudited & expressed in United States Dollars, unless otherwise indicated
14. Long-term Debt
Transactions related to the Company’s unsecured promissory notes during the year ended October 31, 2019 and the period ended July 31, 2020, include the following:
| Face | Carrying | Interest | ||||||||||
| value | amount | payable | ||||||||||
| Balance - October 31, 2018 | $ | 50,000 | $ | 50,000 | $ | 10,444 | ||||||
| 60% - October 2, 2019 (i) | 50,000 | 50,000 | - | |||||||||
| 60% - October 17, 2019 (ii) | 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 | ||||||
| 60% - December 5, 2019 (iii) | 15,000 | 15,000 | - | |||||||||
| Interest expense on long-term debt | - | - | 24,431 | |||||||||
| Deferred financing costs | - | - | - | |||||||||
| Debt repayments | (151,000 | ) | (151,000 | ) | (23,466 | ) | ||||||
| Proceeds (iv) | 600,000 | 600,000 | - | |||||||||
| Debt repayments (iv) | (27,480 | ) | (27,480 | ) | - | |||||||
| Interest accretion | - | 214,474 | - | |||||||||
| Balance - July 31, 2020 | $ | 586,520 | $ | 800,994 | $ | 8,944 | ||||||
| Less: current portion | 315,139 | 315,139 | 8,944 | |||||||||
| Balance - July 31, 2020 non-current portion | $ | 271,381 | $ | 485,855 | $ | - | ||||||
| i. | 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. On December 5, 2019 an additional $15,000 was advanced under the same terms and conditions. On February 18, 2020 all outstanding principal and accrued interest of $13,274 (October 31, 2019 - $2,384) was repaid in full. This amount was owed to a director and officer of the Company. |
| ii. | 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. On February 18, 2020 all outstanding principal and accrued interest of $9,041 (October 31, 2019 - $1,151) was repaid in full. This amount was owed to a key member of management. |
| iii. | On December 5, 2019: Principal of $15,000 with simple interest accrued at a rate of 60% per annum and a maturity of 60 days. On February 18, 2020, all principal and interest was repaid. This amount was owed to a key member of management. |
| iv. | Debt issuance by GR Michigan, LLC |
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Grown Rogue International Inc.
Notes to the condensed interim consolidated financial statements
For the three and nine months ended July 31, 2020 and 2019
Unaudited & expressed in United States Dollars, unless otherwise indicated
On March 20, 2020: Principal of $600,000 was received under a secured debt investment of $600,000 (the “Michigan Debt “). The Michigan Debt carries a two-year term, with monthly payments of principal commencing June 15, 2020. Once the principal is repaid, each investor will receive a gross monthly royalty of 1% per $100,000 invested based on any cannabis business that is majority owned by GR Michigan, LLC (the “Royalty”). The Royalty has a term of two years with maximum amount of two times the amount of principal invested in the Debt Financing. The Company but not the obligation, to purchase the Royalty from any investor by paying the principal invested by such investor in the Debt Financing. The debt is reported at the carrying value of the probability-weighted estimated future cash at amortized cost using the effective interest method. During the nine months ended July 31, 2020, $27,480 was repaid against this debt.
Principal amounts of the Michigan Debt of $50,000 and $100,000 (a total of $150,000), were loaned by officers of the Company. Principal of $150,000, was loaned by a director of the Company; accordingly, a total of $300,000 of Michigan Debt principal was borrowed from related parties (Note 25.v).
15. Convertible Promissory Notes
Transactions related to GR Unlimited’s convertible promissory notes during the year ended October 31, 2019 and the nine month period ended July 31, 2020, 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 | ||||||
| Interest paid | - | - | (30,000 | ) | ||||||||
| Interest forgiven upon settlement | - | - | (10,000 | ) | ||||||||
| Balance - July 31, 2020 | $ | - | $ | - | $ | - | ||||||
During the period ended October 31, 2018, GR Unlimited issued the following unsecured convertible promissory notes:
| i. | 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. |
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Grown Rogue International Inc.
Notes to the condensed interim consolidated financial statements
For the three and nine months ended July 31, 2020 and 2019
Unaudited & expressed in United States Dollars, unless otherwise indicated
| 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. |
| c) | Should purchasers extend the Maturity Date by 6 months on all but not less than all of the 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 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 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) 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 nonassessable 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 nonassessable 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 |
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Grown Rogue International Inc.
Notes to the condensed interim consolidated financial statements
For the three and nine months ended July 31, 2020 and 2019
Unaudited & expressed in United States Dollars, unless otherwise indicated
| 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 |
| 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.
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Grown Rogue International Inc.
Notes to the condensed interim consolidated financial statements
For the three and nine months ended July 31, 2020 and 2019
Unaudited & expressed in United States Dollars, unless otherwise indicated
| ii. | 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 installments had been paid. |
| c) | A onetime additional interest payment equal to 5% of the unpaid principal balance payable concurrent with 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 onetime interest payment shall be prorated as at the date of the full or partial conversion. |
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 nonassessable 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 17.iv.
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Grown Rogue International Inc.
Notes to the condensed interim consolidated financial statements
For the three and nine months ended July 31, 2020 and 2019
Unaudited & expressed in United States Dollars, unless otherwise indicated
During the period ended October 31, 2017, GR Unlimited issued the following unsecured convertible promissory notes:
| iii. | 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 nonassessable 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 principal 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 17.iii. |
| iv. | 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 at Note 17.v. 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.
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Grown Rogue International Inc.
Notes to the condensed interim consolidated financial statements
For the three and nine months ended July 31, 2020 and 2019
Unaudited & expressed in United States Dollars, unless otherwise indicated
The fair value of the conversion option was estimated as $23,000 using the following inputs, assumptions and estimates:
| o | Risk-free interest rate | 1.36% | |
| o | Expected life | 0.75 years | |
| o | Expected volatility | 70% | |
| o | Share price | $612 | |
| o | 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.
| v. | 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:
| o | Risk-free interest rate | 1.27% | |
| o | Expected life | 0.47 years | |
| o | Expected volatility | 70% | |
| o | Share price | $612 | |
| o | Conversion price at time of conversion | $612 |
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Grown Rogue International Inc.
Notes to the condensed interim consolidated financial statements
For the three and nine months ended July 31, 2020 and 2019
Unaudited & expressed in United States Dollars, unless otherwise indicated
16. Convertible Debentures
Transactions related to the Company’s convertible debentures during the year ended October 31, 2019 and the nine month period end July 31, 2020, include the following:
| Face | Carrying | Interest | ||||||||||
| value | amount | payable | ||||||||||
| Balance - October 31, 2018 | $ | 1,029,314 | $ | 931,099 | $ | 7,758 | ||||||
| Issued during the year | 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 | ||||||
| Interest accretion through July 10, 2020 | - | 153,837 | - | |||||||||
| Conversion to common shares (i) | (37,733 | ) | (37,733 | ) | - | |||||||
| Effects of foreign exchange | 30,520 | 30,520 | ||||||||||
| Deemed extinguishment (i) | (2,171,843 | ) | (2,142,233 | ) | - | |||||||
| Balance after deemed extinguishment | $ | - | $ | - | $ | 7,850 | ||||||
| Deemed re-issuance (i) | 2,182,897 | 2,182,897 | - | |||||||||
| Fair value of derivative liability | - | (697,381 | ) | - | ||||||||
| Interest accretion | - | 44,817 | - | |||||||||
| Interest expense | - | - | 133,506 | |||||||||
| Interest payments | - | - | (127,199 | ) | ||||||||
| Effects of foreign exchange | - | 554 | - | |||||||||
| Balance - July 31, 2020 | $ | 2,182,897 | $ | 1,530,887 | $ | 14,157 | ||||||
| i. | Modification of terms during the nine months ended July 31, 2020 and conversion |
During the nine months ended July 31, 2020, $37,733 (CAD$50,000) of principal was converted into 238,095 common shares.
During the nine months ended July 31, 2020, the Company extended the maturity of all convertible notes outstanding, such that the following terms apply to all convertible notes outstanding as at July 31, 2020.
| o | Principal loan amount of CAD$2,950,000 ($2,182,897 at July 10, 2020), due on November 1, 2021; |
| o | Interest payable at 8% per annum; |
| o | Convertible at CAD$0.125 into shares of the Company; |
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Grown Rogue International Inc.
Notes to the condensed interim consolidated financial statements
For the three and nine months ended July 31, 2020 and 2019
Unaudited & expressed in United States Dollars, unless otherwise indicated
| o | If at any time while the debentures were outstanding, the Company issued securities at a price per security lower than CAD$0.125 per share, the conversion price for any unconverted portion of the convertible debentures would be reduced to such lower price per security; and |
| o | Convertible at CAD$0.05 if the Company defaults on debt service. |
Pursuant to the modification of the debentures, the following warrant transactions occurred:
| o | Cancellation of 6,818,182 warrants issued pursuant to the convertible debenture agreements outstanding prior to the modification on July 10, 2020; |
| o | Issuance of 6,818,182 new warrants with as exercise price of CAD$0.16 and an expiration date of November 1, 2021 (Note 19.iii); |
| o | The incremental fair value between the July 10, 2020, fair value of cancelled warrants and the July 10, 2020 newly issued warrants was recognized as an expense of debt restructuring on the statement of comprehensive loss for the nine months ended July 31, 2020; |
| o | Issuance of 1,590,909 warrants as part of the consideration to the creditors for extending the maturity of the debt (Note 19.iii). The fair value of these warrants was recognized as an expense of debt restructuring on the statement of comprehensive loss for the nine months ended July 31, 2020. |
As described above, the conversion price of the debenture is subject to change based upon whether a lower-than-CAD$0.125 private placement of equity is completed. This conversion feature was determined to be a derivative liability in accordance with IFRS 9; a key factor for this determination was that the conversion feature may be settled by other than the exchange of a fixed number of shares of the Company. The value of the derivative liability as at July 31, 2020 was estimated to be $697,381, using the Black-Scholes pricing model with the following assumptions:
| o | Expected dividend yield | Nil | |
| o | Risk-free interest rate | 0.24% | |
| o | Expected life | 1.3 months | |
| o | Expected volatility | 90% |
The derivative liability will be remeasured at fair value through profit and loss at each reporting period using the Black-Scholes pricing model. The derivative liability reported under the convertible debentures prior to the modification has been derecognized and reported as a gain in the statement of comprehensive loss for the nine months ended July 31, 2020.
The discounted value of the loan after the modifications of terms was more than 10% lower than the carrying value of the loan and was therefore deemed an extinguishment and reissuance under IFRS 9. The costs of completing the modification included the estimated fair value of warrants issued, which were expensed as part of the loss incurred upon deemed debt extinguishment and re-issuance.
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Grown Rogue International Inc.
Notes to the condensed interim consolidated financial statements
For the three and nine months ended July 31, 2020 and 2019
Unaudited & expressed in United States Dollars, unless otherwise indicated
The loss of restructuring this debt, as recognized on the statement of comprehensive loss for the nine months ended July 31, 2020, was comprised of the following:
| Composition of loss from debt restructuring | ||||
| Difference: carrying value of deemed prior debt and deemed reissued debt | $ | 40,167 | ||
| Replacement warrants - quantity 6,818,182 (Note 19.xii) | 342,200 | |||
| Consideration warrants - quantity 1,590,909 (Note 19.xii) | 79,846 | |||
| Total loss from deemed restructuring | $ | 462,213 | ||
The modification of terms also resulted in the derecognition of the Company’s previously outstanding derivative liability; a reduction to net loss of $244,572.
| ii. | Convertible debentures issued during the year ended October 31, 2019 |
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 were scheduled to mature on August 10, 2020; the maturity date was extended to November 1, 2021 by a agreements dated July 10, 2020. The debentures were secured by a general security agreement granting a security interest in the Company’s property and assets. The debentures could 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 were outstanding, the Company issued securities at a price per security lower than CAD$0.44 per share, the conversion price for any unconverted portion of the convertible debentures would be reduced to such lower price per security. If within 90 days of the issuance of the convertible debentures, the Company failed to complete a Qualified Financing of not less than CAD$1,000,000, the conversion price of the convertible debentures would be adjusted to CAD$0.30. If any common shares of the company were issued or sold for a price less than $0.44 per common share the conversion price would be adjusted downward to the price of such issuance. The adjustment to the conversion price was 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 19.ix. Of the total debt issuance costs of $47,975, $10,165 was allocated to the derivative liability and included as expenses in the statement of loss and comprehensive loss.
GR Unlimited allocated the proceeds from the issuance of the convertible debentures as follows:
| Convertible debentures, principal | $ | 872,202 | ||
| Conversion option | 232,925 | |||
| $ | 1,105,127 |
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Grown Rogue International Inc.
Notes to the condensed interim consolidated financial statements
For the three and nine months ended July 31, 2020 and 2019
Unaudited & expressed in United States Dollars, unless otherwise indicated
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).
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.
| iii. | Convertible debentures issued during the year ended October 31, 2018 |
During the year 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 Unit. In the event of a default, the Conversion Price shall be reduced to CAD$0.05 per Unit. In connection with the issuance of the convertible debentures, GR Unlimited incurred issuance costs of $111,746.
GR Unlimited 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.
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Grown Rogue International Inc.
Notes to the condensed interim consolidated financial statements
For the three and nine months ended July 31, 2020 and 2019
Unaudited & expressed in United States Dollars, unless otherwise indicated
17. 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 common unit activities of GR Unlimited during the year ended October 31, 2019, all of which occurred prior to completion of the Transaction:
| Number of | ||||||||
| Common Shares* | Member’s Capital | |||||||
| Balance, October 31, 2018 | 40,706,873 | $ | 4,701,773 | |||||
| Issued pursuant to conversion of promissory notes | 5,465,877 | 1,451,400 | ||||||
| Issued in connection with Technology License Agreement (ii) | 6,600,000 | 1,574,761 | ||||||
| Issued upon exercise of unit purchase options | 4,202,429 | 1,218,784 | ||||||
| Issued pursuant to Subscription Receipts | 3,771,023 | 913,968 | ||||||
| Balance, October 31, 2019 and July 31, 2020 | 60,746,202 | $ | 9,860,686 | |||||
| * | 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. | Effective January 31, 2018, the holder of two convertible promissory notes in the original principal amount of $100,000 took the following actions: |
| a) | Received a return of principal of $50,000 from one of the convertible promissory notes. |
| b) | 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 |
| c) | 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). |
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Grown Rogue International Inc.
Notes to the condensed interim consolidated financial statements
For the three and nine months ended July 31, 2020 and 2019
Unaudited & expressed in United States Dollars, unless otherwise indicated
| ii. | 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 commercialising 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. |
| iii. | 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). |
| iv. | 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). |
| v. | 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). |
| vi. | Immediately prior to the Transaction disclosed in Note 2, GR Unlimited issued 1,475,979 common units (1,475,979 common shares of the Company) pursuant to the exercise of the unit purchase option disclosed in Note 21.ii. |
| vii. | 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 21.iii. |
| viii. | 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 21.i. |
| ix. | 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). |
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Grown Rogue International Inc.
Notes to the condensed interim consolidated financial statements
For the three and nine months ended July 31, 2020 and 2019
Unaudited & expressed in United States Dollars, unless otherwise indicated
18. 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 nine months ended July 31, 2020, the following share transactions occurred:
| i. | The Company issued 15,000,000 common shares to Cannabis Growth Opportunity Corporation (“CGOC”) with an aggregate fair value of $733,434 pursuant to a private placement agreement with CGOC. |
In addition, CGOC and the Company entered into subscriptions agreements to exchange each other’s shares (the “Share Swap”). In connection with the Share-Swap agreement, the Company issued 15,000,000 common shares resulting in an aggregate fair value of $1,121,848. Issuance costs of $11,508 were recognized in share capital and $5,083 in contributed surplus.
As part of the Share Swap, each of CGOC and Grown Rogue have signed a voting and resale agreement providing that each party will be required to vote the shares acquired under the Share Swap as recommended by the other party and will be restricted from trading the shares for a period of 18 months.
The private placement agreement with CGOC gives CGOC the pre-emptive right to participate in future offerings of the Company to maintain its ownership share of the Company. In addition, the Company has agreed to nominate one board member of the Company as recommended by CGOC at future shareholder meetings and the ability, if CGOC does not have its nominee on Grown Rogue’s board of directors, to appoint a board observer.
| ii. | Issuance of 200,000 common shares, with an estimated fair value of $12,812, issued to the owner of GH (Note 8.i). |
| iii. | As consideration for notes payable, 353,095 common shares issued with estimated fair value of $47,479. Of the 353,09 shares, 238,095 represented convertible debt principal converted into common shares with a value of $37,733 (CAD$50,000, see Note 16.i) and 115,000 shares, with a value of $9,746, represented consideration for long-term debt. |
| iv. | As consideration for services provided, the Company issued 2,300,000 common shares with an estimated fair value of $163,543. |
| v. | As employee compensation, the Company issued 684,386 shares to employees with an estimated fair value of $55,106. |
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Grown Rogue International Inc.
Notes to the condensed interim consolidated financial statements
For the three and nine months ended July 31, 2020 and 2019
Unaudited & expressed in United States Dollars, unless otherwise indicated
During the year ended October 31, 2019, the following share transactions occurred:
| vi. | 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. |
| vii. | 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. |
| viii. | 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. |
| ix. | 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. |
Pg 31 of 50
Grown Rogue International Inc.
Notes to the condensed interim consolidated financial statements
For the three and nine months ended July 31, 2020 and 2019
Unaudited & expressed in United States Dollars, unless otherwise indicated
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:
| o | Expected dividend yield | Nil | |
| o | Risk-free interest rate | 1.690% | |
| o | Expected life | 2.0 months | |
| o | 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.
| x. | 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 be $33,328. |
| xi. | 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. |
| xii. | 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. |
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Grown Rogue International Inc.
Notes to the condensed interim consolidated financial statements
For the three and nine months ended July 31, 2020 and 2019
Unaudited & expressed in United States Dollars, unless otherwise indicated
19. Warrants
The following table summarizes the warrant activities for the nine months ended July 31, 2020 and year ended October 31, 2019:
| Weighted Average | ||||||||
| Number | Exercise 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 (viii) | 3,409,091 | 0.55 | ||||||
| Issued to brokers (v) | 757,125 | 0.44 | ||||||
| Issued to terminate purchase agreement (ix) | 2,148,117 | 0.44 | ||||||
| Expired | (131,539 | ) | (6.52 | ) | ||||
| Balance - October 31, 2019 | 27,584,605 | $ | 0.53 | |||||
| Issued pursuant to private placement (Note 18i) (x) | 5,000,000 | 0.13 | ||||||
| Issued pursuant to private placement (Note 18i) (xi) | 10,000,000 | 0.13 | ||||||
| Expired | (17,183 | ) | (14.05 | ) | ||||
| Cancellation of prior warrants associated with convertible debt (Note 16) | (6,818,182 | ) | 0.55 | |||||
| Issuance of new warrants associated with convertible debt (Note 16) (xii) | 6,818,182 | 0.16 | ||||||
| Consideration warrants for convertible debt maturity extension (Note 16) (xii) | 1,590,909 | 0.16 | ||||||
| Balance - July 31, 2020 | 44,158,331 | $ | 0.33 | |||||
During the nine months ended July 31, 2020, the Company:
| i. | Issued 5,000,000 warrants in February 2020 to subscribers of the offering disclosed in Note 18.i. Each warrant entitles the holder to acquire one common share of the Company at an exercise price of CAD$0.125 per unit for a period of 24 months. |
The fair value of the warrants of $106,575 was estimated at the grant date based on the Black-Scholes pricing model, using the following assumptions:
| o | Expected dividend yield | Nil | |
| o | Risk-free interest rate | 1.630% | |
| o | Expected life | 2.0 years | |
| o | Expected volatility | 101%* |
| * | Based on the volatility of comparable publicly traded companies |
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Grown Rogue International Inc.
Notes to the condensed interim consolidated financial statements
For the three and nine months ended July 31, 2020 and 2019
Unaudited & expressed in United States Dollars, unless otherwise indicated
| ii. | Issued 10,000,000 warrants in May 2020 to subscribers of the offering disclosed in Note 18.i. Each warrant entitles the holder to acquire one common share of the Company at an exercise price of CAD$0.13 per unit for a period of 24 months. |
The fair value of the warrants of $244,326 was estimated at the grant date based on the Black-Scholes pricing model, using the following assumptions:
| o | Expected dividend yield | Nil | |
| o | Risk-free interest rate | 1.630% | |
| o | Expected life | 2.0 years | |
| o | Expected volatility | 131% |
| iii. | Issued 6,818,182 warrants and also 1,590,909 warrants (totaling 8,409,091) to the creditors of the July 10, 2020 debt agreement described at Note 16.i. Each warrant entitles the holder to acquire one common share of the Company at an exercise price of CAD$0.16 with an expiration date of November 1, 2020. |
The fair value of the warrants of $424,645 was estimated at the grant date based on the Black-Scholes pricing model, using the following assumptions:
| o | Expected dividend yield | Nil | |
| o | Risk-free interest rate | 0.30% | |
| o | Expected life | 1.3 years | |
| o | Expected volatility | 131% |
During the year ended October 31, 2019, the Company:
| iv. | Issued 839,790 warrants in exchange for the same amount of Novicius Subco Warrants as disclosed in Note 18.viii. 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 $73,237 was estimated at the grant date based on the Black-Scholes pricing model, using the following assumptions:
| o | Expected dividend yield | Nil | |
| o | Risk-free interest rate | 1.690% | |
| o | Expected life | 2.0 months | |
| o | Expected volatility | 100%* |
| * | Based on the volatility of comparable publicly traded companies |
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Grown Rogue International Inc.
Notes to the condensed interim consolidated financial statements
For the three and nine months ended July 31, 2020 and 2019
Unaudited & expressed in United States Dollars, unless otherwise indicated
| v. | Issued 1,675,979 warrants in exchange for the same amount of GR Unlimited warrants disclosed in Note 21.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 estimated at the grant date based on the Black-Scholes pricing model, using the following assumptions:
| o | Expected dividend yield | Nil | |
| o | Risk-free interest rate | 1.690% | |
| o | Expected life | 2.0 months | |
| o | Expected volatility | 100%* |
| * | Based on the volatility of comparable publicly traded companies |
| vi. | Issued 3,771,023 warrants in exchange for the same amount of GR Unlimited warrants disclosed in Note 17.ix. 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:
| o | Expected dividend yield | Nil | |
| o | Risk-free interest rate | 1.690% | |
| o | Expected life | 2.0 months | |
| o | Expected volatility | 100%* |
| * | Based on the volatility of comparable publicly traded companies |
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Grown Rogue International Inc.
Notes to the condensed interim consolidated financial statements
For the three and nine months ended July 31, 2020 and 2019
Unaudited & expressed in United States Dollars, unless otherwise indicated
| vii. | Issued 6,193,917 warrants in exchange for the same amount of Grown Rogue Canada warrants disclosed in Note 18.ix. 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:
| o | Expected dividend yield | Nil | |
| o | Risk-free interest rate | 1.690% | |
| o | Expected life | 2.0 months | |
| o | Expected volatility | 100%* |
| * | Based on the volatility of comparable publicly traded companies |
| viii. | Issued 757,125 broker warrants in exchange for the same amount of Grown Rogue Canada broker warrants disclosed in Note 18.ix. 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 $119,864 was estimated at the grant date based on the Black-Scholes pricing model, using the following assumptions:
| o | Expected dividend yield | Nil | |
| o | Risk-free interest rate | 1.690% | |
| o | Expected life | 2.0 months | |
| o | Expected volatility | 100%* |
| * | Based on the volatility of comparable publicly traded companies |
| ix. | 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 16. 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 estimated at the grant date based on the Black-Scholes pricing model, using the following assumptions:
| o | Expected dividend yield | Nil | |
| o | Risk-free interest rate | 1.690% | |
| o | Expected life | 2.0 months | |
| o | Expected volatility | 100%* |
| * | Based on the volatility of comparable publicly traded companies |
| x. | 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:
| o | Expected dividend yield | Nil | |
| o | Risk-free interest rate | 1.690% | |
| o | Expected life | 2.0 months | |
| o | Expected volatility | 100%* |
| * | Based on the volatility of comparable publicly traded companies |
Pg 36 of 50
Grown Rogue International Inc.
Notes to the condensed interim consolidated financial statements
For the three and nine months ended July 31, 2020 and 2019
Unaudited & expressed in United States Dollars, unless otherwise indicated
| xi. | Issued 3,409,091 warrants to subscribers of the convertible debenture offering disclosed in Note 16. Each warrant entitled 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:
| o | Expected dividend yield | Nil | |
| o | Risk-free interest rate | 1.710% | |
| o | Expected life | 2.0 years | |
| o | Expected volatility | 101%* |
| * | Based on the volatility of comparable publicly traded companies |
| xii. | Issued 2,148,117 warrants to finalize a termination agreement (Note 30). 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, and the remaining 1,288,870 vest upon future activities. |
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:
| o | Expected dividend yield | Nil | |
| o | Risk-free interest rate | 1.640% | |
| o | Expected life | 4.0 years | |
| o | 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 July 31, 2020, the following warrants were issued and outstanding:
| Exercise price | Warrants outstanding | Remaining contractual Life (years) | Expiry date | |||||||||
| $ | 0.55 | 17,843,998 | 0.3 | November 30, 2020 | ||||||||
| 0.44 | 757,125 | 0.3 | November 30, 2020 | |||||||||
| 0.16 | 8,409,091 | 1.3 | November 01, 2021 | |||||||||
| 0.13 | 5,000,000 | 1.5 | February 10, 2022 | |||||||||
| 0.13 | 10,000,000 | 1.8 | May 15, 2022 | |||||||||
| 0.44 | 2,148,117 | 2.9 | June 28, 2023 | |||||||||
| $ | 0.33 | 44,158,331 | 1.1 | |||||||||
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Grown Rogue International Inc.
Notes to the condensed interim consolidated financial statements
For the three and nine months ended July 31, 2020 and 2019
Unaudited & expressed in United States Dollars, unless otherwise indicated
20. Subscriptions Payable
| 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 17.ix. 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 and July 31, 2020, these shares had not been issued. |
21. 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:
| o | Expected dividend yield | Nil% | |
| o | Risk-free interest rate | 1.690% | |
| o | Expected life | 5.5 months | |
| o | Expected volatility | 99%* |
| * | Based on the volatility of comparable publicly traded companies |
Pg 38 of 50
Grown Rogue International Inc.
Notes to the condensed interim consolidated financial statements
For the three and nine months ended July 31, 2020 and 2019
Unaudited & expressed in United States Dollars, unless otherwise indicated
| 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 and units and warrants pursuant to the exercise of the option. |
| 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 three month period ended January 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:
| o | Expected dividend yield | Nil% | |
| o | Risk-free interest rate | 1.690% | |
| o | Expected life | 2.0 months | |
| o | Expected volatility | 100%* |
| * | Based on the volatility of comparable publicly traded companies |
Pg 39 of 50
Grown Rogue International Inc.
Notes to the condensed interim consolidated financial statements
For the three and nine months ended July 31, 2020 and 2019
Unaudited & expressed in United States Dollars, unless otherwise indicated
22. Stock Options
| i. | During the year 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:
| o | Expected dividend yield | Nil% | |
| o | Risk-free interest rate | 1.710% | |
| o | Expected life | 3.0 years | |
| o | Expected volatility | 100%* |
| * | Based on the volatility of comparable publicly traded companies |
| ii. | During the year 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:
| o | Expected dividend yield | Nil% | |
| o | Risk-free interest rate | 1.710% | |
| o | Expected life | 3.0 years | |
| o | Expected volatility | 100%* |
| * | Based on the volatility of comparable publicly traded companies |
| iii. | During the nine months ended July 31, 2020, the Company granted options to purchase 3,475,000 common shares of the Company to employees. Each option allows the holder to purchase one common share of the Company at a price of CAD$0.15 at any time until July 9, 20204. |
The fair value of the options of $178,239 was estimated at the grant date based on the Black-Scholes pricing model, using the following assumptions:
| o | Expected dividend yield | Nil% | |
| o | Risk-free interest rate | 0.25% | |
| o | Expected life | 4.0 years | |
| o | Expected volatility | 131% |
Pg 40 of 50
Grown Rogue International Inc.
Notes to the condensed interim consolidated financial statements
For the three and nine months ended July 31, 2020 and 2019
Unaudited & expressed in United States Dollars, unless otherwise indicated
| iv. | During the nine months ended July 31, 2020, the Company granted options to purchase 100,000 common shares of the Company to employees. Each option allows the holder to purchase one common share of the Company at a price of CAD$0.15 at any time until July 9, 20204. |
The fair value of the options of $5,129 was estimated at the grant date based on the Black-Scholes pricing model, using the following assumptions:
| o | Expected dividend yield | Nil% | |
| o | Risk-free interest rate | 0.625% | |
| o | Expected life | 10.0 years | |
| o | Expected volatility | 183% |
As at July 31, 2020 the following Stock Options were issued and outstanding (all prices are in Canadian Dollars unless otherwise noted):
| Exercise price | Options outstanding | Remaining Contractual Life (years) | Expiry date | |||||||
| $ | 0.44 | 500,000 | 1.4 | January 01, 2022 | ||||||
| 0.44 | 150,000 | 1.3 | November 30, 2021 | |||||||
| 0.15 | 3,475,000 | 3.9 | July 09, 2024 | |||||||
| 0.15 | 100,000 | 10.0 | July 20, 2030 | |||||||
| $ | 0.19 | 4,225,000 | 3.7 | |||||||
23. Changes in Non-Cash Working Capital
The changes to the Company’s non-cash working capital for the nine month period ended July 31, 2020 and 2019 are as follows:
| 2020 | 2019 | |||||||
| Accounts receivable | $ | (112,744 | ) | $ | 92,972 | |||
| Other receivable | (22,049 | ) | (15,824 | ) | ||||
| Inventory | 735,105 | 1,373,920 | ||||||
| Prepaid expenses and other assets | 64,180 | 198,325 | ||||||
| Accounts payable and accrued liabilities | (176,430 | ) | (991,497 | ) | ||||
| Interest payable | (32,728 | ) | (110,751 | ) | ||||
| Unearned revenue | (35,000 | ) | - | |||||
| Deferred rent | (4,815 | ) | (5,437 | ) | ||||
| $ | 415,519 | $ | 541,708 | |||||
Pg 41 of 50
Grown Rogue International Inc.
Notes to the condensed interim consolidated financial statements
For the three and nine months ended July 31, 2020 and 2019
Unaudited & expressed in United States Dollars, unless otherwise indicated
24. Supplemental Cash Flow Disclosure
| Nine
months ended July 31, | ||||||||
| 2020 | 2019 | |||||||
| Interest paid | $ | 157,199 | $ | 218,206 | ||||
| Fair value of common shares and units issued for services | 218,649 | 284,389 | ||||||
| Fair value of common shares issued as settlement of debt | - | 80,000 | ||||||
| Property and equipment acquired through finance leases (Note 10) | 68,035 | 62,516 | ||||||
| Conversion of notes payable to common units | 37,733 | 1,063,360 | ||||||
25. Related Party Transactions
During the nine month period ended July 31, 2020, 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 $57,500 was incurred for the period ended July 31, 2020 (2019 - $42,500). The Company had $64,000 (October 31, 2019 - $63,000) owing in accounts payable and accrued liabilities at July 31, 2020. This lease is included in the items described in Notes 12 and 13. |
| ii. | The Company incurred employee/director fees of $48,500 (2019 - $36,000) with an individual related to the Company’s President and CEO. At July 31, 2020, accounts and accrued liabilities payable to this individual were $2,153 (October 31, 2019, $Nil). |
| iii. | The Company incurred fees related to marketing and promotion services of $Nil (2019 - $138,674) from two companies owned by the Company’s former Chief Strategy Officer (“CSO”). At July 31, 2020, accounts payable and accrued liabilities were $Nil (October 31, 2019 - $6,000) payable to these companies. |
| iv. | Key management personnel consists of the President and CEO; the former CSO; the CFO of GR Unlimited; the Chief Marketing Officer; and the Chief Accounting Officer. The compensation paid or payable to key management for services for the nine month periods ended July 31, 2020 and 2019 was as follows: |
| 2020 | 2019 | |||||||
| Salaries and consulting fees | $ | 359,000 | $ | 425,412 | ||||
| Share-based compensation | 46,000 | 33,083 | ||||||
| Stock option expense | 78,028 | - | ||||||
| Total | $ | 483,028 | $ | 458,495 | ||||
Liabilities due to key management at July 31, 2020 totaled $230,112 (October 31, 2019 - $90,000).
Pg 42 of 50
Grown Rogue International Inc.
Notes to the condensed interim consolidated financial statements
For the three and nine months ended July 31, 2020 and 2019
Unaudited & expressed in United States Dollars, unless otherwise indicated
| v. | Additional related party transactions include debt for which officers are creditors of the Company: $150,000 in principal for the Michigan Debt (Note 14.iv); and unsecured debt which was repaid as at July 31, 2020 (Notes 14.i, 14.ii, and 15). A director loaned $150,000 in principal for the Michigan Debt (Note 14.iv), such that $300,000 total principal of the Michigan Debt was loaned by officers and directors. |
As described in Note 32, officers and directors of the Company own 9% of GR Michigan, LLC.
These related party transactions are in the normal course of operations and are measured at the exchange amounts being the amounts agreed to by the parties.
26. Financial Instruments
Market Risk (including interest rate risk and currency risk)
Market risk is the risk that the fair value or cash flows of a financial instrument will fluctuate due to changes in market prices. Market risk reflects interest rate risk, currency risk and other price risks.
Interest Rate Risk
At July 31, 2020 and October 31, 2019, 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.
Currency Risk
As at July 31, 2020, the Company had accounts payable and accrued liabilities of CAD$311,641 and convertible debentures of CAD$2,950,000. 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.
Credit Risk
Credit risk is the risk that one party to a financial instrument will cause a loss for the other party by failing to pay for its obligation.
Credit risk to the Company is derived from cash and trade accounts receivable. The Company places its cash in deposit with United States financial institutions. The Company has established a policy to mitigate the risk of loss related to granting customer credit by primarily selling on a cash-on-delivery basis.
Pg 43 of 50
Grown Rogue International Inc.
Notes to the condensed interim consolidated financial statements
For the three and nine months ended July 31, 2020 and 2019
Unaudited & expressed in United States Dollars, unless otherwise indicated
The carrying amount of cash and trade accounts receivable represents the Company’s maximum exposure to credit risk; the balances of these accounts are summarized in the following table:
| Balance at | July 31, 2020 | October 31, 2019 | ||||||
| Cash and Cash equivalents | $ | 591,352 | $ | 74,926 | ||||
| Accounts receivable | 211,932 | 99,188 | ||||||
| Total | $ | 803,284 | $ | 174,114 | ||||
The allowance for doubtful accounts at July 31, 2020 is $14,742 (October 31, 2019 - $129,131).
As at July 31, 2020 and October 31, 2019, the Company’s trade accounts receivable were aged as follows:
| July 31, 2020 | October 31, 2019 | |||||||
| Current | $ | 127,449 | $ | 51,672 | ||||
| 1-30 days | 87,403 | 500 | ||||||
| 31 days-older | 11,822 | 176,147 | ||||||
| Allowance for doubtful accounts | (14,742 | ) | (129,131 | ) | ||||
| Total | $ | 211,932 | $ | 99,188 | ||||
The change in the provision for expected credit losses is as follows:
| Nine months ended July 31, 2020 | Year ended October 31, 2019 | |||||||
| Balance, beginning of period | $ | 129,131 | $ | 106,443 | ||||
| Additional allowance | 10,159 | 121,793 | ||||||
| Amounts collected | (6,757 | ) | (66,902 | ) | ||||
| Amounts used | (117,791 | ) | (32,203 | ) | ||||
| Balance, end of period | $ | 14,742 | $ | 129,131 | ||||
Liquidity Risk
Liquidity risk is the risk that an entity will have difficulties in paying its financial liabilities.
The Company’s approach to managing liquidity risk is to ensure that it will have sufficient liquidity to meet liabilities when they become due. At July 31, 2020, the Company’s working capital accounts were as follows:
| July 31, 2020 | October 31, 2019 | |||||||
| Cash | $ | 591,352 | $ | 74,926 | ||||
| Current assets excluding cash | 1,316,131 | 1,358,036 | ||||||
| Total current assets | 1,907,483 | 1,432,962 | ||||||
| Current liabilities | 2,228,979 | 4,142,489 | ||||||
| Working capital (deficit) | $ | (321,496 | ) | $ | (2,709,527 | ) | ||
Pg 44 of 50
Grown Rogue International Inc.
Notes to the condensed interim consolidated financial statements
For the three and nine months ended July 31, 2020 and 2019
Unaudited & expressed in United States Dollars, unless otherwise indicated
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 | $ | 1,022,642 | $ | 414,816 | ||||
| Finance lease payable | 72,908 | 25,930 | ||||||
| Debt service | 315,139 | 2,016,742 | ||||||
| Unearned revenue | - | - | ||||||
| Current portion of lease liabilities | 97,808 | - | ||||||
| Interest payable | 23,101 | - | ||||||
| Derivative liabilities | 697,381 | - | ||||||
| Deferred rent | - | 19,690 | ||||||
| Total | $ | 2,228,979 | $ | 2,477,178 | ||||
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.
Fair Value Hierarchy
A number of the Company’s accounting policies and disclosures require the measurement of fair valued for both financial and nonfinancial assets and liabilities. The Company has an established framework, which includes team members who have overall responsibility for overseeing all significant fair value measurements, including Level 3 fair values. When measuring the fair value of an asset or liability, the Company uses observable market data as far as possible. The Company regularly assesses significant unobservable inputs and valuation adjustments. Fair values are categorized into different levels in a fair value hierarchy based on the inputs used in the valuation techniques as follows:
| ● | Level 1: unadjusted quoted prices in active markets for identical assets or liabilities; |
| ● | Level 2: inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly; or |
| ● | Level 3: inputs for the asset or liability that are not based on observable market data (unobservable inputs). |
Pg 45 of 50
Grown Rogue International Inc.
Notes to the condensed interim consolidated financial statements
For the three and nine months ended July 31, 2020 and 2019
Unaudited & expressed in United States Dollars, unless otherwise indicated
The carrying values of the financial instruments at July 31, 2020 are summarized in the following table:
| Amortized Cost | FVTPL | Total | ||||||||||
| Financial Assets | ||||||||||||
| Cash and Cash equivalents | $ | 591,352 | - | $ | 591,352 | |||||||
| Accounts receivable | 211,932 | - | 107,801 | |||||||||
| Other receivable | 57,284 | - | 68,746 | |||||||||
| Financial Liabilities | ||||||||||||
| Accounts payable and accrued liabilities | $ | 1,022,642 | $ | - | $ | 1,327,750 | ||||||
| Finance lease payable | 72,908 | - | 95,087 | |||||||||
| Convertible debentures | - | - | 2,106,532 | |||||||||
| Short-term debt | 315,139 | - | 50,000 | |||||||||
| Long-term debt | 485,855 | - | 585,191 | |||||||||
| Interest payable | 23,101 | - | 54,944 | |||||||||
| Lease liabilities | 97,808 | - | 162,154 | |||||||||
| Derivative liabilities | - | 697,381 | 242,599 | |||||||||
During the nine month period ended July 31, 2020 there were no transfers of amounts between levels.
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Grown Rogue International Inc.
Notes to the condensed interim consolidated financial statements
For the three and nine months ended July 31, 2020 and 2019
Unaudited & expressed in United States Dollars, unless otherwise indicated
27. General and Administrative Expenses
General and administrative expenses for the periods ended July 31, 2020 and 2019 are as follows:
| Three Months Ended | Nine Months Ended | |||||||||||||||
| July 31, | July 31, | |||||||||||||||
| 2020 | 2019 | 2020 | 2019 | |||||||||||||
| Bad debt | $ | (23,226 | ) | $ | 105,285 | $ | 10,159 | $ | 141,276 | |||||||
| Bank fees | 8,882 | 25,768 | 21,499 | 36,274 | ||||||||||||
| Business license and fees | 567 | 14,747 | 4,085 | 45,731 | ||||||||||||
| Compliance costs | 5,154 | - | 19,169 | - | ||||||||||||
| Dues & subscriptions | 8,852 | 25,208 | ||||||||||||||
| Facility expense | - | 181,518 | - | 359,649 | ||||||||||||
| Foreign exchange | (5,636 | ) | - | (19,056 | ) | - | ||||||||||
| Income tax expense | - | 1,068 | - | |||||||||||||
| Insurance | 4,190 | 3,351 | 14,107 | 9,414 | ||||||||||||
| Investor relations | 57,543 | 42,916 | 83,849 | 116,574 | ||||||||||||
| Legal and professional | 75,553 | 507,961 | 417,124 | 1,210,918 | ||||||||||||
| Marketing and promotion | 19,177 | 5,008 | 38,492 | 166,596 | ||||||||||||
| Miscellaneous | (805 | ) | 1,481 | 83 | 14,376 | |||||||||||
| Office expense | 1,983 | 48,777 | 5,314 | 74,513 | ||||||||||||
| Property tax | (751 | ) | - | 7,707 | - | |||||||||||
| Repairs and maintenance | 914 | 219 | 8,371 | 18,804 | ||||||||||||
| Research and development | 150 | - | 1,675 | - | ||||||||||||
| Salaries and benefits | 383,282 | 461,501 | 1,089,767 | 1,412,952 | ||||||||||||
| Supplies | - | 13,498 | - | 26,492 | ||||||||||||
| Transfer agent fees | - | - | 10,175 | - | ||||||||||||
| Travel | 13,266 | 47,339 | 47,444 | 161,500 | ||||||||||||
| Utilities | 255 | 17,952 | 28,079 | 33,926 | ||||||||||||
| Total | $ | 549,350 | $ | 1,477,321 | $ | 1,814,319 | $ | 3,828,995 | ||||||||
28. Capital Disclosures
The Company includes equity, comprised of share capital, contributed surplus (including the fair value of equity instruments to be issued), equity component of convertible promissory notes and deficit, in the definition of capital.
The Company’s objectives when managing capital are as follows:
| ● | to safeguard the Company’s assets and ensure the Company’s ability to continue as a going concern; |
| ● | to raise sufficient capital to finance the construction of its production facility and obtain license to produce recreational marijuana; and |
| ● | to raise sufficient capital to meet its general and administrative expenditures. |
Pg 47 of 50
Grown Rogue International Inc.
Notes to the condensed interim consolidated financial statements
For the three and nine months ended July 31, 2020 and 2019
Unaudited & expressed in United States Dollars, unless otherwise indicated
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.
29. 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 | $ | 89,112 | ||
| 2021 | 114,010 | |||
| 2022 | 17,525 | |||
| b) | During the year ended October 31, 2019, the Company entered into a letter of intent (the “Terminated Michigan Agreement”) with another party whose assets included the local approval for one retail dispensary in the state of Michigan and a 24,000 square foot indoor manufacturing facility that would include both cultivation and processing when fully constructed. The terms of the Agreement included the following provisions: |
| ● | The Company obtaining the option to acquire a 51% interest in the other party, subject to state and regulatory approval, for a onetime payment of $250,000 due upon signing of the Terminated Michigan Agreement; |
| ● | The Company providing up to $2,000,000 in financing by way of a loan for development and operational buildout of the cultivation, processing and dispensary centers of which the Company would be paid back under an established schedule; |
| ● | The Company would 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 Canadian Securities Exchange for a period of ten consecutive days or 24 months from the signing of the Terminated Michigan Agreement. Unless the other party permitted, the Company would have been allowed to not exercise this option for a period of 12 months following the signing of the Terminated Michigan Agreement; and |
| ● | The Company would also issue 900,000 common shares to the other party based on milestones including signing of the Terminated Michigan Agreement, production of 500 pounds of dried cannabis flower and achieving $3,000,000 in topline revenue. |
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Grown Rogue International Inc.
Notes to the condensed interim consolidated financial statements
For the three and nine months ended July 31, 2020 and 2019
Unaudited & expressed in United States Dollars, unless otherwise indicated
The completion of the terms of the Michigan Agreement were subject to Michigan regulatory approval and full licensing of the Company at the state level. During the three months ended January 31, 2020, the Company terminated this agreement.
| c) | Pursuant to the Michigan Debt (Note 14.iv), the Company has committed to repaying principal of $600,000 and also borrowing costs between $600,000 and $1,200,000, for a total between $1,200,000 and $1,800,000, which will be paid between February 2020 and December 2022. |
30. 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 19.xii). The fair value of the vested warrants of $77,014 was expensed as an acquisition cost in the statement of loss and comprehensive loss during the year ended October 31, 2019.
31. Geographical Information
Geographical information relating to the Company’s activities is as follows:
| Nine month period | ||||||||
| ended July 31, | ||||||||
| Revenue | 2020 | 2019 | ||||||
| United States | $ | 3,182,902 | $ | 3,493,354 | ||||
| Canada | - | - | ||||||
| Total | $ | 2,278,908 | $ | 2,719,424 | ||||
| Long-term assets as at: | July 31, 2020 | October 31, 2019 | ||||||
| United States (1) | 2,125,469 | 2,719,424 | ||||||
| Canada | - | - | ||||||
| Total | $ | 2,278,908 | $ | 2,719,424 | ||||
| (1) | Includes: plant and equipment |
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Grown Rogue International Inc.
Notes to the condensed interim consolidated financial statements
For the three and nine months ended July 31, 2020 and 2019
Unaudited & expressed in United States Dollars, unless otherwise indicated
32. Non-controlling Interests
The changes to the non-controlling interest for the nine month period ended July 31, 2020 and year ended October 31, 2019 are as follows:
| July 31, 2020 | October 31, 2019 | |||||||
| Balance, beginning of period | $ | 19,538 | $ | - | ||||
| Net assets contributed | - | 196,250 | ||||||
| Elimination of GRD Cali, LLC non-controlling interest | 22,128 | |||||||
| Non-controlling interest’s 40% share of GRD Cali, LLC | (36,366 | ) | (153,762 | ) | ||||
| Non-controlling interest’s 40% share of Idalia, LLC | 501 | (22,950 | ) | |||||
| Non-controlling interest’s 40% share of GR Michigan, LLC | (576 | ) | - | |||||
| Balance, end of period | $ | 5,225 | $ | 19,538 | ||||
The following is summarized financial information for GRD Cali, LLC:
| July
31, 2020 | October
31, 2019 | |||||||
| Current assets | $ | - | $ | 93,460 | ||||
| Long term assets | - | 41,642 | ||||||
| Current liabilities | - | 25,801 | ||||||
| Advances from parent | - | 73,705 | ||||||
| Net Loss (Income) for the period | 36,366 | 384,404 | ||||||
The following is summarized financial information for Idalia, LLC:
| July
31, 2020 | October
31, 2019 | |||||||
| Current assets | $ | - | $ | - | ||||
| Long term assets | 11,747 | 13,248 | ||||||
| Current liabilities | - | - | ||||||
| Advances from parent | - | - | ||||||
| Net Loss (Income) for the period | (501 | ) | 57,376 | |||||
The following is summarized financial information for GR Michigan, LLC:
| July
31, 2020 | October
31, 2019 | |||||||
| Current assets | $ | 222,873 | $ | - | ||||
| Long term assets | 561,962 | - | ||||||
| Current liabilities | 76,195 | - | ||||||
| Advances from parent | 140,549 | - | ||||||
| Net Loss (Income) for the period | 576 | - | ||||||
Nine percent (9%) of GR Michigan LLC is owned by officers and directors of the Company.
33. Subsequent Events
In August 2020, 800,000 shares were issued pursuant to a conversion of convertible debt (Note 16.i) at CAD$0.125, representing principal converted of CAD$100,000.
34. Comparative Information
The presentation of certain amounts included in cost of sales for the three and nine month periods ended July 31, 2019 have been modified to conform to the current year’s presentation.
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Exhibit 4
Form 52-109FV2
Certification of Interim Filings – Venture Issuer Basic Certificate
I, J. Obie Strickler, President and Chief Executive Officer of Grown Rogue International Inc., certify the following:
1. Review: I have reviewed the interim financial report and interim MD&A (together, the “interim filings”) of Grown Rogue International Inc. (the “issuer”) for the interim period ended July 31, 2020.
2. No misrepresentations: Based on my knowledge, having exercised reasonable diligence, the interim filings do not contain any untrue statement of a material fact or omit to state a material fact required to be stated or that is necessary to make a statement not misleading in light of the circumstances under which it was made, with respect to the period covered by the interim filings.
3. Fair presentation: Based on my knowledge, having exercised reasonable diligence, the interim financial report together with the other financial information included in the interim filings fairly present in all material respects the financial condition, financial performance and cash flows of the issuer, as of the date of and for the periods presented in the interim filings.
Date: September 29, 2020
| “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 5
Form 52-109FV2
Certification of Interim 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 interim financial report and interim MD&A (together, the “interim filings”) of Grown Rogue International Inc. (the “issuer”) for the interim period ended July 31, 2020.
2. No misrepresentations: Based on my knowledge, having exercised reasonable diligence, the interim filings do not contain any untrue statement of a material fact or omit to state a material fact required to be stated or that is necessary to make a statement not misleading in light of the circumstances under which it was made, with respect to the period covered by the interim filings.
3. Fair presentation: Based on my knowledge, having exercised reasonable diligence, the interim financial report together with the other financial information included in the interim filings fairly present in all material respects the financial condition, financial performance and cash flows of the issuer, as of the date of and for the periods presented in the interim filings.
Date: September 29, 2020
| “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 6
GROWN ROGUE INTERNATIONAL INC.
FORM 51-102F1
MANAGEMENT DISCUSSION & ANALYSIS
FOR THE THREE AND NINE MONTHS ENDED JULY 31, 2020
TABLE OF CONTENTS
i
This Management Discussion and Analysis (“MD&A”) made as of September 28, 2020 should be read in conjunction with the unaudited condensed interim consolidated financial statements of Grown Rogue International Inc. (the “Company”, (“we”, “our”, or “us”) for the three and nine month periods ended July 31, 2020 and 2019 (the “Reporting Period”), and the related notes thereto (the “Financial Statements”). The Company’s Financial Statements are presented on a consolidated basis with its wholly-owned subsidiaries: Grown Rogue 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 GR Unlimited’s 60% interest in Idalia, LLC; GR Unlimited’s 60% interest in GRD Cali, LLC, which was disposed of during the three months ended July 31, 2020; and GR Unlimited’s 87% interest in GR Michigan, 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 use of “CAD$” refers to Canadian dollars.
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 the Financial Statements are the responsibility of management. In addition, management is responsible for ensuring that the information contained in the MD&A is consistent where appropriate, with the information contained in the Financial Statements.
The Financial Statements may contain certain amounts based on estimates and judgments. Management has determined such amounts on a reasonable basis to ensure that the Financial Statements are presented fairly in all material respects.
As the Company is a Venture Issuer (as defined under under National Instrument 52-109 Certification of Disclosure in Issuers’ Annual and Interim Filings) (“NI 52-109”), the Company and Management are not required to include representations relating to the evaluation, design, establishment and/or maintenance of disclosure controls and procedures (“DC&P”) and/or Internal Controls over Financial Reporting (“ICFR”), as defined in NI 52-109, nor has it completed such an evaluation. Inherent limitations on the ability of the certifying officers to design and implement on a cost-effective bases DC&P and ICFR for the issuer may result in additional risks of quality, reliability, transparency and timeliness of interim and annual filings and other reports provided under securities legislation.
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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.
Grown Rogue, headquartered in Medford, Oregon, is a multi-state cannabis company curating high quality and consistent flower that allows consumers to enhance life experiences. Grown Rogue is a mid-premium brand that classifies their products based on “Mind, Body & Mood” effects which resonates with consumers from the so-called canna-curious through the canna-serious. Grown Rogue is committed to educating, inspiring and empowering consumers with information about cannabis so they can “enhance experiences” by selecting the right product. Grown Rogue is focused on high quality, low cost production of flower and flower-based products. Flower continues to be the leading product category in most every state as compared to other categories such as edible, vape cartridges, pre-rolls, or concentrates. With its best-in-class production methods, low cost cultivation, award winning product, and geographic location in the famed Emerald Triangle, Grown Rogue is well positioned to becoming a leading flower producer in the cannabis sector.
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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 one wholesaler license. GR Gardens also has a processor license for the Warehouse but is not yet actively operating this license.
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’s Oregon operation is located in the world-renowned Emerald Triangle, which is well-known for the quality of its cannabis. The Emerald Triangle includes the southern part of Oregon and northern part of California. 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, which is 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, carbon dioxide 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 utilized at approximately 85% 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. We recently converted this remaining space into a partial vegetative area allowing us to increase flowering square footage in the other areas of the Warehouse for 8 months out of the year, thus increasing production capacity.
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.
MICHIGAN
In February 2020, 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 12,500 sq ft is operational. Through the date of this MD&A, we have paid $150,000 in cash and approximately $12,000 in shares towards Option consideration.
With the addition of Golden Harvests, Grown Rogue will be adding an additional 1,000 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 once regulatory approval is received.
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PRODUCT
Grown Rogue produces a range of cultivars for consumers to enjoy (traditionally classified as indicas, sativas, and hybrids). Grown Rogue has a mix of “core” and “limited” strains to provide consumers with consistent and unique purchasing options at their local dispensary. Grown Rogue flower has won multiple awards in Oregon, which is one of the most competitive cannabis production environments in the world, including the prestigious Growers Cup competition on two occasions. Grown Rogue also won 1st place for highest THC content, 1st place for highest terpene content, and 3rd place in the grower’s choice category 2018 and won 1st place for highest terpene content in 2019 (there was no growers choice in category in 2019). In addition, the company believes it achieved an outdoor production potency record in the state of Oregon, when its Monkey Train cultivar tested at a THC potency of 35.13%.
GENETICS
We are 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. We continue to focus on bringing new unique genetics to ensure a steady flow of innovative flower and value-added products (“VAPs”).
DISTRIBUTION AND SALES
Grown Rogue distributes product through its wholly owned subsidiary, GR Gardens 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.
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Grown Rogue was one of the first brands in the United States to go to market with this type of branding as part of the ROGUE Categorization: Relax, Optimize, Groove, Uplift and Energize. The focus was to provide consumers with “The Right Experience, Every time” made easier by a simple product description that was not cannabis based, such as sativa or indica.
While other brands have shifted into the “one word” product description, Grown Rogue has leveraged consumer insights and product feedback to evolve the messaging to provide significantly more detail so consumers can make a more informed choice about which Grown Rogue products will optimally enhance their experience.
Grown Rogue’s unique “Mind, Body & Mood” product descriptions provide a level of detail about the expected cannabis experience that is much more insightful and beneficial than competitors. Instead of one word, such as Relax, describing a product, Grown Rogue has six words across three categories. 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 Rogue aspires to eliminate the “dark mystery” historically associated with cannabis by empowering consumers to learn about the plant and then “enhance experiences” as they desire. The transition from prohibition to legal cannabis has provided the cannabis community with an opportunity to welcome a large group of new members and it is vital that product education is completed in an authentic and informative manner to ensure that everyone’s first cannabis experience is not only positive but also as expected.
MARKETING AND ADVERTISING
Grown Rogue’s marketing channels include a comprehensive, fully responsive (mobile) interactive website. The website has been search engine optimized and includes calls to action that encourage consumers to become part of the Grown Rogue community by joining its newsletter list or following the company on social media. Grown Rogue is focused on providing education to new and existing consumers, which is available through its monthly newsletter or via the Blog section of its website. Consumers can find information about Grown Rogue, different types of cannabis products and general industry information.
We strategically leverage digital advertising, primarily on industry sites such as Leafly and Weedmaps, and have selectively advertised in endemic and non-endemic magazines including Grow, Northwest Leaf, Oregon Leaf, Dope, Portland Mercury, and Willamette Weekly.
Grown Rogue has established a social media presence that includes Facebook, Twitter, and Instagram. Grown Rogue’s social identity will be defined by delivering fresh content and keeping interaction with followers/fans prompt and positive. Grown Rogue intends to attract existing cannabis industry participants as well as people not familiar with the industry by creating a positive, inclusive environment where dialogue is encouraged. The goal is to change existing stereotypes and overcome the stigmas associated with the cannabis industry.
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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 four that have been Registered:
| 1. | Grown Rogue was filed on September 22, 2017 and registered on August 7, 2018 under Registration No. 5537240 | |
| 2. | The Right Experience Every Time was filed on September 29, 2017 and registered on August 7, 2018 under Registration 5537260. | |
| 3. | Sizzleberry was filed on September 29, 2017 and registered on August 7, 2018 under Registration 5537259. | |
| 4. | 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 contacted us to request licensing information on this technology. We plan on introducing the nitrogen sealed containers in each of the new markets the company enters, and may license the technology to third parties operating in markets in which Grown Rogue is not currently licensed.
SOCIAL AND ENVIRONMENTAL POLICIES
Grown Rogue employs sustainable business models in all of its operations. Grown Rogue maintains the highest standards of environmental stewardship in cultivation. This includes sustainable water sources with optimization of reclamation and recapture from runoff and recycling of water input. We use only natural and sustainable products in all applications, including nutrients and integrated pest management. We maintain the highest level of sustainable cannabis practices through our focus on sustainable and natural cultivation methods.
Grown Rogue hires and pays living wage to all of its team members and is very involved in each of the communities where it operates.
When wildfires ravaged Oregon, particularly Jackson County, Grown Rogue quickly mobilized to support team mates and their families who lost homes or were adversely impacted, while also donating over $20,000 to community fire relief funds and organizing a Cannabis Coalition Fire Relief Fund with the United Way of Jackson County.
PLANS FOR EXPANSION & ECONOMIC OUTLOOK
Grown Rogue continues to focus on taking its learnings and experience from Oregon 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. This platform that places Grown Rogue in a superior position to capitalize on new markets compared to our competitors. Oregon is arguably the most competitive cannabis market in the world and we have excelled by implementing standard business practices that make the Company well suited for entering and building successful brand presence in newly legalized cannabis markets.
We intend to expand our operating facilities in Oregon and continue our multi-state expansion strategy, which is focused on best-in-class production methods. Our primary focus is 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.
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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 and looking at strategic opportunities in new states.
DEFINITIVE TRANSACTION AGREEMENT AND REVERSE TAKE-OVER TRANSACTION
On October 31, 2018, 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.
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.
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The following selected financial data for each of the three completed financial years are derived from the audited annual financial statements of the Company.
| Year Ended October 31, | 2019 | 2018 | 2017(1) | |||||||||
| Total revenue | $ | 3,924,983 | $ | 1,932,128 | $ | 156,066 | ||||||
| Loss from operations | (7,622,956 | ) | (4,967,609 | ) | (138,854 | ) | ||||||
| Net loss | (9,476,934 | ) | (7,509,986 | ) | (302,397 | ) | ||||||
| Comprehensive Loss | (9,355,014 | ) | (7,509,986 | ) | (302,397 | ) | ||||||
| Total assets | 2,932,476 | 5,366,268 | 2,914,491 | |||||||||
| Total non-current financial liabilities | 217,633 | 2,292,634 | 1,069,139 | |||||||||
| Cash dividends | Nil | Nil | Nil | |||||||||
| (1) | For the period from October 16, 2016 to October 31, 2017 |
Selected financial results of operations are summarized below:
| Three months ended July 31, | ||||||||||||||||
| 2020 | 2019 | Change $, Favorable | Change %, Favorable | |||||||||||||
| Revenue | $ | 903,994 | $ | 773,930 | $ | 130,064 | 17 | % | ||||||||
| Cost of finished cannabis inventory sold | (475,982 | ) | (531,304 | ) | 55,322 | 10 | % | |||||||||
| Gross profit (loss) before fair value adjustments | 428,012 | 242,626 | 185,386 | 76 | % | |||||||||||
| Net loss | (794,072 | ) | (931,184 | ) | 137,112 | 15 | % | |||||||||
| Nine months ended July 31, | ||||||||||||||||
| Change $ Favorable | Change % Favorable | |||||||||||||||
| 2020 | 2019 | (unfavorable) | (unfavorable) | |||||||||||||
| Revenue | $ | 3,182,902 | $ | 3,493,354 | $ | (310,452 | ) | (9 | %) | |||||||
| Cost of finished cannabis inventory sold | (1,817,480 | ) | (2,486,643 | ) | 669,163 | 27 | % | |||||||||
| Gross profit before fair value adjustments | 1,365,422 | 1,006,711 | 358,711 | 36 | % | |||||||||||
| Net loss | (2,234,087 | ) | (7,378,192 | ) | 5,144,105 | 70 | % | |||||||||
REVENUES
Revenues during the nine months ended July 31, 2020, decreased relative to the comparable period in 2019 due to the discontinuance of reselling low-margin third party products, offset by an increase in sales of product from operations (see Adjusted EBITDA for further margin analysis).
COSTS OF FINISHED CANNABIS INVENTORY SOLD
Costs of finished cannabis inventory sold decreased by approximately $670,000 during the nine months ended July 31, 2020 relative to the comparable 2019 period; this reflects the discontinuance of selling third party products, as well as operational efficiencies for our product. The gross margin on our product has improved dramatically, as described under Other Selected Financial Information.
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NET LOSS
Transaction costs
A material driver of the decrease in net loss during the nine months ended July 31, 2020 relative to the comparable period in 2019, is the absence of transaction costs of $3,723,724 that occurred during the nine months ended July 31, 2019.
Accounting for debt restructuring
In July 2020, we changed the terms of convertible debentures (see ‘Debt financing’ within ‘Capital Resources’, below). The impact to net loss from this accounting was the recognition of $462,213 in expense, as well as derecognition of a derivative liability which decreased net loss by $244,572. Accordingly, the impact to the income statement as a result of the convertible debt restructuring was an increase to net loss of $217,641, with no such charges during the comparable 2019 period, other than derecognition of derivative liability for a decrease to net loss of $15,000.
Share-based compensation
During the nine months ended July 31, 2020, we granted 2,984,386 common shares as compensation to employees and service providers. In July 2020, as part of our performance management strategy, we granted 3,575,000 options to employees. The common shares issuances and stock options (measured at fair value using the Black-Scholes pricing model) resulted in total expense recognition of $320,852 during the nine months ended July 31, 2020, as compared to $112,080 during the comparable 2019 period.
General and administrative expenses
General and administrative expenses decreased by approximately $930,000 and $2,000,000 during the three and nine month periods ended July 31, 2020, respectively, to the comparable periods in 2019. The reduction in the general and administrative costs was a result of a larger allocation of overhead to inventory, biological assets and, in turn cost of sales. We also reduced salaries, legal and professional fees, travel, and facility expenses.
Interest expense
During the year ended October 31, 2019, the Company issued a second round of convertible debenture financing with aggregate principal of CAD $1,500,000; the first round was issued during the year ended October 31, 2018. This first round included aggregate principal of CAD$1,500,000. We also entered into four finance leases for $423,033, in aggregate. A result of financing was interest expense of approximately $97,000 and $260,000, respectively, for the three and nine months ended July 31, 2020, compared to interest expense of approximately $60,000 and $214,000, respectively for the three a nine month periods ended July 31, 2019. The convertible debentures also gave rise to accretion expense of approximately $63,000 and $200,000 for the three and nine months ended July 31, 2020, which are increases of approximately $30,000 and $140,000 when compared to accretion expenses of $12,886 and $30,850 incurred during the three and nine months ended July 31, 2019.
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DEBT FINANCING
Convertible debt
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 were to mature August 10, 2020 and were 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 decreased from the original price of $0.44 per share. The notes (including the CAD$1,500,000 principal amount of notes that were issued by the Company on November 15, 2018) were renegotiated in July 2020 with the following terms:
| ● | Principal loan amount of CAD$2,950,000, due on November 1, 2021 |
| ○ | CAD$2,850,000 at the date of this MD&A, following conversion of CAD$100,000 in August 2020); |
| ● | Interest payable at 8% per annum; | |
| ● | Convertible at CAD$0.125 into shares of the Company; | |
| ● | Conversion price will be adjusted to a lower price if the Company completes a private placement of equity for cash at a price lower than CAD$0.125 while the loan is outstanding; | |
| ● | Convertible at CAD$0.05 if the Company defaults on debt service; | |
| ● | Cancellation of 6,818,182 warrants issued pursuant to the convertible debenture agreements outstanding prior to the modification on July 10, 2020; | |
| ● | Issuance of 6,818,182 new warrants with as exercise price of CAD$0.16 and an expiration date of November 1, 2021; and | |
| ● | Issuance of 1,590,909 warrants as part of the consideration to the creditors for extending the maturity of the debt. |
We recognized a loss from restructuring convertible debentures of $462,213, including the following items:
| Composition of loss from debt restructuring | ||||
| Difference: carrying value of deemed prior debt and deemed reissued debt | $ | 40,167 | ||
| Replacement warrants - quantity 6,818,182 (Note 19.xii) | 342,200 | |||
| Consideration warrants - quantity 1,590,909 (Note 19.xii) | 79,846 | |||
| Total loss from deemed restructuring | $ | 462,213 | ||
The modification of terms also resulted in the derecognition of the Company’s previously outstanding derivative liability; a reduction to net loss of $244,572.
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Long-term debt
On March 20, 2020: Principal of $600,000 was received under a secured debt investment of $600,000 (the “Michigan Debt”). The Michigan Debt carries a two year term, with monthly payments of principal commencing June 15, 2020. Once the principal is repaid, each investor will receive a gross monthly royalty of 1% per $100,000 invested based on any cannabis business that is majority owned by GR Michigan, LLC (the “Royalty”). The Royalty has a term of two years with maximum amount of two times the amount of principal invested in the Debt Financing. The Company 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. The debt is reported at the carrying value of the probability-weighted estimated future cash at amortized cost using the effective interest method. The creditors of the Michigan Debt will ultimately receive repayment of principal, plus between one and two times the principal loaned, by December 31, 2022.
Of the $600,000 Michigan Debt principal, $300,000 was loaned by our officers and directors.
Of long-term debt issued prior to October 31, 2019, $14,000 in principal remains payable at July 31, 2020.
EQUITY FINANCING AND INVESTMENT
During the period ended July 31, 2020, the Company completed two agreements with Cannabis Growth Opportunity Corporation (“CGOC”): 1) a private placement of equity (“CGOC Private Placement”) and 2) a share swap of our shares for CGOC’s shares (the “CGOC Share Swap”).
CGOC Private Placement
In exchange for total proceeds of CAD$1,500,000, the Company issued, in two tranches, 15,000,000 common shares and 15,000,000 warrants to purchase an aggregate of 15,000,000 common share of the Company. Of the warrants issued, 5,000,000 have a strike price of CAD$0.125 and expire on February 10, 2022. Of the warrants issued, 10,000,000 have a strike price of CAD$0.13 and expire May 15, 2022.
CGOC Share Swap
In February 2020, we exchanged approximately CAD$1,500,000 worth of our common shares for common shares of CGOC. We issued 15,000,000 common shares to CGOC in exchange for 2,362,204 common shares of CGOC issued to us. As part of the CGOC Share Swap, each of CGOC and Grown Rogue have signed a voting and resale agreement providing that each party will be required to vote the shares acquired under the CGOC Share Swap as recommended by the other party and will be restricted from trading the shares for a period of 18 months.
Option to Acquire Controlling Interest in Golden Harvests
By agreement effective February 6, 2020, the Company 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. The optionee is called Golden Harvests, LLC (“GH”). 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:
| 1. | 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. During the period ended July 31, 2020, the company made a cash payment of $150,000 and issued 200,000 shares valued at $12,812. | |
| 2. | Payment of $200,000 and the issuance of 200,000 common shares of the Company on the sixth-month anniversary of signing the Option. |
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| The Company has exercised its option to delay for six months the payment on the 6 month instalment of US$200,000 in cash and 200,000 in common shares in exchange for US$25,000 in cash and 25,000 common shares. | ||
| 3. | 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. | |
| 4. | Payment of $200,000 and the issuance of 200,000 common shares of the Company due upon exercise of the Option, pending Municipal and State regulatory approval. |
The following table sets out selected quarterly results of the Corporation for the eight quarters ended on or before July 31, 2020. The information contained herein is drawn from the interim financial statements of the Corporation for each of the aforementioned eight quarters.
| Fiscal Year | 2020 | 2019 | 2018 | |||||||||||||||||||||||||||||
| Quarter | Jul | Apr | Jan | Oct | Jul | Apr | Jan | Oct | ||||||||||||||||||||||||
| Revenue ($) | 903,994 | 1,172,612 | 1,106,296 | 431,629 | 773,930 | 1,885,115 | 834,309 | 790,236 | ||||||||||||||||||||||||
| Net loss ($) | (794,072 | ) | (1,206,828 | ) | (233,187 | ) | (2,098,742 | ) | (931,184 | ) | (1,648,446 | ) | (4,798,562 | ) | (2,512,110 | ) | ||||||||||||||||
| Net loss, basic & diluted ($/share) | (0.01 | ) | (0.01 | ) | (0.01 | ) | (0.02 | ) | (0.01 | ) | (0.02 | ) | (0.08 | ) | (0.08 | ) | ||||||||||||||||
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OTHER SELECTED FINANCIAL INFORMATION
ADJUSTED EBITDA (NON-IFRS MEASURE)
The Company’s “Adjusted EBITDA” is a non-IFRS measure used by management that does not have any prescribed meaning by IFRS and that may not be comparable to similar measures presented by other companies. The Company defines Adjusted EBITDA as the Company’s net income or loss for a period, as reported, before interest, taxes, depreciation and amortization, and is further adjusted to remove transaction costs, stock-based compensation expense, accretion expense, gain (loss) on derecognition of derivative liabilities and the effects of fair-value accounting for biological assets and inventory. The Company believes that this is a useful metric to evaluate its operating performance.
We have included a figure within the Adjusted EBITDA reconciliation called “Adjusted Gross Margin.” Adjusted Gross Margin is calculated by removing the impact of fair value adjustments and amortization of fixed assets from net loss.
| Three months ended | Nine months ended | |||||||||||||||
| July 31, | July 31, | |||||||||||||||
| Adjusted EBITDA Reconciliation | 2020 | 2019 | 2020 | 2019 | ||||||||||||
| Net loss, as reported | $ | (794,072 | ) | $ | (931,184 | ) | $ | (2,234,087 | ) | $ | (7,378,192 | ) | ||||
| Add back realized fair value amounts included in inventory sold | 626,522 | 498,542 | 1,471,821 | 1,103,493 | ||||||||||||
| Less unrealized fair value gain (loss) on growth of biological assets | (770,724 | ) | (1,060,550 | ) | (1,425,228 | ) | (1,140,472 | ) | ||||||||
| Less amortization of property & equipment included in cost of sales | 115,331 | - | 351,822 | - | ||||||||||||
| Adjusted Gross Margin | $ | (822,943 | ) | $ | (1,493,192 | ) | $ | (1,835,672 | ) | $ | (7,415,171 | ) | ||||
| Add back accretion expense, as reported | 321,875 | 32,977 | 461,415 | 63,827 | ||||||||||||
| Add back amortization of intangible assets, as reported | 5,980 | 7,660 | 20,620 | 23,714 | ||||||||||||
| Add back amortization of property and equipment, as reported | 48,725 | 157,867 | 103,534 | 480,482 | ||||||||||||
| Add back amortization of right-of-use assets, as reported | 13,233 | - | 70,152 | - | ||||||||||||
| Add back share-based compensation expense, as reported | 329,014 | - | 329,014 | 112,080 | ||||||||||||
| Add back interest expense, as reported | 96,881 | 60,051 | 258,473 | 214,131 | ||||||||||||
| Add back transaction cost | - | - | - | 3,723,724 | ||||||||||||
| Add back unrealized loss on marketable securities, as reported | (69,064 | ) | - | 558,223 | - | |||||||||||
| Less gain on derecognition of derivative liability | (244,572 | ) | - | (244,572 | ) | (15,000 | ) | |||||||||
| Add back loss on debt restructure | 462,213 | - | 462,213 | - | ||||||||||||
| Adjusted EBITDA | $ | 141,342 | $ | (1,234,637 | ) | $ | 183,400 | $ | (2,812,213 | ) | ||||||
The following table reconciles Adjusted Gross Margin to net loss as reported on the statements of comprehensive loss for the three and nine month periods ended July 31, 2020 and 2019.
| Three months ended | Nine months ended | |||||||||||||||||||||||
| July 31, 2020 | July 31, 2020 | |||||||||||||||||||||||
| Adjusted Gross Margin reconciliation | Revenue | Costs | Margin | Revenue | Costs | Margin | ||||||||||||||||||
| Grown Rogue products | $ | 903,994 | $ | 349,026 | 61 | % | $ | 3,057,442 | $ | 1,283,260 | 58 | % | ||||||||||||
| Third party products | -- | -- | -- | 125,460 | 115,522 | 8 | % | |||||||||||||||||
| Asset depreciation included in COGS | -- | 115,331 | -- | -- | 351,822 | -- | ||||||||||||||||||
| Cost of packaging & other included in COGS | -- | 11,625 | -- | -- | 66,876 | -- | ||||||||||||||||||
| Total costs of finished cannabis inventory sold | $ | 903,994 | $ | 475,982 | 47 | % | $ | 3,182,902 | $ | 1,817,480 | 43 | % | ||||||||||||
| Realized fair value amounts in inventory sold | -- | 626,522 | -- | -- | 1,471,821 | -- | ||||||||||||||||||
| Unrealized fair value (gain) on growth of biological assets | -- | (770,724 | ) | -- | -- | (1,425,228 | ) | -- | ||||||||||||||||
| Totals, as reported | $ | 903,994 | $ | 331,780 | 63 | % | $ | 3,182,902 | $ | 1,864,073 | 41 | % | ||||||||||||
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LIQUIDITY AND CAPITAL RESOURCES
The Company’s cash and cash equivalents position was $591,352 as at July 31, 2020 as compared to $74,926 on October 31, 2019. The Company had a working capital deficiency of $321,496 as at July 31, 2020 compared to a working capital deficiency of $2,709,527 as at October 31, 2019.
During the nine months ended July 31, 2020, Grown Rogue used cash of approximately $88,000 through its operating activities, compared to cash used on similar activities of approximately $3,263,000 for the nine months ended July 31, 2019. The Company invested approximately $515,000 in property and equipment during the nine months ended July 31, 2020, an increase compared to investment in similar assets of approximately $210,000 during the nine months ended July 31, 2019. Net cash from financing activities of approximately $1,200,000 during the nine months ended July 31, 2020, was the result of:
| ● | Lease payments of $257,567; | |
| ● | Debt repayment of $178,480; | |
| ● | Debt proceeds of $615,000; and | |
| ● | Private placement proceeds of approximately $1.1 million. |
Cash generated during the nine months ended July 31, 2019, from financing activities included (amounts rounded to nearest $5,000):
| ● | Outflow against subscription receivable of $720,000; | |
| ● | Debt repayments of $250,000; | |
| ● | Proceeds of subscription receipts of $3,235,000; | |
| ● | Proceeds from convertible debenture issuances of $1,105,000; | |
| ● | Net lease payments of $20,000; | |
| ● | Payments of $250,000 for costs of issuing debt & equity; | |
| ● | Payments of $165,000 for Transaction costs; and | |
| ● | Option-based proceeds of $40,000. |
Historically, the Company’s capital requirements to fund expansion and operations have been met primarily through the completion of private placements of equity and debt instruments, including debt with features to convert into equity.
As at July 31, 2020 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 | $ | 89,112 | ||
| 2021 | 114,010 | |||
| 2020 | 17,525 | |||
The Company has committed to repaying principal of $600,000 and also cost of principal between $600,000 and $1,200,000 between February 2020 and December 2022 (as described at the subsection of this MD&A called ‘Long-term debt’).
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OFF-BALANCE SHEET ARRANGEMENTS
The Company does not have any off-balance sheet arrangements.
As of the date of the MD&A, the Company has 107,557,397 common shares outstanding, which reflects the amount outstanding at July 31, 2020 of 106,757,397, plus 800,000 shares issued subsequent to July 31, 2020 (see Subsequent Events, below).
As of the date of this MD&A, the Company has the following warrants outstanding, exercisable into common shares:
| Remaining | ||||||||||||
| Warrants | contractual | |||||||||||
| Exercise price | outstanding | Life (years) | Expiry date | |||||||||
| $ | 0.55 | 17,843,998 | 0.3 | November 30, 2020 | ||||||||
| 0.44 | 757,125 | 0.3 | November 30, 2020 | |||||||||
| 0.16 | 8,409,091 | 1.3 | November 01, 2021 | |||||||||
| 0.13 | 5,000,000 | 1.5 | February 10, 2022 | |||||||||
| 0.13 | 10,000,000 | 1.8 | May 15, 2022 | |||||||||
| 0.44 | 2,148,117 | 2.9 | June 28, 2023 | |||||||||
| $ | 0.33 | 44,158,331 | 1.1 | |||||||||
As of the date of this MD&A, the Company has the following stock options outstanding, exercisable into common shares:
| Remaining | ||||||||||||
| Options | Contractual | |||||||||||
| Exercise price | outstanding | Life (years) | Expiry date | |||||||||
| $ | 0.44 | 500,000 | 1.4 | January 01, 2022 | ||||||||
| 0.44 | 150,000 | 1.3 | November 30, 2021 | |||||||||
| 0.15 | 3,475,000 | 3.9 | July 09, 2024 | |||||||||
| 0.15 | 100,000 | 10.0 | July 20, 2030 | |||||||||
| $ | 0.19 | 4,225,000 | 3.7 | |||||||||
TRANSACTIONS WITH RELATED PARTIES
During the Reporting Period, the Company was involved in the following transactions with related parties:
During the nine month period ended July 31, 2020, the Company incurred the following related party transactions:
| 1. | 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 $57,500 incurred for the period ended July 31, 2020 (2019 - $42,500). The Company had $64,000 (October 31, 2019 - $63,000) owing in accounts payable and accrued liabilities at July 31, 2020. |
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| 2. | The Company incurred employee/director fees of $48,500 (2019 $36,000) with an individual related to the Company’s President and CEO. At July 31, 2020, accounts and accrued liabilities payable to this individual were $2,153 (October 31, 2019, $Nil). | |
| 3. | The Company incurred fees related to marketing and promotion services of $Nil (2019 $138,674) from two companies owned by the Company’s former Chief Strategy Officer (“CSO”). At July 31, 2020, accounts payable and accrued liabilities were $Nil (October 31, 2019 $6,000) payable to these companies. | |
| 4. | Key management personnel consists of the President and CEO; the former CSO; the CFO of GR Unlimited; the Chief Marketing Officer; and the Chief Accounting Officer. The compensation paid or payable to key management for services for the nine month periods ended July 31, 2020 and 2019 is as follows: |
| 2020 | 2019 | |||||||
| Salaries and consulting fees | $ | 359,000 | $ | 425,412 | ||||
| Share-based compensation | 46,000 | 33,083 | ||||||
| Stock option expense | 78,028 | - | ||||||
| Total | $ | 483,028 | $ | 458,495 | ||||
| Liabilities due to key management at July 31, 2020, totaled $230,112 (October 31, 2019 $90,000. | ||
| 5. | Long-term debt principal repayments of $115,000 and associated interest of $23,466, which accrued at a rate of 60% per annum. | |
| 6. | Long-term debt principal of $150,000 was borrowed pursuant to the Michigan Debt (see ‘Long-term debt’ under ‘Capital Resources’) from officers of the Company. Principal repayments of $27,480 were made in total, with a pro-rata portion of $6,870 attributed to the officers. | |
| 7. | Long-term debt principal of $150,000 was borrowed pursuant to the Michigan Debt (see ‘Long-term debt’ under ‘Capital Resources’) from a director of the Company. Principal repayments of $27,480 were made in total, with a pro-rata portion of $6,870 attributed to the director. |
The President and CEO and certain other directors and officers of Grown Rogue invested an aggregate of USD$300,000 (items 6 & 7, directly above) under the Michigan Debt and received an aggregate of a 3% Royalty and 9% of the membership units in GR Michigan, LLC.
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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, 2019:
IFRS 16 Leases (“IFRS 16”) 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. In applying IFRS 16, for all leases, the Company:
| i. | Recognizes right-of-use assets and lease liabilities in the statement of financial position, initially measured at the present value of the future lease payments: | |
| ii. | Recognizes depreciation of right-of-use assets and interest expense on lease liabilities in the statements of income and comprehensive income; | |
| iii. | Separates the total amount of cash paid into a principal portion (presented within financing activities) and interest (presented within operating activities) in the statement of cash flows. |
On November 1, 2019, the Company adopted IFRS 16. As such, the Company reviewed all leases and assessed whether these contracts are or contains a lease. The Company has accounted for its leases upon adoption of IFRS 16 using a modified retrospective approach whereby it recognizes a lease liability and a right-of-use asset at the date of initial application, being November 1, 2019. The lease liability is measured at the present value of the remaining lease payments, discounted using the Company’s incremental borrowing rate. The Company has measured the right-of-use asset at an amount equal to the lease liability.
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FINANCIAL INSTRUMENTS AND OTHER RISK FACTORS
MARKET RISK
Market risk is the risk that the fair value or cash flows of a financial instrument will fluctuate due to changes in market prices. Market risk reflects interest rate risk, currency risk and other price risks.
Interest Rate Risk
At July 31, 2020 and October 31, 2019, 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.
Currency Risk
As at July 31, 2020, the Company had accounts payable and accrued liabilities of CAD$311,641 and convertible debentures of CAD$2,950,000. 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. During August 2020, CAD$100,000 of convertible debentures were converted to common shares, such that at the date of this MD&A, CAD$2,850,000 in principal was outstanding.
CREDIT RISK
Credit risk is the risk that one party to a financial instrument will cause a loss for the other party by failing to pay for its obligation.
Credit risk to the Company is derived from cash and trade accounts receivable. The Company places its cash in deposit with United States financial institutions. The Company has established a policy to mitigate the risk of loss related to granting customer credit by primarily selling on a cash-on-delivery basis.
The carrying amount of cash and trade accounts receivable represents the Company’s maximum exposure to credit risk; the balances of these accounts are summarized in the following table:
| Balance at | July 31, 2020 | October 31, 2019 | ||||||
| Cash and Cash equivalents | $ | 591,352 | $ | 74,926 | ||||
| Accounts receivable | 211,932 | 99,188 | ||||||
| Total | $ | 803,284 | $ | 174,114 | ||||
The allowance for doubtful accounts at July 31, 2020 is $14,742 (October 31, 2019 - $129,131).
LIQUIDITY RISK
Liquidity risk represents the risk that the Company will encounter difficulty in meeting the obligations associated with its financial liabilities. The Company’s approach to managing liquidity risk is to ensure that it will have sufficient liquidity to meet liabilities when they become due. At July 31, 2020, the Company has current assets of $1,907,483 (October 31, 2019 - $1,432,962) and current liabilities of $2,239,321 (October 31, 2019 - $4,142,489), which resulted in a working capital deficit of $321,496 (October 31, 2019 - working capital deficit of $2,709,527). As at July 31, 2020 the Company had cash of $591,352.
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The Company faces risks inherent in an agricultural business.
Cannabis is an agricultural product. There are risks inherent in the agricultural business, such as insects, plant diseases, forest fire and similar agricultural risks. Although some of the Company’s cannabis flower is grown indoors under climate-controlled conditions, with conditions monitored, there can be no assurance that natural elements will not have a material adverse effect on the production of the Company’s products.
COVID-19 Pandemic
The Company’s business, operations and financial condition could be materially and adversely affected by the outbreak of epidemics or pandemics or other health crises, including the recent outbreak of COVID-19. On January 30, 2020, the World Health Organization declared the outbreak a global health emergency, on March 11, 2020, the World Health Organization declared the outbreak a pandemic and on March 13, 2020 the U.S. declared that the COVID-19 outbreak in the United States constitutes a national emergency. The Company will continue to evaluate the situation with respect to the COVID-19 pandemic as it develops and will implement any such changes to its business as may deemed appropriate to mitigate any potential impacts to its business. Such public health crises can result in volatility and disruptions in the supply and demand for products and financial markets, as well as declining trade and market sentiment and reduced mobility of people, all of which could affect consumer good prices, interest rates, credit ratings, credit risk and inflation. The risks to the Company of such public health crises also include risks to employee health and safety, a slowdown or temporary suspension of operations impacted by an outbreak, increased labour and fuel costs, regulatory changes, political or economic instabilities or civil unrest. At this point, COVID-19 has not had a significant impact on the Company’s supply chain nor its ability to continue operations and sustain revenues; however, it is possible that COVID-19 may in the future have a material adverse effect on the Company’s business, results of operations and financial condition.
FAIR VALUES
The carrying amounts for the Company’s cash, accounts receivable, amounts due from a related company, short-term advance to a related party, accounts payable and accrued liabilities, amounts due to employee/director, short-term advance payable, promissory notes and convertible promissory notes approximate their fair values because of the short-term nature of these items.
FAIR VALUE HIERARCHY
A number of the Company’s accounting policies and disclosures require the measurement of fair valued for both financial and nonfinancial assets and liabilities. The Company has an established framework, which includes team members who have overall responsibility for overseeing all significant fair value measurements, including Level 3 fair values. When measuring the fair value of an asset or liability, the Company uses observable market data as far as possible. The Company regularly assesses significant unobservable inputs and valuation adjustments. Fair values are categorized into different levels in a fair value hierarchy based on the inputs used in the valuation techniques as follows:
Level 1: unadjusted quoted prices in active markets for identical assets or liabilities;
Level 2: inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly; or
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Level 3: inputs for the asset or liability that are not based on observable market data (unobservable inputs).
During the period ended July 31, 2020, 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.
In August 2020, 800,000 shares were issued pursuant to a conversion of convertible debt at CAD$0.125, representing principal converted of CAD$100,000.
Grown Rogue derives a substantial portion of its revenues from the cannabis industry in the United States, which industry is illegal under United States federal law. Grown Rogue is indirectly involved (through subsidiaries) in the cannabis industry in the United States where local state laws permit such activities. Currently, its subsidiaries are directly engaged in the manufacture, possession, use, sale or distribution of cannabis in the recreational cannabis marketplace in the State of Oregon. Grown Rogue also intends to enter the Michigan market – we have an option to acquire a controlling interest in a Michigan operator (see subsection ‘Option to Acquire Controlling Interest In Golden Harvests,’ above).
The United States federal government regulates drugs through the Controlled Substances Act (the “CSA”), which places controlled substances, including cannabis, in a schedule. Cannabis is classified as a Schedule I drug. Under federal law, a Schedule I drug or substance has a high potential for abuse, no accepted medical use in the United States and a lack of accepted safety for the use of the drug under medical supervision. The United States Food and Drug Administration has not approved marijuana as a safe and effective drug for any indication.
In the United States cannabis is largely regulated at the state level. Notwithstanding the permissive regulatory environment of medical cannabis at the state level, and the increasing number of states with legal recreational frameworks, cannabis continues to be categorized as a Schedule I controlled substance under the CSA and as such, violates federal law in the United States. Senators Elizabeth Warren and Cory Gardner have introduced a bipartisan Senate bill titled “Strengthening the Tenth Amendment Through Entrusting States (STATES) Act” that would lift the Controlled Substance Act’s restrictions on cannabis in states that have written their own laws. However, there can be no assurances as to when this bill will pass, or if it will pass at all. The Supremacy Clause of the United States Constitution and United States federal laws made pursuant to it are paramount and in case of conflict between federal and state law in the United States, the federal law shall apply.
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As a result of the conflicting views between state legislatures and the United States federal government regarding cannabis, investments in cannabis businesses in the United States are subject to inconsistent legislation and regulation. The response to this inconsistency was addressed in August 2013 when then Deputy Attorney General, James Cole, authored a memorandum (the “Cole Memorandum”) addressed to all United States district attorneys acknowledging that notwithstanding the designation of cannabis as a controlled substance at the federal level in the United States, several US states had enacted laws relating to cannabis for medical and recreational purposes. The Cole Memorandum outlined certain priorities for the Department of Justice relating to the prosecution of cannabis offenses. In particular, the Cole Memorandum noted that in jurisdictions that enacted laws legalizing cannabis in some form and that also implemented strong and effective regulatory and enforcement systems to control the cultivation, distribution, sale and possession of cannabis, conduct in compliance with those laws and regulations is less likely to be a priority at the federal level.
In March 2017, newly appointed Attorney General Jeff Sessions again noted limited federal resources and acknowledged that much of the Cole Memorandum had merit; however, he disagreed that it had been implemented effectively and, on January 4, 2018, Attorney General Jeff Sessions issued a memorandum (the “Sessions Memorandum”) that rescinded the Cole Memorandum. As a result of the Sessions Memorandum, federal prosecutors are no longer bound by the priorities in the Cole Memorandum relating to the prosecution of cannabis activities despite the existence of state-level laws that may be inconsistent with federal prohibitions.
There is no guarantee that state laws legalizing and regulating the sale and use of cannabis will not be repealed or overturned, or that local governmental authorities will not limit the applicability of state laws within their respective jurisdictions. Unless and until the United States Congress amends the Controlled Substances Act with respect to medical and/or adult-use cannabis (and as to the timing or scope of any such potential amendments there can be no assurance), there is a risk that federal authorities may enforce current federal law. If the federal government begins to enforce federal laws relating to cannabis in states where the sale and use of cannabis is currently legal, or if existing applicable state laws are repealed or curtailed, Grown Rogue’s business, results of operations, financial condition and prospects would be materially adversely affected. Until Congress amends the federal law with respect to marijuana use, there is a risk that federal authorities may enforce current federal law against companies such as Grown Rogue for violation of federal law or they may seek to bring an action or actions against Grown Rogue and/or its investors for violation of federal law or otherwise, including, but not limited to, a claim against investors for aiding and abetting another’s criminal activities.
In light of the uncertainty surrounding the treatment of United States cannabis-related activities, including the rescission of the Cole Memorandum, the Canadian Securities Administrators published a staff notice (Staff Notice 51-352 (Revised)) on February 8, 2018 setting out certain disclosure expectations for issuers with United States cannabis-related activities. Staff Notice 51-352 (Revised) includes additional disclosure expectations that apply to all issuers with United States cannabis-related activities, including those with direct and indirect involvement in the cultivation and distribution of cannabis, as well as issuers that provide goods and services to third parties involved in the United States cannabis industry.
In accordance with the Canadian Securities Administrators Staff Notice 51-352 (Revised) – Issuers with U.S. Marijuana-Related Activities (“Staff Notice 51-352”), below is a table of concordance that is intended to assist readers in identifying the disclosure expectations outlined in Staff Notice 51-352.
In accordance with Staff Notice 51-352, this section provides a discussion of the federal and state-level U.S. regulatory regimes in the jurisdictions where Grown Rogue is currently directly involved through its subsidiaries or is planning to be directly involved in the future. Certain Grown Rogue subsidiaries are directly engaged in the manufacture, possession, use, sale or distribution of cannabis in the recreational cannabis marketplace in the State of Oregon. Grown Rogue also intends to enter the Michigan market. In accordance with Staff Notice 51-352, Grown Rogue will evaluate, monitor and reassess this disclosure, and any related risks, on an ongoing basis and the same will be supplemented and amended to investors in public filings, including in the event of government policy changes or the introduction of new or amended guidance, laws or regulations regarding marijuana regulation. Any non-compliance, citations or notices of violation which may have an impact on Grown Rogue’s licenses, business activities or operations will be promptly disclosed by Grown Rogue.
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| All Issuers with US Marijuana-Related Activities | Response | |
| Describe the nature of the issuer’s involvement in the U.S. marijuana industry and include the disclosures indicates for at least one of the direct, indirect and ancillary industry involvement types. | See above under “Description of Business”.
See below under “U.S. Regulatory Matters”
| |
| Prominently state that marijuana is illegal under US federal law and that enforcement of relevant laws is a significant risk | See above | |
| Discuss any statements and other available guidance made by federal authorities or prosecutors regarding the risk of enforcement action in any jurisdiction where the issuer conducts U.S. marijuana-related activities. | See below under “U.S. Regulatory Matters”
See the following risk factors included in the Company’s Listing Statement available on www.SEDAR.com:
Section 17 – Risk Factors – Grown Rogue’s Business is Illegal under U.S. Federal Law
Section 17 – Risk Factors – Because marijuana is illegal under federal law, investing in cannabis business could be found to violate the US Federal CSA | |
| Outline related risks including, among others, the risk that third party service providers could suspend or withdraw services and the risk that regulatory bodies could impose certain restrictions on the issuer’s ability to operate in the U.S. | See the following risk factors included in the Company’s Listing Statement available on www.SEDAR.com: Section 17 – Risk Factors – Grown Rogue’s Business is Illegal under U.S. Federal Law | |
| Section 17 – Risk Factors – Because marijuana is illegal under federal law, investing in cannabis business could be found to violate the US Federal CSA |
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| All Issuers with US Marijuana-Related Activities | Response | |
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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| All Issuers with US Marijuana-Related Activities | Response | |
| 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.
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Because many states in the United States have approved certain medical or recreational uses of cannabis, the U.S. Department of Justice, through the Cole Memorandum, had previously described a set of priorities for federal prosecutors operating in states that had legalized the medical or other adult use of cannabis. The Cole Memorandum represented a significant shift in U.S. federal government priorities away from strict enforcement of federal cannabis prohibition.
However, the Cole Memorandum was merely a directive regarding enforcement and did not overturn or invalidate the Federal CSA or any other federal law or regulation.
The Cole Memorandum was rescinded in January 2018 by Jeff Sessions, the former U.S. Attorney General, who deemed it “unnecessary”. This is based on Mr. Sessions’s belief, which was also expressed in the Cole Memorandum that each state’s federal prosecutor should “follow the well-established principles that govern all federal prosecutions. These principles require federal prosecutors deciding which cases to prosecute to weigh all relevant considerations, including federal law enforcement priorities set by the Attorney General, the seriousness of the crime, the deterrent effect of criminal prosecution, and the cumulative impact of particular crimes on the community.” The rescission of the Cole Memorandum, and comments made publicly by Mr. Sessions and other members of the Trump Administration, signal a significant shift by the U.S. federal government back to more strict enforcement of federal law.
On January 4, 2018, Billy J. Williams, the current United States Attorney for the District of Oregon and former Multnomah County (Oregon) Deputy District Attorney who handled major violent crimes and later served as a Chief of the Violent Crimes Unit and as the Indian Country AUSA/Tribal Liaison for the Department of Justice prior to being appointed as the federal prosecutor for Oregon, Mr. Williams provided the below statement on marijuana enforcement in the District of Oregon: “As noted by Attorney General Sessions, today’s memo on marijuana enforcement directs all U.S. Attorneys to use the reasoned exercise of discretion when pursuing prosecutions related to marijuana crimes. We will continue working with our federal, state, local and tribal law enforcement partners to pursue shared public safety objectives, with an emphasis on stemming the overproduction of marijuana and the diversion of marijuana out of state, dismantling criminal organizations and thwarting violent crime in our communities.”
In an editorial published on January 12, 2018, Mr. Williams wrote: “In sum, I have significant concerns about the state’s current regulatory framework and the resources allocated to policing marijuana in Oregon.”
At a meeting on February 2, 2018, Mr. Williams told Oregon’s top politicians and law enforcement officials that there’s more cannabis being produced in the state than can legally be consumed. “And make no mistake about it, we’re going to do something,” Williams told dozens of politicians, tribal leaders, sheriffs as well as representatives of the FBI and the U.S. Drug Enforcement Administration. “Here’s what I know, in terms of the landscape here in Oregon: We have an identifiable and formidable marijuana over-production and diversion problem,” Williams said. “That’s the fact. My responsibly is to work with our state partners to do something about it.”
Because producing, manufacturing, processing, possessing, distributing, selling, and using marijuana is illegal under U.S. federal law, investing in cannabis business could be found to violate the Federal CSA. As a result, individuals involved with cannabis business, including but not limited to investors and lenders, may be indicted under U.S. federal law. An investment in the Company may: (a) expose an investor personally to criminal liability under U.S. federal law, resulting in monetary fines and jail time; and (b) expose any real and personal property used in connection with Grown Rogue’s business to seizure and forfeiture to the U.S. federal government.
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Active enforcement of the current federal law on cannabis may thus directly and adversely affect revenues and profits of Grown Rogue. The risk of strict enforcement of the Federal CSA remains uncertain.
U.S. FEDERAL LAWS APPLICABLE TO BANKING
Because producing, manufacturing, processing, possessing, distributing, selling, and using marijuana is a crime under the Federal CSA, most U.S. banks and other financial institutions are unwilling to provide banking services to marijuana businesses due to concerns about criminal liability under the Federal CSA as well as concerns related to federal money laundering rules under the U.S. Bank Secrecy Act. Canadian banks are also hesitant to deal with cannabis companies, due to the uncertain legal and regulatory framework of the industry. Banks and other financial institutions could be prosecuted and possibly convicted of money laundering for providing services to cannabis businesses.
Under U.S. federal law, banks or other financial institutions that provide a cannabis business with a checking account, debit or credit card, small business loan, or any other service could be found guilty of money laundering or conspiracy. In both Canada and the United States transactions by cannabis businesses involving banks and other financial institutions are both difficult and unpredictable under the current legal and regulatory landscape. Though guidelines issued in past years allow financial institutions to provide bank accounts to certain cannabis businesses, few U.S. banks have taken advantage of those guidelines and many U. S. cannabis businesses still operate on an all-cash basis.
OREGON STATE REGULATION
The Oregon Medical Marijuana Program (“OMMP”) is a state registry program within the Public Health Division, Oregon Health Authority (“OHA”). The role of the OHA is to administer the Oregon Medical Marijuana Act. The OMMP allows individuals with a medical history of one or more qualifying illnesses and a doctor’s written statement to apply for registration with the OMMP. Qualified applicants are issued a medical marijuana card that entitles them to legally possess and cultivate cannabis, subject to certain limitations.
On November 4, 2014, Oregon voters passed Measure 91, known as the Control, Regulation, and Taxation of Marijuana and Industrial Hemp Act (the “Act”), effectively ending the state’s prohibition of recreational marijuana and legalizing the possession, use, and cultivation of marijuana within legal limits by adults 21 years and older. The Act did not amend or effect the Oregon Medical Marijuana Act and the OMMP. The Act empowered the Oregon Liquor Control Commission (“OLCC”) with regulating sales of recreational marijuana in Oregon. It is possible that the voters could potentially repeal the law that permits both the medical and recreational marijuana industry to operate under state law.
Under current Oregon law, possession and home cultivation by adults at least 21 years old is allowed within legal limits. Public sales of marijuana and marijuana products may be done only through licensed retailers. The OLCC has the authority to decide how many licenses to allow in a specific area or location and may refuse granting a license if there are reasonable grounds to believe there are sufficient licenses in the area or if the granting of a license is not demanded by public interest or convenience. The OLCC may disqualify applicants for a number of reasons, including for lacking a good moral character, for lacking sufficient financial resources or responsibility, for relevant past convictions, and for using marijuana, alcohol, or drugs “to excess.”
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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.
MICHIGAN STATE REGULATION
As part of its business plan, Grown Rogue intends to enter the Michigan state market.
In November 2008, Michigan residents approved the Michigan Medical Marihuana Act20 (the “MMMA”) to provide a legal framework for a safe and effective medical marijuana program. In September 2016, the Michigan Senate passed the Medical Marihuana Facilities Licensing Act21 (the “MMFLA”) and the Marihuana Tracking Act (the “MTA” and together with the MMMA and the MMFLA, the “Michigan Cannabis Regulations”) to provide a comprehensive licensing and tracking scheme, respectively, for the medical marijuana program. Additionally, the Michigan Department of Licensing and Regulatory Affairs and its licensing board (“LARA”) has supplemented the Michigan Cannabis Regulations with “Emergency Rules” to further clarify the regulatory landscape surrounding the medical marijuana program. LARA is the main regulatory authority for the licensing of marijuana businesses.
Under the MMFLA, LARA administrates five types of “state operating licenses” for medical marijuana businesses: (a) a “grower” license, (b) a “processor” license, (c) a “secure transporter” license, (d) a “provisioning center” license and (e) a “safety compliance facility” license. There are no stated limits on the number of licenses that can be made available on a state level; however, LARA has discretion over the approval of applications and municipalities can pass additional restrictions.
On November 6, 2018, Michigan voters approved Proposal 1, to make marihuana legal under state and local law for adults 21 years of age or older and to control the commercial production and distribution of marihuana under a system that licenses, regulates, and taxes the businesses involved. The act will be known as the Michigan Regulation and Taxation of Marihuana Act24. According to Proposal 1, LARA is required to art accepting applications for retail (recreational) dispensaries within 12 months of the measure’s effective date.
MICHIGAN LICENSE
State operating licenses for marijuana businesses have a 1 year term and are annually renewable if certain conditions are met: (a) the renewal application is submitted prior to the date the license expires, or within sixty (60) days of expiration if all other conditions are met and a late fee is paid, (b) the licensee pays the regulatory assessment fee set by LARA and (c) the licensee continues to meet the requirements to be a licensee under the Michigan Cannabis Regulations. Each renewal application is reviewed by LARA, but there is no guarantee of a timely renewal. There is no ultimate expiry after which no renewals are permitted.
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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. |
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.
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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 period ended July 31, 2020 that have materially affected, or are reasonably likely to materially affect, the ICFR. As a result, no such significant changes were identified through their evaluation.
There have been no material changes in the Company’s internal control over financial reporting during the period ended July 31, 2020 that have materially affected, or are reasonably likely to materially affect, internal control over financial reporting.
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Exhibit 7
Grown Rogue Continues Upward Trend Reporting Second Consecutive Quarter of Positive Adjusted EBITDA
Medford, Oregon, September 30, 2020 – Grown Rogue International Inc. (“Grown Rogue” or the “Company”) (CSE: GRIN) (OTC: GRUSF), a multi-state cannabis company with operations and assets in Oregon and Michigan, has released its financial and operating results for the three months ended July 31, 2020. The Company’s business strategy focusing on supply chain efficiencies and higher margin product sales continues to pay dividends as Grown Rogue has achieved positive Adjusted EBITDA1 for the second consecutive quarter while also seeing an increase in average selling price (ASP) for its indoor flower. Production in Q3 2020 at Grown Rogue’s indoor facility increased by 92% versus Q3 2019 and was also up 24% vs Q2 2020.
All amounts are expressed in United States Dollars unless otherwise indicated. Certain metrics, including those expressed on an adjusted basis, are non-IFRS measures.
Q3 2020 Highlights
| ● | Second consecutive quarter of positive Adjusted EBITDA; $141k for the quarter and $183k for the year-to-date.1 Improvement of $1.4m in Q3 2020 versus Q3 2019 ($1.2m). Increased average selling price of indoor flower in Oregon to $1,335 in Q3 2020 from $837 Q3 2019 and $1,082 in Q2 2020 |
| ● | Continued to quickly monetize inventory despite restrictions placed on retailers due to COVID-19, achieving average inventory turns of 11 days in Q3 2020 for Oregon indoor production |
| ● | Reported a cash cost per gram produced of $0.872 for Oregon high quality indoor production |
| ● | Total reported revenue was $904k, all of which was Grown Rogue branded product; a 90% increase for branded product sales and a 17% increase in total revenue versus $774k in Q3 2019 |
| ● | Michigan proforma revenues3 were $518k; of which $462k was from medical flower sales at an average price of $2,462 |
| ● | Proforma revenue3 was $1.4m in Q3 2020 |
| ● | Cash balance of $591k versus $75k at year-end (October 31st) and $257k at July 31, 2019. Working capital deficiency improved from ($2.7m) at year-end to ($0.3m) |
“We’re pleased with our performance in Q3 and the positive effects of our streamlined business strategy, focusing on higher margin products and operational efficiencies, which have allowed us to continue our trend of profitable operations,” said Obie Strickler, CEO of Grown Rogue. “In Michigan, we’ve continued to see tremendous demand for our products as this exciting market continues to grow, especially with recreational sales gaining rapid momentum.
The steady expansion of the Golden Harvests facility has allowed our partner to capitalize on the current market conditions and sets us up for a bright future in the state.”
Q3 2020 Highlights by State
Oregon Operations
| ● | Completed construction of a 7th growing room, bringing our state-of-the-art indoor facility closer to full capacity |
| ● | Indoor flower sold at an average price of $1,335/lb., versus $837/lb. in Q3 2019, which was an increase of 60% |
| ● | Sungrown flower sold at an average price of $677/lb., versus $461/lb. in Q3 2019, which was an increase of 46% |
| ● | Indoor inventory turn times were 11 days on average versus 8 days for Q2 2020, 12 days for Q1 2020, and 22 days for Q4 2019 |
Michigan Operations
| ● | Golden Harvests operates an 80,000 sq. ft. indoor cultivation facility, with ~10,000 sq. ft. producing in Q3 2020, another 2,500 sq. ft. under construction at quarter end and plans for continued expansion |
| ● | Production in Michigan was 245 pounds in Q3 2020, an increase of 40% versus Q2 2020 |
| ● | Michigan proforma revenues3 were $518k; of which $462k was from medical flower sales at an average price of $2,462 |
| ● | Subsequent to quarter end, Golden Harvests received their first Adult-Use cultivation license adding an additional 2,000 plant capacity to the facility. In addition, Golden Harvests completed construction on an additional 2,500 sq. ft. flowering room that was filled in early September |
Selected Financial Information (Complete financial tables have been filed on www.sedar.com)
| (in $000s except per share amounts) | Three Months | |||||||
| Three Months Ended July 31 | 2020 | 2019 | ||||||
| Reported Revenue | 904 | 774 | ||||||
| Gross Profit, excluding fair value items | 428 | 242 | ||||||
| Proforma Revenue3 | 1,422 | 774 | ||||||
| Adjusted EBITDA1 (loss) | 141 | (1,235 | ) | |||||
| Net loss per share | (0.01 | ) | (0.01 | ) | ||||
| Weighted Common Shares Outstanding | 104,821 | 72,466 | ||||||
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Grown Rogue revenue increased from $774k in Q3 2019 to $904k in Q3 2020 due to a combination of higher average selling prices and increased volume sold.
Adjusted EBITDA1 remained positive and increased to $141k, as compared to Q2 2020 YTD EBITDA at $42k, driven by continued improvements in margin and ongoing focus on disciplined financial management.
General and administrative expenses continued to decline YTD from $3.8m to $1.8m, representing 57% of revenue versus 109%. These improvements were the result of streamlined operations along with a larger allocation of overhead to inventory.
The Company used ($88k) of cash in operations YTD, representing a $3.2m improvement versus $3.3m used by operations over the comparable prior year period. The use of cash for the period corresponded with an improvement in net working capital.
| Three months ended | Nine months ended | |||||||||||||||
| July 31, | July 31, | |||||||||||||||
| Adjusted EBITDA Reconciliation | 2020 | 2019 | 2020 | 2019 | ||||||||||||
| Net loss, as reported | $ | (794,072 | ) | $ | (931,184 | ) | $ | (2,234,087 | ) | $ | (7,378,192 | ) | ||||
| Add back realized fair value amounts included in inventory sold | 626,522 | 498,542 | 1,471,821 | 1,103,493 | ||||||||||||
| Less unrealized fair value gain (loss) on growth of biological assets | (770,724 | ) | (1,060,550 | ) | (1,425,228 | ) | (1,140,472 | ) | ||||||||
| Less amortization of property & equipment included in cost of sales | 115,331 | - | 351,822 | - | ||||||||||||
| Adjusted Gross Margin | $ | (822,943 | ) | $ | (1,493,192 | ) | $ | (1,835,672 | ) | $ | (7,415,171 | ) | ||||
| Add back accretion expense, as reported | 321,875 | 32,977 | 461,415 | 63,827 | ||||||||||||
| Add back amortization of intangible assets, as reported | 5,980 | 7,660 | 20,620 | 23,714 | ||||||||||||
| Add back amortization of property and equipment, as reported | 48,725 | 157,867 | 103,534 | 480,482 | ||||||||||||
| Add back amortization of right-of-use assets, as reported | 13,233 | - | 70,152 | - | ||||||||||||
| Add back share-based compensation expense, as reported | 329,014 | - | 329,014 | 112,080 | ||||||||||||
| Add back interest expense, as reported | 96,881 | 60,051 | 258,473 | 214,131 | ||||||||||||
| Add back transaction cost | - | - | - | 3,723,724 | ||||||||||||
| Add back unrealized loss on marketable securities, as reported | (69,064 | ) | - | 558,223 | - | |||||||||||
| Less gain on derecognition of derivative liability | (244,572 | ) | - | (244,572 | ) | (15,000 | ) | |||||||||
| Add back loss on debt restructure | 462,213 | - | 462,213 | - | ||||||||||||
| Adjusted EBITDA | $ | 141,342 | $ | (1,234,637 | ) | $ | 183,400 | $ | (2,812,213 | ) | ||||||
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| Three months ended | Nine months ended | |||||||||||||||||||||||
| July 31, 2020 | July 31, 2020 | |||||||||||||||||||||||
| Adjusted Gross Margin reconciliation | Revenue | Costs | Margin | Revenue | Costs | Margin | ||||||||||||||||||
| Grown Rogue products | $ | 903,994 | $ | 349,026 | 61 | % | $ | 3,057,442 | $ | 1,283,260 | 58 | % | ||||||||||||
| Third party products | -- | -- | -- | 125,460 | 115,522 | 8 | % | |||||||||||||||||
| Asset depreciation included in COGS | -- | 115,331 | -- | -- | 351,822 | -- | ||||||||||||||||||
| Cost of packaging & other included in COGS | -- | 11,625 | -- | -- | 66,876 | -- | ||||||||||||||||||
| Total costs of finished cannabis inventory sold | $ | 903,994 | $ | 475,982 | 47 | % | $ | 3,182,902 | $ | 1,817,480 | 43 | % | ||||||||||||
| Realized fair value amounts in inventory sold | -- | 626,522 | -- | -- | 1,471,821 | -- | ||||||||||||||||||
| Unrealized fair value (gain) on growth of biological assets | -- | (770,724 | ) | -- | -- | (1,425,228 | ) | -- | ||||||||||||||||
| Totals, as reported | $ | 903,994 | $ | 331,780 | 63 | % | $ | 3,182,902 | $ | 1,864,073 | 41 | % | ||||||||||||
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. |
| 2. | The Company has provided Gross Margin Reconciliation to demonstrate the methodology for calculating its non-IFRS production cost and margin metrics. Cash production costs of Grown Rogue products is calculated by taking the cost of finished cannabis inventory sold and deducting non-cash production costs, packaging and distribution costs, inventory write-offs and adjustments, and cost of products purchased from other Licensed Producers that were sold. Cash cost of sales per gram of dried cannabis sold is calculated by taking cash production costs of Grown Rogue products by total grams of dried cannabis sold in the period. Management believes these measures provide useful information as they remove noncash amortization and packaging costs and provide a benchmark of the Company against its competitors. |
| 3. | The Company has provided unaudited pro-forma revenue information, which assumes that closed and pending mergers and acquisitions in 2020 are included in the Company’s financial results as of the beginning of the quarterly and annual periods in 2020. |
NON-IFRS FINANCIAL MEASURES
Cash production costs of Grown Rogue products, EBITDA and Adjusted EBITDA are non-IFRS measures and do not have standardized definitions under IFRS. The Company has also provided unaudited pro-forma financial information, which assumes that closed and pending mergers and acquisitions in 2020 are included in the Company’s financial results as of the beginning of the quarterly and annual periods in 2020. The Company has provided the non-IFRS financial measures, which are not calculated or presented in accordance with IFRS, as supplemental information and in addition to the financial measures that are calculated and presented in accordance with IFRS. These supplemental non-IFRS financial measures are presented because management has evaluated the financial results both including and excluding the adjusted items and believe that the supplemental non-IFRS financial measures presented provide additional perspective and insights when analyzing the core operating performance of the business. These supplemental non-IFRS financial measures should not be considered superior to, as a substitute for or as an alternative to, and should only be considered in conjunction with, the IFRS financial measures presented herein. Accordingly, the following information provides reconciliations of the supplemental non-IFRS financial measures, presented herein to the most directly comparable financial measures calculated and presented in accordance with IFRS.
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About Grown Rogue
Grown Rogue International (CSE: GRIN | OTC: GRUSF) is a vertically-integrated, multi-state Cannabis family of brands on a mission to inspire consumers to “enhance experiences” through cannabis. We have combined an expert management team, award winning grow team, state of the art indoor and outdoor manufacturing facilities, and consumer insight based product categorization, to create innovative products thoughtfully curated from “seed to experience.” The Grown Rogue family of products include sungrown and indoor premium flower, along with nitro sealed indoor and sungrown pre-rolls and jars.
FORWARD-LOOKING STATEMENTS
This press release contains statements which constitute “forward-looking information” within the meaning of applicable securities laws, including statements regarding the plans, intentions, beliefs and current expectations of the Company with respect to future business activities. Forward- looking information is often identified by the words “may,” “would,” “could,” “should,” “will,” “intend,” “plan,” “anticipate,” “believe,” “estimate,” “expect” or similar expressions and include information regarding: (i) statements regarding the future direction of the Company (ii) the ability of the Company to successfully achieve its business and financial objectives, (iii) plans for expansion of the Company into Michigan and securing applicable regulatory approvals, and (iv) expectations for other economic, business, and/or competitive factors. Investors are cautioned that forward-looking information is not based on historical facts but instead reflect the Company’s management’s expectations, estimates or projections concerning the business of the Company’s future results or events based on the opinions, assumptions and estimates of management considered reasonable at the date the statements are made. Although the Company believes that the expectations reflected in such forward-looking information are reasonable, such information involves risks and uncertainties, and undue reliance should not be placed on such information, as unknown or unpredictable factors could have material adverse effects on future results, performance or achievements of the combined company. Among the key factors that could cause actual results to differ materially from those projected in the forward-looking information are the following: changes in general economic, business and political conditions, including changes in the financial markets; and in particular in the ability of the Company to raise debt and equity capital in the amounts and at the costs that it expects; adverse changes in the public perception of cannabis; decreases in the prevailing prices for cannabis and cannabis products in the markets that the Company operates in; adverse changes in applicable laws; or adverse changes in the application or enforcement of current laws; compliance with extensive government regulation and related costs, and other risks described in the Company’s public disclosure documents filed on www.sedar.com.
Should one or more of these risks or uncertainties materialize, or should assumptions underlying the forward-looking information prove incorrect, actual results may vary materially from those described herein as intended, planned, anticipated, believed, estimated or expected. Although the Company has attempted to identify important risks, uncertainties and factors which could cause actual results to differ materially, there may be others that cause results not to be as anticipated, estimated or intended. The Company does not intend, and does not assume any obligation, to update this forward-looking information except as otherwise required by applicable law.
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.
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The Company is indirectly involved in the manufacture, possession, use, sale and distribution of cannabis in the recreational cannabis marketplace in the United States through its indirect operating subsidiaries. Local state laws where its subsidiaries operate permit such activities however, these activities are currently illegal under United States federal law. Additional information regarding this and other risks and uncertainties relating to the Company’s business are disclosed in the Company’s Listing Statement filed on its issuer profile on SEDAR at www.sedar.com. Should one or more of these risks, uncertainties or other factors materialize, or should assumptions underlying the forward-looking information or forward-looking statements prove incorrect, actual results may vary materially from those described herein as intended, planned, anticipated, believed, estimated or expected.
No stock exchange, securities commission or other regulatory authority has approved or disapproved the information contained herein.
For further information on Grown Rogue International please visit www.grownrogue.com or contact:
Obie Strickler
Chief Executive Officer
obie@grownrogue.com
Investor Relations Desk Inquiries
invest@grownrogue.com
(458) 226-2100
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