Real-time Form 4 intelligence. Smarter insider tracking.
YoY shift: Neutral
Year-over-year tone shift - average net-tone change across Risk Factors and MD&A vs the prior 10-K. This filing is -0.04pp more bearish than last year's.
Why YoY instead of absolute: the LM lexicon has ~6.6× more negative words than positive (legal/risk-disclosure language is heavy on hedging), so every 10-K reads bearish on raw tone. Year-over-year change strips that bias and surfaces the actual shift in management's framing.
Tone shift by section
The two components the gauge averages: how Risk Factors and MD&A each shifted in net tone versus last year's 10-K. The headline above is their average, so a green needle over a soft section just means the other section carried it.
Risk Factors
+0.00pp
Flat
Net-tone change vs last year's 10-K.
MD&A
-0.07pp
Flat
Net-tone change vs last year's 10-K.
Per-snippet highlights
Sentence-level sentiment highlighting with category and subcategory filters is coming once the snippet-scoring pipeline lands. For now, dig into the actual section text on the Sections tab.
Risk Factors (Item 1A)
4,755 words
ITEM 1A. RISK FACTORS
In addition to the information contained in this Annual Report on Form 10-K, we have identified the following material risks and uncertainties which reflect our outlook and conditions known to us as of the date of this Annual Report. These material risks and uncertainties should be carefully reviewed by our stockholders and any potential investors in evaluating the Company, our business and the market value of our common stock. Furthermore, any one of these material risks and uncertainties has the potential to cause actual results, performance, achievements or events to be materially different from any future results, performance, achievements or events implied, suggested or expressed by any forward-looking statements made by us or by persons acting on our behalf. Refer to “Forward-looking Statements”.
There is no assurance that we will be successful in preventing the material adverse effects that any one or more of the following material risks and uncertainties may cause on our business, prospects, financial condition and operating results, which may result in a significant decrease in the market price of our common stock. Furthermore, there is no assurance that these material risks and uncertainties represent a complete list of the material risks and uncertainties facing us. There may be additional risks and uncertainties of a material nature that, as of the date of this Annual Report, we are of or that we consider immaterial that may become material in the future, any one or more of which may result in a material effect on us. You could all or a significant portion of your investment due to any one of these material risks and uncertainties.
Language change vs prior 10-K
MD&A (Item 7) - words with the biggest YoY frequency increase
Negative rising
discontinued+3
deficiency+1
Positive rising
No words rose this year.
MD&A (Item 7)
3,350 words
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following management’s discussion and analysis of the Company’s financial condition and results of operations contain forward-looking statements that involve risks, uncertainties and assumptions including, among others, statements regarding our capital needs, business plans and expectations. In evaluating these statements, you should consider various factors, including the risks, uncertainties and assumptions set forth in reports and other documents we have filed with or furnished to the SEC and, including, without , this Annual Report on Form 10-K filing for the fiscal year ended July 31, 2023, including the consolidated financial statements and related notes contained herein. These factors, or any one of them, may cause our actual results or actions in the future to differ materially from any forward-looking statement made in this document. Refer to “Forward-looking Statements” and Item 1A. Risk Factors.
We have a limited operating history which may make it difficult for investors to predict future performance based on current operations.
We have a limited operating history upon which investors may base an evaluation of our potential future performance. Our subsidiary, NMG was formed on March 3, 2014 and began carrying on business in the same year, and therefore, our prospects must be considered in light of the risks common to early-stage enterprises, including under-capitalization, cash shortages, limitations with respect to personnel, financial, and other resources and lack of revenues.
We have incurred losses in prior periods, and losses in the future could cause the quoted price of our Common Shares to decline or have a material adverse effect on our financial condition, our ability to pay our debts as they become due and on our cash flow.
We have incurred losses in prior periods. For the fiscal year ended July 31, 2023, we incurred a comprehensive loss of $20,307,880 and, as of that date, we had an accumulated deficit of $66,829,507. Any losses in the future could cause the quoted price of our Common Shares on the CSE to decline or have a material adverse effect on our financial condition, our ability to pay our debts as they become due, and on our cash flow.
We are a holding company and investors are subject to the risks attributable to our subsidiaries which generate substantially all of our revenues.
We are a holding company and essentially all of our operating assets are the capital stock of our subsidiaries. As a result, investors in us are subject to the risks attributable to our subsidiaries. As a holding company, we conduct our business through our subsidiaries, which generate substantially all of our revenues. Consequently, our cash flows and ability to complete current or desirable future enhancementopportunities are dependent on the earnings of our subsidiaries and the distribution of those earnings to us. The ability of our subsidiaries to pay dividends and other distributions will depend on their operating results and will be subject to applicable laws and regulations which require that solvency and capital standards be maintained by such companies and contractual restrictions contained in the instruments governing their debt. In the event of a bankruptcy, liquidation or reorganization of any of our subsidiaries, holders of indebtedness and trade creditors will generally be entitled to payment of their claims from the assets of those subsidiaries before any assets are made available for distribution to us.
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As a manufacturer and distributor of ingestible products, we face exposure to product liability claims, regulatory action and litigation if products are alleged to have caused harm.
We face an inherent risk of exposure to product liability claims, regulatory action and litigation if our products are alleged to have caused significant loss or injury. In addition, the manufacture and sale of our products involves the risk of injury to consumers due to tampering by unauthorized third parties or product contamination. Previously unknown adverse reactions resulting from human consumption of our products alone or in combination with other medications or substances could occur. We may be subject to various product liability claims, including, among others, that its products caused injury or illness, include inadequate instructions for use or include inadequatewarnings concerning possible side effects or interactions with other substances. A product liability claim or regulatory action against us could result in increased costs, could adversely affect our reputation with our clients and consumers generally, and could have a material adverse effect on our results of operations and financial condition. There can be no assurances that we will be able to obtain or maintain product liability insurance on acceptable terms or with adequate coverage against potential liabilities. Such insurance is expensive and may not be available in the future on acceptable terms, or at all. The inability to obtain sufficient insurance coverage on reasonable terms or to otherwise protect against potential product liability claims could prevent or inhibit the commercialization of our potential products.
As a manufacturer and distributor of products, we face exposure to product recalls or return of products.
We may be subject to the recall or return of our products for reasons such as, product defects, contamination, unintendedharmful side effects, interactions with other substances, packaging safety and inadequate or inaccurate labeling disclosure. If any of our products are recalled, we could be required to incur the unexpected expense of the recall and any legal proceedings that might arise in connection with the recall. We may lose a significant amount of sales and may not be able to replace those sales at an acceptable margin or at all. In addition, a product recall may require significant management attention. There can be no assurance that any quality, potency or contamination problems will be detected in time to avoid unforeseen product recalls, regulatory action or lawsuits. Additionally, if one of our significant brands were subject to recall, the image of the brand and Body and Mind could be harmed. A recall for any of the foregoing reasons could lead to decreased demand for our products and could have a material adverse effect on our results of operations and financial condition. Additionally, product recalls may lead to increased scrutiny of our regulatory agencies, requiring further management attention and potential legal fees and other expenses.
The impact of the COVID-19 pandemic on the global economy and our operations remains uncertain, which could have a material adverse impact on our business, results of operations and financial condition and on the market price of our common shares.
In December 2019, a strain of novel coronavirus (now commonly known as COVID-19) was reported to have surfaced in Wuhan, China. COVID-19 has since spread rapidly throughout many countries, and, on March 11, 2020, the World Health Organization declared COVID-19 to be a pandemic. In an effort to contain and mitigate the spread of COVID-19, many countries, including the United States, Canada and China, have imposed unprecedented restrictions on travel, and there have been business closures and a substantial reduction in economic activity in countries that have had significant outbreaks of COVID-19. COVID-19 may have a future material impact on our results of operation with respect to retail sales at our dispensary locations as well as wholesales of our products in Nevada to dispensaries in Nevada. In Nevada, the state forced all in-store sales to be halted in March 2020, only allowing home delivery sales, and eventually curbside pickup sales. This order forced the retail market and the wholesale demand to nearly stop until retailers satisfied regulatory requirements to carry out home delivery and curbside pickup. This had a significant negative impact on our sales from March 2020 to May 2020 in Nevada. Although certain COVID-19 restrictions have been relaxed, significant uncertainty remains as to the potential impact of the COVID-19 pandemic on our operations, and on the global economy as a whole. It is currently not possible to predict how long the pandemic will last or the time that it will take for economic activity to return to prior levels. The COVID-19 pandemic has resulted in significant financial market volatility and uncertainty. A continuation or worsening of the levels of market disruption and volatility seen in the recent past could have an adverse effect on our ability to access capital, on our business, results of operations and financial condition, and on the market price of our common shares.
Our future success depends on our key executive officers and our ability to attract, retain, and motivate qualified personnel.
Our future performance depends on the continued services and continuing contributions of our senior management, particularly the Chief Executive Officer who consults to us. Certain members of our senior management team are generally contracted on an at-will basis, which means that they could terminate their employment with us at any time with little or short notice. The loss of the services of our senior management, the CEO, or other key employees/contractors for any reason could significantly delay or prevent the achievement of our strategic objectives and harm our business, financial condition and operating results.
Our continuing ability to attract and retain highly qualified personnel will also be critical to our success because of the need to hire and retain additional personnel as business grows. There can be no assurance that we will be able to attract or retain highly qualified personnel. Because of these factors, we may not be able to effectively manage or grow our business, which could adversely affect our financial condition and operations.
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Litigation may adversely affect our business, financial condition and operating results.
We and/or our subsidiaries may become party to litigation from time to time in the ordinary course of our respective businesses which could adversely affect our respective operations. Should any litigation in which we and/or our subsidiaries become involved be determined against us and/or our subsidiaries, such a decision may adversely affect our respective abilities to continue operating, adversely affect the market price of our Common Shares and use significant resources. Even if we and/or our subsidiaries, as the case may be, is involved in litigation and succeeds, litigation can redirect significant company resources. In addition, litigation may also create a negative perception of our brand.
Our intended growth could suffer if the markets into which we sell our products and services decline, do not grow as anticipated or experience cyclicality.
Our growth depends in part on the growth of the markets which we serve, and visibility into our markets is limited. Our quarterly sales and profits depend substantially on the volume and timing of orders received during the fiscal quarter, which are difficult to forecast. Any decline or lower than expected growth in our served markets could diminish demand for our products and services, which could adversely affect our financial condition and results of operations.
Our business operates in industries that may experience periodic, cyclical downturns. In addition, if our business demand depends on customers’ spending budgets, product and economic cycles can affect the spending decisions of these customers. Demand for our products and services is also sensitive to changes in customer order patterns, which may be affected by announced price changes, changes in incentive programs, new product introductions and customer inventory levels. Any of these factors could adversely affect our growth and results of operations in any given period.
We face intense competition and our competitors may have a longer operating history or greater financial resources allowing them to compete more effectively.
We may face intense competition from other companies, some of which can be expected to have longer operating histories and more financial resources and manufacturing and marketing experience than us. Increased competition by larger and better financed competitors could materially and adversely affect our business, financial condition and results of operations.
The State of Nevada, as well as the states of Ohio, Illinois and New Jersey, have only issued to date a small number of licenses to produce and sell medical marijuana. There were, however, many applicants for licenses. Because of early stages of the industry in which we operate, we expect to face additional competition from new entrants. If the number of users of medical marijuana in the United States increases, the demand for products will increase and we expect that competition will become more intense, as current and future competitors begin to offer an increasing number of diversified products. We may not have sufficient resources to maintain research and development, marketing, sales and client support efforts on a competitive basis, which could materially and adversely affect our business, financial condition and results of operations.
Failure to comply with environmental and safety laws may result in us incurring additional costs for corrective measures.
Medical and adult use cannabis operations are subject to environmental and safety laws and regulations concerning, among other things, emissions and discharges to water, air and land, the handling and disposal of hazardous and non-hazardous materials and wastes, and employee health and safety. Our failure to comply with environmental and safety laws and regulations may result in additional costs for corrective measures, penalties or in restrictions in manufacturing operations. In addition, changes in environmental, employee health and safety or other laws, more vigorous enforcement thereof or other unanticipated events could require extensive changes to operations or give rise to material liabilities, which could have an adverse effect on our business, financial conditions and results of operations.
Our cannabis crop could be harmed by pests, plant diseases or other agricultural risks which would have a material adverse affect on our business.
Our business involves the growing of cannabis, which is an agricultural product. As such, our business is subject to the risks inherent in the agricultural business, such as pests, plant diseases and similar agricultural risks. This could lead to a reduced yield when harvesting the cannabis affecting the supply of cannabis for distribution, and, therefore, could have a material adverse effect on our business operations and our ability to meet consumer demand.
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We may experience increased costs during the growth stage of the cannabis due to the possibility of rising energy costs.
Growing cannabis requires a considerable amount of energy. We are vulnerable to rising costs of energy due to our need to consume considerable amounts of energy to grow our product. Rising or volatile energy costs may adversely impact our business by increasing production costs and decreasing revenue if those increased costs cannot be transferred to the consumer.
The cannabis industry is difficult to forecast due to the industry being in the early growth stages.
Detailed sales forecasts are not generally obtainable from sources at this early stage of the medical marijuana industry in the United States. A failure in the demand for products to materialize as a result of competition, technological change or other factors could have a material adverse effect on our business, financial condition and results of operations.
Our public image and the consumer perception of us is greatly influenced by scientific research, regulatory investigations, and media attention. Negative publicity will result in an unfavorable public image and will negatively affect our financial condition and results of operations.
We believe the medical marijuana industry is highly dependent upon consumer perception regarding the safety, efficacy and quality of the medical marijuana produced. Consumer perception of our products and proposed products can be significantly influenced by scientific research or findings, regulatory investigations, litigation, media attention and other publicity regarding the consumption of medical marijuana products. There can be no assurance that future scientific research, findings, regulatory proceedings, litigation, media attention or other research findings or publicity will be favorable to the medical marijuana market or any particular product, or consistent with earlier publicity.
Our dependence upon consumer perceptions means that adverse reports, findings, attention or other publicity, whether or not accurate or with merit, could have a material adverse effect on us, the demand for our products and proposed products, and our business, financial condition, cash flow and results of operations. Further, adverse publicity reports or other media attention regarding the safety, efficacy and quality of medical marijuana in general, or our products and proposed products specifically, or associating the consumption of medical marijuana with illness or other negative effects or events, could have a material adverse effect on our business and results of operations. Such adverse publicity reports or other media attention could arise even if the adverse effects associated with such products resulted from consumers’ failure to consume such products appropriately or as directed.
Risks related to the Federal and State Regulations
Federal regulation and enforcement may adversely affect the implementation of cannabis laws and regulations may negatively impact our results of operations.
Cannabis is a Schedule I controlled substance under the Controlled Substance Act (the “ CSA ”). Even in those jurisdictions in which the manufacture and use of medical cannabis has been legalized at the state level, the possession, use, cultivation, and transfer of cannabis remains a violation of federal law. Federal law criminalizing the use of cannabis pre-empts state laws that legalize its use for medicinal or adult-retail purposes, and therefore strict enforcement of federal law regarding cannabis would severely restrict our ability to carry out our business plan.
The U.S. Department of Justice under the Obama administration had issued memoranda, including the so-called “Cole Memorandum” on August 29, 2013, characterizing enforcement of federal cannabis prohibitions under the CSA to prosecute those complying with state regulatory systems allowing the use, manufacture and distribution of medical cannabis as an inefficient use of federal investigative and prosecutorial resources when state regulatory and enforcement efforts are effective with respect to enumerated federal enforcement priorities under the CSA. In the Cole Memorandum, the U.S. Department of Justice provided guidance to all federal prosecutors indicating that federal enforcement of the CSA against cannabis-related conduct should be focused on eight priorities, which are to prevent: (1) distribution of cannabis to minors; (2) revenue from sale of cannabis to criminal enterprises, gangs and cartels; (3) transfer of cannabis from states where it is legal to states where it is illegal; (4) cannabis activity from being a pretext for trafficking of other illegal drugs or illegal activity; (5) violence or use of firearms in cannabis cultivation and distribution; (6) drugged driving and adverse public health consequences from cannabis use; (7) growth of cannabis on federal lands; and (8) cannabis possession or use on federal property.
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On January 4, 2018, Attorney General Jeff Sessions issued a memo updating the Department of Justice’s policy on federal marijuana enforcement (the “ Sessions Memorandum ”). The Sessions Memorandum effectively rescinded and replaced the Cole Memorandum, and directed all U.S. Attorneys to enforce the laws enacted by Congress and to follow well-established principles when pursuing prosecutions related to marijuana activities. While in theory the protections under the Cole Memorandum have been abolished, the new policy does not explicitly direct local U.S. Attorneys to launch an attack on state-legal marijuana businesses. Rather, the new policy promulgated by the Sessions Memorandum is to return local control to federal prosecutors who know where and how to deploy Justice Department resources most effectively to reduce violentcrime, stem the tide of the drug crisis, and dismantle criminal gangs. The threat of federal prosecution remains for legitimate, state-legal marijuana businesses, including our business.
However, no assurance can be given that the federal prosecutor in each judicial district where we operate will agree that our activities within such prosecutor’s district do not go contrary to the Justice Department’s goals. There is also no guarantee that the current administration or future administrations will not revise the federal enforcement priorities enumerated in the Cole Memorandum, the Sessions Memorandum or otherwise choose to strictly enforce the federal laws governing cannabis production or distribution.
On April 11, 2018, U.S. Senator Cory Gardner received assurances from former President Donald Trump that 1) states with legal marijuana industries would not be targeted by the Justice Department, 2) the rescission of the Cole Memorandum would not impact state’s legal marijuana industries, and 3) that the former President would support a federalism-based legislative solution to fix the states’ rights issue once and for all. The former President’s comments are encouraging to legal marijuana businesses; however, no legislative action at the federal level has been taken.
Under U.S. federal law, banks or other financial institutions that provide us with banking services could be found guilty of money laundering, which restricts our ability to receive reputable banking services and adversely affects our business operations.
Under U.S. federal law it may potentially be a violation of federal money laundering statutes for financial institutions to take any proceeds from marijuana sales or any other Schedule I substance. Banks and other financial institutions could be prosecuted and possibly convicted of money laundering for providing services to cannabis businesses. Under U.S. federal law, banks or other financial institutions that provide a cannabis business with a checking account, debit or credit card, small business loan, or any other service could be found guilty of money laundering or conspiracy. Financial institutions must submit a “suspicious activity report” (“ SAR ”) as required by federal money laundering laws. These marijuana related SARs are divided into three categories: marijuana limited, marijuana priority, and marijuana terminated, based on the financial institution’s belief that the marijuana business follows state law, is operating out of compliance with state law, or where the banking relationship has been terminated. There can be no assurance that a negative SAR will not be filed against us limiting our access to banking services as well as subjecting us to Federal review. This will also negatively impact our public image and affect operations.
Risks related to Our Securities
We may issue additional Common Shares in the future, which could cause significant dilution to all shareholders.
Our Articles of Incorporation authorize the issuance of up to 900,000,000 Common Shares, with a par value of $0.0001 per share. As of October 27, 2023, the Company had 146,636,974 Common Shares issued and outstanding, 7,553,000 stock options outstanding and 36,415,284 share purchase warrants outstanding, of which 3,200,000 share purchase warrants were held in escrow.
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As at July 31, 2023, the Company’s 17,151,000 stock options outstanding of which only 12,989,000 stock options are exercisable into 12,989,000 Common Shares of the Company with the following terms:
Number of options outstanding
Exercise price
Expiry dates
CAD$0.57
10 December 2023
CAD$0.88
21 August 2024
CAD$0.93
1 October 2024
CAD$0.88
23 January 2025
CAD$0.405
1 March 2025
CAD$0.67
30 April 2025
CAD$0.88
21 August 2024
CAD$0.61
10 December 2023
CAD$0.57
10 December 2023
CAD$0.68
6 March 2026
CAD$0.65
5 April 2024
CAD$0.44
30 November 2026
CAD$0.44
30 November 2024
CAD$0.15
8 July 2027
CAD$0.065
25 April 2028
CAD$0.065
25 April 2028
Number of options exercisable
Exercise price
Expiry dates
CAD$0.57
10 December 2023
CAD$0.88
21 August 2024
CAD$0.93
1 October 2024
CAD$0.88
23 January 2025
CAD$0.405
1 March 2025
CAD$0.67
30 April 2025
CAD$0.88
21 August 2024
CAD$0.61
10 December 2023
CAD$0.57
10 December 2023
CAD$0.68
6 March 2026
CAD$0.65
5 April 2024
CAD$0.44
30 November 2026
CAD$0.44
30 November 2024
CAD$0.15
8 July 2027
CAD$0.065
25 April 2028
As at July 31, 2023, the Company’s 20,800,000 share purchase warrants outstanding are exercisable into 20,800,000 Common Shares of the Company with the following terms:
Number of warrants
outstanding and exercisable
Exercise price
Expiry dates
USD$0.40
19 July 2025
USD$0.10
19 December 2026
USD$0.16
14 June 2027
CAD$0.27
This figure does not include 3,200,000 warrants issued to the Agent pursuant to the Loan Agreement, which warrants are held in escrow by us and are to be released to the Agent if we draw on the Delayed Draw Term Loan by March 31, 2023, or cancelled if we do not draw on the Delayed Draw Term Loan. Each warrant, if released to the Agent, will entitle the holder to acquire one share of common stock at an exercise price of US$0.45 per share until July 19, 2025.
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We may issue additional Common Shares in the future in connection with a financing or an acquisition. Such issuances may not require the approval of our shareholders. Any issuance of additional shares of our Common Shares, or equity securities convertible into our Common Shares, including but not limited to, warrants and options, will dilute the percentage ownership interest of all shareholders, may dilute the book value per share of our Common Shares, and may negatively impact the market price of our Common Shares.
Because we do not intend to pay any cash dividends on our Common Shares, our shareholders will not be able to receive a return on their shares unless they sell them.
We intend to retain any future earnings to finance the development and expansion of our business. We do not anticipate paying any cash dividends on our Common Shares in the foreseeable future. Declaring and paying future dividends, if any, will be determined by our Board, based upon earnings, financial condition, capital resources, capital requirements, restrictions in our Articles of Incorporation, contractual restrictions, and such other factors as our Board deems relevant. Unless we pay dividends, our shareholders will not be able to receive a return on their shares unless they sell them. There is no assurance that shareholders will be able to sell shares when desired.
Our Common Shares are categorized as “penny stock”, which may make it more difficult for investors to buy and sell our Common Shares due to suitability requirements.
Our Common Shares are considered “penny stock”. The SEC has adopted Rule 15g-9 which generally defines “penny stock” to be any equity security that has a market price less than $5.00 per share or an exercise price of less than $5.00 per share, subject to certain exceptions. The price of our Common Shares is significantly less than $5.00 per share. This designation imposes additional sales practice requirements on broker-dealers who sell to persons other than established customers and “accredited investors”. The penny stock rules require a broker-dealer buying securities to disclose certain information concerning the transaction, obtain a written agreement from the purchaser and determine that the purchaser is reasonably suitable to purchase the securities given the increased risks generally inherent in penny stocks. These rules may restrict the ability and/or willingness of brokers or dealers to buy or sell our Common Shares, either directly or on behalf of their clients, may discourage potential stockholders from purchasing our Common Shares, or may adversely affect the ability of stockholders to sell their shares.
Financial Industry Regulatory Authority (“FINRA”) sales practice requirements may also limit a shareholder’s ability to buy and sell our Common Shares, which could depress the price of our Common Shares.
In addition to the “penny stock” rules described above, FINRA has adopted rules that require a broker-dealer to have reasonable grounds for believing that the investment is suitable for that customer before recommending an investment to a customer. Prior to recommending speculative low-priced securities to their non-institutional customers, broker-dealers must make reasonable efforts to obtain information about the customer’s financial status, tax status, investment objectives, and other information. Under interpretations of these rules, FINRA believes that there is a high probability that speculative low-priced securities will not be suitable for at least some customers. Thus, the FINRA requirements make it more difficult for broker-dealers to recommend that their customers buy our Common Shares, which may limit your ability to buy and sell our Common Shares, have an adverse effect on the market for our Common Shares, and thereby depress our price per Common Share.
limitation
Introduction
The following discussion summarizes the results of operations for each of our fiscal years ended July 31, 2023 and 2022 and our financial condition as at July 31, 2023 and 2022, with a particular emphasis on fiscal 2023, our most recently completed fiscal year.
Overview
Our business is the production and cultivation of medical and recreational marijuana in Nevada pursuant to licenses held by NMG operating under the marquee brand name of Body & Mind and produces flower, oil, extracts and edibles and are available for sale in dispensaries in Nevada. In addition, we have retail / dispensary operations in California, Illinois and Arkansas, and wholesale operations in Ohio and Arkansas that produce flower and/or concentrates from extraction. During the fiscal year ended July 31, 2023, we had retail/dispensary operations in Ohio and Michigan, however, those dispensaries have now been sold.
Results of Operations for the years ended July 31, 2023 and 2022
The following table sets forth our results of operations for the fiscal years ended July 31, 2023 and 2022:
July 31,
July 31,
Sales
Cost of sales and other
General and Administrative Expenses
Other Items
Net Loss from Continuing Operations
Net Loss
Foreign Currency Translation Adjustment
Comprehensive Loss
Basic and Diluted Loss Per Share – Continuing Operations
Basic and Diluted Loss Per Share – Discontinued Operations
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Revenues and Cost of Sales
For the year ended July 31, 2023, we had total sales of $22,819,983 and cost of sales of $17,044,221 for a gross margin of $5,775,762 compared to total sales of $23,372,823 and cost of sales of $15,925,892 for a gross margin of $7,446,931 in the year ended July 31, 2022. Sales remained relatively the same, with only a 2% decrease for 2023, but the cost of sales increased by 7% compared to 2022 largely due to the Nevada inventory adjustment recognized during fiscal 2023. During the year ended July 31, 2023, the Company recorded product sales as follows:
Revenues – By Segment
Year ended July 31, 2023
Wholesale
Retail
Total
Revenues – By Segment
Year ended July 31, 2022
Wholesale
Retail
Total
Operating Expenses
For the year ended July 31, 2023, general and administrative expenses totaled $13,445,701 compared with $11,958,933 for the year ended July 31, 2022. A significant reason for the increase in general and administrative expenses between the years related to increased depreciation from $1,062,797 to $1,114,508, license, utilities and office administration from $3,570,351 to $4,007,588, business development expense from $669,471 to $835,326 and accounting and legal fees from $845,386 to $1,315,666 as a result of various ongoing acquisitions, expansions and sale of the Michigan and Ohio operations. Lease expense increased from $691,321 to $1,283,987 mainly as a result of additional leased premises in New Jersey and Illinois.
Income Taxes
The (benefit) expense for income taxes consists of the following:
Current:
Federal
State
Deferred:
Federal
State
Total (benefit) expense for income taxes
Section 280E of the Internal Revenue Code (“IRC”) prohibits businesses engaged in the trafficking of Schedule I or Schedule II controlled substances from deducting normal business expenses, such as payroll and rent, from gross income (revenue less cost of goods sold). Section 280E was originally intended to penalizecriminal market operators, but because cannabis remains a Schedule I controlled substance for U.S. Federal purposes, the Internal Revenue Service (the “IRS”) has subsequently applied Section 280E to state-legal cannabis businesses. Cannabis businesses operating in states that align their tax codes with the IRC are also unable to deduct normal business expenses from their state taxes. The nondeductible expenses shown in the effective rate reconciliation above is comprised primarily of the impact of applying Section 280E to the Company’s businesses that are involved in selling cannabis, along with other typical non-deductible expenses such as lobbying expenses.
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Net loss for the year before income tax
Federal and state income tax rates
Expected income tax recovery
State taxes
Stock options
IRC 280E disallowance
Deferred tax adjustment
Return to provision
Valuation allowance
Change in State tax rate
Uncertain tax position
Other
Total income tax expense
The impact of the loss on impairment of goodwill, intangible assets, ROU assets, and loans receivable in the aggregate amount of $9,370,092 is included in the IRC 280E disallowance for 2023. Approximately $19 million was included in the IRC 280E disallowance for the year ended 31 July 2023 related to the impairmentlosses.
Other Income (Expenses)
During the year ended July 31, 2023, our other income and expenses accounted for $10,484,265 in expenses as compared to $22,128,743 in expenses for the year ended July 31, 2023. The significant components in other items primarily relates to the Company’s impairmentloss on brand, licenses, property and equipment and right-of-use assets in Nevada and Long Beach for a combined total of $9,370,092. In 2022, the Company also recognized impairmentloss on brand, licenses, goodwill and right-of-use assets in Manistee, Michigan for a combined total of $20,517,192.
Net Loss
Net loss for the year ended July 31, 2023 totaled $20,566,354 compared with a net loss of $28,228,104 for the year ended July 31, 2022. The decrease in net loss of $7,661,750 is largely due to the impairmentloss on right-of-use assets, brand, licenses and goodwill totaling $20,517,192 in the comparative year and offset mainly as a result of the increase in operating expenses as discussed above.
Other Comprehensive Income (Loss)
We recorded translation adjustments gain of $258,474 and $96,380 for the year ended July 31, 2023 and 2022, respectively. The amounts are included in the statement of operations as other comprehensive income (loss) for the respective years.
Liquidity and Capital Resources
The following table sets out our cash and working capital as of July 31, 2023 and 2022:
July 31,
July 31,
Cash reserves
Working capital (deficiency)
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Financings
There has been no equity financing during the year ended July 31, 2023. The Company received $3,000,000 related to issuing unsecured five-year convertible debentures bearing interest at 8% per annum, compounded annually and common stock purchase warrants to acquire 15,000,000 shares of common stock of the Company. These debentures have a maturity date of December 19, 2027 and the investors have the right at any time prior to the maturity date to convert all or any portion of the principal amount and/or any interest amount, into shares of common stock of the Company at US$0.10 per share. In addition, the Company received proceeds from other loans in the amount of $5,245 (2022: repaid $26,533), net, for the year ended July 31, 2023.
Statement of Cashflows
During the year ended July 31, 2023, our net cash increased by $41,952 (2022: decrease of $5,634,366), which included net cash used in operating activities of $3,833,406 (2022: $3,444,278), net cash used in investing activities of $74,479 (2022: $2,145,486), net cash provided by financing activities of $3,515,182 (2022: used $26,533), effect of exchange rate changes on cash and cash equivalents of $258,474 (2022: $96,380), and increase in cash transferred to assets held for sale of $176,181 (2022: decrease of $114,449).
Cash Flow used in Operating Activities
Cash flow used in operating activities totaled $3,833,406 during the year ended July 31, 2023 and totaled $3,444,278 during the year ended July 31, 2022. Significant changes in cash used in operating activities are outlined as follows:
The Company incurred a net loss from operations of $20,322,690 during the year ended July 31, 2023 compared to $29,159,677 in 2022. The net loss in 2023 included, among other things, non-cash depreciation of $781,033 (2022: $821,284), accrued interest and accretion of $458,703 (2022: $948,909), amortization of right-of-use assets of $669,276 (2022: $438,470), amortization of intangible assets of $1,021,260 (2022: $986,906), impairmentloss on its assets of $9,370,093 (2022: $20,517,192), and stock-based compensation of $270,693 (2022: $435,266).
The following non-cash items further adjusted the loss for the year ended July 31, 2023 and 2022:
Increase in amounts receivable and prepaid of $136,717 (2022: decrease of $1,160,729), increase in inventory of $1,254,830 (2022: decrease of $200,230), decrease in deposits of $41,211 (2022: increase of $113,828), increase in trade payables and accrued liabilities of $791,661 (2022: $491,817), decrease in lease liabilities of $718,414 (2022: $775,307), increase in income taxes payable of $2,766,557 (2022: decrease of $1,072,760), and decrease in due to related parties of $70,381 (2021: increase of $111,788).
Cash provided by operating activities from discontinued operations totaled $939,660 during the year ended July 31, 2023 and totaled $1,347,731 during the year ended July 31, 2022.
Cash Flow used in Investing Activities
During the year ended July 31, 2023, investing activities used cash of $74,479 compared to $2,145,486 cash used during the year ended July 31, 2022. The change in cash used in investing activities from the year ended July 31, 2023 relates primarily to investment in Canopy net of cash received of $Nil (2022: $871,497), additional property and equipment of $992,884 (2022: $264,513), and a loan of $938,205 (2022: $391,168) from CCG in Arkansas.
Cash used in investing activities from discontinued operations totaled $19,800 during the year ended July 31, 2023 compared to $618,308 during the year ended July 31, 2022.
Cash Flow provided by Financing Activities
During the year ended July 31, 2023, financing activities provided cash of $3,515,182 compared to $26,533 used during the year ended July 31, 2022. In 2023, the Company received proceeds of $3,000,000 related to convertible debenture financing.
During the year ended July 31, 2022, the Company repaid loans payable of $26,533.
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Trends and Uncertainties
Potential Impact of the COVID-19 Pandemic
In December 2019, a strain of novel coronavirus (now commonly known as COVID-19) was reported to have surfaced in Wuhan, China. COVID-19 has since spread rapidly throughout many countries, and, on March 11, 2020, the World Health Organization declared COVID-19 to be a pandemic. In an effort to contain and mitigate the spread of COVID-19, many countries, including the United States, Canada and China, have imposed unprecedented restrictions on travel, and there have been business closures and a substantial reduction in economic activity in countries that have had significant outbreaks of COVID-19. Although certain restrictions have been relaxed, COVID-19 may have a future material impact on our results of operation with respect to retail sales at our dispensary locations as well as wholesales of our products in Nevada to dispensaries in Nevada. Significant uncertainty remains as to the potential impact of the COVID-19 pandemic on our operations, and on the global economy as a whole. It is currently not possible to predict how long the pandemic will last or the time that it will take for economic activity to return to prior levels. We do not yet know the full extent of any impact on our business or our operations, however, we will continue to monitor the COVID-19 situation closely, and intend to follow health and safety guidelines as they evolve.
There are no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors.
Outstanding share data
At November 10, 2023, we had 146,636,974 issued and outstanding common shares, 17,151,000 outstanding stock options and 20,800,000 outstanding warrants.
Critical Accounting Policies
Our financial statements and accompanying notes have been prepared in accordance with United States generally accepted accounting principles applied on a consistent basis. The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods.
We regularly evaluate the accounting policies and estimates that we use to prepare our financial statements. In general, management’s estimates are based on historical experience, on information from third party professionals, and on various other assumptions that are believed to be reasonable under the facts and circumstances. Actual results could differ from those estimates made by management.
We believe the following critical accounting policies require us to make significant judgments and estimates in the preparation of our consolidated financial statements.
Income taxes
The determination of deferred income tax assets or liabilities requires subjective assumptions regarding future income tax rates and the likelihood of utilizing tax carry-forwards. Changes in these assumptions could materially affect the recorded amounts, and therefore do not necessarily provide certainty as to their recorded values.
Foreign currency
The Company determines the functional currency through an analysis of several indicators such as expenses and cash flows, financing activities, retention of operating cash flows, and frequency of transactions with the reporting entity.
Fair value of financial instruments
Management uses valuation techniques, in measuring the fair value of financial instruments, where active market quotes are not available.
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In applying the valuation techniques, management makes maximum use of market inputs wherever possible, and uses estimates and assumptions that are, as far as possible, consistent with observable data that market participants would use in pricing the instrument. Where applicable data is not observable, management uses its best estimate about the assumptions that market participants would make. Such estimates include liquidity risk, credit risk and volatility may vary from the actual results that would be achieved in an arm’s length transaction at the reporting date. The assessment of the timing and extent of impairment of intangible assets involves both significant judgements by management about the current and future prospects for the intangible assets as well as estimates about the factors used to quantify the extent of any impairment that is recognized.
Long-lived assets and goodwill
Long-lived assets and goodwill are reviewed for indicators of impairment at least annually. When there are indications of impairment, the Company calculates the fair value of reporting units for goodwill and the fair value of the asset groups for long-lived assets using various valuation techniques, which require the input of highly subjective assumptions that can materially affect the fair value estimate.
Intellectual property
The recoverability of the carrying value of the intellectual property is dependent on numerous factors. The carrying value of these assets is reviewed by management when events or circumstances indicate that its carrying value may not be recovered. If impairment is determined to exist, an impairmentloss is recognized to the extent that the carrying amount exceeds the recoverable amount.
Stock-based compensation
The option pricing models require the input of highly subjective assumptions, particularly the expected stock price volatility. Changes in the subjective input assumptions can materially affect the fair value estimate, and therefore the existing models do not necessarily provide a reliable single measure of the fair value of the Company’s stock options.
Business Combination
The results of businesses acquired in a business combination are included in our consolidated financial statements from the date of the acquisition. Purchase accounting results in assets and liabilities of an acquired business being recorded at their estimated fair values on the acquisition date. Any excess consideration over the fair value of assets acquired and liabilities assumed is recognized as goodwill.
We perform valuations of assets acquired and liabilities assumed on each acquisition accounted for as a business combination in order to record the tangible and intangible assets acquired and liabilities assumed based on our best estimate of fair value. Determining the fair value of assets acquired and liabilities assumed requires management to use significant judgment and estimates including the selection of valuation methodologies, estimates of future revenue and cash flows, discount rates and selection of comparable companies. Significant estimation is required in determining the fair value of the customer relationship intangible assets, deferred revenue and contingent consideration liabilities. The significant estimation is primarily due to the judgmental nature of the inputs to the valuation models used to measure the fair value of these intangible assets, deferred revenue and contingent consideration liabilities, as well as the sensitivity of the respective fair values to the underlying significant assumptions. We use the income approach to measure the fair value of these intangible assets. The significant assumptions used to estimate the fair value of the intangible assets included forecasted revenues from existing customers and existing customer attrition rates. When estimating the significant assumptions to be used in the valuation we include a consideration of current industry information, market and economic trends, historical results of the acquired business and other relevant factors. These significant assumptions are forward-looking and could be affected by future economic and market conditions. We engage the assistance of valuation specialists in concluding on fair value measurements in connection with determining fair values of assets acquired and liabilities assumed in a business combination.
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Recent Accounting Pronouncements
In June 2016, the FASB issued ASU No. 2016-13 “Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments” which requires the measurement and recognition of expected credit losses for financial assets held at amortized cost. ASU 2016-13 replaces the existing incurred lossimpairment model with an expected loss methodology, which will result in more timely recognition of credit losses. ASU 2016-13 is effective for annual reporting periods, and interim periods within those years beginning after December 15, 2022. The Company does not anticipate this amendment to have a significant impact on the consolidated financial statements.
In October 2021, the FASB issued ASU 2021-08, Business Combinations (Topic 805), Accounting for Contract Assets and Contract Liabilities from Contracts with Customers. ASU 2021-08 requires the recognition and measurement of contract assets and contract liabilities acquired in a business combination in accordance with ASC 606, Revenue from Contracts with Customers. Considerations to determine the amount of contract assets and contract liabilities to record at the acquisition date include the terms of the acquired contract, such as timing of payment, identification of each performance obligation in the contract and allocation of the contract transaction price to each identified performance obligation on a relative standalone selling price basis as of contract inception. ASU 2021-08 is effective for the Company beginning in the first quarter of 2023. ASU 2021-08 should be applied prospectively for acquisitions occurring on or after the effective date of the amendments. Early adoption of the proposed amendments would be permitted, including adoption in an interim period. The Company does not anticipate this amendment to have a significant impact on the consolidated financial statements.
