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Gage Growth Corp. – ‘1-U’ for 3/22/21

On:  Tuesday, 3/23/21, at 6:36pm ET   ·   As of:  3/24/21   ·   For:  3/22/21   ·   Accession #:  1104659-21-40433

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  As Of               Filer                 Filing    For·On·As Docs:Size             Issuer                      Filing Agent

 3/24/21  Gage Growth Corp.                 1-U:5       3/22/21    1:932K                                   Toppan Merrill/FA

Document/Exhibit                   Description                      Pages   Size 

 1: 1-U         Current Report                                      HTML    444K 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 1-U

CURRENT REPORT PURSUANT TO REGULATION A

Date of report: March 22, 2021

Gage Growth Corp.

(formerly, Wolverine Partners Corp.)

(Exact name of issuer as specified in its charter)

N/A

(I.R.S. Employer Identification Number)

77 King Street West, Suite 400, Toronto, Ontario, Canada M5K 0A1

(Full mailing address of principal executive office)

(313) 771-5499

(Issuer’s telephone number, including area code)

Item 5.     Non-reliance on Previously Issued Financial Statements

On March 22, 2021, the board of directors (the “Board”) of Gage Growth Corp, formerly Wolverine Partners Corp. (the “Company”) concluded that its previously issued interim financial statements for the six-month period ending June 30, 2020, filed with the Securities and Exchange Commission on September 29, 2020 should no longer be relied upon because of an error in such financial statements. The Company arrived at this conclusion while going through its year-end closing process and audit. Consequently, the Company has restated its condensed consolidated interim financial statements for the aforementioned period, and has attached its revised statements to this Form 1-U as Exhibit A.

The adjustments that were made to correct the interim financial statements are as follows:

1.       The first adjustment was related to the Company’s “customer loyalty points” and impacted the Company’s revenues, cost of sales and deferred revenue. During the Company’s year-end review, it was discovered that the reported sales should have been reduced by customer loyalty points earned and this change also impacted cost of sales both of which were overstated. Additionally, the Company determined that its assumed rate of customer loyalty points was too high, so the Company reduced the rate of accrual and this adjustment impacted its revenues and deferred revenue balance.

2.       The second adjustment was the impact of the sales reduction on the calculation of average sales price used in the Company’s biological assets. This impacted the Company’s unrealized gain on changes in fair value of biological assets as well as the biological asset value on the statement of financial position.

3.       The third adjustment was the refinement of the calculation of the value of the options issued during 2020 as it was determined that the volatility was incorrectly calculated and therefore the Company updated the volatility used in the Black Scholes model to value the options. This caused an increase in the value of the Company’s options issued which impacted both share based compensation expense as well as the amounts capitalized into equity for the options issued during the year.

4.       The fourth adjustment related to a subsequent review of the Company’s sales and lease back documentation, during which it was concluded that these transactions should have been included in the June 30, 2020 statement of financial position.

5.       The fifth adjustment related to a misclassification within shareholders’ equity between reserve for share based payments and accumulated other comprehensive income.

6.       The sixth and final adjustment related to a determination that the tax treatment of unrealized gains and losses on one of the Company’s investments was applied to the wrong tax jurisdiction.

These corrections are noted in the “Corrections” column on the table on page 37 of the adjusted financial statements, attached as Exhibit A.

The Board has discussed its decision to correct its previously issued interim financial statements with its independent auditor, who agrees that the adjustments discussed above should be made to prevent future reliance on the previously issued statements and has had the chance to review adjusted interim financial statements attached as Exhibit A.

EXHIBIT INDEX

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, this Form 1-U has been signed by the following persons in the capacities and on the date indicated. 

Exhibit A

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 1-SA

x   SEMIANNUAL REPORT PURSUANT TO REGULATION A

or

¨ SPECIAL FINANCIAL REPORT PURSUANT TO REGULATION A

For the fiscal semiannual period ended:

June 30, 2020

Gage Growth Corp.

(formerly, Wolverine Partners Corp.)

(Exact name of issuer as specified in its charter)

N/A

(I.R.S. Employer Identification Number)

77 King Street West, Suite 400, Toronto, Ontario, Canada M5K 0A1

(Full mailing address of principal executive office)

(313) 771-5499

(Issuer’s telephone number, including area code)

This Management’s Discussion & Analysis (this “MD&A”) has been prepared by management and should be read in conjunction with the condensed consolidated interim financial statements of the Gage Growth Corp. d/b/a Gage Cannabis Co. (the “Corporation” or the “Company”) together with the related notes thereto for the six-month periods ended June 30, 2020 and June 30, 2019, as well as our audited consolidated financial statements and accompanying MD&A for the year ended December 31, 2019. The condensed consolidated interim financial statements have been prepared in accordance with International Accounting Standards 34, Interim Financial Reporting (“IAS 34”) using accounting policies consistent with International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board (“IASB”) and interpretations of the International Financial Reporting Interpretations Committee (“IFRIC”). Financial information presented in this MD&A is presented in United States (“U.S.”) dollars (“$” OR “US$”), unless otherwise indicated in compliance with International Financial Reporting Standards

Management’s Responsibility for the Financial Statements

Management is responsible for the preparation and fair presentation of the condensed consolidated interim financial statements of the Company together with the related notes thereto for the six months ended June 30, 2020 and June 30, 2019 in accordance with International Financial Reporting Standards, and for such internal control as management determines is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error.

This MD&A contains future-oriented financial information and financial outlook information (collectively, "FOFI") about the Corporation’s prospective results of operations, production and production efficiency, commercialization, revenue and cash on hand, all of which are subject to the same assumptions, risk factors, limitations, and qualifications as set forth in the prospectus. FOFI contained in this MD&A was approved by management as of the date of this MD&A and was provided for the purpose of providing further information about the Corporation’s future business operations. The Company disclaims any intention or obligation to update or revise any FOFI contained in this MD&A, whether as a result of new information, future events or otherwise, unless required pursuant to applicable law. Readers are cautioned that the FOFI contained in this MD&A should not be used for purposes other than for which it is disclosed herein.

OVERVIEW OF THE CORPORATION

On November 22, 2017, the Company was incorporated under the Canada Business Corporations Act (“CBCA”) as “Wolverine Partners Corp.”. The Corporation’s registered and head office is located at 77 King Street West, Suite 400, Toronto-Dominion Centre Toronto, ON M5K 0A1 Canada. The Corporation formed Spartan Partners Corporation, a Michigan corporation (“Spartan Corporation”), as a wholly-owned subsidiary on March 14, 2018 and Spartan Partners Holdings, LLC, a Michigan limited liability company (“Spartan LLC”) on December 20, 2018. Spartan Corporation is the majority shareholder of Spartan LLC who, in turn, wholly-owns Spartan Partners Services LLC (“Services”), Spartan Partners Properties LLC (“Properties”), and Spartan Partners Licensing LLC (“Licensing”), and Mayde US LLC (“Mayde”), all Michigan limited liability companies. Spartan LLC’s subsidiaries have entered into business relationships with a number of licensed and provisionally licensed cultivators, processors, and retailers in the State of Michigan.

On September 16, 2019, the Corporation entered into an asset purchase agreement with Radicle Cannabis Holdings Inc. (“Radicle”) and Gage Co. Inc., pursuant to which the Corporation purchased the trademarks and goodwill of the Gage brand (the “Gage Brand”) then owned by Radicle.

On October 8, 2019, the Corporation entered into an acquisition agreement wherein the Corporation, through 11650157 Canada Corp. (“SubCo”), agreed to purchase all of the issued and outstanding shares of Rivers Innovations Inc. (“Innovations”). On November 11, 2019, Innovations amalgamated with SubCo to form Gage Innovations Corp., a wholly owned subsidiary of the Corporation, and the Innovations Acquisition closed.

BUSINESS OF THE CORPORATION

The Company and its subsidiaries (collectively referred to the “Corporation”) provide management, consulting, human resources, financing, intellectual property, licensing and real estate support for three licensed cultivation centers in Michigan that currently serve five provisioning centers (with an estimated nine provisioning centers by the end of 2020 based upon management assessment), as of the date of this Form 1-SA with additional locations planned beyond 2020.

The Corporation is a vertically integrated business that provides support services to its affiliated cultivators, processors and provisioning centers that are able to control the entire supply chain from cultivation, to oil extraction and processing, to sale for medical and adult-use through licensed Gage-branded provisioning centers or by direct delivery to customers. The Corporation’s principal assets or businesses in the cannabis industry is predominately in the State of Michigan, USA. The Corporation’s plan is to build a solid support base in Michigan before it expands into other states.

In addition to providing support to Gage-branded provisioning centers, the Corporation has also entered into a licensing and partnership agreement with Cookies Creative Consulting & Promotions, LLC (“Cookies”), a California-based cannabis company, wherein the Corporation provides support for a Cookies provisioning center located in the City of Detroit, and dedicates significant shelf space to display and sell Cookies-brand products at existing Gage provisioning centers. Although the Corporation provides such support and services to such cultivation and provisioning centers through various licensing and services agreements, it does not directly own or operate any of its affiliated entities.

In January 2019, the Corporation entered into membership interest transfer restriction and succession agreements, service agreements, credit facilities, lease agreement and licensing agreements (collectively “Affiliate Agreements”) with AEY Holdings, LLC, AEY Thrive, LLC, Thrive Enterprises, LLC, AEY Capital, LLC, 3 State Park, LLC, Pure Releaf SP Drive, LLC, and Buena Vista Real Estate, LLC (collectively, the “License Holders”), through which the Corporation exerts control but without a financial or economic interest in such License Holders. Through these Affiliate Agreements, the Corporation took on the commitment of various licensed retail and cultivation leased premises, which were then sub-leased to the various License Holders. Since then the Corporation has continued to acquire leases, land, brands and continues to provide support to the License Holders engaged in cultivating, processing and retail sales of cannabinoid-based products and are collectively poised to become a dominant vertically integrated cannabis support company in Michigan.

Non-IFRS Financial and Performance Measures

In addition to providing financial measurements based on IFRS, the Company provides additional financial metrics that are not prepared in accordance with IFRS. Management uses non-IFRS financial measures, in addition to IFRS financial measures, to understand and compare operating results across accounting periods, for financial and operational decision making, for planning and forecasting purposes and to evaluate the Company’s financial performance. These non-IFRS financial measures are adjusted EBITDA and working capital. Management believes that these non-IFRS financial measures reflect the Company’s ongoing business in a manner that allows for meaningful comparisons and analysis of trends in the business, as they facilitate comparing financial results across accounting periods and to those of peer companies. As there are no standardized methods of calculating these non-IFRS measures, the Company’s methods may differ from those used by others, and accordingly, the use of these measures may not be directly comparable to similarly titled measures used by others. Accordingly, these non-IFRS measures are intended to provide additional information and should not be considered in isolation or as a substitute for measures of performance prepared in accordance with IFRS.

Adjusted EBITDA

Adjusted EBITDA is a financial measure that is not defined under IFRS. The Company uses this non-IFRS financial measure and believes it enhances an investor’s understanding of the Company’s financial and operating performance from period to period because it excludes certain material non-cash items and certain other adjustments management believes are not reflective of the Company’s ongoing operations and performance. The adjusted EBITDA excludes from net income as reported interest, share-based compensation, tax, depreciation, non-cash expenses, other income, grow cost expensed for biological assets and unsold inventory, and the non-cash fair value effects of accounting for biological assets and inventories. The Company reports adjusted EBITDA to help investors assess the operating performance of its business. The financial measures noted above are metrics that have been adjusted from the IFRS net income measure in an effort to provide readers with a normalized metric in making comparisons more meaningful across the cannabis industry, as well as to remove non-recurring, irregular and one-time items that may otherwise distort the IFRS net income measure. Other companies in the Corporation’s industry may calculate these measures differently than the Company does, limiting their usefulness as comparative measures.

Reconciliations of Non-IFRS Financial and Performance Measures

The table below reconciles net income to adjusted EBITDA for the periods indicated.

RESULTS OF OPERATIONS

The Corporation reports results of operations of its affiliates from the date that the Corporation enters into various support services agreements with its affiliates. The following selected financial information for the six months ended June 30, 2020 includes only the results of the operations after the Corporation established such various support services agreements with affiliates. Accordingly, the information included below may not be representative of the results of operations if such affiliates had included their results of operations for the entire reporting period.

The consolidated financial statements of the Corporation for the six-months ended June 30, 2020 include the accounts of the Corporation and its affiliates as follows:

The Corporation through its 51.2% subsidiary, Spartan Partners Holdings, LLC (“Spartan LLC”), provides support services to the following License Holders through the Affiliate Agreements, and holds no financial or economic interests in these license holding companies. The Corporation includes these entities in its consolidation but has allocated the net loss and comprehensive loss in these entitles to non-controlling interest:

All of the Corporation’s revenues from inception to date are from the sale of its cannabis-based products within the state of Michigan, primarily to medical card holders within the State of Michigan.

Revenue is recorded net of customer discounts. Cost of sales may include different costs compared to other manufacturing and distribution companies. The Corporation’s cost of sales includes inventory, product-related costs and costs to ship products to customers.

Six-months ended June 30, 2020 and six-months ended June 30, 2019:

Revenue for the six months ended June 30, 2020 was $16,986,108. There was only $6,885 revenue in the comparable period of the prior year as the Corporation opened its first provisioning centers in September and October of 2019. The Corporation opened its third provisioning center in Detroit, Michigan in January, 2020 under the Cookies brand. The Corporation opened its fourth provisioning center in Lansing, Michigan in May, 2020. The Corporation opened its fifth provisioning center in Traverse City, Michigan in July, 2020. The Corporation plans to open three to four more provisioning centers before the end of its current fiscal year which ends on December 31, 2020.

Cost of Goods Sold and Net Change in Fair Value of Biological Assets

Cost of goods sold for the six months ended June 30, 2020 was $10,064,313 as compared to $3,893 in the prior year’s six-month period. The six months ended June 30, 2020 cost of goods sold resulted from the sales to retail customers from its provisioning centers as well as the costs of growing and harvesting biological assets at its cultivation centers. The Corporation did not have any cultivation or provisioning centers in operation in the six months ended June 30, 2019.

The License Holders also recorded an unrealized gain on changes in fair value of biological assets of $310,722 representing the fair value of cannabis seeds, clones and pre-harvest plants which were grown in the six-month period ended June 30, 2020. There were no biological assets in the first six months of 2019.

Gross Profit

Gross profit for the six-months ended June 30, 2020 was $7,232,517 or 42.6% of revenue as compared to $2,992 in the comparable period of 2019. Gross profit was higher than the same period in the prior year due to the sales to retail customers from the Corporation’s provisioning centers that were opened in the second half of 2019 and in 2020 as well as the successful harvest of products from its cultivation centers that were also opened in the second half of 2019 and in 2020.

The Corporation recorded an unrealized gain on changes in the fair value of biological assets of $310,722 during the first half of 2020. There was no gain or loss on biological assets in the first half of 2019 as there were no biological assets until after June 30, 2019.

Operating Profit (Loss)

The Corporation incurred an operating loss of $7,211,240 for the period ended June 30, 2020 compared to an operating loss of $28,994,580 in the same period of 2019,

Total operating expenditures were $14,443,757 for the six-months ended June 30, 2020 as compared to $28,997,572 in the comparable period of 2019. The change from the prior year was due to a decrease in share exchange expenses of $25,160,280 partially offset by increases in non-cash share-based expense of $3,577,090, general administration costs of $5,763,538 and sales and marketing costs of $818,606.

Share exchange expense decreased $25,160,280 in the June 30, 2020 six-month period compared to the same period in the prior year due to the Corporation incurring a non-cash expense of $25,160,280 in 2019 which resulted from the fair value of share exchange reserve expenses relating to the acquisition of equity interests in Terra Capital Holdings, LLC paid with exchangeable units issued by Spartan LLC.

Share-based compensation expense increased $3,577,090 due to option issuances to employees in 2019 and option and share issuances to employees in 2020 which aligns those receiving options with contributing to the long-term growth and success of the Corporation. The Corporation recognizes the expense, based on the fair value of the options at grant date, using the Black-Scholes option pricing model and amortized over the vesting period of the options.

General administration costs increased by $5,763,538 in the June 30, 2020 six-month period compared to the same period in the prior year primarily due to costs of operating the provisioning centers which drove the sales in the period and the cultivation centers which were not in operation during the six-month period ending June 30, 2019.

Selling and marketing expenses increased $818,605 for the six months ended June 30, 2020 as compared to the same period in 2019. The increase was primarily due to costs of brand licensing agreements that increased due to promotional activities to support the sale of Cookies and Gage branded products as well as raising awareness of the Gage and Cookies provisioning centers.

LIQUIDITY AND CAPITAL RESOURCES

The Corporation’s primary need for liquidity is to fund working capital requirements of business operations, capital expenditures, expansions, acquisitions, and for general corporate purposes. The Corporation is an early stage growth company. Although it is generating cash from sales in 2020, it will continue to rely on financing to support current operations, expand its cultivation facilities and new provisioning center acquisitions that are expected to generate earnings in the long term.

The Corporation’s primary sources of liquidity are gross profits generated by the sales to retail customers at its provisioning centers as well as funds generated through financing activities including the placement of equity from private placements as well as utilizing its fixed assets, specifically land and building, to generate debt financing. The Corporation’s ability to fund its operations, to make planned capital expenditures, and to make planned acquisitions, depends on its future operating performance and cash flows, which are subject to prevailing economic and regulatory conditions and financial, business, and other factors, some of which are beyond the Corporation’s control. The Corporation expects that its cash on hand and cash flows from operations, along with private placement equity and debt financing, will be adequate to meet its capital requirements and operational needs for the next 12 months.

Working Capital

The Corporation’s financial position and liquidity as of June 30, 2020, consisted of an ending cash position of $4,051,163, with no bank debt. At December 31, 2019, the Corporation had $9,705,991 of cash and $6,500,000 of term deposits.

Cash Flow

The following table summarizes the sources and uses of cash for the six-months ended June 30, 2020 and 2019:

Operating Activities

Cash flow from operating activities was a net cash use of $1,134,033 for the six months ended June 30, 2020, an improvement of $1,637,259 compared to $2,771,292 net cash use during the six months ended June 30, 2019. The improvement in cash used by operating activities year-over-year is primarily a result of the net loss of $6,018,400 for the six months ended June 30, 2020 being $23,230,956 lower than the net loss of $29,249,396 for the same period in the prior year, partially offset by non-cash items of $5,735,583 for the six months ended June 30, 2020 being $20,026,878 less than the non-cash items of $25,762,461 for the six months ending June 30, 2019 as well as the net changes in working capital items of $715,643 as a source of cash in the six months ending June 30, 2019 compared to a use of cash of $851,176 in the six months ending June 30, 2020.

The non-cash items were lower in the six months ending June 30, 2020 as compared to the same period in the prior year primarily due to $25,160,280 of non-cash exchangeable shares issued in the 2019 period and were higher as a result of the non-cash share based expense and higher non-cash depreciation and amortization expenses in the six months ended June 30, 2020 as compared to the same period in 2019.

The $715,643 working capital source of cash in the six months ended June 30, 2019 was driven by the increase in accounts payable and accrued liabilities. The $851,176 working capital use of cash in the six months ended June 30, 2020 was primarily driven by the increases in inventory of $4,191,355 and biological assets of $310,722 offset by related increases in accounts payable and accrued liabilities of $2,290,068, current tax payable of $1,038,500 and deferred revenue of $218,919.

Investing Activities

Net cash used in investing activities was $281,779 for the six months ended June 30, 2020, a decrease of $12,780,999 compared to the $13,062,778 net cash used in investing activities for the six months ended June 30, 2019. This decrease of $12,780,999 of net cash used in investing activities is primarily due to the issuance of notes receivables of $7,561,484 as well as the acquisition of investments of $2,262,929 in the six months ended June 30, 2019 combined with the $6,500,000 source of cash in the six months ended June 30, 2020 from the redemption of a term deposit. These favorable changes in investing activities were partially offset by the source of cash in the six months ending June 30, 2019 from deposits for property acquisitions of $1,073,530 and the collection of a loan receivable of $2,110,537.

Financing Activities

Net cash from Financing Activities was a use of $1,239,304 for the six months ended June 30, 2020, a decrease of $22,455,423 compared to the $21,216,119 net cash provided by financing activities for the six months ended June 30, 2019. The Corporation’s cash provided by financing activities for the six months ended June 30, 2019 was driven by the proceeds from issuance of subordinate voting shares of $21,370,245. The net cash used in financing activities in the six months ended June 30, 2020 of $1,239,304 was principally due to the payment of the lease assignment payable as well as the lease liability.

Off-Balance Sheet Arrangements

As of the date of this filing, the Corporation does not have any off-balance-sheet arrangements that have, or are reasonably likely to have, a current or future effect on the results of operations or financial condition of the Corporation, including, and without limitation, such considerations as liquidity and capital resources.

Going Concern

The condensed consolidated interim financial statements were prepared on a going concern basis, which assumes that the Corporation will be able to realize its assets and discharge its liabilities in the normal course of business. 

Management is of the opinion the continued operations of the Corporation are dependent on its ability to generate future cash flows from operations and obtain additional funding through external financing to deliver on its business plan. There is a risk that financing will not be available on a timely basis or on terms acceptable to the Corporation. The Company has considered the funds raised under the Regulation A, Tier 2, equity financing subsequent to June 30, 2020 as disclosed herein in making this assessment.

 The condensed consolidated interim financial statements do not give effect to any adjustments which would be necessary should the Corporation be unable to continue operations. Management has assessed that it has sufficient working capital and access to funding for the Corporation to continue operations for the next fiscal year, however due to potential uncertainties described above going concern disclosure has been included in the condensed consolidated interim financial statements.

TRENDS IN CASH FLOW, CAPITAL EXPENDITURES AND OPERATING EXPENSES

Drivers of Results of Operations

Revenue

The Corporation derives its revenue from cannabis products which the license holders grows and harvests through cultivation facilities and sells to customers through provisioning centers as well as through wholesale sales. The Corporation has increased its revenue through the start up of 2 new provisioning centers during the six months ended June 30, 2020. At the end of the period, the license holders had 4 provisioning centers operating. Since June 30, 2020, the license holders added one additional provisioning center and has plans to open 3 to 4 more provisioning centers by the end of the current fiscal year. In regards to cultivation facilities, the license holders entered the current fiscal year with one cultivation center operational. During the six months ended June 30, 2020, the license holders launched the operations of a second cultivation center. Since June 30, 2020, the first phase of a third cultivation center became operational in August 2020. It expects to begin harvesting product from this third cultivation center by the end of the current fiscal year. In addition, it is in the process of building out the second phase of its third cultivation center which it expects to be operational during calendar 2021.

Cost of Goods Sold

The Corporations Cost of Goods Sold includes the costs directly attributable to product sales and includes amounts paid to produce finished goods, such as cultivation supplies as well as packaging and other supplies, fees for testing services and processing, rent, utilities, and related costs. To supplement its current cultivation capacity it purchases wholesale flower, concentrates and other cannabis related products. Cannabis costs are affected by various state regulations that limit the sourcing and procurement of cannabis product, which may create fluctuations in margins over comparative periods as the regulatory environment changes. During the six months ended June 30, 2020, the Corporation continued to focus on executing sustainable profitable growth of the Corporation’s base business by expanding its cultivation facilities as well as its provisioning centers.

Total Expenses

Total expenses include corporate infrastructure required to support ongoing business, sales and marketing expenses to accelerate sales at the provisioning centers, depreciation and amortization of the building and equipment for the companies facilities, and share-based payments to align efforts of management and staff with shareholders. In addition, in the first six months of 2019, there was share exchange expense with a shareholder.

Sales and marketing costs support the efforts of the provisioning centers to attract retail customers and elicit customer loyalty to the company’s brands. As a percentage of sales, the Company expects sales to increase at a higher rate, compared to most sales and marketing costs. General and administrative expenses represent costs incurred at the Corporation’s facilities including cultivation and provisioning centers. These expenses primarily relate to personnel costs, including salaries, incentive compensation, benefits, professional service costs, including legal and accounting, licensing costs, facilities costs including security and office expenses. The Company expects to continue to invest thoughtfully in this area to support the Corporation’s aggressive expansion plans and to support the increasing complexity of the cannabis business. Furthermore, to support Corporation’s expansion plans and plans to become a publicly traded company, the Corporation anticipates a commensurate increase in compensation expenses related to recruiting and hiring talent, accounting, legal and professional fees.

Provision for Income Taxes

The Corporation is subject to federal income taxes and state income taxes in the jurisdictions in which it operates and, consequently, income tax expense is a function of the allocation of taxable income by legal entity and the various activities that impact the timing of taxable events. The Corporation is subject to the limits of IRC Section 280E under which the Corporation is only allowed to deduct expenses directly related to cost of producing the products or cost of products. This results in permanent differences between ordinary and necessary business expenses deemed non-allowable under IRC Section 280E and a higher effective tax rate than most industries.

RELATED PARTY TRANSACTIONS

Parties are considered to be related if one party has the ability, directly or indirectly, to control the other party or exercise significant influence over the other party in making financial and operating decisions. Parties are also considered to be related if they are subject to common control. Related parties may be individuals or corporate entities. A transaction is considered to be a related party transaction when there is a transfer of resources or obligations between related parties.

The Corporation’s key management personnel have authority and responsibility for overseeing, planning, directing and controlling the activities of the Corporation. Key management personnel include members of the Board of Directors, Chief Executive Officer/President and Chief Financial Officer. Compensation of key management personnel may include short-term and long-term benefits. Short-term benefits include salaries and bonuses. Share-based compensation include warrants and stock options vested during the year.

Compensation provided to key management for the six months ended June 30, 2020 and June 30, 2019 is as follows:

The following are events occurring subsequent to June 30, 2020 and up to March 22, 2021:

OUTSTANDING SHARE DATA

As of June 30, 2020, the Corporation had the following shares outstanding:

And the following dilutive equity instrument outstanding:

As at the date of this Form 1-SA, the Corporation has the following shares outstanding:

And the following dilutive equity instrument outstanding:

There were no events that required disclosure under Form 1-U during the first six months of 2020.

INDEX TO AMENDED AND RESTATED FINANCIAL STATEMENTS

Gage Growth Corp. (formerly, Wolverine Partners Corp.)
 

Amended and Restated Condensed Consolidated Interim Financial Statements (Unaudited)
 

For six months ended June 30, 2020 and 2019

(In United States Dollars)

Gage Growth Corp. (formerly, Wolverine Partners Corp.)
Amended and Restated Condensed Consolidated Interim Statements of Financial Position
As at June 30, 2020 and December 31, 2019

(In United States Dollars, unless stated otherwise)

The accompanying notes are an integral part of these amended and restated condensed consolidated financial statements.

Gage Growth Corp. (formerly, Wolverine Partners Corp.)

Amended and Restated Condensed Consolidated Interim Statements of Loss and Comprehensive Loss

For six months ended June 30, 2020 and 2019

(In United States Dollars, unless stated otherwise)

(Unaudited)

The accompanying notes are an integral part of these amended and restated condensed consolidated financial statements.

Gage Growth Corp. (formerly, Wolverine Partners Corp.)

Amended and Restated Condensed Consolidated Interim Statements of Cash Flows

For six months ended June 30, 2020 and 2019

(In United States Dollars, unless stated otherwise)

(Unaudited)

The accompanying notes are an integral part of these amended and restated condensed consolidated financial statements.

Gage Growth Corp. (formerly, Wolverine Partners Corp.)
Amended and Restated Condensed Consolidated Interim Statements of Changes in Shareholders’ Equity

For six months ended June 30, 2020 and 2019

(In United States Dollars, unless stated otherwise)

(Unaudited)

The accompanying notes are an integral part of these amended and restated condensed consolidated financial statements.

Gage Growth Corp. (formerly, Wolverine Partners Corp.)

Notes to the Amended and Restated Condensed Consolidated Interim Financial Statements

For six months ended June 30, 2020 and 2019

(In United States Dollars, unless stated otherwise)

(Unaudited) 

Gage Growth Corp. (“Gage”, the “Corporation”, or the “Company”) was incorporated on November 22, 2017, under the Ontario Business Corporations Act. On March 11, 2019, the Company filed an amendment to the Articles of Incorporation whereby the Company re-designated the existing class of common shares as subordinate voting shares (“Subordinate Voting Shares”) and is authorized to issue an unlimited number of super voting shares (“Super Voting Shares”) and proportionate voting shares (“Proportionate Voting Shares”) (Note 18). The registered office of the Company is located at Suite 400, 77 King Street West Toronto-Dominion Centre, Toronto, Ontario M5K 0A1. The principal activities of the Company are providing branding and crucial support services to affiliated licensed operators that produce, distribute, and sell cannabis and cannabis-related products in the State of Michigan.

Going Concern

These unaudited amended and restated consolidated interim financial statements (“consolidated financial statements”) have been prepared with the assumption that the Company will be able to continue operating as a going concern for the foreseeable future. Going concern assumes the Company will be able to realize its assets and discharge its liabilities in the normal course of business. The Company had a net loss for the six months period ended June 30, 2020 of $6,018,440 (2019 - $ 29,249,396), as the Company did not incur large, non-cash expenses compared to prior period. The Company’s accumulated deficit at June 30, 2020 was $58,715,371 (2019 - $53,711,171). The Company’s cash used in operations for the six-month period ended June 30, 2020 was $1,134,033 (2019 - $2,771,292).

Management has applied significant judgment in assessing the Company’s ability to continue as a going concern when preparing its consolidated financial statements for the six months ended June 30, 2020 and 2019. Management prepares the consolidated financial statements on a going concern basis unless management either intends to liquidate the entity or has no realistic alternative but to do so. The Company has considered the Regulation A, Tier 2. Equity financing completed subsequent to June 30, 2020 as disclosed in Note 26 in making this assessment.

Statement of compliance

These consolidated financial statements of the Company have been prepared in accordance with International Accounting Standards 34, Interim Financial Reporting (“IAS 34”) using accounting policies consisting with International Financial Reporting Standards (“IFRS”), as issued by the International Accounting Standards Board (“IASB”) and interpretations of the IFRS Interpretations Committee (“IFRIC”).

These consolidated financial statements have been prepared in accordance with the same accounting policies and methods of application as the most recent audited financial statements for the year ended December 31, 2019, other than as disclosed in Note 4, except that they do not include all the disclosures required for the annual audited financial statements. These financial statements should be read in conjunction with the audited consolidated financial statements for the Company for the year ended December 31, 2019.

These consolidated financial statements were authorized for issue in accordance with a resolution of the Board of Directors on March 22, 2021.

Basis of measurement

These consolidated financial statements have been prepared on a historical cost basis except for biological assets, financial instruments classified as financial instruments at fair value through profit or loss and at fair value through other comprehensive income and the initial measurement of assets and liabilities acquired through equity transactions, which are initially recorded at their fair value. In addition, these consolidated financial statements have been prepared using the accrual basis of accounting.

These consolidated financial statements are presented in United States dollars. The Company’s functional currency is the Canadian dollar, and the functional currency of all subsidiaries is the United States dollar. Where the functional currency is different from the presentation currency, assets and liabilities have been translated using the exchange rate at the period end, and income, expenses, and cash flow items are translated using the rate that approximates the exchange rates at the dates of the transactions (the average for the period). All resulting exchange rate differences are recorded in accumulated other comprehensive (loss) income.

Gage Growth Corp. (formerly, Wolverine Partners Corp.)

Notes to the Amended and Restated Condensed Consolidated Interim Financial Statements

For six months ended June 30, 2020 and 2019

(In United States Dollars, unless stated otherwise)

(Unaudited) 

Transactions entered into in a currency other than the currency of the primary economic environment in which the Company or its subsidiaries operates (their "functional currency") are recorded at the rates prevailing when the transactions occur except depreciation and amortization which are translated at the rates of exchange applicable to the related assets, with any gains or losses recognized in the consolidated statements of loss and comprehensive loss. Foreign currency monetary assets and liabilities are translated at current rates of exchange with the resulting gain or losses recognized in the consolidated statements of loss and comprehensive loss. Exchange differences arising on the retranslation of unsettled monetary assets and liabilities are recognized immediately in net loss. Non-monetary assets and liabilities are translated using historical exchange rates. Non-monetary assets and liabilities measured at fair value in a foreign currency are translated using the exchange rates at the date when the fair value is determined.

Principles of consolidation

These consolidated financial statements include the accounts of the Company and its controlled subsidiaries. For financial reporting purposes, the Company is considered to control a subsidiary when it is exposed, or has rights, to variable returns from its involvement with the subsidiary and can affect those returns through its power over the subsidiary. Controlled subsidiaries are included in the consolidated financial statements from the date control is obtained until the date control ceases. Where the Company’s equity interest in a subsidiary is less than 100%, the Company recognizes non-controlling interests. All intercompany balances, transactions, income, expenses, profits, and losses, including unrealized gains and losses, have been eliminated upon consolidation.

The accounts of the controlled subsidiaries are prepared for the same reporting period as the Company, using consistent accounting policies. The table below lists the Company’s controlled subsidiaries and the ownership interests in each:

*The Company through its subsidiaries, entered into Membership Interest Transfer Restriction and Succession Agreement and Services Agreements with its affiliated licensing companies which prevent the licensing companies from taking certain actions or omitting to take certain actions where to do so would be contrary to the expected economic benefits that the Company expects to derive from the relationship with the licensing companies. The Company includes these entities in its consolidation but has allocated their net loss and comprehensive loss in the Company’s consolidated statements of loss and comprehensive loss to net loss attributable to non-controlling interest.

Gage Growth Corp. (formerly, Wolverine Partners Corp.)

Notes to the Amended and Restated Condensed Consolidated Interim Financial Statements

For six months ended June 30, 2020 and 2019

(In United States Dollars, unless stated otherwise)

(Unaudited) 

The preparation of consolidated financial statements in accordance with IFRS requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and notes to the consolidated financial statements. These estimates are based on management’s best knowledge of current events and actions the Company may undertake in the future. Actual results could differ from those estimates. Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to the accounting estimates are recognized in the period in which the estimates are revised. Significant areas requiring the Company to make estimates are further discussed below.

i) Impairment testing and recoverability of assets

The Company reviews the value in use versus the carrying value of each of the individual assets when there are indicators of impairment. The recoverable amount of an asset is estimated based on an assessment of value in use using a discounted cash flow approach. The approach uses cash flow projections based upon a financial forecast approved by management, covering a five-year period. Cash flows for the years thereafter are extrapolated using the estimated terminal growth rate. The risk premiums expected by market participants related to uncertainties about the industry and assumptions relating to future cash flows may differ or change quickly, depending on economic conditions and other events.

ii) Private company investments

All privately held investments (including options, warrants and conversion features) are initially recorded at the transaction price, being the fair value at the time of acquisition. At the end of each reporting period, the fair value of an investment may (depending upon the circumstances) be adjusted using one or more of the valuation methods. These are included in Level 3 of the fair value hierarchy (see Note 24).

The determination of fair value of the Company’s privately held investments at other than initial cost, is subject to certain limitations. Financial information for private companies in which the Company has investments may not be available and, even if available, that information may be limited and/or unreliable.

The use of the various valuation approaches may involve uncertainties and determinations based on management’s judgment and any value estimated from these techniques may not be realized or realizable.

Company-specific information is considered when determining whether the fair value of a privately held investment should be adjusted upward or downward at the end of each reporting period. In addition to company-specific information, the Company will also consider trends in general market conditions and the share performance of comparable publicly traded companies when valuing privately held investments.

iii) Consolidation

The Company uses judgment in determining the entities that it controls for consolidation. For financial reporting purposes, an entity is considered controlled when the Company has power over an entity and its ability to affect its economic return from the entity. The Company has power over an entity when it has existing rights that give it the ability to direct relevant activities which can significantly affect the investee’s returns. Such power can result from contractual arrangements. However, certain contractual arrangements contain rights that are designed to protect the Company’s interest, without giving it an economic interest in the entity.

On January 31, 2019, the Company entered into Membership Interest Transfer Restriction and Succession Agreements with five affiliated licensed entities, which were executed in connection with the subsidiary’s extension of credit to the licensed entities along with, among other things, the assumption of certain lease agreements. The Company’s management has assessed that it has the ability to direct relevant activities which could significantly affect and impact the economic benefits derived from its contractual relationship with the affiliated licensed entities.

Gage Growth Corp. (formerly, Wolverine Partners Corp.)

Notes to the Amended and Restated Condensed Consolidated Interim Financial Statements

For six months ended June 30, 2020 and 2019

(In United States Dollars, unless stated otherwise)

(Unaudited) 

iv) Business combinations

Judgment is used in determining whether an acquisition is a business combination, or an asset acquisition based on the facts and circumstances of the transaction in relation to the criteria listed in IFRS 3 Business Combinations.

In an asset acquisition, all identifiable assets, liabilities and contingent liabilities acquired are recorded at their fair values and one of the most significant estimates relates to the determination of the fair value of these assets and liabilities. For any assets acquired, depending on the type of asset and the complexity of determining its fair value, an independent valuation expert or management may develop the fair value, using appropriate valuation techniques, which are generally based on a forecast of the total expected future net cash flows. The evaluations are linked closely to the assumptions made by management regarding the future performance of the assets concerned and any changes in the discount rate applied.

v) Biological assets and inventory

In calculating the value of the biological assets, management is required to make a number of judgments and estimates, including estimating the stage of growth of the cannabis plants up to the point of harvest, harvesting costs, selling costs, sales price, wastage and expected yields for the cannabis plants. In calculating inventory values, management is required to determine an estimate of the obsolete inventory and compares the inventory cost to estimated net realizable value.

vi) Estimated useful lives of long-lived assets

Depreciation and amortization of property, plant, and equipment and intangible assets are dependent upon estimates of useful lives and the pattern of use of the assets. Management reviews the useful lives of depreciable assets at each reporting date. Management assesses that the useful lives represent the expected utilization in terms of duration of the assets to the Company. Actual utilization, however, may vary due to technical obsolescence.

vii) Share-based payments

The fair value of all share-based payments granted is determined using the Black-Scholes option pricing model which incorporates assumptions regarding risk-free interest rates, dividend yield, expected volatility, estimated forfeitures, and the expected life of options. Since the Company is a private Company, the volatility of the Company’s stock price is based on comparable companies with similar risk profile based on management’s judgement.

viii) Right-of-use assets and lease liabilities

For the measurement of lease liabilities, considerations were given to all factors that create an economic incentive to exercise extension, purchase and termination options available in its leasing arrangements. These options are only included in the lease term if management determines it is reasonably certain to be exercised. The assessment is reviewed if a significant events or significant changes in circumstances occur which affect this assessment.

The Company has applied judgement to determine the incremental borrowing rate and the lease term for some lease contracts in which it is a lessee that include renewal options, which significantly affects the amount of lease contract liability and right-of-use assets recognized. The Company estimates the incremental borrowing rate when initially recording property leases by reviewing recent industry financing terms to estimate the rate of interest that the Company would pay to borrow over a similar term.

ix) Provisions

Provisions represent liabilities of the Company for which the amount or timing is uncertain. Provisions are recognized when the Company has a present legal or constructive obligation as a result of past events, it is probable that an outflow of resources will be required to settle the obligation, and the amount can be reliably estimated. Provisions are not recognized for future operating losses. Where material, provisions are measured at the present value of the expected expenditures to settle the obligation using a discount rate that reflects current market assessments of the time value of money and the risks specific to the obligation. The increase in the provision due to passage of time is recognized as interest expense.

x) Income taxes

Provisions for taxes are made using the best estimate of the amount expected to be paid based on a qualitative assessment of all relevant factors. The Company reviews the adequacy of these provisions at the end of the reporting period. However, it is possible that at some future date an additional liability could result from audits by taxing authorities. Where the final outcome of these tax-related matters is different from the amounts that were initially recorded, such differences will affect the tax provisions in the period in which such determination is made.

As the Company operates in the cannabis industry, it is subject to the limits of IRC Section 280E under which the Company is only allowed to deduct expenses directly related to sales of the product for US tax purposes. Although proper deductions for cost of goods sold are generally allowed to determine gross income, the scope of such items has been the subject of debate, and deductions for significant costs may not be permitted. While there are currently several pending cases before various administrative and federal courts challenging these restrictions, there is no guarantee that these courts will issue an interpretation of Section 280E favorable to cannabis businesses. Thus, the operations of the Company's US subsidiaries may be subject to United States federal tax, without the benefit of certain deductions or credits.

xi) COVID-19 estimation uncertainty

In March 2020, the World Health Organization declared the outbreak of COVID-19 a global pandemic. Government measures to limit the spread of COVID-19, including the closure of non-essential businesses, did not materially disrupt the Company’s operations during the first half of 2020. The production and sale of cannabis have been recognized as essential services in Michigan and allowed to operate subject to new precautionary regulations.

The outbreak of COVID-19 has resulted in governments worldwide enacting emergency measures to combat the spread of the virus. These measures, which include the implementation of travel bans, self-imposed quarantine period and social distancing, have caused material disruption to businesses globally resulting in an economic slowdown. As of the date of issuance of the financial statements, it is not possible to reliably estimate the length and severity of these developments and its impact on the financial results and financial condition of the Company. The Company is closely monitoring the impact of the pandemic on all aspects of its business.

IFRS 3

In October 2018, the IASB issued “Definition of a Business (Amendments to IFRS 3)”. The amendments clarify the definition of a business, with the objective of assisting entities to determine whether a transaction should be accounted for as a business combination or as an asset acquisition. The amendment provides an assessment framework to determine when a series of integrated activities is not a business. The amendments are effective for business combinations occurring on or after the beginning of the first annual reporting period beginning on or after January 1, 2020. The Company has adopted the amendment on its effective date and will evaluate its impact on future business combinations and asset acquisitions in accordance with the standard.

IAS 1

In October 2018, the IASB issued “Definition of Material”, an amendment to IAS 1 – Presentation of Financial Statements and IAS 8 – Accounting Policies, Changes in Accounting Estimates and Errors, to clarify the definition of material and to align the definition used in the Conceptual Framework and the standards themselves. Materiality is defined as “information is material if omitting, misstating or obscuring it could reasonably be expected to influence decisions that the primary users of general purpose financial statements make on the basis of those financial statements, which provide financial information about a specific reporting entity.” This amendment is effective for annual periods beginning January 1, 2020. The Company does not expect the impact of the adoption of this standard to be material on the Company’s consolidated financial statements.

In January, 2020, the IASB issued “Classification of Liabilities as Current or Non-current (Amendments to IAS 1)”. The amendment clarifies the requirements relating to determining if a liability should be presented as current or non-current is based on the contractual arrangements in place as at the reporting date and does not impact the amount or timing of recognition. The amendment applies retrospectively for annual reporting periods beginning on or after January 1, 2022. The Company is currently evaluating the potential impact of these amendments on the Company’s consolidated financial statements.

On October 8, 2019, the Company entered into an acquisition agreement with 11650157 Canada Corp.(“SubCo”), Rivers Innovations Inc. (“Innovations”) and certain shareholders of Innovations, pursuant to which the Company agreed to purchase all of the issued and outstanding shares of Innovations in exchange for Subordinate Voting Shares in the Company (the “Innovations Acquisition”). In connection with the Innovations Acquisition, the Company issued 34,491,601 Subordinate Voting Shares in exchange for 78,000,000 common shares in the capital of Innovations by way of a three-cornered amalgamation. Upon closing on November 7, 2019, Innovations amalgamated with SubCo to form Gage Innovations Corp., a wholly-owned subsidiary of the Company and issued 88,440 Options and 4,422,000 Subordinate Voting Share purchase warrants of the Company to replace options and share purchase warrants of Innovations and the market-based measure of the replacement options and warrants was allocated between the consideration and post-transaction service.

As the acquisition did not meet the definition of a business in accordance with IFRS, the Company treated the above acquisitions as an asset acquisition.

All assets acquired and liabilities assumed in the above asset acquisition were recorded at their fair values and consideration given in the form of shares and warrants was measured based on the fair value of the net assets acquired as stated below:

The term deposit of $15,000,000 has an interest rate of 1.20% and a maturity date of July 26, 2020.

The fair value of 4,422,000 replacement warrants issued to Innovations warrant holders was determined using the Black-Scholes option pricing model with the following inputs and assumptions: Stock price - $1.138; Exercise price - $0.12 - $1.70; Dividend Yield - Nil; Expected volatility – 72.2%; Risk-free interest rate 1.59%; and Expected life of 2.34 years. Of the total fair value attributable to the replacement warrants of $3,063,119, $368,816 is attributable to the consideration paid at acquisition date and remaining is attributable to post transaction service which will be recognized over the remaining vesting period.

The fair value of 88,440 original options issued to Innovations option holders was determined using the Black-Scholes option pricing model with the following inputs and assumptions: Stock price - $1.138; Exercise price - $1.14; Dividend Yield - Nil; Expected volatility – 72.2%; Risk-free interest rate 1.59%; and Expected life of 2.34 years (Note 21).

On November 7, 2019, pursuant to the closing of the acquisition of Rivers Innovations Inc. (Note 5), the Company acquired marketable securities consisting of 160,000 shares of Plus Products Inc. The shares were valued at $259,184 upon acquisition. These are strategic investments and therefore the Company has irrevocably elected at initial recognition to recognize these investments as “investments at fair value through other comprehensive income” with any fair value changes recognized directly in other comprehensive income.

During the six months ended June 30, 2020, the Company recognized an unrealized loss of $113,351 (2019 - $67,184) and an unrealized foreign exchange loss of $9,613 (2019 - gain of $6,164) on these investments.

Below is the movement in these marketable securities:

The Company’s biological assets consist of seeds and cannabis plants. The changes in the carrying value of biological assets are as follows:

The Company measured its biological assets at fair value less costs to sell. This is determined using a model which estimates the expected harvest yield in grams for plants currently being cultivated, and then adjusts that amount for the expected selling price less costs to sell per gram.

The fair value measurements for biological assets have been categorized as Level 3 fair values based on the inputs to the valuation technique used. The Company’s method of accounting for biological assets attributes value accretion on a straight-line basis throughout the life of the biological asset from initial cloning to the point of harvest.

The significant assumptions used in determining the fair value of biological assets include the standard cost incurred in each stage of the plant growth, the stage of completion in the production process, including estimate of harvest date and the following:

As of June 30, 2020, the weighted-average fair value less cost to complete and cost to sell a gram of dried cannabis was $6.48 (December 31, 2019 - $4.29). It is expected that the Company’s biological assets will yield approximately 445,056 grams (December 31, 2019 - 294,646 grams) of medical cannabis when harvested. The estimated growing period is 16 weeks.

During the six months ended June 30, 2020, the Company’s biological assets produced 383,155 grams (2019 – Nil) of dried cannabis. Included in the June 30, 2020, consolidated statements of loss and comprehensive loss is a gain on biological assets of $310,722 (2019 – Nil).

The Company’s estimates are, by their nature, subject to change, and differences from the anticipated yield will be reflected in the gain or loss on biological assets in future periods.

8.       INVENTORY

a 

Inventory consists of domestically grown medicinal cannabis, vaporizers, and merchandise for distribution. As of June 30, 2020, the Company has inventory of $6,099,304 (2019 - $1,907,949) comprised of the following:

9.       PROPERTY, PLANT AND EQUIPMENT