Discontinued Operations and Assets Held for Sale

9 Months Ended

Apr. 30, 2024

Discontinued Operations and Assets Held for Sale

Discontinued Operations and Assets Held for Sale

21. Discontinued Operations and Assets Held for Sale

The following table summarizes the Company’s loss from discontinued operations for the three and nine months ended 30 April 2024 and 2023. The gain and loss resulting from the forgiveness of intercompany payables has been eliminated in consolidation.

	Three months ended 30 April 2024			Three months ended 30 April 2023			Nine months ended 30 April 2024			Nine months ended 30 April 2023
Sales	$	80,989		$	3,141,358		$	2,662,441		$	9,648,988
Cost of sales		(24,969	)		(2,990,602	)		(2,354,957	)		(9,092,205	)
Gross profit		56,020			150,756			307,484			556,783
Operating expenses		(141,897	)		(496,144	)		(800,434	)		(2,100,215	)
Other items		(67	)		(945,291	)		(581,350	)		(944,462	)
		(141,964	)		(1,441,435	)		(1,381,784	)		(3,044,677	)
Loss from discontinued operations before income taxes	$	(85,944	)	$	(1,290,679	)	$	(1,074,300	)	$	(2,487,894	)
Income tax expense (recovery)		97,455			(489,630	)		(50,329	)		(988,820	)
Net income (loss) from discontinued operations	$	11,511		$	(1,780,309	)	$	(1,124,629	)	$	(3,476,714	)

The assets and liabilities associated with discontinued operations consisted of the following as of 30 April 2024 and 31 July 2023:

	30 April 2024		31 July 2023
Assets held for sale
Cash	$	13,514	$	215,622
Accounts receivable		17,319		564,392
Other amounts receivable		-		20,000
Prepaids		16,251		332,814
Inventory		156,240		1,609,521
Property and equipment, net		585,936		1,143,818
Operating lease right-of-use assets		177,575		356,748
Brand and licenses, net		-		2,047,295
Total assets held for sale		966,835		6,290,210
Liabilities held for sale
Accounts payable and accrued liabilities		2,006,371		479,619
Income taxes payable		-		239,434
Operating lease liabilities		182,252		1,541,900
Total liabilities held for sale	$	2,188,623	$	2,260,953

Total assets and liabilities associated held for sale are presented as current assets and liabilities, respectively, due to the fact that they are likely to be sold within 12 months.

A reconciliation of the beginning and ending balances of assets held for sale for the nine months ended 30 April 2024 and for year ended 31 July 2023, are as follows:

	Held for Sale Subsidiaries			Subsidiaries Disposed			Total
Balance as of 31 July 2022	$	1,230,011		$	4,712,393		$	5,942,404
Transferred in		-			7,300,845			7,300,845
Ongoing activity from discontinued operations		(136,336	)		(5,637,909	)		(5,774,245	)
Disposition		-			(1,178,794	)		(1,178,794	)
Balance as of 31 July 2023		1,093,675			5,196,535			6,290,210
Ongoing activity from discontinued operations		(126,840	)		-			(126,840	)
Disposition		-			(5,196,535	)		(5,196,535	)
Balance as of 30 April 2024	$	966,835		$	-		$	966,835

A reconciliation of the beginning and ending balances of liabilities held for sale for the nine months ended 30 April 2024 and for year ended 31 July 2023 are as follows:

	Held for Sale Subsidiaries			Subsidiaries Disposed			Total
Balance as of 31 July 2022	$	259,470		$	819,612		$	1,079,082
Transferred in		-			1,789,189			1,789,189
Ongoing activity from discontinued operations		(40,291	)		(158,306	)		(198,597	)
Disposition		-			(408,721	)		(408,721	)
Balance as of 31 July 2023		219,179			2,041,774			2,260,953
Ongoing activity from discontinued operations		1,969,444			-			1,969,444
Disposition		-			(2,041,774	)		(2,041,774	)
Balance as of 30 April 2024	$	2,188,623		$	-		$	2,188,623

In April 2023, the Company approved the sale of the Michigan retail operation. In July 2023 and August 2023, the Company approved the sale of the Ohio operations. In January 2024, the Company approved the sale of the Nevada operation.

Available for Sale Subsidiaries

Membership Interest Purchase Agreement (NMG OH P1)

On September 5, 2023, DEP entered into a membership interest purchase agreement (the “NMG OH P1 Purchase Agreement”) with LMTB LLC, an Ohio limited liability company (the “LMTB”), pursuant to which DEP will sell the issued and outstanding membership interests (the “NMG OH P1 Interests”) in NMG OH P1 to LMTB for the purchase price of US$2,000,000, subject to adjustment in the event that NMG OH P1’s Working Capital (as defined in the NMG OH P1 Purchase Agreement) on the NMG OH P1 Closing Date (as defined in the NMG OH P1 Purchase Agreement) varies from the Target Working Capital (as defined in the NMG OH P1 Purchase Agreement and thereby fixed at zero (0) dollars). An amount equal to the Deposit (as defined in the NMG OH P1 Purchase Agreement), being US$1,000,000, shall be held in escrow by Murphy Schiller & Wilkes LLP as escrow agent (the “NMG OH P1 Escrow Agent”) pursuant to the terms and conditions of an escrow agreement entered into among DEP, NMG OH P1 and LMTB contemporaneously with the NMG OH P1 Purchase Agreement.

Subsidiaries Disposed

Membership Interest Purchase Agreement (NMG)

On 31 January 2024, the Company’s wholly owned subsidiaries, DEP Nevada entered into a membership interest purchase agreement (the “NMG Purchase Agreement”) with Vegas Brazil LLC, a California limited liability company (the “Vegas Brazil”), pursuant to which DEP will sell the issued and outstanding membership interests (the “NMG Interests”) in NMG to Vegas Brazil for the purchase price of US$2,000,000, subject to adjustment in the event that NMG’s Working Capital (as defined in the NMG Purchase Agreement) on the NMG Closing Date (as hereinafter defined) varies from the Target Working Capital (as defined in the NMG Purchase Agreement and thereby fixed at zero (0) dollars). Closing shall occur no later than fifteen (15) calendar days following receipt of regulatory approval and satisfaction or waiver, if applicable, of all closing conditions, or in such other manner or at such other time or date as the parties may mutually agree in writing.

In connection with the NMG Purchase Agreement, DEP and Vegas Brazil entered into a letter agreement (the “Letter Agreement”), commencing on December 15, 2023 (the “Economic Takeover Date”) and expiring on the earlier of: (i) the termination of the NMG Purchase Agreement, or (ii) the closing date of the NMG Purchase Agreement. Economic Takeover Date is defined in the NMG Purchase Agreement as the date Vegas Brazil accepts responsibility for all forward-going profits and losses. The financial performance of NMG has been deconsolidated as of December 15, 2023 while the entity is in the Transfer of Ownership process.

The purchase price of US$2,000,000 consists of: (i) a cash deposit of US$250,000 (paid); (ii) US$750,000 in cash to be paid within six months of receipt of regulatory approval by the Nevada Cannabis Compliance Board, which cash payment will be covered by a personal guarantee of an affiliate of Vegas Brazil; and (iii) a secured promissory note in the amount of US$1,000,000 (the "Note") to be delivered by Vegas Brazil to DEP on the closing date, and which Note will be personally guaranteed by an affiliate of Vegas Brazil. The Note shall bear interest at the applicable federal rate as of the closing date and the Note will be paid in six (6) equal monthly payments with the first payment occurring on the seven (7) month anniversary of the closing date.

As of April 30, 2024, there was $1,750,000 disposition receivable from Vegas Brazil, of which $750,000 will be paid in cash within six months of receipt of regulatory approval by the Nevada Cannabis Compliance Board, which is expected to occur in the near future, and $1,000,000 will be paid by a secured promissory note on the closing date.

Operating Lease as a Lessor (NMG)

On 21 July 2023, Nevada Medical Group, LLC and Moj NV, LLC entered into a Manufacturing Equipment Lease Agreement, whereby Moj NV will lease certain equipment from the Company. Moj NV is solely responsible for the operation and maintenance of the equipment and all costs related thereto. The term of the agreement commenced on 21 July 2023 and received a deposit of $20,000 that will be applied to the last monthly rent payment. For the first year of the lease, the rent is $20,000 per month. The lease can be terminated by either party with a 90-day written notice, or 30-day notice with cause. The Company records monthly rent payments as other income as they are received.

NMG OH 1 Disposition

On 17 October 2023, pursuant to equity purchase agreement (the “EPA”) dated 21 July 2023, between the Company’s wholly owned subsidiaries, DEP Nevada, NMG OH 1 and FarmaceuticalRX, LLC (the “Purchaser”), DEP sold all of the issued and outstanding interests and other ownership, equity or profits interests in NMG OH 1 to the Purchaser (the “Disposition”).

Pursuant to the closing of the Disposition, on 17 October 2023 (the “Closing Date”), the Purchaser paid an initial total consideration of US$8.225 million (US$7,975,000 on closing plus US$250,000 deposit upon signing of the EPA) (the “Initial Purchase Price”) in cash to DEP Nevada, which Initial Purchase Price is subject to a working capital adjustment and other customary adjustments pursuant to the EPA to be calculated within 365 days of the Closing Date (the “Final Purchase Price”). Based on the Accepted Adjustment Statement (as defined in the EPA), the parties shall determine if the Final Purchaser Price shall be adjusted upwards or downwards. An amount equal to the Escrow Amount (as defined in the EPA) of US$100,000 from the Final Purchase Price is being held in escrow and will be released to DEP Nevada on the fifth day of the twelfth month after the Closing Date unless there are any indemnification claims pending until such time as the claim is resolved. The $100,000 held in escrow was included in other amounts receivable as of 30 April 2024.

In addition, DEP Nevada shall receive a payment of US$2,500,000 (each, a “Bonus Payment”) for each additional dispensary license granted to NMG OH 1 by the State of Ohio Board of Pharmacy or other regulatory body, in accordance with the terms of the EPA. Additional dispensary licenses that will receive the Bonus Payment shall specifically exclude an adult use license issued for the License (as defined in the EPA) and current lease location.

Simultaneously with the closing of the EPA, the Company used US$7.33 million of the Initial Purchase Price funds to fully repay the debt owing to its senior secured lender (see Focus Growth loan in Note 14).

NMG MI 1 Disposition

In April 2023, the Company approved the sale of the Michigan retail operation, which was completed in June 2023.

Assets held for sale related to NMG wholesale operation, Ohio operations and Michigan retail operation represent a strategic shift in the Company's operations and therefore is classified as available for sale subsidiaries and discontinued operations as of 31 July 2023.

During the year ended 31 July 2023, the Company performed an analysis of any impairments prior to reclassifying certain assets as held for sale and recorded an impairment of $944,015 which is included as a component of loss on impairment in the consolidated statements of operations and comprehensive loss.