PART I
ITEM 1 - IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND
ADVISORS
Not
applicable.
ITEM 2 - OFFER STATISTICS AND EXPECTED TIMETABLE
Not
applicable.
ITEM 3 - KEY INFORMATION
(A) SELECTED FINANCIAL DATA
This
Report includes audited consolidated financial statements of the
Company for the years ended June 30, 2018, 2017 and 2016. These
audited consolidated financial statements have been prepared in
accordance with IFRS as issued by the IASB.
The
following is selected financial data for the Company for each of
the last three fiscal years ended 2016 through 2018 on a
consolidated basis. The data is extracted from the audited
consolidated financial statements of the Company for each of the
said years.
Summary of Financial Information in Accordance with International
Financial Reporting Standards (IFRS) (CDN)
Operating data – Fiscal year ended June 30
|
For the Years
Ending June 30,
|
|
|
|
|
|
$
|
$
|
$
|
|
Revenue
|
-
|
-
|
-
|
|
Net loss for
year
|
(4,865,933
)
|
(88,405
)
|
(73,712
)
|
|
Net loss per
share
|
(0.15
)
|
(0.00
)
|
(0.00
)
|
|
|
|
|
|
|
Working capital
(deficit)
|
3,882,542
|
(626,476
)
|
(538,071
)
|
|
Total
assets
|
4,875,592
|
6,756
|
7,775
|
|
Total
liabilities
|
320,321
|
633,232
|
545,846
|
|
Capital
stock
|
14,480,241
|
7,880,660
|
7,880,660
|
|
Contributed
surplus
|
3,808,611
|
361,196
|
361,196
|
|
Accumulated
deficit
|
(13,734,265
)
|
(8,868,332
)
|
(8,779,927
)
|
|
Accumulated other
comprehensive income
|
684
|
-
|
-
|
|
Shareholders’
equity (deficiency)
|
4,555,271
|
(626,476
)
|
(538,071
)
|
The
Company has not declared or paid any dividends in any of its last
three fiscal years.
Exchange Rates
In this
Annual Report on Form 20-F, unless otherwise specified, all
monetary amounts are expressed in Canadian Dollars. The
exchange rates used herein were obtained from Bank of Canada;
however, they cannot be guaranteed.
On
November 30, 2018, being the last day of November 2018, the
exchange rate, based on the daily buying rates, for the conversion
of Canadian Dollars into United States Dollars (the “Daily
Rate of Exchange”) was $0.7518.
The
following table sets out the high and low exchange rates for each
of the last six months.
|
2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
High for
period
|
$
0.
7641
|
$
0.
7811
|
$
0.7749
|
$
0.7742
|
$
0.7682
|
$
0.7744
|
|
Low for
period
|
$
0.
7518
|
$
0.
7609
|
$
0.7583
|
$
0.7603
|
$
0.7544
|
$
0.7513
|
The
following table sets out the average exchange rates for the five
most recent financial years calculated by using the average of the
Daily Rate of Exchange on the last day of each month during the
period.
|
|
|
|
|
|
|
|
|
|
Average for the
year
|
$
0.7855
|
$
0.7564
|
$
0.7540
|
$
0.8466
|
$
0.9367
|
(B) CAPITALIZATION AND INDEBTEDNESS
Not
applicable.
(C) REASONS FOR THE OFFER AND USE OF PROCEEDS
Not
applicable.
(D) RISK FACTORS
The
following is a brief discussion of those distinctive or special
characteristics of the Company’s operations and industry that
may have a material adverse impact on, or constitute risk factors
in respect of, the Company’s future financial
performance.
Summary of Regulatory Environment
Although
cannabis is federally illegal in the U.S., the U.S. federal
government’s approach to enforcement of such laws has trended
toward non-enforcement. On August 29, 2013, the
U.S. Department of Justice (the
“DOJ”)
, issued a memorandum known as the
“Cole Memorandum” to all U.S. Attorneys’ offices
(federal prosecutors). The Cole Memorandum generally directed U.S.
Attorneys not to prioritize the enforcement of federal cannabis
laws against individuals and businesses that comply with state laws
legalizing cannabis. While not legally binding, and merely
prosecutorial guidance, the Cole Memorandum laid a framework for
managing the tension between state and federal laws concerning
state regulated cannabis businesses.
On
January 4, 2018, the Cole Memorandum was revoked by Attorney
General Jeff Sessions, an opponent of state-regulated medical and
recreational cannabis. While this did not create a change in
federal law, as the Cole Memorandum was not itself legally binding
upon federal prosecutors, the revocation removed the DOJ’s
guidance to U.S. Attorneys that state-regulated cannabis industries
substantively in compliance with the Cole Memorandum’s
guidelines should not be a prosecutorial priority.
In
addition to his revocation of the Cole Memorandum, Attorney General
Sessions also issued a one-page memorandum known as the
“Sessions Memorandum.” The Sessions Memorandum
confirmed the rescission of the Cole Memorandum and explained the
rationale for such rescission. According to the Sessions
Memorandum, the Cole Memorandum was “unnecessary” due
to existing general enforcement guidance set forth in the U.S.
Attorney's Manual (the “USAM”). The USAM enforcement
priorities, similar to the Cole Memorandum priorities, consider the
“seriousness” of the alleged crimes, the
“deterrent effect of criminal prosecution” and
“the cumulative impact of particular crimes on the
community”. Accordingly, U.S. Attorneys presently possess the
same prosecutorial discretion they held while the Cole Memorandum
was in place.
U.S.
legal counsel continuously monitors all U.S. Attorney comments
related to regulated medical and recreational cannabis laws to
assess various risks and enforcement priorities within each
jurisdiction. Dozens of U.S. Attorneys across the U.S. have
affirmed that their prosecutorial discretion and/or federal
enforcement priorities have not changed.
In
addition, federal money laundering statutes may be violated in the
event that financial institutions take any proceeds from cannabis
sales or any other Schedule I substance, and Canadian banks are
hesitant to deal with cannabis companies, due to the uncertain
legal and regulatory framework of the industry. Banks and other
financial institutions could be prosecuted and possibly convicted
of money laundering for providing services to cannabis businesses.
Under U.S. federal law, banks or other financial institutions that
provide a cannabis business with a checking account, debit or
credit card, small business loan, or any other service could be
found guilty of money laundering or conspiracy. Nevertheless, the
U.S. Department of the Treasury issued a memorandum in February of
2014 (the “FinCEN Memorandum”) outlining the pathways
for financial institutions to bank state-sanctioned cannabis
businesses. Under these guidelines, financial institutions must
submit a “suspicious activity report”
(“SAR”) as required by federal money laundering laws.
These cannabis related SARs are divided into three categories:
cannabis limited, cannabis priority, and cannabis terminated, based
on the financial institution’s belief that the cannabis
business follows state law, is operating out of compliance with
applicable state law, or where the banking relationship has been
terminated.
Attorney
General Sessions’ revocation of the Cole Memorandum and the
2014 Cole Memo has not affected the status of the FinCEN
Memorandum, nor has the Department of the Treasury given any
indication that it intends to rescind the FinCEN
Memorandum.
Despite
the revocation of the Cole Memorandum, a legislative safeguard for
the medical cannabis industry remains in place. Congress utilized a
rider provision in the FY 2015, 2016 and 2017 Consolidated
Appropriations Acts (currently the “Leahy Amendment”)
to prevent the federal government from using congressionally
appropriated funds to enforce federal cannabis laws against
regulated medical cannabis actors operating in compliance with
applicable state law. The Leahy Amendment was included in the FY
2018 budget passed on March 23, 2018, meaning that, the Leahy
Amendment is still in effect as of today’s date and will
remain in effect until September 30, 2018, when FY 2019
begins.
Compliance with Applicable State Law
Each
licensee of the Intellectual Property complies with applicable U.S.
state licensing requirements as follows: (1) each licensee is
licensed pursuant to applicable U.S. state law to cultivate,
possess and/or distribute cannabis in such state; (2) renewal dates
for such licenses are docketed by legal counsel and/or other
advisors; (3) random internal audits of the licensee’s
business activities are conducted by the applicable state regulator
and by the respective investee to ensure compliance with applicable
state law; (4) each employee is provided with an employee handbook
that outlines internal standard operating procedures in connection
with the cultivation, possession and distribution of cannabis to
ensure that all cannabis inventory and proceeds from the sale of
such cannabis are properly accounted for and tracked, using
scanners to confirm each customer’s legal age and the
validity of each customer’s drivers’ license; (5) each
room that cannabis inventory and/or proceeds from the sale of such
inventory enter is monitored by video surveillance; (6) software is
used to track cannabis inventory from seed-to-sale; and (7) each
licensee is contractually obligated to comply with applicable state
law in connection with the cultivation, possession and/or
distribution of cannabis. CordovaCann’s U.S. legal counsel
reviews, from time to time, the licenses and documents referenced
above in order to confirm such information and identify any
deficiencies.
Colorado’s Cannabis Regulatory Environment
For the
purposes of Staff Notice 51-352, the assets and interests held by
CordovaCann in Colorado are classified as “ancillary”
involvement in the U.S. cannabis industry.
Colorado
authorized the cultivation, possession and distribution of cannabis
by certain licensed Colorado cannabis businesses. The Colorado
Marijuana Enforcement Division regulates Colorado’s cannabis
regulatory program. CordovaCann is advised by U.S. legal counsel
and/or other advisors in connection with Colorado’s cannabis
regulatory program. CordovaCann only engages in transactions with
Colorado cannabis businesses that hold licenses that are in good
standing to cultivate, possess and/or distribute cannabis in
Colorado in compliance with Colorado’s cannabis regulatory
program. To the extent required by Colorado’s cannabis
regulatory program, CordovaCann has fully disclosed and/or
registered each financial interest CordovaCann holds in such
Colorado cannabis business. As of the date hereof, CordovaCann and
Clearview Industries are in compliance with Colorado’s
cannabis regulatory program.
Oregon’s Cannabis Regulatory Environment
For the
purposes of Staff Notice 51-352, the assets and interests held by
CordovaCann in Oregon are classified as “ancillary”
involvement in the U.S. cannabis industry.
Oregon
authorized the cultivation, possession and distribution of cannabis
by certain licensed Oregon cannabis businesses. The Oregon Liquor
Control Commission regulates Oregon’s cannabis regulatory
program. CordovaCann is advised by U.S. legal counsel and/or other
advisors in connection with Oregon’s cannabis regulatory
program. CordovaCann only engages in transactions with Oregon
cannabis businesses that hold licenses that are in good standing to
cultivate, possess and/or distribute cannabis in Oregon in
compliance with Oregon’s cannabis regulatory program. To the
extent required by Oregon’s cannabis regulatory program,
CordovaCann has fully disclosed and/or registered each financial
interest CordovaCann holds in such Oregon cannabis business. As of
the date hereof, CordovaCann and FOTF are in compliance with
Oregon’s cannabis regulatory program.
California’s Cannabis Regulatory Environment
For the
purposes of Staff Notice 51-352, the assets and interests
contemplated to be held by CordovaCann in California are classified
as “ancillary” involvement in the U.S. cannabis
industry.
California
authorized the cultivation, possession and distribution of cannabis
by certain licensed California cannabis businesses. The California
Bureau of Cannabis Control regulates California’s cannabis
regulatory program. CordovaCann is advised by U.S. legal counsel
and/or other advisors in connection with California’s
cannabis regulatory program. CordovaCann only engages in
transactions with California cannabis businesses that hold licenses
that are in good standing to cultivate, possess and/or distribute
cannabis in California in compliance with California’s
cannabis regulatory program. To the extent required by
California’s cannabis regulatory program, CordovaCann has
fully disclosed and/or registered each financial interest
CordovaCann holds in such California cannabis business. As of the
date hereof, CordovaCann and Humboldt Healthcare are in compliance
with California’s cannabis regulatory program.
Nevada’s Cannabis Regulatory Environment
For the
purposes of Staff Notice 51-352, the assets and interests proposed
to be held by CordovaCann in Nevada are classified as
“ancillary” involvement in the U.S. cannabis
industry.
Nevada
authorized the cultivation, possession and distribution of cannabis
by certain licensed Nevada cannabis businesses. The Nevada
Department of Taxation regulates Nevada’s cannabis regulatory
program. CordovaCann is advised by U.S. legal counsel and/or other
advisors in connection with Nevada’s cannabis regulatory
program. CordovaCann only engages in transactions with Nevada
cannabis businesses that hold licenses that are in good standing to
cultivate, possess and/or distribute cannabis in Nevada in
compliance with Nevada’s cannabis regulatory program. To the
extent required by Nevada’s cannabis regulatory program,
CordovaCann has fully disclosed and/or registered each financial
interest CordovaCann holds in such Nevada cannabis business. As of
the date hereof, CordovaCann and Forever Green are in compliance
with Nevada’s cannabis regulatory program.
The
following are certain risk factors relating to the business carried
on by the Company that prospective holders of Common Shares should
carefully consider.
Risks specifically related to the United States regulatory
system.
The Company’s investments operate in a new industry which is
highly regulated, highly competitive and evolving rapidly. As such,
new risks may emerge, and management may not be able to predict all
such risks or be able to predict how such risks may result in
actual results differing from the results contained in any
forward-looking statements.
The Company’s investments incur ongoing costs and obligations
related to regulatory compliance. Failure to comply with
regulations may result in additional costs for corrective measures,
penalties or in restrictions of operations. In addition, changes in
regulations, more vigorous enforcement thereof or other
unanticipated events could require extensive changes to operations,
increased compliance costs or give rise to material liabilities,
which could have a material adverse effect on the business, results
of operations and financial condition of the Company’s
investments and, therefore, on the Company’s prospective
returns. Further, the Company may be subject to a variety of claims
and lawsuits. Adverse outcomes in some or all of these claims may
result in significant monetary damages or injunctive relief that
could adversely affect our ability to conduct our business.
Litigation and other claims are subject to inherent uncertainties
and management’s view of these matters may change in the
future. A material adverse impact on our financial statements could
also occur for the period in which the effect of an unfavorable
final outcome becomes probable and reasonably capable of being
estimated. The industry is subject to extensive controls and
regulations which may significantly affect the financial condition
of market participants. The marketability of any product may be
affected by numerous factors that are beyond the control of the
Company’s investments and which cannot be predicted, such as
changes to government regulations, including those relating to
taxes and other government levies which may be imposed. Changes in
government levies, including taxes, could reduce the
Company’s investments’ earnings and could make future
capital investments or the Company’s investments’
operations uneconomic. The industry is also subject to numerous
legal challenges, which may significantly affect the financial
condition of market participants and which cannot be reliably
predicted.
CordovaCann is expected to continue to derive a portion of its
revenues from the cannabis industry in certain states of the United
States, which industry is illegal under United States federal law.
While the Company’s business activities are compliant with
applicable state and local laws, such activities remain illegal
under United States federal law. CordovaCann is involved in the
cannabis industry in the United States where local and state laws
permit such activities or provide limited defenses to criminal
prosecutions. The enforcement of relevant laws is a significant
risk.
Thirty of the states in the United States have enacted
comprehensive legislation to regulate the sale and use of medical
cannabis. Notwithstanding the permissive regulatory environment of
medical cannabis at the state level, cannabis continues to be
categorized as a Schedule 1 controlled substance under the United
States Controlled Substances Act of 1970. As such, cannabis-related
practices or activities, including without limitation, the
cultivation, manufacture, importation, possession, use or
distribution of cannabis, are illegal under United States federal
law. Strict compliance with state laws with respect to cannabis
will neither absolve the Company of liability under United States
federal law, nor will it provide a defense to any federal
proceeding which may be brought against the Company. Any such
proceedings brought against the Company may adversely affect the
Company’s operations and financial performance.
Because of the conflicting views between state legislatures and the
federal government of the United States regarding cannabis,
investments in cannabis businesses in the United States are subject
to inconsistent legislation, regulation, and enforcement. Unless
and until the United States Congress amends the United States
Controlled Substances Act with respect to cannabis or the Drug
Enforcement Agency reschedules or de-schedules cannabis (and as to
the timing or scope of any such potential amendments there can be
no assurance), there is a risk that federal authorities may enforce
current federal law, which would adversely affect the current and
future investments of the Company in the United States. As a result
of the tension between state and federal law, there are a number of
risks associated with the Company’s existing and future
investments in the United States.
For the reasons set forth above, the Company’s existing
interests in the United States cannabis market may become the
subject of heightened scrutiny by regulators, stock exchanges,
clearing agencies and other authorities in Canada. It has been
reported by certain publications in Canada that the Canadian
Depository for Securities Limited may implement policies that would
see its subsidiary, CDS Clearing and Depository Services Inc.
(“CDS”), refuse to settle trades for cannabis issuers
that have investments in the United States. CDS is Canada’s
central securities depository, clearing and settlement hub settling
trades in the Canadian equity, fixed income and money markets. The
TMX Group, the owner and operator of CDS, subsequently issued a
statement on August 17, 2017 reaffirming that there is no CDS ban
on the clearing of securities of issuers with cannabis-related
activities in the United States, despite media reports to the
contrary and that the TMX Group was working with regulators to
arrive at a solution that will clarify this matter, which would be
communicated at a later time.
On February 8, 2018, following discussions with the Canadian
Securities Administrators (“CSA”) and recognized
Canadian securities exchanges, the TMX Group announced the signing
of a Memorandum of Understanding (“TMX MOU”) with
Aequitas NEO Exchange Inc., CSE, the Toronto Stock Exchange, and
the TSX Venture Exchange. The TMX MOU outlines the parties’
understanding of Canada’s regulatory framework applicable to
the rules, procedures, and regulatory oversight of the exchanges
and CDS as it relates to companies with cannabis-related activities
in the United States. The TMX MOU confirms, with respect to the
clearing of listed securities, that CDS relies on the exchanges to
review the conduct of listed companies. As a result, there is no
CDS ban on the clearing of securities of companies with
cannabis-related activities in the United States. However, there
can be no guarantee that this approach to regulation will continue
in the future. If such a ban were to be implemented, it would have
a material adverse effect on the ability of holders of Common
Shares to make and settle trades. In particular, the Common Shares
would become highly illiquid as until an alternative was
implemented, investors would have no ability to effect a trade of
the Common Shares through the facilities of a stock exchange. The
Company has obtained eligibility with the Depository Trust Company
(“DTC”) for its Common Share quotation on the OTCQB and
such DTC eligibility provides another possible avenue to clear
Common Shares in the event of a CDS ban.
The activities of CordovaCann’s investments are, and will
continue to be, subject to evolving regulation by governmental
authorities. The Company’s investments are directly or
indirectly engaged in the medical and recreational cannabis
industry in the United States and Canada, where local state laws
permit such activities. The legality of the production, extraction,
distribution and use of cannabis differs among each North American
jurisdictions.
CordovaCann’s investments have been focused in four states
that have legalized the medical and/or recreational use of
cannabis, being Oregon, Colorado, California and Nevada. Over half
of the U.S. states have enacted legislation to legalize and
regulate the sale and use of medical cannabis. However, the U.S.
federal government has not enacted similar legislation. As such,
the cultivation, manufacture, distribution, sale and use of
cannabis remains illegal under U.S. federal law.
Further, on January 4, 2018, U.S. Attorney General, Jeff Sessions,
formally rescinded the standing DOJ federal policy guidance
governing enforcement of marijuana laws, as set forth in a series
of memos and guidance from 2009-2014, principally the Cole
Memorandum. The Cole Memorandum generally directed U.S. Attorneys
not to enforce the federal marijuana laws against actors who are
compliant with state laws, provided enumerated enforcement
priorities were not implicated. The rescission of this memo and
other Obama-era prosecutorial guidance did not create a change in
federal law as the Cole Memorandums were never legally binding;
however, the revocation removed the DOJ’s guidance to U.S.
Attorneys that state-regulated cannabis industries substantively in
compliance with the Cole Memorandum’s guidelines should not
be a prosecutorial priority. The federal government of the United
States has always reserved the right to enforce federal law
regarding the sale and disbursement of medical or recreational
marijuana, even if state law sanctioned such sale and disbursement.
Although the rescission of the above memorandums does not
necessarily indicate that marijuana industry prosecutions are now
affirmatively a priority for the DOJ, there can be no assurance
that the federal government will not enforce such laws in the
future.
Additionally, there can be no assurance that state laws legalizing
and regulating the sale and use of cannabis will not be repealed or
overturned, or that local governmental authorities will not limit
the applicability of state laws within their respective
jurisdictions. It is also important to note that local and city
ordinances may strictly limit and/or restrict the distribution of
cannabis in a manner that could make it extremely difficult or
impossible to transact business in the cannabis industry. If the
federal government begins to enforce federal laws relating to
cannabis in states where the sale and use of cannabis is currently
legal, or if existing state laws are repealed or curtailed, the
Company’s investments in such businesses would be materially
and adversely affected notwithstanding the fact that the Company is
not directly engaged in the sale or distribution of cannabis.
Federal actions against any individual or entity engaged in the
marijuana industry or a substantial repeal of marijuana related
legislation could adversely affect the Company, its business and
its investments.
In light of the political and regulatory uncertainty surrounding
the treatment of U.S. cannabis-related activities, including the
rescission of the Cole Memorandum discussed above, on February 8,
2018, the CSA published Staff Notice 51-352 setting out the
CSA’s disclosure expectations for specific risks facing
issuers with cannabis-related activities in the United States.
Staff Notice 51-352 confirms that a disclosure-based approach
remains appropriate for issuers with U.S. cannabis-related
activities. Staff Notice 51-352 includes additional disclosure
expectations that apply to all issuers with U.S. cannabis-related
activities, including those with direct and indirect involvement in
the cultivation and distribution of cannabis, as well as issuers
that provide goods and services to third parties involved in the
U.S. cannabis industry. The Company views this staff notice
favorably, as it provides increased transparency and greater
certainty regarding the views of the exchanges and the regulators
regarding the Company’s existing operations and strategic
business plan as well as the Company’s ability to pursue
further investments and opportunities in the United
States.
The Company’s investments in the United States are subject to
applicable anti-money laundering laws and regulations.
The Company is subject to a variety of laws and regulations
domestically and in the United States that involve money
laundering, financial recordkeeping and proceeds of crime,
including the U.S. Currency and Foreign Transactions Reporting Act
of 1970 (commonly known as the Bank Secrecy Act), as amended by
Title III of the Uniting and Strengthening America by Providing
Appropriate Tools Required to Intercept and Obstruct Terrorism Act
of 2001 (USA PATRIOT Act), the Proceeds of Crime (Money Laundering)
and Terrorist Financing Act (Canada), as amended and the rules and
regulations thereunder, and any related or similar rules,
regulations or guidelines, issued, administered or enforced by
governmental authorities in the United States and Canada. Further,
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, aiding and abetting, or
conspiracy.
Despite these laws, FinCEN issued a memorandum on February 14, 2014
outlining the pathways for financial institutions to bank marijuana
businesses in compliance with federal enforcement priorities. The
FinCEN Memorandum states that in some circumstances, it is
permissible for banks to provide services to cannabis-related
businesses without risking prosecution for violation of federal
money laundering laws. It refers to supplementary guidance that
Deputy Attorney General Cole issued to federal prosecutors relating
to the prosecution of money laundering offenses predicated on
cannabis-related violations of the United States Controlled
Substances Act on the same day (the “2014 Cole Memo”).
The 2014 Cole Memo has been rescinded as of January 4, 2018, along
with the Cole Memorandum, removing guidance that enforcement of
applicable financial crimes was not a DOJ priority.
Attorney General Sessions’ revocation of the Cole Memorandum
and the 2014 Cole Memo has not affected the status of the FinCEN
Memorandum, nor has the Department of the Treasury given any
indication that it intends to rescind the FinCEN Memorandum itself.
Though it was originally intended for the 2014 Cole Memo and the
FinCEN Memorandum to work in tandem, the FinCEN Memorandum appears
to remain in effect as a standalone document which explicitly lists
the eight enforcement priorities originally cited in the rescinded
Cole Memorandum. Although the FinCEN Memorandum remains intact,
indicating that the Department of the Treasury and FinCEN intend to
continue abiding by its guidance, it is unclear whether the current
administration will continue to follow the guidelines of the FinCEN
Memorandum.
The Company’s investments, and any proceeds thereof, are
considered proceeds of crime due to the fact that cannabis remains
illegal federally in the United States.
This restricts the
ability of the Company to declare or pay dividends, effect other
distributions or subsequently repatriate such funds back to Canada.
Furthermore, while the Company has no current intention to declare
or pay dividends on its Common Shares in the foreseeable future,
the Company may decide or be required to suspend declaring or
paying dividends without advance notice and for an indefinite
period of time.
The Company’s investments in the United States may be subject
to heightened scrutiny by Canadian authorities.
For the reasons set forth above, the Company’s existing
investments in the United States, and any future investments, may
become the subject of heightened scrutiny by regulators, stock
exchanges and other authorities in Canada. As a result, the Company
may be subject to significant direct and indirect interaction with
public officials. There can be no assurance that this heightened
scrutiny will not in turn lead to the imposition of certain
restrictions on the Company’s ability to invest in the United
States or any other jurisdiction, in addition to those described
herein.
Although the TMX MOU has confirmed that there is currently no CDS
ban on the clearing of securities of companies with
cannabis-related activities in the United States, there can be no
guarantee that this approach to regulation will continue in the
future. If such a ban were to be implemented, it would have a
material adverse effect on the ability of holders of Common Shares
to make and settle trades. In particular, the Common Shares would
become highly illiquid as until an alternative was implemented,
investors would have no ability to effect a trade of the Common
Shares through the facilities of a stock exchange.
Change in laws, regulations and guidelines.
Each investment’s current and proposed operations are subject
to a variety of laws, regulations and guidelines, including, but
not limited to, those relating to the manufacture, management,
transportation, storage and disposal of cannabis, as well as laws
and regulations relating to health and safety (including those for
consumable products), the conduct of operations and the protection
of the environment. These laws and regulations are broad in scope
and subject to evolving interpretations. If any changes to such
laws, regulations and guidelines occur, which are matters beyond
the control of the Company, the Company may incur significant costs
in complying with such changes or it may be unable to comply
therewith, which in turn may result in a material adverse effect on
the Company’s business, financial condition and results of
operation. In addition, violations of these laws, or allegations of
such violations, could disrupt certain aspects of the
Company’s business plan and result in a material adverse
effect on certain aspects of its planned operations.
Changes in regulations, more vigorous enforcement thereof, the
imposition of restrictions on the Company’s ability to
operate in the U.S. as a result of the federally illegal nature of
cannabis in the U.S. or other unanticipated events could require
extensive changes to the Company’s operations, increased
compliance costs or give rise to material liabilities, which could
have a material adverse effect on the business, results of
operations and financial condition of the Company.
United States tax residence of the Company.
The
Company, which is and will continue to be a Canadian corporation
generally would be classified as a non-United States corporation
(and, therefore, as a non-United States tax resident) under general
rules of United States federal income taxation. Section 7874 of the
United States Tax Code, however, contains rules that can cause a
non-United States corporation to be taxed as a United States
corporation for United States federal income tax purposes. The
rules described in this paragraph are relatively new, their
application is complex and there is little guidance regarding their
application. Under section 7874 of the United States Tax Code, a
corporation created or organized outside the United States (i.e., a
non-United States corporation) will nevertheless be treated as a
United States corporation for United States federal income tax
purposes (such treatment is referred to as an
“Inversion”) if each of the following three conditions
are met (i) the non-United States corporation acquires, directly or
indirectly, or is treated as acquiring under applicable United
States Treasury Regulations, substantially all of the assets held,
directly or indirectly, by a United States corporation, (ii) after
the acquisition, the former stockholders of the acquired United
States corporation hold at least 80% (by vote or value) of the
shares of the non-United States corporation by reason of holding
shares of the United States acquired corporation, and (iii) after
the acquisition, the non-United States corporation’s expanded
affiliated group does not have substantial business activities in
the non-United States corporation’s country of organization
or incorporation when compared to the expanded affiliated
group’s total business activities (clauses (i) – (iii),
collectively, the “Inversion Conditions”). For this
purpose, “expanded affiliated group” means a group of
corporations where (i) the non-United States corporation owns stock
representing more than 50% of the vote and value of at least one
member of the expanded affiliated group, and (ii) stock
representing more than 50% of the vote and value of each member is
owned by other members of the group. The definition of an
“expanded affiliated group” includes partnerships where
one or more members of the expanded affiliated group own more than
50% (by vote and value) of the interests of the
partnership.
If the
Company is treated as a United States corporation for United States
federal income tax purposes under section 7874 of the United States
Tax Code (which is considered likely, although no definitive
determination of this matter has been reached, and no tax ruling
has been sought or obtained in this regard), the Company would be
considered a United States tax resident and subject to United
States federal income tax on its worldwide income. However, for
Canadian tax purposes, the Company is expected, regardless of any
application of section 7874 of the United States Tax Code, to be
treated as a Canadian resident Company (as defined in the Tax Act)
for Canadian income tax purposes. As a result, if the Company is
considered a United States corporation under section 7874, the
Company would be subject to taxation both in Canada and the United
States which could have a material adverse effect on its financial
condition and results of operations. In addition, any distributions
paid by the Company to a holder of Common Shares may be subject to
United States withholding tax as well as any applicable Canadian
withholding tax. A Non-United States Holder may also be subject to
United States tax, including withholding tax, on disposition of its
Common Shares.
Passive Foreign Investment Company.
There is a risk that the Company may, in the future, be construed
as a passive foreign investment Company (“PFIC”). If
the Company is a PFIC, its shareholders in the U.S. are likely
subject to adverse U.S. tax consequences. Under U.S. federal income
tax laws, if a Company is a PFIC for any year, it could have
adverse U.S. federal income tax consequences to a U.S. shareholder
with respect to its investment in the Company’s shares. The
Company earns royalty and franchise revenue which may be treated as
passive income unless the royalty and franchise revenue is derived
in the active conduct of a trade or business. Assessing whether
royalty or franchise revenue received by the Company and its
subsidiaries is derived in the active conduct of a trade or
business involves substantial factual and legal ambiguity. Based on
current business plans and financial expectations, the Company
expects that it will not be a PFIC for its current tax year. PFIC
classification is fundamentally factual in nature, generally cannot
be determined until the close of the tax year in question, and is
determined annually. Furthermore, because PFIC determinations are
made annually, it is possible that the Company will meet the
requirements to be treated as a PFIC in one or more years, but not
meet such requirements in other years. U.S. shareholders should
consult their own tax advisors regarding the potential adverse tax
consequences to owning PFIC stock, and whether they are able to and
should make any elections or take other actions to mitigate such
potential adverse tax consequences.
If the Company is deemed to be an investment Company under the
United States Investment Company Act of 1940, as amended (the
“Investment Company Act”), it may be required to
institute burdensome compliance requirements and its activities may
be restricted.
The Company intends to conduct its operations so that it is not
required to register as an investment Company under the Investment
Company Act. Section 3(a)(1)(C) of the Investment Company Act
defines an investment Company as any issuer that is engaged or
proposes to engage in the business of investing, reinvesting,
owning, holding or trading in securities and owns or proposes to
acquire investment securities having a value exceeding 40.0% of the
value of the issuer’s total assets (exclusive of government
securities and cash items) on an unconsolidated basis. However, any
issuer primarily engaged, directly or through a wholly-owned
subsidiary or subsidiaries, in a business or businesses other than
that of investing, reinvesting, owning, holding, or trading in
securities is exempt from the requirements of the Investment
Company Act under Section 3(b)(1).
If the Company is deemed to be an investment Company under the
Investment Company Act, its activities may be restricted, including
restrictions on the nature of the Company’s investments and
restrictions on the issuance of securities. In addition, the
Company may have imposed upon it burdensome requirements,
including:
●
registration
as an investment Company;
●
adoption
of a specific form of corporate structure; and
●
reporting,
record keeping, voting, proxy and disclosure requirements and other
rules and regulations.
In sum, if the Company were to be characterized as an investment
Company, the inability of the Company to satisfy such regulatory
requirements, whether on a timely basis or at all, could, under
certain circumstances, have a material adverse effect on the
Company and its ability to continue pursuing its business plan
could be limited.
The Company's Common Shares are considered to be penny stock, which
may adversely affect the liquidity of its Common
Shares.
The capital stock of the Company would be classified as
“penny stock” as defined in Reg. § 240.3a51-1
promulgated under the Securities Exchange Act of 1934 (the
“1934 Act”). In response to perceived abuse in the
penny stock market generally, the 1934 Act was amended in 1990 to
add new requirements in connection with penny stocks. In connection
with effecting any transaction in a penny stock, a broker or dealer
must give the customer a written risk disclosure document that (a)
describes the nature and level of risk in the market for penny
stocks in both public offerings and secondary trading, (b)
describes the broker’s or dealer’s duties to the
customer and the rights and remedies available to such customer
with respect to violations of such duties, (c) describes the dealer
market, including “bid” and “ask” prices
for penny stock and the significance of the spread between the bid
and ask prices, (d) contains a toll-free telephone number for
inquiries on disciplinary histories of brokers and dealers, and (e)
define significant terms used in the disclosure document or the
conduct of trading in penny stocks. In addition, the broker-dealer
must provide to a penny stock customer a written monthly account
statement that discloses the identity and number of shares of each
penny stock held in the customer’s account, and the estimated
market value of such shares. The extensive disclosure and other
broker-dealer compliance related to penny stocks may result in
reducing the level of trading activity in the secondary market for
such stocks, thus limiting the ability of the holder to sell such
stock.
Additional financing.
The continued development of the Company will require additional
financing. There is no guarantee that the Company will be able to
achieve its business objectives. The Company intends to fund its
future business activities by way of additional offerings of equity
and/or debt financing as well as through anticipated positive cash
flow from operations in the future. The failure to raise or procure
such additional funds or the failure to achieve positive cash flow
could result in the delay or indefinite postponement of current
business objectives. There can be no assurance that additional
capital or other types of financing will be available if needed or
that, if available, will be on terms acceptable to the Company. If
additional funds are raised by offering equity securities, existing
shareholders could suffer significant dilution. Any debt financing
secured in the future could involve the granting of security
against assets of the Company and also contain restrictive
covenants relating to capital raising activities and other
financial and operational matters, which may make it more difficult
for the Company to obtain additional capital and to pursue business
opportunities, including potential acquisitions. The Company will
require additional financing to fund its operations until positive
cash flow is achieved.
The Company’s access to both public and private capital and
its ability to access financing to support continuing operations
and investments may be further restricted due to uncertainty and
the changing nature of the marijuana regulatory environment in
jurisdictions in which the Company operates. See
“
Risks specifically related to
the United States regulatory system
” and “
Change in laws, regulations
and guidelines
”
above.
Investments may be pre-revenue.
The Company has made and may make future investments in entities
that have no significant sources of operating cash flow and no
revenue from operations. As such, the Company’s investments
are subject to risks and uncertainties including the risk that the
Company’s investments will not be able to:
●
implement
or execute their current business plan, or create a business plan
that is sound;
●
maintain
their anticipated management team; and/or
●
raise
sufficient funds in the capital markets or otherwise to effectuate
their business plan.
If the Company’s investments cannot execute any one of the
foregoing, their businesses may fail, which could have a materially
adverse impact on the business, financial condition and operating
results of the Company.
Lack of control over operations of investments.
The Company relies on its investments to execute on their business
plans and to produce medical and/or recreational cannabis products,
and holds contractual rights and minority equity interests relating
to the operation of the Company’s investments. The operators
of the Company’s investments have significant influence over
the results of operations of the Company’s investments.
Further, the interests of the Company and the operators of the
Company’s investments may not always be aligned. As a result,
the cash flows of the Company are dependent upon the activities of
third parties which creates the risk that at any time those third
parties may: (i) have business interests or targets that are
inconsistent with those of the Company; (ii) take action contrary
to the Company’s policies or objectives; (iii) be unable or
unwilling to fulfill their obligations under their agreements with
the Company; or (iv) experience financial, operational or other
difficulties, including insolvency, which could limit or suspend a
third party’s ability to perform its obligations. In
addition, payments may flow through the Company’s
investments, and there is a risk of delay and additional expense in
receiving such revenues. Failure to receive payments in a timely
fashion, or at all, under the agreements to which the Company is
entitled may have a material adverse effect on the Company. In
addition, the Company must rely, in part, on the accuracy and
timeliness of the information it receives from the Company’s
investments, and use such information in its analyses, forecasts
and assessments relating to its own business. If the information
provided by investment entities to the Company contains material
inaccuracies or omissions, the Company’s ability to
accurately forecast or achieve its stated objectives, or satisfy
its reporting obligations, may be materially impaired.
Private companies and illiquid securities.
The Company may invest in securities of private companies. In some
cases, the Company may be restricted by contract or generally by
applicable securities laws from selling such securities for a
period of time. Such securities may not have a ready market and the
inability to sell such securities or to sell such securities on a
timely basis or at acceptable prices may impair the Company’s
ability to exit such investments when the Company considers it
appropriate.
Unfavourable publicity or consumer perception.
The regulated cannabis industry in the United States and Canada is
at an early stage of its development. The Company believes the
medical and recreational cannabis industry is highly dependent on
consumer perception regarding the safety and efficacy of
recreational and medical cannabis. Consumer perceptions regarding
legality, morality, consumption, safety, efficacy and quality of
cannabis are mixed and evolving. Consumer perception can be
significantly influenced by scientific research or findings,
regulatory investigations, litigation, media attention and other
publicity regarding the consumption of cannabis products. There can
be no assurance that future scientific research, findings,
regulatory proceedings, litigation, media attention or other
research findings or publicity will be favourable to the cannabis
market or any particular product, or consistent with earlier
publicity. Future research reports, findings, regulatory
proceedings, litigation, media attention or other publicity that
are perceived as less favourable than, or that question, earlier
research reports, findings or publicity could have a material
adverse effect on the demand for cannabis and on the business,
results of operations, financial condition and cash flows of the
Company. Further, adverse publicity reports or other media
attention regarding cannabis in general, or associating the
consumption of cannabis with illness or other negative effects or
events, could have such a material adverse effect on the business
of the Company. Such adverse publicity reports or other media
attention could arise even if the adverse effects associated with
such products resulted from consumers’ failure to consumer
such products legally, appropriately or as directed.
Public opinion and support for medical and recreational cannabis
use has traditionally been inconsistent and varies from
jurisdiction to jurisdiction. Legalization of medical and
recreational cannabis remains a controversial issue subject to
differing opinions surrounding the level of legalization (for
example, legalization of medical marijuana as opposed to
legalization in general).
Limited operating history.
Since March 1997, when it was created by amalgamation, the Company
has had no significant revenues or earnings from operations. The
Company has operated at a loss to date and may continue to sustain
operating losses for the foreseeable future. There is no assurance
that the Company will ever be profitable. Therefore, it is
difficult for investors to evaluate the Company’s operations
and prospects which may increase the risks associated with an
investment in the Company.
At June 30, 2018,
the Company had a working capital surplus of $3,882,542 as compared
to a working capital deficiency of $626,476 as at June 30, 2017.
The Company’s ability to continue as a going concern is
dependent upon its ability to access sufficient capital until it
has profitable operations and raises a material concern. To this
point, all operational activities and overhead costs have been
funded through equity issuances, debt issuances and related party
advances. With the continued funding from equity and debt
issuances, the Company believes it will able to meet its cash
requirements in the upcoming fiscal year. At June 30, 2018, there
is substantial doubt about the Company’s ability to continue
as a going concern primarily due to its history of losses.
Liquidity risk continues to be a key concern in the development of
future operations.
Although the Company expects to generate some revenues from its
investments, many of the investments will only start generating
revenues in future periods and, accordingly, the Company is
therefore expected to remain subject to many of the risks common to
early-stage enterprises for the foreseeable future, including
challenges related to laws, regulations, licensing, integrating and
retaining qualified employees; making effective use of limited
resources; achieving market acceptance of existing and future
solutions; competing against companies with greater financial and
technical resources; acquiring and retaining customers; and
developing new solutions. There is no assurance that the Company
will be successful in achieving a return on shareholders’
investment and the likelihood of success must be considered in
light of the early stage of operations.
Banking.
Since the production and possession of cannabis is currently
illegal under U.S. federal law, it is possible that banks may
refuse to open bank accounts for the deposit of funds from
businesses involved with the cannabis industry. The inability to
open bank accounts with certain institutions could materially and
adversely affect the business of the Company.
Currency fluctuations.
Certain revenues and expenses of the Company are expected to be
denominated in U.S. Dollars, and therefore may be exposed to
significant currency exchange fluctuations. Recent events in the
global financial markets have been coupled with increased
volatility in the currency markets. Fluctuations in the exchange
rate between the U.S. Dollar and the Canadian Dollar may have a
material adverse effect on the Company’s business, financial
condition and operating results. CordovaCann may, in the future,
establish a program to hedge a portion of its foreign currency
exposure with the objective of minimizing the impact of adverse
foreign currency exchange movements; however, there can be no
assurance that such a program will effectively mitigate currency
risks.
Risks associated with strategic transactions.
As part of the Company’s overall business strategy, the
Company intends to pursue select strategic acquisitions, leasing
and lending transactions and licensing agreements which would
provide additional product offerings, vertical integrations,
additional industry expertise, and a stronger industry presence in
both existing and new jurisdictions. The success of any such
strategic transactions will depend, in part, on the ability of the
Company to realize the anticipated benefits and synergies from
integrating the Company’s investments into the businesses of
the Company. Future strategic actions may expose it to potential
risks, including risks associated with: (a) the integration of new
operations, services and personnel; (b) unforeseen or hidden
liabilities; (c) the diversion of resources from the
Company’s existing business and technology; (d) potential
inability to generate sufficient revenue to offset new costs; (e)
the expenses of acquisitions; and (f) the potential loss of or harm
to relationships with both employees and existing users resulting
from its integration of new businesses. In addition, any proposed
acquisitions may be subject to regulatory approval.
While the Company intends to conduct reasonable due diligence in
connection with such strategic transactions, there are risks
inherent in any transaction. Specifically, there could be unknown
or undisclosed risks or liabilities of such companies for which the
Company is not sufficiently indemnified. Any such unknown or
undisclosed risks or liabilities could materially and adversely
affect the Company’s financial performance and results of
operations. The Company could encounter additional transaction and
integration related costs or other factors such as the failure to
realize all of the benefits from the strategic actions. All of
these factors could cause dilution to the Company’s earnings
per share or decrease or delay the anticipated accretive effect of
the transaction and cause a decrease in the market price of the
Company’s Common Shares.
Bankruptcy or insolvency of investments.
There is no guarantee that the Company will be able to effectively
enforce any interests it may have in the Company’s
investments. A bankruptcy or other similar event related to an
investment of CordovaCann that precludes a party from performing
its obligations under an agreement may have a material adverse
effect on the Company. Furthermore, as an equity investor, should
an investment have insufficient assets to pay its liabilities, it
is possible that other liabilities will be satisfied prior to the
liabilities owed to the Company. In addition, bankruptcy or other
similar proceedings are often a complex and lengthy process, the
outcome of which may be uncertain and could result in a material
adverse effect on the Company.
Research and market development.
Although the Company, itself and through its investments, is
committed to researching and developing new markets and products
and improving existing products, there can be no assurances that
such research and market development activities will prove
profitable or that the resulting markets and/or products, if any,
will be commercially viable or successfully produced and
marketed.
The Company must rely largely on its own market research to
forecast sales as detailed forecasts are not generally obtainable
from other sources at this early stage of the medical and
recreational cannabis industry in North America.
The Company is operating its business in a relatively new medical
and recreational cannabis industry and market. Accordingly, there
are no assurances that this industry and market will continue to
exist or grow as currently estimated or anticipated, or function
and evolve in a manner consistent with management’s
expectations and assumptions. Any event or circumstance that
affects the recreational or medical cannabis industry or market
could have a material adverse effect on the Company’s
business, financial condition and results of operations. Due to the
early stage of the regulated cannabis industry, forecasts regarding
the size of the industry and the sales of products by the
Company’s investments are inherently difficult to prepare
with a high degree of accuracy and reliability. 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 the business, results of operations and financial
condition of the Company’s investments, and consequently, the
Company.
Reliance on management.
The success of the Company is dependent upon the ability,
expertise, judgment, discretion and good faith of its senior
management. Qualified individuals are in high demand, and the
Company may incur significant costs to attract and retain them. In
addition, the Company’s lean management structure may be
strained as the Company pursues growth opportunities in the future.
The loss of the services of such individuals or an inability to
attract other suitably qualified persons when needed, could have a
material adverse effect on the Company’s ability to execute
on its business plan and strategy, and the Company may be unable to
find adequate replacements on a timely basis, or at
all.
CordovaCann’s future success depends substantially on the
continued services of its executive officers, consultants and
advisors. If one or more of its executive officers or key personnel
were unable or unwilling to continue in their present positions,
the Company might not be able to replace them easily or at all. In
addition, if any of its executive officers or key employees joins a
competitor or forms a competing Company, the Company may lose
know-how, key professionals and staff members. These executive
officers and key employees could compete with and take customers
away which could materially and adversely affect the
Company’s prospects, financial performance and results of
operations.
Operation permits and authorizations.
The Company’s investments may not be able to obtain or
maintain the necessary licenses, permits, authorizations or
accreditations, or may only be able to do so at great cost, to
operate their respective businesses. In addition, the
Company’s investments may not be able to comply fully with
the wide variety of laws and regulations applicable to the cannabis
industry. Failure to comply with or to obtain the necessary
licenses, permits, authorizations or accreditations could result in
restrictions on an investment’s ability to operate in the
cannabis industry, which could have a material adverse effect on
the Company’s business.
Litigation.
CordovaCann may become party to litigation from time to time in the
ordinary course of business which could adversely affect its
business. Should any litigation in which the Company becomes
involved be determined against the Company, such a decision could
adversely affect the Company’s ability to continue operating
and the market price for the Common Shares and could use
significant resources. Even if the Company is involved in
litigation and wins, litigation can redirect significant resources.
Litigation may also create a negative perception of the
Company.
Liability, enforcement complaints, etc.
CordovaCann’s participation in the cannabis industry may lead
to litigation, formal or informal complaints, enforcement actions,
and inquiries by various federal, state, or local governmental
authorities into or against the Company or its investments.
Litigation, complaints, and enforcement actions involving either of
the Company or its investments could consume considerable amounts
of financial and other corporate resources, which could have an
adverse effect on the Company’s future cash flows, earnings,
results of operations and financial condition.
Product liability.
Certain of the Company’s investments manufacture, process
and/or distribute products designed to be ingested by humans, and
therefore face an inherent risk of exposure to product liability
claims, regulatory action and litigation if products are alleged to
have caused significant loss or injury. In addition, previously
unknown adverse reactions resulting from human consumption of
cannabis alone or in combination with other medications or
substances could occur. A product liability claim or regulatory
action against an investment entity of CordovaCann could result in
increased costs, could adversely affect the Company’s
reputation, and could have a material adverse effect on the results
of operations and financial condition of the Company.
Reliance on key inputs.
The cultivation, extraction and processing of cannabis and
derivative products is dependent on a number of key inputs and
their related costs including raw materials, electricity, water and
other local utilities. Any significant interruption or negative
change in the availability or economics of the supply chain for key
inputs could materially impact the business, financial condition
and operating results of the Company’s investments. Some of
these inputs may only be available from a single supplier or a
limited group of suppliers. If a sole source supplier was to go out
of business, the relevant investment entity might be unable to find
a replacement for such source in a timely manner or at all. Any
inability to secure required supplies and services or to do so on
appropriate terms could have a materially adverse impact on the
business, financial condition and operating results of an
investment, and consequently, the Company.
Price volatility of publicly traded securities
.
In recent years, the securities markets in the United States and
Canada have experienced a high level of price and volume
volatility, and the market prices of securities of many companies
have experienced wide fluctuations in price which have not
necessarily been related to the operating performance, underlying
asset values or prospects of such companies. There can be no
assurance that continuing fluctuations in price will not occur. It
may be anticipated that any quoted market for the Common Shares of
CordovaCann will be subject to market trends generally,
notwithstanding any potential success of CordovaCann in creating
revenues, cash flows or earnings. The value of the Common Shares
would be affected by such volatility. An active public market for
the Company’s Common Shares might not develop or be
sustained. If an active public market for the Company’s
Common Shares does not develop, the liquidity of a
shareholder’s investment may be limited and the share price
may decline.
Management of growth.
CordovaCann may experience a period of significant growth in the
number of personnel that may place a strain upon its management
systems and resources. Its future will depend in part on the
ability of its officers and other key personnel to implement and
improve financial and management controls, reporting systems and
procedures on a timely basis and to expand, train, motivate and
manage the workforce. CordovaCann’s current and planned
personnel, systems, procedures and controls may be inadequate to
support its future operations.
Dividends.
CordovaCann has not paid dividends in the past, and the Company
does not anticipate paying any dividends in the foreseeable future.
Dividends paid by the Company would be subject to tax and,
potentially, withholdings.
Any decision to declare and pay dividends in the future will be
made at the discretion of the Company’s Board of Directors
and will depend on, among other things, financial results, cash
requirements, contractual restrictions and other factors that the
Company’s Board of Directors may deem relevant. As a result,
investors may not receive any return on an investment in the Common
Shares unless they sell their Common Shares for a price greater
than that which such investors paid for them.
Risk factors related to dilution.
The
Company may issue additional securities in the future, which may
dilute a shareholder’s holdings in the Company. The
Company’s articles permit the issuance of an unlimited number
of Common Shares. The Directors of the Company have discretion to
determine the price and the terms of further issuances. Moreover,
additional Common Shares will be issued by the Company on the
exercise of options under the Company’s Option Plan and upon
the exercise of outstanding warrants.
Intellectual property and proprietary protection
.
The success of the Company will depend, in part, on the ability of
the Company and the Company’s investments to maintain,
enhance and protect its intellectual property, including various
existing and potential proprietary techniques and processes. The
Company and the Company’s investments may be vulnerable to
competitors who develop competing technology, whether independently
or as a result of acquiring access to the proprietary products and
trade secrets of the Company or the Company’s investments. In
addition, effective future patent, copyright and trade secret
protection may be unavailable or limited in certain foreign
countries and may be unenforceable under the laws of certain
jurisdictions.
The Company relies on a combination of laws and contractual
provisions to establish and protect its rights in intellectual
property. There can be no assurance that the steps taken to protect
proprietary rights will be adequate to deter misappropriation of
intellectual property or technology. The Company may face claims
alleging infringement of intellectual property rights held by
others. Such claims, whether or not meritorious, may result in the
expenditure of significant financial and managerial resources,
legal fees, result in injunctions, temporary restraining orders
and/or require the payment of damages. An adverse determination in
legal proceedings, a costly litigation process or a costly
settlement could have a material adverse effect on the
Company’s business, prospects, revenues, operating results
and financial condition.
Insurance coverage.
CordovaCann currently does not have insurance coverage. The Company
is likely to require insurance coverage in the future. There can be
no assurance that adequate insurance coverage will be available to
the Company in the future, or that if available, that such
insurance will be obtainable by the Company at a commercially
justifiable premium. There also can be no assurance that any
insurance coverage obtained by the Company will be sufficient to
cover claims to which the Company may become subject. If insurance
coverage is unavailable to cover any such claims, the
Company’s financial resources, results of operations and
prospects could be adversely affected. If the Company were to incur
substantial liability and such damages were in excess of policy
limits, there could be a material adverse effect on the
Company’s business, financial condition and results of
operations.
Operational risks.
CordovaCann and its investments may be affected by a number of
operational risks and may not be adequately insured for certain
risks, including: labour disputes; catastrophic accidents; fires;
blockades or other acts of social activism; changes in the
regulatory environment; impact of non-compliance with laws and
regulations; natural phenomena, such as inclement weather
conditions, floods, earthquakes and ground movements. There is no
assurance that the foregoing risks and hazards will not result in
damage to, or destruction of, the Company’s
investments’ properties, grow facilities and extraction
facilities, personal injury or death, environmental damage, adverse
impacts on the Company’s investments’ operations,
costs, monetary losses, potential legal liability and adverse
governmental action, any of which could have an adverse impact on
the Company’s future cash flows, earnings and financial
condition on the Company. Also, the Company’s investments may
be subject to or affected by liability or sustain loss for certain
risks and hazards against which they may elect not to insure
because of the cost. This lack of insurance coverage could have an
adverse impact on the Company’s future cash flows, earnings,
results of operations and financial condition.
Costs of maintaining a public listing.
As a public Company, there are costs associated with legal,
accounting and other expenses related to regulatory compliance.
Securities legislation and the rules and policies of securities
exchanges require listed companies to, among other things, adopt
corporate governance and related practices, and to continuously
prepare and disclose material information, all of which add to an
issuer’s legal and financial compliance costs. CordovaCann
may also elect to devote greater resources than it otherwise would
have on communication and other activities typically considered
important by publicly traded companies.
Holding Company.
CordovaCann is a holding company and essentially all of its assets
are the capital stock of its material subsidiaries. As a result,
investors in CordovaCann are subject to the risks attributable to
its subsidiaries. Consequently, CordovaCann’s cash flows and
ability to complete current or desirable future enhancement
opportunities are dependent on the earnings of its subsidiaries and
investments and the distribution of those earnings to CordovaCann.
The ability of these entities 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 any
debt arrangements. In the event of a bankruptcy, liquidation or
reorganization of any of CordovaCann’s material subsidiaries,
holders of indebtedness and trade creditors may be entitled to
payment of their claims from the assets of those subsidiaries
before CordovaCann.
Difficulty implementing business strategy.
The growth and expansion of the Company is heavily dependent upon
the successful implementation of its business strategy. There can
be no assurance that the Company will be successful in the
implementation of its business strategy.
Conflicts of interest.
Certain of the Company’s directors and officers are, and may
continue to be, involved in other business ventures through their
direct and indirect participation in, among other things,
corporations, partnerships and joint ventures, that may become
potential competitors of the technologies, products and services
the Company intends to provide. Situations may arise in connection
with potential acquisitions or opportunities where the other
interests of these directors and officers conflict with or diverge
from the Company’s interests. In accordance with applicable
corporate law, directors who have a material interest in or who are
parties to a material contract or a proposed material contract with
the Company are required, subject to certain exceptions, to
disclose that interest and generally abstain from voting on any
resolution to approve the transaction. In addition, the directors
and officers are required to act honestly and in good faith with a
view to the Company’s best interests. However, in conflict of
interest situations, the Company’s directors and officers may
owe the same duty to another Company and will need to balance their
competing interests with their duties to the Company. Circumstances
(including with respect to future corporate opportunities) may
arise that may be resolved in a manner that is unfavourable to the
Company.
Previous operations.
The
Company recently changed its focus from the identification and
evaluation of assets for purchase in the media, technology and
consumer industries, to a provider of services and investment
capital to companies in the cannabis sector. The Company also
changed its name on January 3, 2018 from “LiveReel Media
Corporation” to “CordovaCann Corp.”. While the
Company has now divested all of its assets relating to its previous
business, there is no guarantee that liabilities relating to the
previous business will not negatively impact the Company’s
current or future operations or financial performance. Management
is not aware of any liabilities relating to its previous business
operations.
Resale of Common Shares.
Although the Common Shares are listed on the CSE and the OTCQB,
there can be no assurance that an active and liquid market for the
Common Shares will develop or be maintained and an investor may
find it difficult to resell any securities of the Company. In
addition, there can be no assurance that the publicly-traded stock
price of the Company will be high enough to create a positive
return for investors. Further, there can be no assurance that the
Common Shares will be sufficiently liquid so as to permit investors
to sell their position in the Company without adversely affecting
the stock price. In such event, the probability of resale of the
Common Shares would be diminished.
ITEM 4 - INFORMATION ON THE COMPANY
(A) HISTORY AND DEVELOPMENT OF THE COMPANY
CordovaCann
was originally named “Biolink Corp.” and was formed as
a result of an amalgamation completed between “Biolink
Corp.”, “1149250 Ontario Inc.” and “I.D.
Investments Inc.” under the
Business Corporation Act
(Ontario)
(“OBCA”) on March 18, 1997. In connection with a number
of corporate reorganizations, the Company changed its name to
“First Empire Entertainment.com Inc.”, “First
Empire Corporation Inc.”, “Noble House Entertainment
Inc.” and “Live Reel Media Corporation”. On
October 20, 2006, the Company completed its continuance from the
OBCA to the
Business Corporation
Act
(Canada) (“CBCA”) and concurrently changed
its name from “Live Reel Media Corporation” to
“LiveReel Media Corporation”. On January 3, 2018, the
Company changed its name to its current name, “CordovaCann
Corp.”
The
Company is a “reporting issuer” in the Province of
Ontario, Canada which is governed by the Ontario Securities
Commission. The Company’s common shares are listed for
trading on the Canadian Securities Exchange (the “CSE”)
under the symbol “CDVA”. Furthermore, the Company is
also a fully reporting OTC Markets company and its common shares
are currently listed and trade on the OTCQB under the trading
symbol “LVRLF”. CordovaCann’s head office and
registered office is located at 333 Bay Street, Suite 1700,
Toronto, Ontario, M5H 2R2.
CordovaCann
is a Canadian-domiciled company focused on building a leading,
diversified cannabis products business across multiple
jurisdictions including Canada and the United States. CordovaCann
primarily provides services and investment capital to the
processing and production vertical markets of the cannabis
industry. On January 3, 2018, the Company changed its name from
LiveReel Media Corporation to CordovaCann Corp. to reflect the
Company’s new initiative in the cannabis sector. Prior to the
most recent name change, the Company was engaged in the
identification and evaluation of assets for purchase in the media,
technology and consumer industries.
On
March 10, 2015, the Company’s Board of Directors, consisting
of Michael Wekerle, Henry Kneis and Thomas Astles resigned as
Directors of the Company and were replaced with Graham Simmonds,
Ashish Kapoor and Henry J. Kloepper. Michael Wekerle resigned as
Chief Executive Officer and was replaced by Graham Simmonds. Henry
Kneis resigned as Chief Financial Officer and was replaced by
Ashish Kapoor who was also appointed as Corporate
Secretary.
On
March 10, 2015, loans payable of $200,000 with accrued interest in
the amount of $49,825 and other related party advances in the
amount of $124,822 owing to Difference Capital Financial Inc., were
fully settled with the issuance of $374,647 in related party notes
payable (the “Notes Payable”) to new entities related
to the Company at the time of the transaction. The Notes Payable
were unsecured, accrued interest at 12% per annum and were due on
demand.
On
September 22, 2017, Graham Simmonds resigned as Chief Executive
Officer and was replaced by Thomas (Taz) M. Turner,
Jr.
On
September 22, 2017, $330,966 of the Notes Payable and $53,089 of
amounts due to related parties were settled by a shareholder of the
Company resulting in a loan due to the shareholder in the total
amount of $384,055 (the “Shareholder Loan”). The
Shareholder Loan was unsecured, interest free and was due on
demand.
On
October 19, 2017, the $384,055 owing on the Shareholder Loan was
fully settled with the issuance of 7,681,110 Common Shares of the
Company.
On
November 22, 2017, the Company held its annual and special meeting
of the shareholders (the “Meeting”). At the Meeting,
shareholders voted in favor of all of the matters submitted before
the meeting as further set out in the notice of annual and special
meeting of the shareholders and management information circular,
both dated October 20, 2017, which included: (i) an ordinary
resolution to adopt a new rolling Option Plan not to exceed ten
percent (10%) of the Common Shares of the Company, outstanding at
the time of the granting of options; (ii) a special resolution
approving the amendment of the Company’s articles of
incorporation to change the name of the Company to
“CordovaCann Corp.” or to such other name as may be
approved by the Board of Directors, without further approval of the
shareholders; and (iii) a special resolution authorizing the Board
of Directors, in their sole and complete discretion, to authorize
and effect a consolidation of all of the issued and outstanding
Common Shares of the Company on the basis of a ratio up to five (5)
pre-consolidated Common Shares for one (1) post-consolidated Common
Share. The name change took effect on January 3, 2018 and the
consolidation is still being reviewed by the Board of
Directors.
Furthermore,
at the Meeting, the shareholders elected Graham Simmonds, Henry J.
Kloepper, Thomas (Taz) M. Turner, Jr., Ashish Kapoor, Nathan
Nienhuis and Eric Lowy to serve as Directors of the Company until
the next annual shareholders meeting of the Company.
On
January 16, 2018, the Company incorporated CordovaCann Holdings,
Inc., a wholly-owned Delaware corporation (“CordovaCann
USA”) to act as the Company’s parent holding company in
the United States.
On
January 17, 2018, the Company incorporated Cordova CO Holdings,
LLC, a Colorado limited liability company (“Cordova
CO”), as a wholly-owned subsidiary of CordovaCann USA to act
as the Company’s primary operating subsidiary in the State of
Colorado.
On
January 18, 2018, Cordova CO, entered into a license agreement with
Clearview Industries, LLC, a Colorado limited liability company
(“Clearview Industries”), which holds a Medical and
Retail Infused Product license issued by Colorado’s Marijuana
Enforcement Division. Under the terms of the license agreement,
Cordova CO granted Clearview Industries a limited, non-exclusive,
non-transferable license to utilize certain technology, standard
operating procedures and other intellectual property of CordovaCann
(the “Intellectual Property”) for the purpose of
manufacturing, packaging and distributing cannabis infused products
for consumption in the State of Colorado and in accordance with the
laws of the State of Colorado. Under the license agreement, Cordova
CO shall receive 29% of the gross profits generated by any products
produced and sold by Clearview Industries utilizing the
Intellectual Property. The license agreement has an initial term of
five (5) years. Furthermore, Cordova CO has also purchased assets
from Clearview Industries which Cordova CO leases back to Clearview
Industries along with new additional assets under a master
equipment lease, with lease payments to be received monthly.
CordovaCann is in discussions to provide consulting services to
Clearview Industries to assist in initiatives, including, but not
limited to, production and processing facility design, product
formulation and packaging consulting (the “Consulting
Services”). On June 7, 2018, Cordova CO entered into a
revolving promissory note with Clearview Industries for up to the
principal sum of USD $50,000 for working capital purposes. The
revolving note is unsecured, bearing interest at 8% per annum and
due twelve (12) months from the date of issuance.
On
February 1, 2018, CordovaCann entered into a letter of intent with
Forever Green, LLC, a Nevada limited liability company
(“Forever Green”), which holds a Medical Marijuana
Establishment license issued by the Nevada State Department of
Taxation. Under the terms of the letter of intent, CordovaCann will
license certain Intellectual Property to Forever Green so that
Forever Green may manufacture, package, and distribute
cannabis-infused end products for recreational use in the State of
Nevada in accordance with state and local laws. CordovaCann will
receive a royalty and/or packaging and labeling fees from the sale
of products that utilize CordovaCann’s Intellectual Property.
CordovaCann and Forever Green are currently in the process of
negotiating definitive agreements to formalize the terms of the
transaction. CordovaCann is also in discussions to provide Forever
Green with financing for working capital and growth plans as well
as to provide certain Consulting Services to Forever
Green.
On
February 26, 2018, the Company incorporated Cordova OR Holdings,
LLC, an Oregon limited liability company (“Cordova
OR”), as a wholly-owned subsidiary of CordovaCann USA to act
as the Company’s primary operating subsidiary in the State of
Oregon.
On
March 7, 2018, CordovaCann entered into a memorandum of
understanding with Humboldt Healthcare, LLC (“Humboldt
Healthcare”), which grants CordovaCann exclusivity on a
transaction to acquire a majority stake in the real estate and
intellectual property assets owned by Humboldt Healthcare and
utilized by Humboldt Healthcare in connection with the recreational
cannabis market in the state of California (the “Humboldt
Healthcare Assets”). The real estate is located in Humboldt
County, California and would allow for over 100,000 square feet of
canopy for cannabis production and processing. Under the terms of
the memorandum of understanding, CordovaCann has agreed to pay
Humboldt Healthcare up to USD $100,000 for such exclusivity. This
transaction would allow CordovaCann to purchase 100% of the
Humboldt Healthcare Assets for USD $8,000,000, or to purchase 51%
of the Humboldt Healthcare Assets for USD $5,080,000 with the
remaining 49% interest continuing to be held by Humboldt
Healthcare. Under the 51% partnership purchase method, the Company
would be entitled to a USD $1,000,000 reimbursement from the
operating partnership under mutually agreeable terms. If Humboldt
Healthcare were to continue to hold an interest in the Humboldt
Healthcare Assets, CordovaCann and Humboldt Healthcare would
contribute to and operate the Humboldt Healthcare Assets under a
joint venture structure. The exclusivity period to affect the
transaction shall remain in effect until the agreement is
terminated by either party.
On
April 3, 2018, the Company changed the name of its wholly-owned
Ontario-based subsidiary from “LiveReel Productions
Corporation” to “CordovaCann Holdings Canada,
Inc.” (“CordovaCann Canada”) to act as the
Company’s primary operating subsidiary in
Canada.
On
April 4, 2018, Cordova OR acquired a membership interest in
cannabis-related assets utilized by Farms of the Future, Inc., an
Oregon corporation (“FOTF”), which holds a Mixed Use
Tier II Production License issued by the Oregon Liquor Control
Commission. The assets include six (6) acres of real estate in
Clackamas County, a 3,400 square foot cultivation facility and
related equipment used in cannabis production utilized in
connection with FOTF’s cannabis business (the “Oregon
Assets”). Under the transaction, Cordova OR acquired a 27.5%
membership interest in Cordova OR Operations, LLC (“OR
Operations”) for USD $400,000 and has agreed to pay an
additional USD $1,050,000 on or before April 3, 2019 to acquire the
remaining 72.5% membership interest in OR Operations which has full
and clear title to the Oregon Assets. Under an equipment lease and
a lease agreement, OR Operations leases the Oregon Assets to FOTF,
with lease payments to be received monthly. CordovaCann is in
discussions to provide additional Consulting Services to FOTF.
Furthermore, Cordova OR has provided advances to OR Operations to
fund the purchase of additional assets that will also be utilized
by FOTF to expand its operations to 36,000 square feet of
cultivation and to add a processing facility on the premises. The
advances are unsecured, bearing interest at 8% per annum and due
twelve (12) months from the date of issuance.
On May
17, 2018, Graham Simmonds resigned as a Director of the Company and
Thomas (Taz) M. Turner, Jr. replaced Mr. Simmonds as Chairman of
the Company. Furthermore, the Board of Directors also appointed
Nathan Nienhuis to serve as the Company’s Chief Operating
Officer.
On
September 4, 2018, the Company incorporated Cordova Investments
Canada, Inc., a wholly-owned Ontario corporation (“Cordova
Investments Canada”) to act as the Company’s parent
holding company in Canada.
On
September 5, 2018, the Company announced that it had entered into a
letter of intent to acquire all of the issued and outstanding
common shares of 2366607 Ontario Inc. d/b/a Alterna Medicinals
Canada (“Alterna”) for the total purchase price of
$1,693,750 and 1,204,167 Common Shares of the Company, contingent
upon Alterna obtaining receipt of a License to Cultivate under the
Cannabis Act for Alterna’s facility in Listowel, Ontario.
Furthermore, the Company also agreed to loan up to $1,000,000 to
Alterna to fund the required capital expenditures to advance the
application process for such License to Cultivate. CordovaCann and
the vendor are currently in the process of negotiating definitive
agreements to formalize the terms of the transaction.
On
September 18, 2018, Cordova Investments Canada entered into a
letter of intent with NWN Inc. (“NWN”) to form a
strategic partnership. This new partnership would allow CordovaCann
to license from NWN industry-leading cannabinoid technology and
intellectual property for use in a number of U.S. jurisdictions
currently served by the Company. NWN is a privately-held Canadian
company that is conducting research on the effects of cannabinoids
to develop novel compilations and formulations of cannabis-derived
products for global commercial use. NWN’s intellectual
property and product development initiatives are focused on the
manufacturing of consistent cannabinoid derivative products. NWN
also conducts research on the genetic properties of cannabis to
develop genetically differentiated cannabis plants that improve
yields and enhance specific attributes of cultivated flower.
Furthermore, on September 18, 2018, Cordova Investments Canada
advanced $500,000 for the purchase of 500,000 convertible preferred
shares of NWN at a price of $1.00 per preferred share. Each
preferred share is convertible into one common share of NWN,
subject to appropriate adjustments for any stock splits,
consolidations or other recapitalizations. The Company also agreed
to purchase an additional 3,500,000 preferred shares at a price of
$1.00 per share on or before December 31, 2018 under the same terms
and received a right of first refusal to participate in any future
equity offerings of NWN. NWN is considered to be a related party by
virtue of a common officer and director with
CordovaCann.
On
October 17, 2018, the Company’s Board of Directors and Audit
Committee requested that MNP LLP resign as the Company’s
auditor to facilitate the appointment of Marcum LLP as the
Company’s new auditor until the next annual general meeting,
effective immediately on the date thereof.
On
October 31, 2018, the Company announced that it has agreed to
acquire land and assets in Covelo, California (the “Covelo
Assets”) for the total purchase price of USD $6,200,000. The
Covelo Assets to be acquired include 276 acres of contiguous land
parcels suitable for cannabis cultivation and an additional 14
acres of industrial-zoned contiguous land parcels that may also be
utilized for cultivation. The transactions as contemplated are
expected to close on or around January 15, 2019 and are subject to
standard terms and conditions of transactions of this nature. In
conjunction with the purchase of the Covelo Assets, CordovaCann has
also exclusively engaged a team of experienced operators that have
worked in the northern California cannabis market for well over a
decade who will utilize the Covelo Assets for cultivation,
processing, manufacturing and distribution of cannabis
products.
On
November 6, 2018, the Company incorporated Cordova CA Holdings,
LLC, a California limited liability company (“Cordova
CA”), as a wholly-owned subsidiary of CordovaCann USA to act
as the Company’s primary holding subsidiary in the State of
California.
On
November 6, 2018, the Company incorporated CDVA Enterprises LLC, a
California limited liability company (“CDVA
Enterprises”), as a wholly-owned subsidiary of CordovaCann
USA to act as the Company’s primary operating subsidiary in
the State of California.
On
November 12, 2018, the Company announced it had entered into a
letter of intent to acquire cannabis-related assets (the
“Washington Assets”) utilized by Blue Roots LLC
(“Blue Roots”) for a total purchase price of USD
$3,500,000. Blue Roots is an owner and operator of a Marijuana
Producer Tier II license issued by the Washington State Liquor and
Cannabis Board. Under the terms of the agreement, the Company
agreed to purchase the Washington Assets in exchange for a cash
payment of USD $3,500,000 and the vendors or their designee
retaining a 30% carried interest in the Washington Assets, all due
on closing. The transaction as contemplated is expected to close on
or before February 1, 2019 and is subject to certain closing
conditions, including but not limited to satisfactory due diligence
and the approval of the Company’s Board of
Directors.
(B) BUSINESS OVERVIEW
CordovaCann
is committed to assembling a premier cannabis business with a
vision to becoming a worldwide industry leader. The Company is
focused on working with leading cannabis production and processing
operators in key jurisdictions that will enable CordovaCann to
serve national and international markets that have legal and
regulated medical and/or recreational cannabis industries. The
Company intends to leverage its production and processing
investments to establish a global multi-jurisdictional platform
that delivers consistent formulations of best-of-breed brands and
predictable consumer experiences.
CordovaCann
has entered into strategic relationships and investments with
cannabis operators in Oregon, Colorado, California, Nevada and
Canada. The Company will provide a variety of resources and
services to these respective operators including, but not limited
to: capital commitments, strategic positioning, brand development,
best operating practices, access to intellectual property,
administrative assistance, and general business consulting. Over
the next twelve months, CordovaCann is focused on growing the
operations of these strategic relationships. Moving forward, the
Company will also seek partnerships with cannabis operators in key
legal markets not currently served by CordovaCann, as well as seek
to expand operations in those markets where the Company already has
a presence. CordovaCann plans to immediately develop various end
products for distribution in each of its current markets as well as
to service other brands and intellectual property owners with its
growing processing and manufacturing platforms with a view to
allowing these clients and prospective clients to gain access to
our channels to market and to also generate additional revenue for
the Company. The platform that the Company is building will seek to
ensure that the end products are consistent across all
jurisdictions by maintaining strict and professional standard
operating procedures covering everything from marketing, sales,
packaging, and branding through to the ultimate end user
experience.
Over
the longer-term, CordovaCann will focus on continuing to expand its
reach into additional legal markets, with an increasing focus on
international operations. The Company expects to organically build
and forge strategic relationships with cannabis producers and
processors in North America, South America, Europe, and Asia, but
expects it should also be able to serve these markets through the
export of products from Canada where legal. As the Company works to
penetrate each of these markets with its branded products,
CordovaCann will likely develop and/or acquire new brands and
products to further leverage its channels to market through the
broadening of its product offerings. Additionally, CordovaCann may
invest in additional parts of the cannabis value chain such as
distribution and retail dispensaries, in markets where such assets
are legal and provide a competitive advantage and significant
operating leverage for the Company.
Competition
The
Company competes with other companies for financing and investment
opportunities in the cannabis industry. Some of these companies may
possess greater financial resources than the Company. Such
competition may result in the Company being unable to enter into
desirable strategic agreements or similar transactions, to recruit
or retain qualified employees or to acquire the capital necessary
to fund its investments. Existing or future competition in the
cannabis industry, including, without limitation, the entry of
large multinational entities into the industry, could materially
adversely affect the Company’s prospects for entering into
additional agreements in the future. In addition, the Company
currently competes with other cannabis streaming and royalty
companies, some of which may possess greater financial resources
than the Company.
There
is potential that the Company will face intense competition from
other companies, some of which can be expected to have longer
operating histories and more financial resources and experience
than the Company. Increased competition by larger and better
financed competitors, including competitors to the Company’s
investments, could materially and adversely affect the business,
financial condition and results of operations of the Company. It is
possible that larger competitors could establish price setting and
cost controls which would effectively “price out”
certain of the Company’s investments operating within and in
support of the medical and recreational cannabis
industry.
Because
of the early stage of the industry in which the Company will
operate, the Company expects to face additional competition from
new entrants. To become and remain competitive, the Company will
require research and development, marketing, sales and support. The
Company may not have sufficient resources to maintain research and
development, marketing, sales and support efforts on a competitive
basis, which could materially and adversely affect the business,
financial condition and results of operations of the
Company.
(C) ORGANIZATIONAL STRUCTURE
The
following diagram presents the corporate subsidiaries of the
Company, all of which are wholly-owned subsidiaries (the
“Subsidiaries”), other than Cordova OR Operations, LLC
which is 27.5% owned by CordovaCann.
(D) PROPERTY, PLANTS AND EQUIPMENT
The
Company does not lease any real property.
The
Company owns a 27.5% interest in a premise located at 17551 SE Hwy
224, Damascus, Oregon 97089, through its interest stake in OR
Operations (the “Premises”). The Premises consists of
approximately 231,000 square feet which is leased by OR Operations
to third parties.
The
Company’s registered office is 333 Bay Street, Suite 1700,
Toronto, Ontario, M5H 2R2, Canada. It
is not charged monthly rent under
this arrangement.
ITEM 5 - OPERATING AND FINANCIAL REVIEW AND PROSPECTS
(A) OPERATING RESULTS
The
following discussion should be read in conjunction with the audited
consolidated financial statements of the Company and notes thereto
contained elsewhere in this report. The following is stated in
CAD.
Results of operations
|
For the Years
Ending June 30,
|
|
|
|
|
|
$
|
$
|
$
|
|
Revenue
|
-
|
-
|
-
|
|
Cost of
sales
|
(12,770
)
|
-
|
-
|
|
Expenses
|
(4,860,754
)
|
(88,405
)
|
(73,712
)
|
|
Share of profit of
joint venture
|
7,591
|
-
|
-
|
|
Net loss for
year
|
(4,865,933
)
|
(88,405
)
|
(73,712
)
|
|
Net loss per
share
|
(0.15
)
|
(0.00
)
|
(0.00
)
|
Revenues
During
the year ended June 30, 2018, the Company generated $24,159 in
revenue from the rental of cannabis-related equipment as compared
to $nil for the years ended June 30, 2017 and 2016, however, the
Company has not recorded any revenue during such period pending a
determination that collectability is reasonably assured. The
Company does expect to collect the outstanding balance related to
the lease agreement and will recognize revenue upon such
receipt.
In
relation to the aforementioned revenue, cost of sales for the year
ended June 30, 2018 was $12,770 as compared to $nil for the years
ended June 30, 2017 and 2016. Cost of sales is the result of
depreciation expense on its cannabis-related
equipment.
Expenses
The
overall analysis of the expenses is as follows:
For the
Years Ending June 30,
|
|
|
|
|
|
$
|
$
|
$
|
|
Consulting
fees
|
977,410
|
-
|
-
|
|
Share based
compensation
|
3,447,415
|
-
|
-
|
|
Professional
fees
|
225,151
|
8,250
|
2,500
|
|
Shareholders
information services
|
52,714
|
19,107
|
16,011
|
|
Office and
general
|
127,865
|
5,468
|
5,879
|
|
Financing
costs
|
14,845
|
55,580
|
49,322
|
|
Exclusivity
fee
|
42,550
|
-
|
-
|
|
Foreign exchange
gain
|
(27,196
)
|
-
|
-
|
|
|
4,860,754
|
88,405
|
73,712
|
Consulting Fees
Consulting
fees for the year ended June 30, 2018 was $977,410 as compared to
$nil for the years ended June 30, 2017 and 2016. Consulting fees
increased due to the hiring of consultants during the year ended
June 30, 2018 as a result of the Company’s new focus in the
cannabis industry.
Share Based Compensation
Share
based compensation expense for the year ended June 30, 2018 was
$3,447,415 as compared to $nil for the years ended June 30, 2017
and 2016. Share based compensation expense was the result of
warrants issued to consultants and options issued under the stock
option plan during the year ended June 30, 2018.
Professional Fees
Professional
fees during the year ended June 30, 2018 was $225,151 as compared
to $8,250 for the year ended June 30, 2017 (June 30, 2016 –
$2,500). Professional fees consisted of legal and audit fees. The
increase in legal and professional fees during the year ended June
30, 2018 was due primarily to an increase in legal bills related to
the Company’s operations in the cannabis
industry.
Shareholder Information Services
Shareholder
information services during the year ended June 30, 2018 was
$52,714 as compared to $19,107 for the year ended June 30, 2017
(June 30, 2016 – $16,011). Shareholder information costs for
the year ended June 30, 2018, 2017 and 2016 comprised of annual
general meeting accruals and costs, transfer agent fees and related
filing fees. The increase in fees during the year ended June 30,
2018 was due to the Company’s annual and special meeting held
in November 2017 and its increased business
operations.
Office and General
Office
and general costs during the year ended June 30, 2018 was $127,865
as compared to $5,468 for the year ended June 30, 2017 (June 30,
2016 – $5,879). Office and general costs for the year ended
June 30, 2018 was comprised primarily of administrative, travel and
other expenses incurred by the Company and its employees and
consultants.
Financing Costs
During
the year ended June 30, 2018, the Company accrued interest $14,845
on its liabilities as compared to $55,580 for the year ended June
30, 2017 (June 30, 2016 – $49,322). The decrease in financing
costs are due to the settlement of the Shareholder Loan and
repayments of related party loans and accrued interest during the
year ended June 30, 2018.
Exclusivity Fee
On
March 7, 2018, the Company entered into a memorandum of
understanding (the “MOU”) with a third party which
granted the Company exclusivity on a transaction to acquire a
majority stake in real estate and intellectual property assets
owned by the third party. Under the terms of the MOU, the Company
agreed to pay the third party up to USD $100,000 for such
exclusivity. During the year ended June 30, 2018, the Company paid
and expensed $42,550 as a result of the exclusivity fee as compared
to $nil for the year ended June 30, 2017 (June 30, 2016 –
$nil).
Foreign Exchange
Foreign
exchange gain for the year ended June 30, 2018 was $27,196 as
compared to $nil for the years ended June 30, 2017 and 2016. The
foreign exchange gain for the year ended June 30, 2018 was the
result of an increase in transactions based in United States
Dollars.
Share in Profit of a Joint Venture
On
April 4, 2018, the Company acquired 27.5% of OR Operations in a
step acquisition for the acquisition of land and buildings. As a
result of such investment, the Company recognized $7,591 as its
proportional share in the net income of OR Operations during the
year ended June 30, 2018 as compared to $nil for the year ended
June 30, 2017 (June 30, 2016 – $nil).
Net Loss and Comprehensive Loss
Net
loss for the year ended June 30, 2018 was $4,865,933 as compared to
$88,405 for the year ended June 30, 2017 (June 30, 2016 –
$73,712).
Comprehensive
loss for the year ended June 30, 2018 was $4,865,249 as compared to
$88,405 for the year ended June 30, 2017 (June 30, 2016 –
$73,712).
(B) LIQUIDITY AND CAPITAL RESOURCES
Working
Capital
At June
30, 2018, the Company had total assets of $4,875,592 (June 30, 2017
– $6,756) consisting of cash and cash equivalents of
$3,250,697, promissory note receivable of $15,802, prepaid expense
of $325,659, advances to joint venture of $610,705, long term
investment in joint venture of $534,311 and equipment of $138,418.
At June 30, 2017, the Company had total assets of $6,756 consisting
of prepaid expenses.
The
increase in assets from June 30, 2017 to June 30 2018 was primarily
the result of proceeds from private placements during the year
ended June 30, 2018. Prepaid expense at June 30, 2018 was primarily
the result of new consulting hires during the year ended June 30,
2018. Investments and advances in joint venture at June 30, 2018
was the result of the Company’s investment in OR Operations
during the year ended June 30, 2018. Equipment and the promissory
note receivable at June 30, 2018 was the result of the
Company’s transaction in Colorado during the year ended June
30, 2018.
At June
30, 2018, the Company had total liabilities of $320,321 (June 30,
2017 – $633,232) consisting of accounts payable and accrued
liabilities. At June 30, 2017, the Company had total liabilities of
$633,232 consisting of accounts payable and accrued liabilities of
$88,415, due to related parties of $170,170 and note payable to
related parties of $374,647.
The
increase in accounts payable and accrued liabilities from June 30,
2017 to June 30, 2018 is a result of the Company’s increased
operations. The decrease in related party notes payable and due to
related parties from June 30, 2017 to June 30, 2018 is a result of
the issuance of the Shareholder Loan and subsequent debt settlement
and repayments in cash.
At June
30, 2018, the Company had a working capital surplus of $3,882,542
as compared to a working capital deficiency of $626,476 as at June
30, 2017. The Company’s ability to continue as a going
concern is dependent upon its ability to access sufficient capital
until it has profitable operations and raises a material concern.
To this point, all operational activities and overhead costs have
been funded through equity issuances, debt issuances and related
party advances. With the continued funding from equity and debt
issuances, the Company believes it will able to meet its cash
requirements in the upcoming fiscal year. At June 30, 2018, there
is substantial doubt about the Company's ability to continue as a
going concern primarily due to its history of losses. Liquidity
risk continues to be a key concern in the development of the future
operations.
All of
the prospective asset purchases and acquisitions described
elsewhere in this Annual Report are subject to the Company's
ability to secure appropriate financing for them individually or on
a combined basis.
Cash Used in Operating Activities
The
Company used cash in operating activities of $1,177,474 (June 30,
2017 – $2,420; June 30, 2016 – $20,302) for the
year-ended June 30, 2018 due to the reasons as discussed
above.
Cash Used in Investing Activities
The
Company used cash in investing activities of $1,304,415 (June 30,
2017 and 2016 – $nil) for the year ended June 30, 2018. The
increase was primarily attributable to cash used for the investment
and advances in the joint venture during the year.
Cash From Financing Activities
The
Company received proceeds from financing activities of $5,731,902
(June 30, 2017 – $2,420; June 30, 2016 – $20,302)
during the year ended June 30, 2018. The increase was primarily due
to private placements that occurred during the year.
(C)
RESEARCH
AND DEVELOPMENT, PATENTS AND LICENSES
The
Company has not spent any funds on research and development during
the fiscal years ended 2018, 2017 and 2016.
(D)
TREND
INFORMATION
There
are no trends, commitments, events or uncertainties presently known
to management that are reasonably expected to have a material
effect on the Company’s business, financial condition or
results of operation other than the nature of the business (refer
to the heading entitled “Risk Factors”).
(E)
OFF-BALANCE
SHEET ARRANGEMENTS
As at
June 30, 2018, the Company did not have any off balance sheet
arrangements, including any relationships with unconsolidated
entities or financial partnerships to enhance perceived
liquidity.
(F)
CONTRACTUAL
OBLIGATIONS
As at
June 30, 2018, the Company did not have any key contractual
obligations other than the following:
On April 4, 2018, Cordova OR acquired a membership interest in
cannabis-related assets utilized by Farms of the Future, Inc., an
Oregon corporation (“FOTF”), which holds a Mixed Use
Tier II Production License issued by the Oregon Liquor Control
Commission. The assets include six (6) acres of real estate in
Clackamas County, a 3,400 square foot cultivation facility and
related equipment used in cannabis production utilized in
connection with FOTF’s cannabis business (the “Oregon
Assets”). Under the transaction, Cordova OR acquired a 27.5%
membership interest in Cordova OR Operations, LLC (“OR
Operations”) for USD $400,000 and has agreed to pay an
additional USD $1,050,000 on or before April 3, 2019 to acquire the
remaining 72.5% membership interest in OR Operations which has full
and clear title to the Oregon Assets.
(G)
SAFE
HARBOR
Statements
in Item 5 of this Annual Report on Form 20-F that are not
statements of historical fact, constitute “forward-looking
statements.” See “Forward-Looking Statements” on
page 1 of this Annual Report. The Company is relying on the safe
harbor provided in Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as
amended, in making such forward-looking statements.
ITEM 6 - DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
(A) DIRECTORS AND SENIOR MANAGEMENT
Mr. Thomas (Taz) M. Turner, Jr.
joined the Board of
Directors on November 22, 2017 and as Chief Executive Officer of
the Company on September 22, 2017. Mr. Turner is currently the
Chairman of the Board of Directors. Mr. Turner has over 15 years of
experience in the capital markets focused on both debt and equity
securities in the technology and consumer industries. Since
founding Southshore Capital Partners, LP in 2009, Mr. Turner has
guided the growth of Southshore’s long/short global equity
hedge fund as General Partner. Through his fund, Mr. Turner has
invested in public and private cannabis companies since 2012. Prior
to Southshore, Mr. Turner held progressive positions at hedge funds
and private equity funds with Tala Investments, Trafelet Delta
Funds and ABS Capital Partners, where he specialized in technology
and consumer investments. Mr. Turner graduated from the University
of Virginia with a Bachelor of Science in both Commerce and
Mathematics.
We
believe Mr. Turner is well-qualified to serve as Chairman of the
Board of Directors due to his investment experience, operational
experience and business contacts.
Mr. Ashish Kapoor
joined the Board of Directors on March 10,
2015. Mr. Kapoor also assumed the roles of Chief Financial Officer
and Corporate Secretary of the Company, effective March 10, 2015.
Mr. Kapoor has over 18 years of experience in providing capital
markets advisory and assurance services as a finance professional.
After obtaining his Chartered Accountant designation at Ernst &
Young, Mr. Kapoor has gained over 10 years of experience in
investment banking; advising clients across various industries. As
a senior vice president at Macquarie Capital Markets Canada Ltd.,
Mr. Kapoor was responsible for the Canadian telecom, media,
entertainment and technology investment banking and principal
investing group. During his 10 years at Macquarie, Mr. Kapoor
completed in excess of $3 billion in successful principal
investments and advised on a further $4 billion of mergers and
acquisitions for third party clients. Mr. Kapoor was formerly the
CFO of DealNet Capital Corp., a consumer finance company, and
Transeastern Power Trust (prior to its current name, Blockchain
Power Trust), an independent power producer focused on renewable
energy sources. Mr. Kapoor is currently the CFO of Gilla Inc., an
E-liquid manufacturing business with distribution to over 25
countries, and a director of The Mint Corporation, a globally
certified payments company. Mr. Kapoor obtained his Chartered
Accountant designation as part of the Ernst & Young’s
Toronto practice and was awarded the Gold Medal for first place in
Ontario, and the Bronze Medal for third place in Canada on the 2000
Chartered Accountancy Uniform Final Examination. Mr. Kapoor is also
a CFA Charter holder and holds a Masters of Accounting and a
Bachelor of Arts degree from University of Waterloo.
We
believe Mr. Kapoor is well-qualified to serve as a member of the
Board of Directors due to his public company experience, financial
markets knowledge and business contacts.
Mr. Nathan Nienhuis
joined the Board of Directors on
November 22, 2018. Mr. Nienhuis was also appointed as Chief
Operating Officer of the Company on May 17, 2018. Mr. Nienhuis has
extensive experience consulting to both public and private
companies on all aspects of cannabis operations; including general
operations, facility design, management of production and
processing facilities, product development and dispensary
oversight. Mr. Nienhuis has served as a consultant to various
public and private companies since 1996. Over the course of his
career, Mr. Nienhuis has served as head horticulturalist at
licensed medical cannabis companies in California, Arizona,
Colorado, Washington, Oregon, Nevada, Washington DC, and Canada.
Furthermore, Mr. Nienhuis has developed and sold cutting-edge
equipment for the safe extraction of cannabinoids and has been at
the forefront of devising new extraction methods for processing at
scale. As an extraction expert, Mr. Nienhuis has consulted on
facility design for commercial cannabis extraction laboratories
across the world, including ensuring compliance with Class 1
Division 1 standards for the use of volatile
chemicals.
We
believe Mr. Nienhuis is well-qualified to serve as a member of the
Board of Directors due to his industry experience, operational
experience and business contacts.
Mr. Henry J. Kloepper
joined the Board of Directors on March
10, 2015. Mr. Kloepper is a leading financier and has been involved
in investment banking and corporate finance for over 30 years. Mr.
Kloepper has a rounded knowledge of the capital markets, strategic
growth and investments. Mr. Klopper has served as a director and
officer of a number of public and private corporations and has held
executive positions with Award Capital, JP Morgan, Citibank, Bank
of America, and North American Trust in the US, Canada, and
Europe.
We
believe Mr. Kloepper is well-qualified to serve as a member of the
Board of Directors and Chairman of the Audit Committee due to his
public company experience, financial markets knowledge and business
contacts.
Mr. Eric Lowy
joined the Board of Directors on November 22,
2018. Mr. Lowy is a Partner at Irwin Lowy LLP, a law firm located
in Toronto, Canada. Mr. Lowy’s practice focuses primarily on
corporate finance, securities and merger and acquisition
transactions, as well as public company governance and regulation.
Mr. Lowy has extensive experience in counselling senior management
and boards of public and private corporations, including with
respect to financial disclosure matters and the preparation of
financial statements and related management discussion and
analysis. Mr. Lowy has served as a legal advisor to and as a
director of a number of public and private
corporations.
We
believe Mr. Lowy is well-qualified to serve as a member of the
Board of Directors due to his public company experience, financial
markets knowledge and business contacts.
(B) COMPENSATION
The
compensation payable to directors and officers of the Company and
its subsidiary is summarized below:
1.
General
The
Company recognizes that remuneration plays an important role in
attracting, motivating, rewarding and retaining knowledgeable and
skilled individuals to the Company’s management team.
However, the Company has not, as yet, generated any significant
income or cash flow from operations. The Board of Directors has to
consider not only the financial situation of the Company at the
time of the determination of executive compensation, but also the
estimated financial situation in the mid and long-term. The Board
of Directors plans to ensure that, at all times, its compensation
arrangements adequately reflect the responsibilities and risks
involved in being an effective Director and/or Officer of the
Company.
Given
the Company’s size and stage of operations, the Board does
not have a separate compensation committee and such functions are
addressed by the entire Board.
On
November 22, 2017, the Company’s shareholders approved and
the Company adopted a new rolling stock option plan (the
“Option Plan”), under which the Board of Directors may
from time to time, in its discretion, grant to directors, officers,
employees and consultants of the Company. Pursuant to the Option
Plan, the Company may issue options for such period and exercise
price as may be determined by the Board of Directors, and in any
case not exceeding ten (10) years from the date of grant with the
total options issued under the Option Plan not exceeding ten
percent (10%) of the common shares of the Company, outstanding at
the time of the granting of such options. The minimum exercise
price of an option granted under the Option plan must not be less
than the market value of the common shares on the date such option
is granted. The Option Plan is filed as Exhibit 4.(d) to this
Annual Report and is incorporated herein by reference.
2. Statement of Executive Compensation
The
following table and accompanying notes set forth all compensation
paid by the Company to all persons who served as the
Company’s Directors and Officers during the fiscal year ended
June 30, 2018. The information is provided for the fiscal years
ended 2018, 2017 and 2016.
|
Name and
principal position
|
Year
|
Salary
(CAD$)
|
Share-based
awards
(CAD$)
|
Option-based
awards
(CAD$)
|
Non-equity
incentive plan compensation
(CAD$)
|
Pension
value
(CAD$)
|
All other
compensation
(CAD$)
|
Total
compensation
(CAD$)
|
|
|
|
|
|
|
Annual incentive
plans
|
Long-term
incentive plans
|
|
|
|
|
Thomas M, Turner,
Jr.,
Chairman and Chief Executive
Officer
|
2018
2017
2016
|
141,126
-
-
|
-
-
-
|
216,694
(1)
-
-
|
-
-
-
|
-
-
-
|
-
-
-
|
-
-
-
|
357,820
-
-
|
|
Ashish Kapoor,
Director, Chief Financial Officer
and Corporate Secretary
|
2018
2017
2016
|
141,126
-
-
|
-
-
-
|
216,694
(1)
-
-
|
-
-
-
|
-
-
-
|
-
-
-
|
-
-
-
|
357,820
-
-
|
|
Nathan Nienhuis, Director and Chief
Operating Officer
|
2018
2017
2016
|
56,574
-
-
|
-
-
-
|
1,815,029
(1)
-
-
|
-
-
-
|
-
-
-
|
-
-
-
|
-
-
-
|
1,871,603
-
-
|
|
Henry J.
Kloepper,
Director
|
2018
2017
2016
|
7,747
-
-
|
-
-
-
|
18,851
(1)
-
-
|
-
-
-
|
-
-
-
|
-
-
-
|
-
-
-
|
26,598
-
-
|
|
Eric Lowy,
Director
|
2018
2017
2016
|
7,747
-
-
|
-
-
-
|
18,851
(1)
-
-
|
-
-
-
|
-
-
-
|
-
-
-
|
-
-
-
|
26,598
-
-
|
|
Graham
Simmonds,
Former Chairman and Chief Executive
Officer
|
2018
2017
2016
|
115,309
-
-
|
-
-
-
|
216,694
(1)
-
-
|
-
-
-
|
-
-
-
|
-
-
-
|
-
-
-
|
332,003
-
-
|
(1) See
Item 6(E) below for details of option based
awards.
Employment Agreements; Termination and Change of Control
Benefits
As at
the date of this Annual Report, the Company is a party to the
following employment agreements with the Company’s Directors
and Officers:
Thomas (Taz) M. Turner, Jr.
Pursuant to the employment
agreement entered into with Mr. Turner, Mr. Turner serves as Chief
Executive Officer of the Company and is entitled to an annual base
salary of USD $200,000 and is eligible to earn a cash performance
bonus.
Mr.
Turner’ employment agreement may be terminated by the Company
without notice or payment in lieu of notice for just cause. Mr.
Turner may terminate his employment for any reason by providing at
least two months’ notice in writing. If the Company elects to
terminate the employment of Mr. Turner without cause, and provided
Mr. Turner is in compliance with the relevant terms and conditions
of his employment agreement, the Company shall be obligated to pay
Mr. Turner eighteen months of his monthly base salary and any
accrued and unpaid expenses and fees.
If
(i) there has been a Change of Control (as defined below) of
the Company, and (ii) the Involuntary Termination (as defined
below) of the employment of Mr. Turner has occurred within twelve
months of the date of the Change of Control, the Company shall pay
Mr. Turner, in a lump sum, an amount equal to the sum of the
following:
(a)
twenty-four months
of the base salary immediately prior to the date of the Change of
Control;
(b)
the annual premium
cost to the Company of all the benefits provided to Mr. Turner by
the Company under his employment agreement immediately prior to the
date of the Change of Control; and
(c)
any other
outstanding amounts owed to Mr. Turner under his employment
agreement.
Furthermore,
the Company shall also be required to pay to Mr. Turner the lump
sum of any other outstanding amounts owed to Mr. Turner (including
entities related to or controlled by Mr. Turner) regardless of the
terms of such amounts which will become immediately due and payable
upon Involuntary Termination.
Ashish Kapoor.
Pursuant to the employment agreement entered
into with Mr. Kapoor, Mr. Kapoor serves as Chief Financial Officer
of the Company and is entitled to an annual base salary of USD
$200,000 and is eligible to earn a cash performance
bonus.
Mr.
Kapoor’ employment agreement may be terminated by the Company
without notice or payment in lieu of notice for just cause. Mr.
Kapoor may terminate his employment for any reason by providing at
least two months’ notice in writing. If the Company elects to
terminate the employment of Mr. Kapoor without cause, and provided
Mr. Kapoor is in compliance with the relevant terms and conditions
of his employment agreement, the Company shall be obligated to pay
Mr. Kapoor eighteen months of his monthly base salary and any
accrued and unpaid expenses and fees.
If
(i) there has been a Change of Control (as defined below) of
the Company, and (ii) the Involuntary Termination (as defined
below) of the employment of Mr. Kapoor has occurred within twelve
months of the date of the Change of Control, the Company shall pay
Mr. Kapoor, in a lump sum, an amount equal to the sum of the
following:
(a)
twenty-four months
of the base salary immediately prior to the date of the Change of
Control;
(b)
the annual premium
cost to the Company of all the benefits provided to Mr. Kapoor by
the Company under his employment agreement immediately prior to the
date of the Change of Control; and
(c)
any other
outstanding amounts owed to Mr. Kapoor under his employment
agreement.
Furthermore,
the Company shall also be required to pay to Mr. Kapoor the lump
sum of any other outstanding amounts owed to Mr. Kapoor (including
entities related to or controlled by Mr. Kapoor) regardless of the
terms of such amounts which will become immediately due and payable
upon Involuntary Termination.
Nathan Nienhuis.
Pursuant to the employment agreement
entered into with Mr. Nienhuis, Mr. Nienhuis serves as Chief
Operating Officer of the Company and is entitled to an annual base
salary of USD $200,000 and is eligible to earn a cash performance
bonus.
Mr.
Nienhuis’ employment agreement may be terminated by the
Company without notice or payment in lieu of notice for just cause.
Mr. Nienhuis may terminate his employment for any reason by
providing at least two months’ notice in writing. If the
Company elects to terminate the employment of Mr. Nienhuis without
cause, and provided Mr. Nienhuis is in compliance with the relevant
terms and conditions of his employment agreement, the Company shall
be obligated to pay Mr. Nienhuis eighteen months of his monthly
base salary and any accrued and unpaid expenses and
fees.
If
(i) there has been a Change of Control (as defined below) of
the Company, and (ii) the Involuntary Termination (as defined
below) of the employment of Mr. Nienhuis has occurred within twelve
months of the date of the Change of Control, the Company shall pay
Mr. Nienhuis, in a lump sum, an amount equal to the sum of the
following:
(a)
twenty-four months
of the base salary immediately prior to the date of the Change of
Control;
(b)
the annual premium
cost to the Company of all the benefits provided to Mr. Nienhuis by
the Company under his employment agreement immediately prior to the
date of the Change of Control; and
(c)
any other
outstanding amounts owed to Mr. Nienhuis under his employment
agreement.
Furthermore,
the Company shall also be required to pay to Mr. Nienhuis the lump
sum of any other outstanding amounts owed to Mr. Nienhuis
(including entities related to or controlled by Mr. Nienhuis)
regardless of the terms of such amounts which will become
immediately due and payable upon Involuntary
Termination.
For the
purposes of the aforementioned employment agreements, the
occurrence of any one or more of the following events shall
constitute a change of control (a “
Change of Control
”):
(a)
the acceptance by
the Company’s shareholders representing in the aggregate more
than fifty percent (50%) of all the issued and outstanding Common
Shares of the Company, of any offer, whether by way of take-over
bid or otherwise, for all or any of the Common Shares of the
Company;
(b)
the acquisition
hereafter, by whatsoever means (including, without limitation by
way of arrangement, merger or amalgamation), by any person (or two
or more persons acting jointly or in concert), directly or
indirectly, of the beneficial ownership of the Common Shares of the
Company or rights to acquire the Common Shares of the Company that,
together with such person’s then owned Common Shares and
rights to acquire Common Shares, if any, representing in the
aggregate more than fifty percent (50%) of all issued and
outstanding Common Shares of the Company;
(c)
the passing of a
resolution by the Board of Directors or the common shareholders to
substantially liquidate the assets or wind-up or significantly
rearrange the affairs of the Company in one or more transactions or
series of transactions (including by way of an arrangement, merger
or amalgamation) or the commencement of proceedings for such a
liquidation, winding-up or re-arrangement;
(d)
the sale by the
Company of all or substantially all of its assets (other than to an
affiliate of the Company) in circumstances where the affairs of the
Company are continued, directly or indirectly, and where the
shareholders of the Company remain substantially the same following
the sale as existed prior to the sale;
(e)
persons who were
proposed as nominees (but not including nominees under a common
shareholder proposal) to become members of the Board of Directors
immediately prior to a meeting of the common shareholders involving
a contest for, or an item of business relating to the election of
the Company’s directors, not constituting a majority of the
directors of the Company following such election; and
(f)
any other event
which, in the opinion of the Board of Directors, reasonably
constitutes a change of control of the Company.
For the
purposes of the aforementioned employment agreements, involuntary
termination (“
Involuntary
Termination
”) shall mean:
(a)
any requirement by
the Company that the Officer’s position and principal office
be relocated to a location materially different than the
Officer’s location on the date of the Change of Control,
without the consent of the Officer;
(b)
any material
reduction in the Officer’s title, reporting relationship,
responsibilities or authority;
(c)
any reduction in
the base salary of the Officer;
(d)
any material
reduction in the value of the Officer’s employee benefit
programs; or
(e)
the termination of
the Officer’s employment other than for cause.
Director Compensation
The
Company has no formal agreements for compensating its Directors for
their services in their capacity as directors. The Company’s
Board of Directors agreed to pay each of the Company’s
non-executive directors USD $2,000 per month for their services.
The payment or non-payment of non-executive director fees is made
by the Board of Directors from time to time. Directors are expected
in the future to receive stock options to purchase Common Shares as
may be awarded by the Board of Directors.
Long Term Incentive Plan (LTIP) Awards
The
Company does not have a LTIP, pursuant to which cash or non-cash
compensation intended to serve as an incentive for performance
(whereby performance is measured by reference to financial
performance or the price of the Company’s securities) was
paid or distributed during the most recently completed fiscal
year.
Defined Benefit or Actuarial Plan Disclosure
There
is no pension plan or retirement benefit plan that has been
instituted by the Company and none are proposed at this
time.
(C) BOARD PRACTICES
The
Board is currently comprised of five (5) directors; being; Thomas
(Taz) M. Turner, Jr. (Chairman); Ashish Kapoor; Nathan Nienhuis;
Henry J. Kloepper and Eric Lowy who were each elected by the
Company’s shareholders to hold office until the next annual
meeting of shareholders or until a successor is duly elected or
appointed, unless his office is earlier vacated in accordance with
the by-laws of the Company. Mr. Kloepper and Mr. Lowy are currently
the only “independent” directors. Mr. Turner, the
Company’s Chief Executive Officer; Mr. Kapoor, the
Company’s Chief Financial Officer; and Mr. Nienhuis, the
Company’s Chief Operating Officer; are not considered to be
independent. The Board has determined that a board of five (5)
members will be effective in the governance and supervision of the
management of the Company’s business and affairs at this
time.
Other
than the Audit Committee, the Board has no other committees. The
directors are regularly informed of or are actively involved in the
operations of the Company. The scope and size of the
Company’s operations and development does not currently
warrant an increase in the size of the Board or the formation of
additional committees, however, the Board periodically examines its
size and constitution and may from time to time establish ad hoc
committees to deal with specific situations.
Mandate of the Board
The
Board has adopted a mandate, in which it has explicitly assumed
responsibility for the stewardship of the Company. In carrying out
its mandate the Board holds at least four meetings (or consent
resolutions, where applicable) annually. The frequency of meetings,
as well as the nature of the matters dealt with, will vary from
year to year depending on the state of our business and the
opportunities or risks, which we face from time to time. To assist
in the discharge of its responsibilities, the Board has designated
an Audit Committee, as more particularly discussed
below.
Audit Committee
The
current members of the Company’s Audit Committee are Henry J.
Kloepper, who is also the Chair of the Audit Committee, Eric Lowy,
and Nathan Nienhuis. Mr. Kloepper and Mr. Lowy are currently the
only “independent” members of the Audit Committee. Mr.
Nienhuis, the Company’s Chief Operating Officer, is not
considered to be an independent member of the Audit Committee. All
members of the Audit Committee are considered to be financially
literate.
The
Audit Committee’s primary function is to assist the Board of
Directors in fulfilling its oversight responsibilities with respect
to accounting and financial reporting processes, the integrity of
the financial statements the Company, compliance with legal and
regulatory requirements, the overall adequacy and maintenance of
the systems of internal controls that management has established
and the overall responsibility for the Company’s external and
internal audit processes including the external auditor’s
qualifications, independence and performance.
The
Audit Committee has the duty to review and ensure that the
Company’s financial disclosures are complete and accurate,
are in accordance with generally accepted accounting principles and
fairly present the financial position and risks of the
organization. The Audit Committee should, where it deems
appropriate, review compliance with laws and regulations and the
Company’s own policies.
The
Audit Committee provides the Board of Directors with such
recommendations and reports with respect to the financial
disclosures of the Company as it deems advisable. A copy of the
Audit Committee Charter is filed as Exhibit 14(a)(ii) to this
Annual Report and is incorporated herein by reference.
Corporate Governance Committee
The
Company does not currently have a Corporate Governance Committee.
The directors determined that, in light of the Company’s size
and resources, setting up such a committee would not be practical
for the Company at this time.
Compensation Committee
The
Company does not currently have a Compensation Committee. The
directors determined that, in light of the Company’s size and
resources, setting up such a committee would be too expensive for
the Company at this time.
(D) EMPLOYEES
The
Company presently has no permanent employees other than those as
disclosed in Item 6(B) above. It uses the services of consultants
from time to time.
(E) SHARE OWNERSHIP
The
Corporation had the following plans as at June 30, 2018 and the
date of this Annual Report:
2017 Stock Option Plan
- On November 22,
2017, the Company’s shareholders approved and the Company
adopted a new rolling stock option plan (the “Option
Plan”), under which the Board of Directors may from time to
time, in its discretion, grant to directors, officers, employees
and consultants of the Company. Pursuant to the Option Plan, the
Company may issue options for such period and exercise price as may
be determined by the Board of Directors, and in any case not
exceeding ten (10) years from the date of grant with the total
options issued under the Option Plan not exceeding ten percent
(10%) of the common shares of the Company, outstanding at the time
of the granting of such options. The minimum exercise price of an
option granted under the Option plan must not be less than the
market value of the common shares on the date such option is
granted. The complete Option Plan is filed as Exhibit 4.(d) to this
Annual Report and is incorporated herein by reference.
The
objective of the Option Plan is to provide for and encourage
ownership of common shares of the Company by its directors,
officers, consultants and employees and those of any subsidiary
companies so that such persons may increase their stake in the
Company and benefit from increases in the value of the common
shares. The Option Plan is designed to be competitive with other
companies in the industry. It is the view of management that the
Option Plan is a significant incentive for the directors, officers,
consultants and employees to continue and to increase their efforts
in promoting the Company’s operations to the mutual benefit
of both the Company and such individuals and also allow the Company
to avail of the services of experienced persons with minimum cash
outlay.
The
following table sets forth the share ownership of those persons
listed in subsection 6.B above and includes details of all warrants
and options held by such persons at June 30, 2018:
|
|
Option-Based
Awards
|
Share-Based
Awards
|
|
Name
|
Number of
Shares
Held
|
Number of
securities underlying unexercised options
(#)
|
Option exercised
price
(CAD$)
|
Value of
unexercised in-the-money options
($)
|
Number of shares
or units of shares that have not vested
(#)
|
Market or payout
value of share based awards that have not
vested
(CAD$)
|
|
Thomas M, Turner,
Jr.,
|
2,947,523
(1)
|
150,000
(4)
|
0.40
|
-
|
-
|
-
|
Chairman and Chief Executive
Officer
|
|
150,000
(4)
|
1.15
|
|
|
|
|
Ashish Kapoor,
|
5,895,046
(2)
|
150,000
(4)
|
0.40
|
-
|
-
|
-
|
|
Director, Chief Financial Officer
and Corporate Secretary
|
|
150,000
(4)
|
1.15
|
|
|
|
|
Nathan
Nienhuis,
|
-
|
3,000,000
(5)
|
0.10
|
-
|
-
|
-
|
|
Director and
Chief
|
|
1,500,000
(6)
|
1.15
|
|
|
|
|
Operating
Officer
|
|
150,000
(4)
|
0.40
|
|
|
|
|
|
|
150,000
(4)
|
1.15
|
|
|
|
|
Henry J.
Kloepper,
Director
|
-
|
50,000
(4)
|
0.40
|
-
|
-
|
-
|
|
Eric Lowy,
Director
|
-
|
150,000
(4)
|
0.40
|
-
|
-
|
-
|
|
Graham
Simmonds,
|
1,858,334
(3)
|
150,000
(4)
|
0.40
|
-
|
-
|
-
|
|
Former Chairman and Chief Executive
Officer
|
|
150,000
(4)
|
1.15
|
|
|
|
Note:
(1)
Includes 2,947,523
Common Shares owned by T3 Research, LLC. Mr. Turner also may be
seen to have control or direction over an additional 2,947,523
Common Shares held by Southshore Capital Partners, LP, a private
investment fund.
(2)
Includes 5,895,046
Common Shares owned by 2364201 Ontario Corp.
(3)
Includes 1,858,334
Common Shares owned by The Woodham Group Inc. Mr. Simmonds is one
the beneficiaries of The GraySim Family Trust, a discretionary
family trust, which holds 5,895,046 Common Shares. Mr. Simmonds is
not a trustee of The GraySim Family Trust and has no control or
direction over the Common Shares beneficially owned by
it.
(4)
Option-based
awards issued under the Option plan; all of which are fully vested
and exercisable.
(5)
On November 1,
2017 and in connection to a consulting agreement, Mr Nienhuis was
issued warrants for the purchase of 3,000,000 common shares of the
Company exercisable until October 31, 2019 at an exercis price of
$0.10 per share.
(6)
On March 9, 2018
and in connection to a consulting agreement, Mr. Nienhuis was
issued warrants for the purchase of 1,500,000 common shares of the
Company exercisable until March 8, 2020 at an exercise price of
$1.15 per share, such warrants vesting immediately upon
issuance.
There
were 40,036,228 Common Shares issued and outstanding as at June 30,
2018 and as at the date of this Annual Report. There were 1,750,000
options and 6,650,000 warrants issued and outstanding as at June
30, 2018 and 1,750,000 options and 9,150,000 warrants issued and
outstanding as at the date of this Annual Report.
ITEM 7 - MAJOR SHAREHOLDERS AND RELATED PARTY
TRANSACTIONS
(A) MAJOR SHAREHOLDERS
The
Company's securities are recorded on the books of its transfer
agent in registered form. The majority of such shares are, however,
registered in the name of intermediaries such as brokerage houses
and clearing-houses on behalf of their respective clients. The
Company does not have knowledge of the beneficial owners
thereof.
As at
December 10, 2018, intermediaries like CDS & Co, of Toronto,
Canada and Cede & Co of New York, USA held approximately
26%
of the issued and
outstanding common shares of the Company on behalf of several
beneficial shareholders whose individual holdings details were not
available.
The
following table shows the record and, where known to us, the
beneficial ownership of our shares by each shareholder holding at
least 5% of our common shares as at June 30, 2018. As used herein,
the term beneficial ownership with respect to a security is defined
by Rule 13d-3 under the Securities Exchange Act of
1934.
|
Name of Shareholder
|
|
|
|
|
|
|
|
2364201 Ontario
Corp.
|
5,895,046
|
14.72
%
|
|
The GraySim Family
Trust
|
5,895,046
|
14.72
%
|
|
Southshore Capital
Partners, LP
|
2,947,523
|
7.36
%
|
|
T3 Research,
LLC
|
2,947,523
|
7.36
%
|
|
Crimson Fund I,
LLC
|
2,054,491
|
5.13
%
|
All of
the Company’s shareholders have the same voting
rights.
At
December 10, 2018, the Company had 40,036,228 common shares
outstanding, which, as per the details provided by TSX Trust
Company, the Company’s registrar and transfer agent, were
held by approximately 436 record holders (excluding the beneficial
shareholders held through the intermediaries) of which 67
shareholders are based in the United States (including the
beneficial shareholders held through the intermediaries) and hold
an aggregate of 16,625,498 shares or less than 2% of the Common
Shares.
The
Registrant is a publicly owned Canadian corporation, the shares of
which are owned by Canadian residents, U.S. residents, and
residents of other countries. The Registrant is not owned or
controlled directly or indirectly by another corporation (other
than as indicated in the chart above) or any foreign government.
There are no arrangements, known to the Company, the operation of
which may at a subsequent date result in a change of control of the
Company.
(B) RELATED PARTY TRANSACTIONS
Transactions
with related parties are incurred in the normal course of business
and are measured at the exchange amount which is the amount of
consideration established by and agreed to by the related parties.
Related party transactions for the years ended June 30, 2018, 2017
and 2016 and balances as at those dates, not disclosed elsewhere in
these consolidated financial statements are:
1.
During the year
ended June 30, 2018, the Company received $nil (June 30, 2017
– $2,420; June 30, 2016 – $20,302) in advances from
related parties, for working capital purposes;
2.
During the year
ended June 30, 2018, the Company purchased equipment valued at
$44,439 (June 30, 2017 – $nil; June 30, 2016 – $nil)
from a corporation related by virtue of a common officer and a
director;
3.
During the year
ended June 30, 2018, the Company expensed $508,399 (June 30, 2017
– $nil; June 30, 2016 – $nil) in fees payable to
Officers and Directors of the Company and in fees payable to a
corporation related by virtue of a common officer and director. As
at June 30, 2018, the Company has a prepaid expense amount paid to
the related corporation in the amount of $74,147 and fees payable
to Officers and Directors of the Company of $59,518;
and
4.
During the year
ended June 30, 2018, the Company expensed $2,286,120 (June 30, 2017
– $nil; June 30, 2016 – $nil) in stock-based
compensation related to Officers and Directors of the
Company.
Indebtedness to Company of Directors, Executive Officers and Senior
Officers
None of
the directors, consultants, executive officers and senior officers
of the Company or any of its subsidiaries, proposed nominees for
election or associates of such persons is or has been indebted to
the Company at any time for any reason whatsoever, including the
purchase of securities of the Company or any of its
subsidiaries.
(C) INTERESTS OF EXPERTS AND COUNSEL
Not
applicable.
ITEM 8 - FINANCIAL INFORMATION
(A) CONSOLIDATED STATEMENTS AND OTHER FINANCIAL
INFORMATION
Information
regarding our financial statements is contained under the caption
"Item 18. Financial Statements" below.
Legal Proceedings
The
Company is not currently involved in any litigation nor is it aware
of any litigation pending or threatened.
Dividend Policy
Since
its incorporation, the Company has not declared or paid, and has no
present intention to declare or to pay in the foreseeable future,
any cash dividends with respect to its common shares. Earnings will
be retained to finance further growth and development of the
business of the Company. However, if the Board of Directors
declares dividends, all common shares will participate equally in
the dividends, and, in the event of liquidation, in the net assets,
of the Company.
(B) SIGNIFICANT CHANGES
On
September 22, 2017, Graham Simmonds resigned as Chief Executive
Officer and was replaced by Thomas M. Turner, Jr., effective
immediately.
On
November 22, 2017, the Company’s shareholders elected Graham
Simmonds, Henry J. Kloepper, Thomas (Taz) M. Turner, Jr., Ashish
Kapoor, Nathan Nienhuis and Eric Lowy to serve as Directors of the
Company until the next annual shareholders meeting of the
Company.
On May
17, 2018, Graham Simmonds resigned as a Director of the Company and
Thomas (Taz) M. Turner, Jr. replaced Mr. Simmonds as Chairman of
the Company. Furthermore, the Board of Directors also appointed
Nathan Nienhuis to serve as the Company’s Chief Operating
Officer.
ITEM 9 - THE OFFER AND LISTING
(A) OFFER AND LISTING
DETAILS
The
Company’s Common Shares are listed for trading on the CSE
under the symbol “CDVA” and are quoted on the OTCQB
marketplace in the United States under the symbol
“LVRLF”.
The
following table sets forth the reported high and low prices and the
trading volume of the Common Shares on the CSE for each month for
the twelve (12) months prior to the date of this Annual
Report.
|
Date
|
High ($)
|
Low ($)
|
Volume
|
|
November,
2018
|
1.39
|
1.05
|
202,744
|
|
October,
2018
|
1.47
|
1.05
|
82,846
|
|
September,
2018
|
1.70
|
1.00
|
125,489
|
|
August,
2018
|
2.00
|
1.00
|
64,800
|
|
July,
2018
|
N/A
|
N/A
|
N/A
|
|
June,
2018
|
N/A
|
N/A
|
N/A
|
|
May,
2018
|
N/A
|
N/A
|
N/A
|
|
April,
2018
|
N/A
|
N/A
|
N/A
|
|
March,
2018
|
N/A
|
N/A
|
N/A
|
|
February,
2018
|
N/A
|
N/A
|
N/A
|
|
January,
2018
|
N/A
|
N/A
|
N/A
|
|
December,
2017
|
N/A
|
N/A
|
N/A
|
The
following table sets forth the reported high and low prices and the
trading volume of the Common Shares on the OTCQB marketplace for
each month for the twelve (12) months prior to the date of this
Annual Report.
|
Date
|
High (USD $)
|
Low (USD $)
|
Volume
|
|
November,
2018
|
1.20
|
0.85
|
216,700
|
|
October,
2018
|
1.31
|
0.67
|
103,500
|
|
September,
2018
|
1.30
|
0.82
|
168,500
|
|
August,
2018
|
2.00
|
0.80
|
211,900
|
|
July,
2018
|
2.57
|
1.5
|
73,400
|
|
June,
2018
|
2.60
|
1.77
|
46,800
|
|
May,
2018
|
2.45
|
1.67
|
52,100
|
|
April,
2018
|
2.20
|
0.95
|
138,600
|
|
March,
2018
|
1.20
|
0.36
|
117,962
|
|
February,
2018
|
1.20
|
0.45
|
263,653
|
|
January,
2018
|
0.70
|
0.26
|
141,008
|
|
December,
2017
|
0.30
|
0.16
|
29,200
|
(B) PLAN OF
DISTRIBUTION
Not
applicable.
(C) MARKETS
The
Company’s Common Shares are listed for trading on the CSE
under the symbol “CDVA” and the OTCQB marketplace in
the United States under the symbol
“LVRLF”.
(D) SELLING SHAREHOLDERS
Not
applicable.
(E) DILUTION
Not
applicable.
(F) EXPENSES OF THE ISSUE
Not
applicable.
ITEM 10 - ADDITIONAL INFORMATION
(A) SHARE CAPITAL
This
Form 20-F is being filed as an Annual Report under the Exchange Act
and, as such, there is no requirement to provide any information
under this section.
(B) MEMORANDUM AND ARTICLES OF ASSOCIATION
Following
approval by the shareholders in a special meeting held on October
4, 2006 as explained in item 8(B) above, the Company applied for
authorization to continue from being governed by the OBCA and was
granted approval on October 26, 2006 to continue under the
jurisdiction of the CBCA. An application for authorization to
continue is included in Exhibits 1.1 and 1.2 hereof, which exhibits
have been incorporated by reference into this report.
New
by-laws were adopted in the special meeting of shareholders on
October 4, 2006 in compliance with the requirements of the CBCA.
The new by-laws were included in Exhibit 1.3 thereof, which exhibit
has been incorporated by reference into this report.
On
January 3, 2018, the Company changed its name to its current name,
"CordovaCann Corp." The Company's certificate of amendment is filed
as Exhibit 1.16 to this Annual Report and is incorporated herin by
reference.
(C) MATERIAL CONTRACTS
Except
as set forth herein, under “Item 5(A) – Operating and
Financial Review Prospects – Operating Results –
Overview” or “Item 7(B) – Major Shareholders and
Related Party Transactions – Related Party
Transactions”, all material contracts entered into in last
two fiscal years were in the ordinary course of its
business.
(D) EXCHANGE CONTROLS
Limitations
on the ability to acquire and hold shares of the Company may be
imposed by the
Competition
Act
(Canada) (the “Competition Act”). This
legislation permits the Commissioner of Competition to review any
acquisition of a significant interest in us. This legislation
grants the Commissioner jurisdiction, for up to three years, to
challenge this type of acquisition before the Competition Tribunal
if the Commissioner believes that it would, or would be likely to,
result in a substantial lessening or prevention of competition in
any market in Canada.
The
Competition Act requires that any person proposing to acquire any
of the assets in Canada of an operating business file a
notification with the Competition Bureau where (a)
"size of the parties" threshold -
the
parties to the transaction, together with their respective
affiliates, have (i) assets in Canada the value of which exceeds
$400 million in the aggregate, or (ii) annual gross revenues from
sales in, from or into Canada that exceed $400 million in the
aggregate;
and
(b)
"size of the transaction"
threshold
- the aggregate value of those assets, or the
gross revenues from sales in or from Canada generated from those
assets, would exceed
an annually
established threshold (2014 - $82 million), based on the book value
of the subject assets or Company in Canada, or gross revenues from
sales in or from Canada generated from those assets or by the
Company).
For the purposes of the Competition Act, asset
values and gross revenues are to be determined as of the last day
of the period covered by the most recent audited financial
statements in which the assets or gross revenues are accounted
for.
In the case of share acquisitions, an additional "shareholding
threshold" must be exceeded.
This legislation requires any
person who intends to acquire shares to file a notification with
the Competition Bureau if certain financial thresholds are
exceeded, and that person would hold more than 20% of our voting
shares as a result of the acquisition. If a person already
owns 20% or more of our voting shares, a notification must be filed
when the acquisition would bring that person’s holdings over
50%. Where a notification is required, the legislation
prohibits completion of the acquisition until the expiration of a
statutory waiting period, unless the Commissioner provides written
notice that he does not intend to challenge the
acquisition.
There
are no governmental laws, decrees or regulations in Canada that
restrict the export or import of capital or that affect the
remittance of dividends, interest or other payments to non-resident
holders of our securities. However, any such remittance to a
resident of the United States may be subject to a withholding tax
pursuant to the
Income Tax
Act
(Canada). For further information concerning such
withholding tax, see “Taxation" below.
Except
as may be provided under the
Investment Canada Act
(the "ICA"),
there are no specific limitations under the laws of Canada or in
the Articles of the Company with respect to the rights of
non-residents of Canada to hold and/or vote securities of the
Company.
The ICA
requires each individual, government or agency thereof,
corporation, partnership, trust or joint venture that is not a
“Canadian” as defined in the ICA (a
“non-Canadian”) making an investment to acquire control
of a Canadian business, the gross assets of which exceed certain
defined threshold levels, to file an application for review with
the Investment Review Division of Industry Canada. The
threshold level for non-Canadians who are private sector World
Trade Organization investors (as defined in the ICA) is in excess
of $600 million in enterprise value and from non-Canadians who are
state-owned World Trade Organization investors is in excess of $369
million in asset value, subject to an annual adjustment on the
basis of a prescribed formula in the ICA to reflect inflation and
real growth within Canada.
In the
context of the Company, in essence, three methods of acquiring
control of a Canadian business are regulated by the ICA: (i) the
acquisition of all or substantially all of the assets used in
carrying on business in Canada; (ii) the acquisition, directly or
indirectly, of voting shares of a Canadian corporation carrying on
business in Canada; (iii) the acquisition of voting shares of an
entity which controls, directly or indirectly, another entity
carrying on business in Canada. An acquisition of a majority
of the voting interests of an entity, including a corporation, is
deemed to be an acquisition of control under the ICA.
However, under the ICA, there is a rebuttable presumption
that control is acquired if one-third of the voting shares of a
Canadian corporation or an equivalent undivided interest in the
voting shares of such corporation are held by a non-Canadian person
or entity. An acquisition of less than one-third of the
voting shares of a Canadian corporation is deemed not to be an
acquisition of control. An acquisition of less than a
majority, but one-third or more, of the voting shares of a Canadian
corporation is presumed to be an acquisition of control unless it
can be established that on the acquisition the Canadian corporation
is not, in fact, controlled by the acquirer through the ownership
of voting shares. Certain transactions relating to the
acquisition of common shares would be exempt from review from the
ICA, including:
(a)
acquisition of
common shares by a person in the ordinary course of a
person’s business as a trader or dealer in
securities;
(b)
acquisition of
control of a Canadian corporation in connection with the
realization of security granted for a loan or other financial
assistance and not for any purpose related to the provisions of the
ICA; and
(c)
acquisition of
control of a Canadian corporation by reason of an amalgamation,
merger, consolidation or corporate reorganization following which
the ultimate direct or indirect control in fact of the corporation,
through the ownership of voting interests, remains
unchanged.
In
addition, if less than a majority of voting interests of a Canadian
corporation are owned by Canadians, the acquisition of control of
any other Canadian corporation by such corporation may be subject
to review unless it can be established that the corporation is not
in fact controlled through the ownership of voting interests and
that two-thirds of the members of the board of directors of the
corporation are Canadians.
Where
an investment is reviewable under the ICA, it may not be
implemented unless it is likely to be of net benefit to Canada.
If an applicant is unable to satisfy the Minister responsible
for Industry Canada that the investment is likely to be of net
benefit to Canada, the applicant may not proceed with the
investment. Alternatively, an acquiror may be required to
divest control of the Canadian business that is the subject of the
investment.
In
addition to the foregoing, the ICA requires formal notification to
the Canadian government of all other acquisitions of control of
Canadian businesses by non-Canadians. These provisions
require a foreign investor to give notice in the required form,
which notices are for information, as opposed to review
purposes.
(E) TAXATION
Canadian Federal Income Tax Consequences
We
consider that the following general summary fairly describes the
principal Canadian federal income tax considerations applicable to
holders of our common shares who, for purposes of the
Income Tax Act
(Canada) (the “ITA”), deal at
arm’s length with the Company, hold such shares as capital
property, do not carry on business in Canada, have not been at any
time residents of Canada for purposes of the ITA and are residents
of the United States (“U.S. Residents”) under the
Canada-United States Income Tax Convention (1980) (the
“Convention”).
This
summary is based upon the current provisions of the ITA, the Income
Tax Regulations (the “Regulations”), the current
publicly announced administrative and assessing policies of the
Canada Revenue Agency (formerly Canada Customs and Revenue Agency),
and all specific proposals (the “Tax Proposals”) to
amend the ITA and Regulations publicly announced prior to the date
hereof by the Minister of Finance (Canada). This description
is not exhaustive of all possible Canadian federal income tax
consequences and, except for the Tax Proposals, does not take into
account or anticipate any changes in law, whether by legislative,
governmental or judicial action, nor does it take into account
provincial or foreign tax considerations which may differ
significantly from those discussed herein.
The
following discussion is for general information only and it is not
intended to be, nor should it be construed to be, legal or tax
advice to any holder or prospective holder of our common shares and
no opinion or representation with respect to any Canadian federal,
provincial or foreign tax consequences to any such holder or
prospective holder is made. Accordingly, holders and
prospective holders of our common shares should consult with their
own tax advisors about the Canadian federal, provincial and foreign
tax consequences of purchasing, owning and disposing of our common
shares.
Dividends
Dividends,
including stock dividends, paid or credited or deemed to be paid or
credited on our common shares to a U.S. Resident will be subject to
withholding tax at a rate of 25%. The Convention provides
that the normal 25% withholding tax rate will generally be reduced
to 15% on dividends paid on shares of a corporation resident in
Canada for federal income tax purposes (such as the Company) to
U.S. Residents, and also provides for a further reduction of this
rate to 5% where the beneficial owner of the dividends is a
corporation which is a resident of the United States and owns at
least 10% of the voting shares of the corporation paying the
dividend. These Convention reductions are not available to
beneficial owners who are a U.S. LLC corporation.
Capital Gains
The
Convention provides that a U.S. Resident will not be subject to tax
under the ITA in respect of any capital gain on the disposition of
our common shares unless such shares constitute taxable Canadian
property of the U.S. Resident and the U.S. Resident is not entitled
to the benefits of the Convention with regards to capital gains.
Our common shares will constitute taxable Canadian property
if at any time during the five year period immediately preceding
the disposition of our common shares, the U.S. Resident, or persons
with whom the U.S. Resident did not deal at arm’s length, or
the U.S. Resident together with persons with whom the U.S. resident
did not deal at arm’s length owned 25% or more of the issued
shares of any class of our capital stock.
Where a
U.S. Resident realizes a capital gain on a disposition of shares
that constitute “taxable Canadian property”, the
Convention relieves the U.S. Resident from liability for Canadian
tax on such capital gains unless:
(a)
the value of the
shares is derived principally from “real property” in
Canada, including the right to explore for or exploit natural
resources and rights to amounts computed by reference to
production,
(b)
the shareholder was
resident in Canada for 120 months during any period of 20
consecutive years preceding the disposition, was resident in Canada
at any time during the 10 years immediately preceding the
disposition and the shares were owned by him when he ceased to be
resident in Canada, or
(c)
the shares formed
part of the business property of a “permanent
establishment” or pertained to a fixed base used for the
purpose of performing independent personal services that the
shareholder has or had in Canada within the 12 months preceding the
disposition.
These
Convention benefits are generally not available to beneficial
owners who are a U.S. LLC corporation.
U.S. Federal Income Tax Consequences
The
following is a summary of the anticipated material U.S. federal
income tax consequences to a U.S. Holder (as defined below) arising
from and relating to the acquisition, ownership, and disposition of
our common shares (“Common Shares”).
This
summary is for general information purposes only and does not
purport to be a complete analysis or listing of all potential U.S.
federal income tax consequences that may apply to a U.S. Holder as
a result of the acquisition, ownership, and disposition of Common
Shares. In addition, this summary does not take into account
the individual facts and circumstances of any particular U.S.
Holder that may affect the U.S. federal income tax consequences of
the acquisition, ownership, and disposition of Common Shares.
Accordingly, this summary is not intended to be, and should
not be construed as, legal or U.S. federal income tax advice with
respect to any U.S. Holder. Each U.S. Holder should consult
its own financial advisor, legal counsel, or accountant regarding
the U.S. federal, U.S. state and local, and foreign tax
consequences of the acquisition, ownership, and disposition of
Common Shares.
Scope of this Disclosure
Authorities
This
summary is based on the
Internal
Revenue Code of 1986
, as amended (the “Code”),
Treasury Regulations (whether final, temporary, or proposed),
published rulings of the Internal Revenue Service
(“IRS”), published administrative positions of the IRS,
the Convention Between Canada and the United States of America with
Respect to Taxes on Income and on Capital, signed September 26,
1980, as amended (the “Canada-U.S. Tax Convention”),
and U.S. court decisions that are applicable and, in each case, as
in effect and available, as of the date of this Annual Report.
Any of the authorities on which this summary is based could
be changed in a material and adverse manner at any time, and any
such change could be applied on a retroactive basis. This
summary does not discuss the potential effects, whether adverse or
beneficial, of any proposed legislation that, if enacted, could be
applied on a retroactive basis
.
U.S. Holders
For
purposes of this summary, a “U.S. Holder” is a
beneficial owner of Common Shares that, for U.S. federal income tax
purposes, is (a) an individual who is a citizen or resident of
the U.S., (b) a corporation, or any other entity classified as
a corporation for U.S. federal income tax purposes, that is created
or organized in or under the laws of the U.S. or any state in the
U.S., including the District of Columbia, (c) an estate if the
income of such estate is subject to U.S. federal income tax
regardless of the source of such income, or (d) a trust if
(i) such trust has validly elected to be treated as a U.S.
person for U.S. federal income tax purposes or (ii) a U.S.
court is able to exercise primary supervision over the
administration of such trust and one or more U.S. persons have the
authority to control all substantial decisions of such
trust.
Non-U.S. Holders
For
purposes of this summary, a “non-U.S. Holder” is a
beneficial owner of Common Shares other than a U.S. Holder.
This summary does not address the U.S. federal income tax
consequences of the acquisition, ownership, and disposition of
Common Shares to non-U.S. Holders. Accordingly, a non-U.S.
Holder should consult its own financial advisor, legal counsel, or
accountant regarding the U.S. federal, U.S. state and local, and
foreign tax consequences (including the potential application of
and operation of any tax treaties) of the acquisition, ownership,
and disposition of Common Shares.
U.S. Holders Subject to Special U.S. Federal Income Tax Rules Not
Addressed
This
summary does not address the U.S. federal income tax consequences
of the acquisition, ownership, and disposition of Common Shares to
U.S. Holders that are subject to special provisions under the Code,
including the following U.S. Holders: (a) U.S. Holders
that are tax-exempt organizations, qualified retirement plans,
individual retirement accounts, or other tax-deferred accounts;
(b) U.S. Holders that are financial institutions, insurance
companies, real estate investment trusts, or regulated investment
companies; (c) U.S. Holders that are dealers in securities or
currencies or U.S. Holders that are traders in securities that
elect to apply a mark-to-market accounting method; (d) U.S.
Holders that have a “functional currency” other than
the U.S. dollar; (e) U.S. Holders that are liable for the
alternative minimum tax under the Code; (f) U.S. Holders that
own Common Shares as part of a straddle, hedging transaction,
conversion transaction, constructive sale, or other arrangement
involving more than one position; (g) U.S. Holders that
acquired Common Shares in connection with the exercise of employee
stock options or otherwise as compensation for services;
(h) U.S. Holders that hold Common Shares other than as a
capital asset within the meaning of Section 1221 of the Code;
or (i) U.S. Holders that own, directly or indirectly, 10% or
more, by voting power or value, of our outstanding shares.
U.S. Holders that are subject to special provisions under the
Code, including U.S. Holders described immediately above, should
consult their own financial advisor, legal counsel or accountant
regarding the U.S. federal, U.S. state and local, and foreign tax
consequences of the acquisition, ownership, and disposition of
Common Shares.
If an
entity that is classified as partnership (or
“pass-through” entity) for U.S. federal income tax
purposes holds Common Shares, the U.S. federal income tax
consequences to such partnership (or “pass-through”
entity) and the partners of such partnership (or owners of such
“pass-through” entity) generally will depend on the
activities of the partnership (or “pass-through”
entity) and the status of such partners (or owners). Partners
of entities that are classified as partnerships (or owners of
“pass-through” entities) for U.S. federal income tax
purposes should consult their own financial advisor, legal counsel
or accountant regarding the U.S. federal income tax consequences of
the acquisition, ownership, and disposition of Common
Shares.
Tax Consequences Other than U.S. Federal Income Tax Consequences
Not Addressed
This
summary does not address the U.S. state and local, U.S. federal
estate and gift, or foreign tax consequences to U.S. Holders of the
acquisition, ownership, and disposition of Common Shares.
Each U.S. Holder should consult its own financial advisor,
legal counsel, or accountant regarding the U.S. state and local,
U.S. federal estate and gift, and foreign tax consequences of the
acquisition, ownership, and disposition of Common Shares.
(See “Taxation—Canadian Federal Income Tax
Consequences” above).
U.S. Federal Income Tax Consequences of the Acquisition, Ownership,
and Disposition of Common Shares
Distributions on Common Shares
General Taxation of Distributions
A U.S.
Holder that receives a distribution, including a constructive
distribution, with respect to the Common Shares will be required to
include the amount of such distribution in gross income as a
dividend (without reduction for any Canadian income tax withheld
from such distribution) to the extent of our current or accumulated
“earnings and profits”. To the extent that a
distribution exceeds our current and accumulated “earnings
and profits”, such distribution will be treated
(a) first, as a tax-free return of capital to the extent of a
U.S. Holder’s tax basis in the Common Shares and,
(b) thereafter, as gain from the sale or exchange of such
Common Shares. (See more detailed discussion at
“Disposition of Common Shares” below).
Reduced Tax Rates for Certain Dividends
For
taxable years beginning after December 31, 2002 and before January
1, 2011, a dividend paid by us generally will be taxed at the
preferential tax rates applicable to long-term capital gains if
(a) we are a “qualified foreign corporation” (as
defined below), (b) the U.S. Holder receiving such dividend is
an individual, estate, or trust, and (c) such dividend is paid
on Common Shares that have been held by such U.S. Holder for at
least 61 days during the 121-day period beginning 60 days before
the “ex-dividend date” (i.e., the first date that a
purchaser of such Common Shares will not be entitled to receive
such dividend).
We
generally will be a “qualified foreign corporation”
under Section 1(h)(11) of the Code (a “QFC”) if
(a) we are incorporated in a possession of the U.S.,
(b) we are eligible for the benefits of the Canada-U.S. Tax
Convention, or (c) the Common Shares are readily tradable on
an established securities market in the U.S. However, even if
we satisfy one or more of such requirements, we will not be treated
as a QFC if we are a “passive foreign investment
company” (as defined below) for the taxable year during which
we pay a dividend or for the preceding taxable year. In 2003,
the U.S. Department of the Treasury (the “Treasury”)
and the IRS announced that they intended to issue Treasury
Regulations providing procedures for a foreign corporation to
certify that it is a QFC. Although these Treasury Regulations
were not issued in 2004, the Treasury and the IRS have confirmed
their intention to issue these Treasury Regulations. It is
expected that these Treasury Regulations will obligate persons
required to file information returns to report a distribution with
respect to a foreign security issued by a foreign corporation as a
dividend from a QFC if the foreign corporation has, among other
things, certified under penalties of perjury that the foreign
corporation was not a “passive foreign investment
company” for the taxable year during which the foreign
corporation paid the dividend or for the preceding taxable year.
We do
not believe that we were a “passive foreign investment
company” for the taxable year ended June 30, 2008.
(See more detailed discussion at “Additional
Rules that May Apply to U.S. Holders” below). There can
be no assurance that the IRS will not challenge the determination
made by us concerning our “passive foreign investment
company” status or that we will not be a “passive
foreign investment company” for the current or any future
taxable year. Accordingly, there can be no assurances that we
will be a QFC for the current or any future taxable year, or that
we will be able to certify that it is a QFC in accordance with the
certification procedures issued by the Treasury and the
IRS.
If we
are not a QFC, a dividend paid by us to a U.S. Holder, including a
U.S. Holder that is an individual, estate, or trust, generally will
be taxed at ordinary income tax rates (and not at the preferential
tax rates applicable to long-term capital gains). The
dividend rules are complex, and each U.S. Holder should consult its
own financial advisor, legal counsel, or accountant regarding the
dividend rules.
Distributions Paid in Foreign Currency
The
amount of a distribution paid to a U.S. Holder in foreign currency
generally will be equal to the U.S. dollar value of such
distribution based on the exchange rate applicable on the date of
receipt. A U.S. Holder that does not convert foreign currency
received as a distribution into U.S. dollars on the date of receipt
generally will have a tax basis in such foreign currency equal to
the U.S. dollar value of such foreign currency on the date of
receipt. Such a U.S. Holder generally will recognize ordinary
income or loss on the subsequent sale or other taxable disposition
of such foreign currency (including an exchange for U.S.
dollars).
Dividends Received Deduction
Dividends
paid on the Common Shares generally will not be eligible for the
“dividends received deduction.” The availability
of the dividends received deduction is subject to complex
limitations that are beyond the scope of this discussion, and a
U.S. Holder that is a corporation should consult its own financial
advisor, legal counsel, or accountant regarding the dividends
received deduction.
Disposition of Common Shares
A U.S.
Holder will recognize gain or loss on the sale or other taxable
disposition of Common Shares in an amount equal to the difference,
if any, between (a) the amount of cash plus the fair market
value of any property received and (b) such U.S.
Holder’s tax basis in the Common Shares sold or otherwise
disposed of. Any such gain or loss generally will be capital
gain or loss, which will be long-term capital gain or loss if the
Common Shares are held for more than one year. Gain or loss
recognized by a U.S. Holder on the sale or other taxable
disposition of Common Shares generally will be treated as
“U.S. source” for purposes of applying the U.S. foreign
tax credit rules. (See more detailed discussion at
“Foreign Tax Credit” below).
Preferential
tax rates apply to long-term capital gains of a U.S. Holder that is
an individual, estate, or trust. There are currently no
preferential tax rates for long-term capital gains of a U.S. Holder
that is a corporation. Deductions for capital losses and net
capital losses are subject to complex limitations. For a U.S.
Holder that is an individual, estate, or trust, capital losses may
be used to offset capital gains and up to US$3,000 of ordinary
income. An unused capital loss of a U.S. Holder that is an
individual, estate, or trust generally may be carried forward to
subsequent taxable years, until such net capital loss is exhausted.
For a
U.S. Holder that is a corporation, capital losses may be used to
offset capital gains, and an unused capital loss generally may be
carried back three years and carried forward five years from the
year in which such net capital loss is recognized.
Foreign Tax Credit
A U.S.
Holder who pays (whether directly or through withholding) Canadian
income tax with respect to dividends paid on the Common Shares
generally will be entitled, at the election of such U.S. Holder, to
receive either a deduction or a credit for such Canadian income tax
paid. Generally, a credit will reduce a U.S. Holder’s
U.S. federal income tax liability on a dollar-for-dollar basis,
whereas a deduction will reduce a U.S. Holder’s income
subject to U.S. federal income tax. This election is made on
a year-by-year basis and applies to all foreign taxes paid (whether
directly or through withholding) by a U.S. Holder during a year.
Complex
limitations apply to the foreign tax credit, including the general
limitation that the credit cannot exceed the proportionate share of
a U.S. Holder’s U.S. federal income tax liability that such
U.S. Holder’s “foreign source” taxable income
bears to such U.S. Holder’s worldwide taxable income.
In applying this limitation, a U.S. Holder’s various
items of income and deduction must be classified, under complex
rules, as either “foreign source” or “U.S.
source.” In addition, this limitation is calculated
separately with respect to specific categories of income (including
“passive income,” “high withholding tax
interest,” “financial services income,”
“general income,” and certain other categories of
income). Dividends paid by us generally will constitute
“foreign source” income and generally will be
categorized as “passive income” or, in the case of
certain U.S. Holders, “financial services income.”
However, for taxable years beginning after December 31, 2006,
the foreign tax credit limitation categories are reduced to
“passive income” and “general income” (and
the other categories of income, including “financial services
income,” are eliminated). The foreign tax credit rules
are complex, and each U.S. Holder should consult its own financial
advisor, legal counsel, or accountant regarding the foreign tax
credit rules.
Information Reporting; Backup Withholding Tax
Payments
made within the U.S., or by a U.S. payor or U.S. middleman, of
dividends on, and proceeds arising from certain sales or other
taxable dispositions of, Common Shares generally will be subject to
information reporting and backup withholding tax, at the rate of
28%, if a U.S. Holder (a) fails to furnish such U.S.
Holder’s correct U.S. taxpayer identification number
(generally on Form W-9), (b) furnishes an incorrect U.S.
taxpayer identification number, (c) is notified by the IRS
that such U.S. Holder has previously failed to properly report
items subject to backup withholding tax, or (d) fails to
certify, under penalty of perjury, that such U.S. Holder has
furnished its correct U.S. taxpayer identification number and that
the IRS has not notified such U.S. Holder that it is subject to
backup withholding tax. However, U.S. Holders that are
corporations generally are excluded from these information
reporting and backup withholding tax rules. Any amounts
withheld under the U.S. backup withholding tax rules will be
allowed as a credit against a U.S. Holder’s U.S. federal
income tax liability, if any, or will be refunded, if such U.S.
Holder furnishes required information to the IRS. Each U.S.
Holder should consult its own financial advisor, legal counsel, or
accountant regarding the information reporting and backup
withholding tax rules.
Additional Rules that May Apply to U.S. Holders
If we
are a “controlled foreign corporation,” or a
“passive foreign investment company” (each as defined
below), the preceding sections of this summary may not describe the
U.S. federal income tax consequences to U.S. Holders of the
acquisition, ownership, and disposition of Common
Shares.
Controlled Foreign Corporation
We
generally will be a “controlled foreign corporation”
under Section 957 of the Code (a “CFC”) if more
than 50% of the total voting power or the total value of our
outstanding shares are owned, directly or indirectly, by citizens
or residents of the U.S., domestic partnerships, domestic
corporations, domestic estates, or domestic trusts (each as defined
in Section 7701(a)(30) of the Code), each of which own,
directly or indirectly, 10% or more of the total voting power of
our outstanding shares (a
“10% Shareholder”).
If we
are a CFC, a 10% Shareholder generally will be subject to
current U.S. federal income tax with respect to (a) such 10%
Shareholder’s pro rata share of the “subpart F
income” (as defined in Section 952 of the Code) of the
Company and (b) such 10% Shareholder’s pro rata
share of our earnings invested in “United States
property” (as defined in Section 956 of the Code).
In addition, under Section 1248 of the Code, any gain
recognized on the sale or other taxable disposition of Common
Shares by a U.S. Holder that was a 10% Shareholder at any time
during the five-year period ending with such sale or other taxable
disposition generally will be treated as a dividend to the extent
of the “earnings and profits” of the Company that are
attributable to such Common Shares. If we are both a CFC and
a “passive foreign investment company” (as defined
below), we generally will be treated as a CFC (and not as a
“passive foreign investment company”) with respect to
any 10% Shareholder.
We do
not believe that the Company has previously been, or currently is a
CFC. However, there can be no assurance that we will not be a
CFC for the current or any future taxable year.
Passive Foreign Investment Company
We
generally will be a “passive foreign investment
company” under Section 1297 of the Code (a
“PFIC”) if, for a taxable year, (a) 75% or more of
our gross income for such taxable year is passive income or
(b) 50% or more of the assets held by us either produce
passive income or are held for the production of passive income,
based on the fair market value of such assets (or on the adjusted
tax basis of such assets, if we are not publicly traded and either
is a “controlled foreign corporation” or makes an
election). “Passive income” includes, for
example, dividends, interest, certain rents and royalties, certain
gains from the sale of stock and securities, and certain gains from
commodities transactions.
For
purposes of the PFIC income test and asset test described above, if
we own, directly or indirectly, 25% or more of the total value of
the outstanding shares of another foreign corporation, we will be
treated as if it (a) held a proportionate share of the assets
of such other foreign corporation and (b) received directly a
proportionate share of the income of such other foreign
corporation. In addition, for purposes of the PFIC income
test and asset test described above, “passive income”
does not include any interest, dividends, rents, or royalties that
are received or accrued by us from a “related person”
(as defined in Section 954(d)(3) of the Code), to the extent
such items are properly allocable to the income of such related
person that is not passive income.
We do
not believe that the Company has previously been, or currently are
a PFIC. However, there can be no assurance that the IRS will not
challenge our determination concerning our PFIC status or that we
will not be a PFIC for the current or any future taxable
year.
Default PFIC Rules Under Section 1291 of the Code
If we
are a PFIC, the U.S. federal income tax consequences to a U.S.
Holder of the acquisition, ownership, and disposition of Common
Shares will depend on whether such U.S. Holder makes an election to
treat the Company as a “qualified electing fund” or
“QEF” under Section 1295 of the Code (a “QEF
Election”) or a mark-to-market election under
Section 1296 of the Code (a “Mark-to-Market
Election”). A U.S. Holder that does not make either a
QEF Election or a Mark-to-Market Election will be referred to in
this summary as a “Non-Electing U.S.
Holder.”
A
Non-Electing U.S. Holder will be subject to the rules of
Section 1291 of the Code with respect to (a) any gain
recognized on the sale or other taxable disposition of Common
Shares and (b) any excess distribution paid on the Common
Shares. A distribution generally will be an “excess
distribution” to the extent that such distribution (together
with all other distributions received in the current taxable year)
exceeds 125% of the average distributions received during the three
preceding taxable years (or during a U.S. Holder’s holding
period for the Common Shares, if shorter).
Under
Section 1291 of the Code, any gain recognized on the sale or
other taxable disposition of Common Shares, and any excess
distribution paid on the Common Shares, must be ratably allocated
to each day in a Non-Electing U.S. Holder’s holding period
for the Common Shares. The amount of any such gain or excess
distribution allocated to prior years of such Non-Electing U.S.
Holder’s holding period for the Class Common Shares
(other than years prior to the first taxable year of the Company
during such Non-Electing U.S. Holder’s holding period and
beginning after December 31, 1986 for which we was not a PFIC) will
be subject to U.S. federal income tax at the highest tax applicable
to ordinary income in each such prior year. A Non-Electing
U.S. Holder will be required to pay interest on the resulting tax
liability for each such prior year, calculated as if such tax
liability had been due in each such prior year. Such a
Non-Electing U.S. Holder that is not a corporation must treat any
such interest paid as “personal interest,” which is not
deductible. The amount of any such gain or excess
distribution allocated to the current year of such Non-Electing
U.S. Holder’s holding period for the Common Shares will be
treated as ordinary income in the current year, and no interest
charge will be incurred with respect to the resulting tax liability
for the current year.
If we
are a PFIC for any taxable year during which a Non-Electing U.S.
Holder holds Common Shares, we will continue to be treated as a
PFIC with respect to such Non-Electing U.S. Holder, regardless of
whether we cease to be a PFIC in one or more subsequent years.
A Non-Electing U.S. Holder may terminate this deemed PFIC
status by electing to recognize gain (which will be taxed under the
rules of Section 1291 of the Code discussed above) as if such
Common Shares were sold on the last day of the last taxable year
for which the Company was a PFIC.
QEF Election
A U.S.
Holder that makes a QEF Election generally will not be subject to
the rules of Section 1291 of the Code discussed above.
However, a U.S. Holder that makes a QEF Election will be
subject to U.S. federal income tax on such U.S. Holder’s pro
rata share of (a) the net capital gain of the Company, which
will be taxed as long-term capital gain to such U.S. Holder, and
(b) and the ordinary earnings of the Company, which will be
taxed as ordinary income to such U.S. Holder. Generally,
“net capital gain” is the excess of (a) net
long-term capital gain over (b) net short-term capital loss,
and “ordinary earnings” are the excess of
(a) “earnings and profits” over (b) net
capital gain. A U.S. Holder that makes a QEF Election will be
subject to U.S. federal income tax on such amounts for each taxable
year in which we are a PFIC, regardless of whether such amounts are
actually distributed to such U.S. Holder by us.
However,
a U.S. Holder that makes a QEF Election may, subject to certain
limitations, elect to defer payment of current U.S. federal income
tax on such amounts, subject to an interest charge. If such
U.S. Holder is not a corporation, any such interest paid will be
treated as “personal interest,” which is not
deductible.
A U.S.
Holder that makes a QEF Election generally also (a) may
receive a tax-free distribution from us to the extent that such
distribution represents “earnings and profits” of the
Company that were previously included in income by the U.S. Holder
because of such QEF Election and (b) will adjust such U.S.
Holder’s tax basis in the Common Shares to reflect the amount
included in income or allowed as a tax-free distribution because of
such QEF Election. In addition, a U.S. Holder that makes a
QEF Election generally will recognize capital gain or loss on the
sale or other taxable disposition of Common Shares.
The
procedure for making a QEF Election, and the U.S. federal income
tax consequences of making a QEF Election, will depend on whether
such QEF Election is timely. A QEF Election will be treated
as “timely” if such QEF Election is made for the first
year in the U.S. Holder’s holding period for the Common
Shares in which we were a PFIC. A U.S. Holder may make a
timely QEF Election by filing the appropriate QEF Election
documents at the time such U.S. Holder files a U.S. federal income
tax return for such first year. However, if we were a PFIC in
a prior year, then in addition to filing the QEF Election
documents, a U.S. Holder must elect to recognize (a) a gain
(which will be taxed under the rules of Section 1291 of the
Code discussed above) as if the Common Shares were sold on the
qualification date or (b) if we were also a CFC, such U.S.
Holder’s pro rata share of the post-1986 “earnings and
profits” of the Company as of the qualification date.
The “qualification date” is the first day of the
first taxable year in which we were a QEF with respect to such U.S.
Holder. The election to recognize such gain or
“earnings and profits” can only be made if such U.S.
Holder’s holding period for the Common Shares includes the
qualification date. By electing to recognize such gain or
“earnings and profits,” such U.S. Holder will be deemed
to have made a timely QEF Election. In addition, under very
limited circumstances, a U.S. Holder may make a retroactive QEF
Election if such U.S. Holder failed to file the QEF Election
documents in a timely manner.
A QEF
Election will apply to the taxable year for which such QEF Election
is made and to all subsequent taxable years, unless such QEF
Election is invalidated or terminated or the IRS consents to
revocation of such QEF Election. If a U.S. Holder makes a QEF
Election and, in a subsequent taxable year, we cease to be a PFIC,
the QEF Election will remain in effect (although it will not be
applicable) during those taxable years in which we are not a PFIC.
Accordingly, if we become a PFIC in another subsequent
taxable year, the QEF Election will be effective and the U.S.
Holder will be subject to the QEF rules described above during any
such subsequent taxable year in which we qualify as a PFIC.
In addition, the QEF Election will remain in effect (although
it will not be applicable) with respect to a U.S. Holder even after
such U.S. Holder disposes of all of such U.S. Holder’s direct
and indirect interest in the Common Shares. Accordingly, if
such U.S. Holder reacquires an interest in the Company, such U.S.
Holder will be subject to the QEF rules described above for each
taxable year in which we are a PFIC.
Each
U.S. Holder should consult its own financial advisor, legal
counsel, or accountant regarding the availability of, and procedure
for making, a QEF Election. U.S. Holders should be aware that
there can be no assurance that we will satisfy record keeping
requirements that apply to a QEF, or that we will supply U.S.
Holders with information that such U.S. Holders require to report
under the QEF rules, in event that we are a PFIC and a U.S. Holder
wishes to make a QEF Election.
Mark-to-Market Election
A U.S.
Holder may make a Mark-to-Market Election only if the Common Shares
are marketable stock. The Common Shares generally will be
“marketable stock” if the Common Shares are regularly
traded on (a) a national securities exchange that is
registered with the Securities and Exchange Commission,
(b) the national market system established pursuant to section
11A of the Securities and Exchange Act of 1934, or (c) a
foreign securities exchange that is regulated or supervised by a
governmental authority of the country in which the market is
located, provided that (i) such foreign exchange has trading
volume, listing, financial disclosure, and other requirements and
the laws of the country in which such foreign exchange is located,
together with the rules of such foreign exchange, ensure that such
requirements are actually enforced and (ii) the rules of such
foreign exchange ensure active trading of listed
stocks.
A U.S.
Holder that makes a Mark-to-Market Election generally will not be
subject to the rules of Section 1291 of the Code discussed
above. However, if a U.S. Holder makes a Mark-to-Market
Election after the beginning of such U.S. Holder’s holding
period for the Common Shares and such U.S. Holder has not made a
timely QEF Election, the rules of Section 1291 of the Code
discussed above will apply to certain dispositions of, and
distributions on, the Common Shares.
A U.S.
Holder that makes a Mark-to-Market Election will include in
ordinary income, for each taxable year in which we are a PFIC, an
amount equal to the excess, if any, of (a) the fair market
value of the Common Shares as of the close of such taxable year
over (b) such U.S. Holder’s tax basis in such Common
Shares. A U.S. Holder that makes a Mark-to-Market Election
will be allowed a deduction in an amount equal to the lesser of
(a) the excess, if any, of (i) such U.S. Holder’s
adjusted tax basis in the Common Shares over (ii) the fair
market value of such Common Shares as of the close of such taxable
year or (b) the excess, if any, of (i) the amount
included in ordinary income because of such Mark-to-Market Election
for prior taxable years over (ii) the amount allowed as a
deduction because of such Mark-to-Market Election for prior taxable
years.
A U.S.
Holder that makes a Mark-to-Market Election generally also will
adjust such U.S. Holder’s tax basis in the Common Shares to
reflect the amount included in gross income or allowed as a
deduction because of such Mark-to-Market Election. In
addition, upon a sale or other taxable disposition of Common
Shares, a U.S. Holder that makes a Mark-to-Market Election will
recognize ordinary income or loss (not to exceed the excess, if
any, of (a) the amount included in ordinary income because of
such Mark-to-Market Election for prior taxable years over
(b) the amount allowed as a deduction because of such
Mark-to-Market Election for prior taxable years).
A
Mark-to-Market Election applies to the taxable year in which such
Mark-to-Market Election is made and to each subsequent taxable
year, unless the Common Shares cease to be “marketable
stock” or the IRS consents to revocation of such election.
Each U.S. Holder should consult its own financial advisor,
legal counsel, or accountant regarding the availability of, and
procedure for making, a Mark-to-Market Election.
Other PFIC Rules
Under
Section 1291(f) of the Code, the IRS has issued proposed
Treasury Regulations that, subject to certain exceptions, would
cause a U.S. Holder that had not made a timely QEF Election to
recognize gain (but not loss) upon certain transfers of Common
Shares that would otherwise be tax-deferred (e.g., gifts and
exchanges pursuant to corporate reorganizations). However,
the specific U.S. federal income tax consequences to a U.S. Holder
may vary based on the manner in which Common Shares are
transferred.
Certain
additional adverse rules will apply with respect to a U.S. Holder
if we are a PFIC, regardless of whether such U.S. Holder makes a
QEF Election. For example under Section 1298(b)(6) of
the Code, a U.S. Holder that uses Common Shares as security for a
loan will, except as may be provided in Treasury Regulations, be
treated as having made a taxable disposition of such Common Shares.
The
PFIC rules are complex, and each U.S. Holder should consult its own
financial advisor, legal counsel, or accountant regarding the PFIC
rules and how the PFIC rules may affect the U.S. federal income tax
consequences of the acquisition, ownership, and disposition of
Common Shares.
This summary is of a general nature only and is not intended to be
relied on as legal or tax advice or representations to any
particular investor. Consequently, potential investors are
urged to seek independent tax advice in respect of the consequences
to them of the acquisition of common stock having regard to their
particular circumstances.
(F) DIVIDEND AND PAYING AGENTS
Not
applicable.
(G) STATEMENT BY EXPERTS
Not
applicable.
(H) DOCUMENTS ON DISPLAY
The
documents concerning the Company referred to in this Annual Report
may be inspected at the Company's office at 333 Bay Street, Suite
1700, Toronto, Ontario, Canada, M5H 2R2. The Company may be reached
at (917) 843-2169. Documents filed with the Securities and Exchange
Commission ("SEC") may also be read and copied at the SEC's public
reference room at 100 F Street, N.E., Washington, D.C. 20549.
Please call the SEC at 1-800-SEC-0330 for further information on
the public reference rooms.
The
Company is subject to reporting requirements as a “reporting
issuer” under applicable securities legislation in Canada and
as a “foreign private issuer” under the Securities
Exchange Act of 1934 (the “Exchange Act”). As a result,
we must file periodic reports and other information with the
Canadian securities regulatory authorities and the Securities and
Exchange Commission.
A copy
of this Form 20-F Annual Report and certain other documents
referred to in this Annual Report and other documents filed by us
may be retrieved from the system for electronic document analysis
and retrieval (“SEDAR”) system maintained by the
Canadian securities regulatory authorities at www.sedar.ca or from
the Securities and Exchange Commission electronic data gathering,
analysis and retrieval system (“EDGAR”) at
www.sec.gov/edgar.
(I) SUBSIDIARY INFORMATION
The
documents concerning the Company’s subsidiaries referred to
in this Annual Report may be inspected at the Company's office at
333 Bay Street, Suite 1700, Toronto, Ontario, Canada, M5H
2R2.
ITEM 11 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
The
Company, through its financial assets and liabilities, is exposed
to various risks. The Company has established policies and
procedures to manage these risks, with the objective of minimizing
any adverse effect that changes in these variables could have on
the consolidated financial statements. The following analysis
provides a measurement of risks as at June 30, 2018:
Credit
risk is the risk of financial loss to the Company if a customer or
counterparty to a financial instrument fails to meet its
contractual obligations. The Company is not exposed to any
significant credit risk.
Liquidity
risk is the risk that the Company will not be able to meet its
financial obligations as they fall due within one year. The
Company’s approach to managing liquidity risk is to ensure,
as far as possible, that it will have sufficient liquidity to meet
its liabilities when due, under both normal and stressed
conditions, without incurring unacceptable losses or risking damage
to the Company’s reputation. At June 30, 2018, there is
substantial doubt about the Company’s ability to continue as
a going concern primarily due to its history of losses. Liquidity
risk continues to be a key concern in the development of future
operations.
Interest
rate risk is the risk that the fair value or future cash flows of a
financial instrument will fluctuate because of changes in market
interest rates. The interest rates on all of the Company’s
existing debt are fixed, and therefore it is not currently subject
to any significant cash flow interest rate risk.
The
functional currency of the Company is the Canadian Dollar. Currency
risk arises because the amount of the local currency expenses, cash
flows and payables for transactions denominated in foreign
currencies may vary due to changes in exchange rates.
The
Company’s operations do not involve the direct input or
output of any commodities and therefore it is not subject to any
significant commodity price risk. In addition, the Company does not
have any equity investment in other listed public companies, and
therefore it is not subject to any significant stock market price
risk.
The
Company never entered into and did not have at the end of the year
ended June 30, 2018, any foreign currency hedge
contracts.
ITEM 12 - DESCRIPTION OF SECURITIES OTHER THAN EQUITY
SECURITIES
Not
required since this is an annual report.
CordovaCann
Corp.
(formerly LiveReel
Media Corporation)
Consolidated
Statements of Financial Position
As at June 30, 2018
and June 30, 2017
(Expressed in
Canadian Dollars)
|
As at
|
|
|
|
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
Current
|
|
|
|
Cash
and cash equivalents
|
3,250,697
|
-
|
|
Promissory note (
Note 14
)
|
15,802
|
-
|
|
Prepaid
expense
|
325,659
|
6,756
|
|
Advances to joint venture (
Note 5
)
|
610,705
|
-
|
|
|
4,202,863
|
6,756
|
|
|
|
|
|
Investment in joint venture (
Note 5
)
|
534,311
|
-
|
|
Equipment (
Note 4
)
|
138,418
|
-
|
|
|
|
|
|
Total
assets
|
4,875,592
|
6,756
|
|
|
|
|
|
|
|
|
|
LIABILITIES
|
|
|
|
Current
|
|
|
|
Accounts
payable and accrued liabilities
|
320,321
|
88,415
|
|
Due to related parties (
Note 6
)
|
-
|
170,170
|
|
Related party notes payable (
Note 7
)
|
-
|
374,647
|
|
Total
liabilities
|
320,321
|
633,232
|
|
|
|
|
|
SHAREHOLDERS' EQUITY (DEFICIENCY)
|
|
|
|
Share
capital
|
14,480,241
|
7,880,660
|
|
Contributed
surplus
|
3,808,611
|
361,196
|
|
Accumulated
deficit
|
(13,734,265
)
|
(8,868,332
)
|
|
Accumulated
other comprehensive income
|
684
|
-
|
|
Total shareholders' equity (deficiency)
|
4,555,271
|
(626,476
)
|
|
|
|
|
|
Total liabilities and shareholders' equity
(deficiency)
|
4,875,592
|
6,756
|
Going
concern (
Note
1
)
Related
party transactions (
Note
9
)
Commitments
(
Note 12
)
Subsequent
events (
Note
17
)
|
Approved
on behalf of the Board:
|
|
|
|
|
|
|
|
|
|
“Henry J.
Kloepper”
,
Director
|
|
“Thomas M. Turner,
Jr.”
,
Director
|
|
|
(signed)
|
|
(signed)
|
The accompanying
notes are an integral part of these consolidated financial
statements.
CordovaCann
Corp.
(formerly LiveReel
Media Corporation)
Consolidated
Statements of Operations and Comprehensive Loss
For the years ended
June 30, 2018, 2017 and 2016
(Expressed in
Canadian Dollars)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue (
Note 4
)
|
-
|
-
|
-
|
|
Cost of sales (
Note 4
)
|
12,770
|
-
|
-
|
|
|
(12,770
)
|
-
|
-
|
|
|
|
|
|
|
Expenses
|
|
|
|
|
Consulting
fees
|
977,410
|
-
|
-
|
|
Share based compensation (
Note 10, 11
)
|
3,447,415
|
-
|
-
|
|
Professional
fees
|
225,151
|
8,250
|
2,500
|
|
Shareholders
information services
|
52,714
|
19,107
|
16,011
|
|
Office
and general
|
127,865
|
5,468
|
5,879
|
|
Financing
costs
|
14,845
|
55,580
|
49,322
|
|
Exclusivity fee (
Note 12(a)
)
|
42,550
|
-
|
-
|
|
Foreign
exchange gain
|
(27,196
)
|
-
|
-
|
|
|
|
|
|
|
|
4,860,754
|
88,405
|
73,712
|
|
Loss before other income
|
(4,873,524
)
|
(88,405
)
|
(73,712
)
|
|
Share of profit of a joint venture
(
Note
5
)
|
(7,591
)
|
-
|
-
|
|
Net loss
|
(4,865,933
)
|
(88,405
)
|
(73,712
)
|
|
|
|
|
|
|
Loss per share - basic and diluted
|
(0.15
)
|
(0.00
)
|
(0.00
)
|
|
|
|
|
|
|
Weighted average number of outstanding common shares - basic and
diluted
|
32,255,112
|
23,521,744
|
23,521,744
|
|
|
|
|
|
|
Net loss
|
(4,865,933
)
|
(88,405
)
|
(73,712
)
|
|
Foreign
exchange translation adjustment
|
684
|
-
|
-
|
|
Comprehensive loss
|
(4,865,249
)
|
(88,405
)
|
(73,712
)
|
The accompanying
notes are an integral part of these consolidated financial
statements.
CordovaCann
Corp.
(formerly LiveReel
Media Corporation)
Consolidated
Statements of Changes in Equity (Deficiency)
As at June 30,
2018, 2017 and 2016
(Expressed in
Canadian Dollars)
|
|
|
|
|
|
Accumulated Other
Comprehensive Income
|
|
|
Balance, July 1,
2015
|
23,521,744
|
$
7,880,660
|
$
361,196
|
$
(8,706,215
)
|
$
-
|
$
(464,359
)
|
|
Net loss
|
-
|
-
|
-
|
(73,712
)
|
-
|
(73,712
)
|
|
Balance, June 30,
2016
|
23,521,744
|
$
7,880,660
|
$
361,196
|
$
(8,779,927
)
|
$
-
|
$
(538,071
)
|
|
Net loss
|
-
|
-
|
-
|
(88,405
)
|
-
|
(88,405
)
|
|
Balance, June 30,
2017
|
23,521,744
|
$
7,880,660
|
$
361,196
|
$
(8,868,332
)
|
$
-
|
$
(626,476
)
|
|
Common shares issued for settlement
of shareholder loan (
Note
8(a)
)
|
7,681,110
|
384,055
|
-
|
-
|
-
|
384,055
|
|
Common shares
issued
for private placement (
Note 8(b)
)
|
5,532,500
|
553,250
|
-
|
-
|
-
|
553,250
|
|
Common shares issued for private
placement
(Note
8(c))
|
890,074
|
959,251
|
-
|
-
|
-
|
959,251
|
|
Issuance of options (
Note 11
)
|
-
|
-
|
1,177,727
|
-
|
-
|
1,177,727
|
|
Issuance of warrants (
Note 10
)
|
-
|
-
|
2,269,688
|
-
|
-
|
2,269,688
|
|
Common shares issued for private
placement (
Note
8(d)
)
|
2,410,800
|
4,703,025
|
-
|
-
|
-
|
4,703,025
|
|
Foreign
currency
translation gain
|
-
|
-
|
-
|
-
|
684
|
684
|
|
Net loss
|
-
|
-
|
-
|
(4,865,933
)
|
-
|
(4,865,933
)
|
|
Balance, June 30,
2018
|
40,036,228
|
$
14,480,241
|
$
3,808,611
|
$
(13,734,265
)
|
$
684
|
$
4,555,271
|
The accompanying
notes are an integral part of these consolidated financial
statements.
CordovaCann
Corp.
(formerly LiveReel
Media Corporation)
Consolidated
Statements of Cash Flows
For the years ended
June 30, 2018, 2017 and 2016
(Expressed in
Canadian Dollars)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating activities
|
|
|
|
|
Net
loss for the year
|
(4,865,933
)
|
(88,405
)
|
(73,712
)
|
|
|
|
|
|
|
Adjusted
for non-cash items:
|
|
|
|
|
Accrued
related party interest
|
-
|
55,580
|
49,322
|
|
Shares issued on consulting agreement
(
Note
8
)
|
322,862
|
-
|
-
|
|
Share based compensation (
Note 10, 11
)
|
3,447,415
|
-
|
-
|
|
Share of profit of a joint venture
(
Note
5
)
|
(7,591
)
|
-
|
-
|
|
Depreciation (
Note 4
)
|
12,770
|
-
|
-
|
|
Write
down of receivables
|
-
|
5,239
|
-
|
|
|
|
|
|
|
Changes in non-cash working capital items:
|
|
|
|
|
Prepaid
expense
|
(318,903
)
|
(2,620
)
|
(4,136
)
|
|
Receivables
|
-
|
(1,600
)
|
(2,676
)
|
|
Due
to related parties
|
-
|
-
|
6,215
|
|
Accounts
payable and accrued liabilities
|
231,906
|
29,386
|
4,685
|
|
Cash
used in operating activities
|
(1,177,474
)
|
(2,420
)
|
(20,302
)
|
|
|
|
|
|
|
Investing activities
|
|
|
|
|
Purchase
of equipment
|
(151,188
)
|
-
|
-
|
|
Investment in joint venture (
Note 5
)
|
(526,720
)
|
-
|
-
|
|
Advances to joint venture (
Note 5
)
|
(610,705
)
|
-
|
-
|
|
Promissory note (
Note 14
)
|
(15,802
)
|
-
|
-
|
|
Cash
used in investing activities
|
(1,304,415
)
|
-
|
-
|
|
|
|
|
|
|
Financing activities
|
|
|
|
|
Advances
from related parties
|
-
|
2,420
|
20,302
|
|
Repayments of related parties (
Note 6
)
|
(117,081
)
|
-
|
-
|
|
Repayments of related party notes payable
(
Note
7
)
|
(43,681
)
|
-
|
-
|
|
Proceeds from issuance of common shares
(
Note
8
)
|
5,892,664
|
-
|
-
|
|
Proceeds
from financing activities
|
5,731,902
|
2,420
|
20,302
|
|
|
|
|
|
|
Effect
of exchange rate changes on cash
|
684
|
-
|
-
|
|
|
|
|
|
|
Net increase in cash and cash equivalents
|
3,250,697
|
-
|
-
|
|
Cash and cash equivalents, beginning of year
|
-
|
-
|
-
|
|
Cash and cash equivalents, end of year
|
3,250,697
|
-
|
-
|
|
|
|
|
|
|
Supplementary cash flow information
|
|
|
|
|
Interest
paid
|
107,146
|
-
|
-
|
|
Non-cash loan settlement
(
Note 6,
7
)
|
384,055
|
-
|
-
|
|
Taxes
paid
|
-
|
-
|
-
|
The accompanying
notes are an integral part of these consolidated financial
statements.
CordovaCann
Corp.
(formerly LiveReel
Media Corporation)
Notes to the
Consolidated Financial Statements
For the years ended
June 30, 2018, 2017 and 2016
(Expressed in
Canadian Dollars)
1.
NATURE
OF OPERATIONS AND GOING CONCERN
CordovaCann Corp.
(formerly LiveReel Media Corporation) (the “Company” or
“CordovaCann”) is a Canadian-domiciled company focused
on building a leading, diversified cannabis products business
across multiple jurisdictions including Canada and the United
States. CordovaCann primarily provides services and investment
capital to the processing and production vertical markets of the
cannabis industry. On January 3, 2018, the Company changed its name
from LiveReel Media Corporation to CordovaCann Corp. The
Company’s registered address is 333 Bay Street, Suite 1700,
Toronto, Ontario, M5H 2R2.
These consolidated
financial statements of the Company have been prepared in
accordance with International Financial Reporting Standards
(“IFRS”) as promulgated by the International Accounting
Standards Board (“IASB”) on a going concern basis which
presumes the realization of assets and discharge of liabilities in
the normal course of business for the foreseeable future. There is
substantial doubt about the Company's ability to continue as a
going concern as the Company incurred a comprehensive loss of
$4,865,249 (June 30, 2017 – $88,405; June 30, 2016 - $73,712)
during the year ended June 30, 2018 and has a total accumulated
deficit of $13,734,265 (June 30, 2017 – $8,868,332) as at
June 30, 2018. The Company’s ability to continue as a going
concern is dependent upon its ability to access sufficient capital
until it has profitable operations and raises a material concern.
To this point, all operational activities and overhead costs have
been funded through equity issuances, debt issuances and related
party advances.
The Company
believes that continued funding from equity and debt issuances will
provide sufficient cash flow for it to continue as a going concern
in its present form, however, there can be no assurances that the
Company will achieve this. Accordingly, these consolidated
financial statements do not include any adjustments related to the
recoverability and classification of recorded asset amounts or the
amount and classification of liabilities or any other adjustments
that might be necessary should the Company be unable to continue as
a going concern.
The Company’s
common shares trade on the OTCQB in the United States under the
symbol “LVRLF”. On August 8, 2018, the Company’s
common shares commenced trading on the Canadian Securities Exchange
under the symbol “CDVA” to secure future financing in
Canadian Dollars.
2.
BASIS OF PREPARATION
(a)
Statement
of Compliance
These consolidated
financial statements of the Company and its subsidiaries were
prepared using accounting policies consistent with IFRS as issued
by the IASB and interpretations of the IFRS Interpretations
Committee (“IFRIC”).
These consolidated
financial statements were authorized for issue by the Board of
Directors on October 29, 2018.
CordovaCann
Corp.
(formerly LiveReel
Media Corporation)
Notes to the
Consolidated Financial Statements
For the years ended
June 30, 2018, 2017 and 2016
(Expressed in
Canadian Dollars)
2.
BASIS OF PREPARATION (continued)
(b)
Basis
of Presentation
These consolidated
financial statements have been prepared on a historical cost basis,
except where otherwise disclosed. Historical cost is based on the
fair value of the consideration given in exchange for assets. In
addition, these consolidated financial statements have been
prepared using the accrual basis of accounting, except for cash
flow information.
(c)
Functional
and Presentation Currency
The consolidated
financial statements are presented in Canadian Dollars, which is
the Company’s presentation currency. The functional
currencies of the group, as determined by management, are as
follows:
|
|
|
|
Currency
|
|
|
|
|
|
|
CordovaCann
Corp.
|
|
Canadian
|
|
CordovaCann
Holdings Canada, Inc.
|
|
Canadian
|
|
CordovaCann
Holdings, Inc.
|
|
United
States
|
|
Cordova
CO Holdings, LLC
|
|
United
States
|
|
Cordova
OR Holdings, LLC
|
|
United
States
|
|
Cordova
OR Operations, LLC (27.5%)
|
|
United
States
|
|
|
|
|
|
In translating the
financial statements of the Company's foreign subsidiaries from
their functional currencies into the Company's reporting currency
of Canadian Dollars, balance sheet accounts are translated using
the closing exchange rate in effect at the balance sheet date and
income and expense accounts are translated using an average
exchange rate prevailing during the reporting period. Adjustments
resulting from the translation, if any, are included in accumulated
other comprehensive income (loss) in shareholders'
equity.
(d)
Use
of Estimates and Judgements
The preparation of
these consolidated financial statements in accordance with IFRS
requires management to make judgements, estimates and assumptions
that affect the application of accounting policies and reported
amounts of assets and liabilities at the date of the consolidated
financial statements and reported amounts of expenses during the
reporting period. Actual outcomes could differ from these
estimates. These consolidated financial statements include
estimates, which, by their nature, are uncertain. The impacts of
such estimates are pervasive throughout the financial statements,
and may require accounting adjustments based on future occurrences.
The estimates and underlying assumptions are reviewed on a regular
basis. Revisions to accounting estimates are recognized in the
period in which the estimate is revised and in any future periods
affected.
The key assumptions
concerning the future, and other key sources of estimation
uncertainty as of the date of the statement of financial position
that have a significant risk of causing material adjustment to the
carrying amounts of assets and liabilities within the next fiscal
year arise in connection with the valuation of financial
instruments, fair value of share purchase warrants, share-based
payments and deferred tax assets.
CordovaCann
Corp.
(formerly LiveReel
Media Corporation)
Notes to the
Consolidated Financial Statements
For the years ended
June 30, 2018, 2017 and 2016
(Expressed in
Canadian Dollars)
2.
BASIS
OF PREPARATION (continued)
(e)
Basis
of Consolidation
Subsidiaries are
entities controlled by the Company. Control exists when the Company
has the power, directly and indirectly, to govern the financial and
operating polices of an entity and be exposed to the variable
returns from its activities. The financial statements of
subsidiaries are included in the consolidated financial statements
from the date that control commences until the date that control
ceases. These consolidated financial statements include the
accounts of the Company and its wholly owned subsidiaries:
CordovaCann Holdings Canada, Inc., and CordovaCann Holdings, Inc.
and its wholly owned subsidiaries: Cordova CO Holdings, LLC and
Cordova OR Holdings, LLC.
A joint venture is
a joint arrangement whereby the parties that have joint control of
the arrangement have rights to the net assets related to the
arrangement. The Company accounts for its interests in joint
ventures using the equity method of accounting. The Company
initially records its interests in joint ventures at cost.
Subsequent to initial recognition, the carrying value of the
Company’s interest in the joint venture is adjusted for the
Company’s share of comprehensive income and distributions of
the investee.
Refer to Note 5 for
additional information on the Company’s joint venture in
Cordova OR Operations, LLC.
3.
SIGNIFICANT
ACCOUNTING POLICIES
The significant
accounting policies used in the preparation of these consolidated
financial statements are described below.
Cash
and cash equivalents
Cash consists of
bank balances and cash held in trust. Cash equivalents consist of
short-term deposits with original maturities of three months or
less. As at June 30, 2018 and June 30, 2017, there were no cash
equivalents.
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
policy decisions. Parties are also considered to be related if they
are subject to common control or common significant influence.
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.
CordovaCann
Corp.
(formerly LiveReel
Media Corporation)
Notes to the
Consolidated Financial Statements
For the years ended
June 30, 2018, 2017 and 2016
(Expressed in
Canadian Dollars)
3.
SIGNIFICANT ACCOUNTING POLICIES (continued)
Leases
The Company records
income as a result of an operating lease. The Company presents its
assets subject to the operating leases in its statement of
financial position. The Company recognizes income from its
operating leases on a straight-line basis over the lease terms,
unless another systematic basis better represents the time pattern
in which the economic benefits in the leased asset
diminish.
Share-based
payments
Share-based
payments to employees are measured at the fair value of the
instruments issued and recognized over the expected service
periods. Share-based payments to non-employees are measured at the
fair value of goods or services received or the fair value of the
equity instruments issued, if it is determined the fair value of
the goods or services cannot be reliably measured, and are recorded
at the date the goods or services are received. The corresponding
amount is recorded to the stock options reserve. The fair value of
options is determined using the Black-Scholes Option Pricing Model
which incorporates all market vesting conditions. The number of
shares and options expected to vest is reviewed and adjusted at the
end of each reporting period such that the amount recognized for
services received as consideration for the equity instruments
granted shall be based on the number of equity instruments that
will eventually vest.
Equipment
Equipment is stated
at cost, less accumulated depreciation and any accumulated
impairment losses. The gain or loss arising on the disposal or
retirement of an item of equipment is determined as the difference
between the sales proceeds and the carrying amount of the asset and
is recognized in the statement of operations. Expenditures to
replace a component of an item of equipment that is accounted for
separately are capitalized and the existing carrying amount of the
component written off. Other subsequent expenditures are
capitalized if future economic benefits will arise from the
expenditure. All other expenditures, including repair and
maintenance, are recognized in the statement of operations as
incurred.
Depreciation is
charged to the income statement based on the cost, less estimated
residual value, of the asset on a straight-line basis over the
estimated useful life. Depreciation commences when the assets are
available for use. The estimated useful lives are as
follows:
|
|
Method:
|
|
Rate:
|
|
Equipment
|
Straight-line
|
|
5
years
|
Loss
per share
Basic loss per
share is calculated by dividing net loss by the weighted average
number of common shares outstanding during the period. Diluted loss
per share reflects the dilution that would occur if outstanding
stock options and share purchase warrants were exercised or
converted into common shares using the treasury stock method and
are calculated by dividing net loss applicable to common shares by
the sum of the weighted average number of common shares outstanding
and all additional common shares that would have been outstanding
if
potentially
dilutive common shares had been issued.
CordovaCann
Corp.
(formerly LiveReel
Media Corporation)
Notes to the
Consolidated Financial Statements
For the years ended
June 30, 2018, 2017 and 2016
(Expressed in
Canadian Dollars)
3.
SIGNIFICANT ACCOUNTING POLICIES (continued)
The inclusion of
the Company’s stock options and share purchase warrants in
the computation of diluted loss per share would have an
anti-dilutive effect on loss per share and are therefore excluded
from the computation. Consequently, there is no difference between
basic loss per share and diluted loss per share. The outstanding
number of and type of securities that could potentially dilute
basic net loss per share in the future but that were not included
in the computation of diluted net loss per share are as
follows:
|
|
|
|
|
|
Stock
options
|
1,750,000
|
-
|
-
|
|
Warrants
|
6,650,000
|
-
|
-
|
|
|
|
|
|
Financial
Instruments
Financial assets
The Company
initially recognizes financial assets at fair value on the date
that they are originated. All financial assets (including assets
designated at fair value through profit or loss,
“FVTPL”) are recognized initially on the date at which
the Company becomes a party to the contractual provisions of the
instrument. The Company derecognizes a financial asset when the
contractual rights to the cash flows from the asset expire, or it
transfers the rights to receive the contractual cash flows on the
financial asset in a transaction in which substantially all the
risks and rewards of ownership of the financial asset are
transferred. Any interest in transferred financial assets that is
created or retained by the Company is recognized as a separate
asset or liability.
The Company
classifies its financial assets as financial assets at FVTPL,
available for sale (“AFS”) financial assets or loans
and receivables. A financial asset is classified at FVTPL if it is
classified as held for trading or is designated as such upon
initial recognition. Financial assets are designated at FVTPL if
the Company manages such investments and makes purchase and sale
decisions based on their fair value in accordance with the
Company’s documented risk management or investment strategy.
Financial assets at FVTPL are measured at fair value, and changes
therein are recognized in profit or loss.
Loans and
receivables are financial assets with fixed or determinable
payments that are not quoted in an active market. Such assets are
recognized initially at fair value. Subsequent to initial
recognition loans and receivables are measured at amortized cost
using the effective interest method, less any impairment
losses.
AFS financial
assets are non-derivatives that are either designated as AFS or are
not classified as loans and receivables or financial assets at
FVTPL. AFS financial assets are stated at fair value at the end of
each reporting period. Changes in the carrying amount of AFS
monetary financial assets relating to changes in foreign currency
rates, interest income calculated using the effective interest
method and dividends on AFS equity investments are recognized in
profit or loss. Other changes in the carrying amount of AFS
financial assets are recognized in other comprehensive income
(“OCI”). When the investment is disposed of or is
determined to be impaired, the cumulative gain or loss previously
accumulated in OCI is reclassified to profit or loss. AFS equity
investments that do not have a quoted market price in an active
market and whose fair value cannot be reliably measured are
measured at cost less any identified impairment losses at the end
of each reporting period.
CordovaCann
Corp.
(formerly LiveReel
Media Corporation)
Notes to the
Consolidated Financial Statements
For the years ended
June 30, 2018, 2017 and 2016
(Expressed in
Canadian Dollars)
3.
SIGNIFICANT ACCOUNTING POLICIES (continued)
Financial
Instruments (continued)
Financial liabilities
The Company
initially recognizes financial liabilities at fair value on the
date that they are originated. All financial liabilities (including
liabilities designated at FVTPL) are recognized initially on the
date at which the Company becomes a party to the contractual
provisions of the instrument. The Company derecognizes a financial
liability when its contractual obligations are discharged or
cancelled or expire.
The Company
classifies its financial liabilities as either financial
liabilities at FVTPL or other liabilities. Subsequent to initial
recognition other liabilities are measured at amortized cost using
the effective interest method. Financial liabilities at fair value
are stated at fair value with changes being recognized in profit or
loss.
Classification of financial instruments
The Company
classifies its financial assets and liabilities depending on the
purpose for which the financial instruments were acquired, their
characteristics, and management intent as outlined
below:
|
|
|
Classification:
|
|
Receivables
|
|
Loan and
receivable
|
|
Promissory
note
|
|
Loan and
receivable
|
|
Accounts payable
and accrued liabilities
|
|
Other
liabilities
|
Fair value
estimates are made at a specific point in time, based on relevant
market information and information about the financial instruments.
These estimates are subjective in nature and involve uncertainties
and matters of significant judgment. Change in assumptions could
significantly affect the estimates.
Impairment
of financial assets
Financial assets
are assessed for indicators of impairment at the end of each
reporting period. Financial assets are impaired when there is
objective evidence that, as a result of one or more events that
occurred after the initial recognition of the financial assets, the
estimated future cash flows of the investments have been negatively
impacted. Evidence of impairment could include: significant
financial difficulty of the issuer or the counterparty; or default
or delinquency in interest or principal payments; or the likelihood
that the borrower will enter bankruptcy or financial
reorganization.
The carrying amount
of financial assets is reduced by any impairment loss directly for
all financial assets with the exception of amounts receivable,
where the carrying value is reduced through the use of an allowance
account. When an amount receivable is considered uncollectible, it
is written off against the allowance account. Subsequent recoveries
of amounts previously written off are credited against the
allowance account. Changes in the carrying amount of the allowance
account are recognized in profit or loss.
If, in a subsequent
period, the amount of the impairment loss decreases and the
decrease can be related objectively to an event occurring after the
impairment was recognized, the previously recognized impairment
loss is reversed through profit or loss to the extent that the
carrying amount of the investment at the date the impairment is
reversed does not exceed what the amortized cost would have been
had the impairment not been recognized.
CordovaCann
Corp.
(formerly LiveReel
Media Corporation)
Notes to the
Consolidated Financial Statements
For the years ended
June 30, 2018, 2017 and 2016
(Expressed in
Canadian Dollars)
3.
SIGNIFICANT ACCOUNTING POLICIES (continued)
Income
taxes
Income tax expense
is comprised of current and deferred tax. Income tax expense is
recognized in profit or loss except to the extent that it relates
to items recognized in equity, in which case it is recognized in
equity.
Current income tax
is the expected tax payable on the taxable income for the year,
using tax rates enacted or substantively enacted at the reporting
date, and any adjustments to tax payable in respect of previous
years.
Deferred tax
liabilities or assets are recognized using the balance sheet
method, providing for temporary differences between the carrying
amounts of assets and liabilities for financial reporting purposes
and amounts used for taxation purposes. Deferred tax is not
recognized on the initial recognition of assets or liabilities in a
transaction that is not a business combination.
Deferred tax is
measured at the tax rates that are expected to be applied to
temporary differences when they reverse, based on the laws that
have been enacted or substantively enacted by the reporting date.
Deferred tax assets and liabilities are offset if there is a
legally enforceable right to offset, and they relate to income
taxes levied by the same tax authority on the same taxable entity,
or on different tax entities, but they intend to settle current tax
liabilities and assets on a net basis or their tax assets and
liabilities will be realized simultaneously.
A deferred tax
asset is recognized to the extent that it is probable that future
taxable profits will be available against which the temporary
difference can be utilized. Deferred tax assets are reviewed at
each reporting date and are reduced to the extent that it is no
longer probable that the related tax benefit will be
realized.
Equity
Common shares are
classified as equity. Transaction costs directly attributable to
the issue of common shares and share purchase options are
recognized as a deduction from equity, net of any tax effects. When
share capital recognized as equity is repurchased, the amount of
the consideration paid, including directly attributable costs, is
recognized as a deduction from total equity.
Impairment
of long-lived assets
Long-lived assets,
including property, plant and equipment and intangible assets are
reviewed for impairment at each statement of financial position
date or whenever events or changes in circumstances indicate that
the carrying amount of an asset exceeds its recoverable amount. For
the purpose of impairment testing, assets that cannot be tested
individually are grouped together into the smallest group of assets
that generates cash inflows from continuing use that are largely
independent of the cash inflows of other assets or groups of assets
(the cash-generating unit, or "CGU"). The recoverable amount of an
asset or a CGU is the higher of its fair value, less costs to sell,
and its value in use. If the carrying amount of an asset exceeds
its recoverable amount, an impairment charge is recognized
immediately in profit or loss equal to the amount by which the
carrying amount exceeds the recoverable amount. Where an impairment
loss subsequently reverses, the carrying amount of the asset is
increased to the lesser of the revised estimate of recoverable
amount, and the carrying amount that would have been recorded had
no impairment loss been recognized previously.
CordovaCann
Corp.
(formerly LiveReel
Media Corporation)
Notes to the
Consolidated Financial Statements
For the years ended
June 30, 2018, 2017 and 2016
(Expressed in
Canadian Dollars)
3.
SIGNIFICANT ACCOUNTING POLICIES (continued)
Investment
in joint venture
Joint ventures are
joint arrangements whereby the parties that have joint control of
the arrangement have rights to the net assets of the arrangement.
Joint control is the contractually agreed sharing of control of an
arrangement, which exists only when decisions about relevant
activities require unanimous consent of the parties sharing
control. Investees in which the Company has joint control and
rights to net assets thereof, are defined as joint ventures. The
Company’s interest in Cordova OR Operations, LLC. is
classified as a joint venture.
Investments in
joint ventures are accounted for using the equity method and are
initially recognized at cost, excluding financial assets that are
not in-substance common shares and inclusive of transaction. The
carrying amount of goodwill arising from the acquisition of joint
ventures is included in the carrying amount of the investments in
joint ventures. The Company’s interest in an investee is
initially recorded at cost and is subsequent adjusted for the
Company’s share of changes in the income and expenses of the
investee, less any impairment in the value of individual
investments, less any dividends paid. Where the Company transacts
with an investee, unrealized profits and losses are eliminated to
the extent of the Company’s interest in that
investee.
The consolidated
financial statements include the Company's share of the income and
expenses and equity movement of equity accounted investees. In
accordance with IFRS, the investee’s most recent available
financial statements are used in the application of the equity
method. Where the investee’s reporting period differs from
the Company’s, the investee prepares financial information as
of the same period end as the Company, unless it is impracticable
to do so. Otherwise, the Company will adjust for its share of
income and expenses and equity movement based on the
investee’s most recently completed financial statements,
adjusted for the effects of significant transactions. The Company
does not recognize losses exceeding the carrying value of its
interest in the joint venture.
New
Standards Not Yet Adopted
IFRS
9 – Financial Instruments
In July 2014, the
IASB issued the final publication of the IFRS 9 Financial
Instruments (“IFRS 9”) standard. The new standard is
effective for annual periods beginning on or after January 1, 2018.
IFRS 9 includes revised guidance on the classification and
measurement of financial instruments, new guidance for measuring
impairment on financial assets, and new hedge accounting guidance.
The Company assessed the impact of adopting IFRS 9 retrospectively
and determined that the impact was not material. Commencing July 1,
2018, the Company will adopt IFRS 9 on a cumulative effective
basis, with no restatement of the comparative period.
IFRS
15 – Revenue from Contracts with Customers
In May 2014, the
IASB issued IFRS 15 Revenue from Contracts with Customers ("IFRS
15"). The new standard is effective for annual periods beginning on
or after January 1, 2018. IFRS 15 introduces a single model for
recognizing revenue from contracts with customers. The standard
requires revenue to be recognized in a manner that depicts the
transfer of promised goods or services to a customer and at
an
CordovaCann
Corp.
(formerly LiveReel
Media Corporation)
Notes to the
Consolidated Financial Statements
For the years ended
June 30, 2018, 2017 and 2016
(Expressed in
Canadian Dollars)
3.
SIGNIFICANT ACCOUNTING POLICIES (continued)
IFRS
15 – Revenue from Contracts with Customers
(continued)
amount that
reflects the consideration expected to be received in exchange for
transferring those goods or services. The Company assessed the
impact of adopting IFRS 15 retrospectively and determined that the
impact was not material. Commencing July 1, 2018, the Company will
adopt IFRS 15 on a cumulative effective basis, with no restatement
of the comparative period.
IFRS
16 - Leases
In January 2016,
the IASB issued a new standard, IFRS 16 – Leases. The new
standard requires lessees to recognize most leases on the balance
sheet using a single model, thereby eliminating the distinction
between operating and finance leases. Lessor accounting, however,
remains similar to current accounting practice, and the distinction
between operating and finance leases is retained. The standard is
effective for annual periods beginning on or after January 1, 2019
and will supersede IAS 17 Leases. Early application is permitted if
IFRS 15 – Revenue from Contracts with Customers has also been
applied. The Company does not intend to adopt the new standard
prior to its effective date and does not expect the new standard to
have a significant impact on the consolidated financial
statements.
IFRS
7 – Financial Instruments: Disclosure
IFRS 7 Financial
Instruments: Disclosure, was amended to require additional
disclosures on transition from IAS 39 to IFRS 9. IFRS 7 is
effective on adoption of IFRS 9, which is effective for annual
periods commencing on or after January 1, 2018. The Company intends
to adopt the amendments to IFRS 7 on July 1, 2018 and does not
expect the implementation will result in a significant effect to
the financial statements.
4.
EQUIPMENT
Equipment consists
of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equipment $
|
$
151,188
|
$
12,770
|
$
138,418
|
$
-
|
During
the year ended June 30, 2018, the Company expensed $12,770 in
depreciation (June 30, 2017 – $nil; June 30, 2016 –
$nil) which has been recorded as cost of sales in relation to the
below lease agreement.
The Company entered
into an operating lease on February 1, 2018 with an unrelated party
(the “Lessee”), under which the Lessee agreed to lease
the above equipment for an initial period of twelve months. The
Lessee shall make monthly payments of USD $5,040 due on or before
the first day of each respective month.
During the year ended June 30, 2018
, the
Company had rental income in the amount of $24,159 outstanding as a
result of this lease. The Company has not recorded revenue for the
rental income pending a determination by the Company that
collectability is reasonably assured. The Company expects to
collect the outstanding balance related to the lease agreement and
will recognize revenue upon receipt.
CordovaCann
Corp.
(formerly LiveReel
Media Corporation)
Notes to the
Consolidated Financial Statements
For the years ended
June 30, 2018, 2017 and 2016
(Expressed in
Canadian Dollars)
4.
EQUIPMENT (continued)
The lease will
automatically extend for additional twelve month periods unless
either party provides notice of its intent to terminate the lease.
At June 30, 2018, it is estimated that future minimum lease
payments of USD $35,280 are to be charged within the next
year.
5.
INVESTMENT AND ADVANCES IN JOINT VENTURE
On April 4, 2018,
the Company entered into an agreement to acquire 27.5% of Cordova
OR Operations, LLC (“OR Operations”) in a step
acquisition for the acquisition of land and buildings. Under the
terms of the agreement, the Company acquired a 27.5% membership
interest in OR Operations for USD $400,000 and agreed to pay an
additional USD $1,050,000, on or before April 3, 2019 (the
“Mandatory Payment Date”), to acquire the remaining
72.5% membership interest in OR Operations; failure to pay the
remaining purchase price would result in the Company forfeiting all
right, title and interest in OR Operations on such date. Prior to
the Mandatory Payment Date, the decisions over relevant activities
of OR Operations will be jointly determined. The Company has
concluded that it has joint control over OR Operations as at June
30, 2018. Accordingly, until the 72.5% membership is redeemed, the
investment in OR Operations shall be classified as a joint venture
and has been accounted for using the equity method in accordance
with IAS 28. The concepts underlying the procedures used in
accounting for the acquisition of a subsidiary will also be adopted
for the acquisition of additional interests in OR Operations. The
carrying amount of the investment will be adjusted to recognize
changes in the Company’s net share of assets of OR Operations
since the acquisition date. Given the limited time between the
acquisition and the year-end, the accounting for the step
acquisition of OR Operations was only provisionally determined as
at June 30, 2018. Consistent with IFRS, the measurement period for
the step acquisition of OR Operations shall not exceed one year
from the acquisition date.
Summarised
financial information for investment in OR Operations is set out
below:
|
Participating
share
|
27.50
%
|
|
Balance
at June 30, 2017
|
$
-
|
|
Additions
|
526,720
|
|
Share
of net income (loss)
|
7,591
|
|
Balance
at June 30, 2018
|
$
534,311
|
CordovaCann
Corp.
(formerly LiveReel
Media Corporation)
Notes to the
Consolidated Financial Statements
For the years ended
June 30, 2018, 2017 and 2016
(Expressed in
Canadian Dollars)
5.
INVESTMENT AND ADVANCES IN JOINT VENTURE (continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
assets
|
320,330
|
|
Non-current
assets
|
2,241,939
|
|
Current
liabilities
|
(624,493
)
|
|
Non-current
liabilities
|
-
|
|
Net
and comprehensive loss
|
27,603
|
|
|
|
During the year
ended June 30, 2018, the Company also advanced a total of $610,705
to OR Operations (June 30, 2017 – $nil; June 30, 2016 –
$nil). The advances to OR Operations are unsecured, bearing
interest at 8% per annum and due twelve months from the date of
issuance.
6.
DUE TO RELATED PARTIES
Amounts due to
related parties consist of the following:
|
|
|
|
|
Amounts owing to
officers and a director of the company
|
$
-
|
$
12,796
|
|
Amounts owing to
entities related by virtue of common officers
|
-
|
38,486
|
|
Interest accrued on
related party notes payable
|
-
|
118,888
|
|
|
$
-
|
$
170,170
|
On September 22,
2017, amounts due to related parties in the amount of $53,089 were
settled in a transaction with a shareholder (see Note 7) while the
remaining $117,081 was repaid in cash.
CordovaCann
Corp.
(formerly LiveReel
Media Corporation)
Notes to the
Consolidated Financial Statements
For the years ended
June 30, 2018, 2017 and 2016
(Expressed in
Canadian Dollars)
7.
RELATED PARTY NOTES PAYABLE
On September 22,
2017, $330,966 of notes payable and $53,089 of amounts due to
related parties (see Note 6) were settled by a shareholder of the
Company resulting in a total amount due to the shareholder
(“Shareholder Loan”) of $384,055. This loan was
subsequently settled with the issuance of 7,681,110 common shares
of the Company at the price of $0.05 per share. No gain or loss was
recorded on the issuance consistent with the provisions of IFRIC 19
(see Note 8).
The related party
notes payable was unsecured, accrued interest at 12% and was due on
demand. During the year ended June 30, 2018, the Company accrued
interest of $14,877 (June 30, 2017 – $55,580; June 30, 2016
– $49,322) on the Notes Payable.
During the year
ended June 30, 2018, the Company fully repaid the remaining balance
owing on the Notes Payable with cash.
|
|
|
|
|
Balance,
beginning of period
|
$
374,647
|
$
374,647
|
|
Settlement
with shareholder
|
(330,966
)
|
-
|
|
Repayment
with cash
|
(43,681
)
|
-
|
|
Balance,
end of period
|
$
-
|
$
374,647
|
8.
SHARE CAPITAL
Authorized:
Unlimited number of common shares
During the year
ended June 30, 2018, the Company had the following common share
transactions:
a.
On
October 19, 2017, the Shareholder Loan in the amount of $384,055
(see Note 7) was settled with the issuance of 7,681,110 common
shares of the Company at a price of $0.05 per share;
b.
On
December 14, 2017, the Company issued 5,532,500 common shares
valued at $0.10 per share as part of a private placement for total
gross proceeds of $553,250; of which $533,250 was received in cash
and $20,000 was received in services provided by a
consultant;
c.
On
March 12, 2018, the Company issued 890,074 common shares valued at
$1.08 per share as part of a private placement for total gross
proceeds of $959,251; all of which was received in cash;
and
d.
On June
12, 2018 and June 15, 2018, the Company issued 2,390,800 and 20,000
common shares, respectively, valued at $1.95 per share as part of a
private placement for total gross proceeds of $4,703,025; of which
$4,400,163 was received in cash and $302,862 was received in
services provided by consultants.
During the years
ended June 30, 2017 and June 30, 2016, the Company had no common
share transactions.
CordovaCann
Corp.
(formerly LiveReel
Media Corporation)
Notes to the
Consolidated Financial Statements
For the years ended
June 30, 2018, 2017 and 2016
(Expressed in
Canadian Dollars)
9.
RELATED PARTY TRANSACTIONS
Transactions with
related parties are incurred in the normal course of business and
are measured at the exchange amount which is the amount of
consideration established by and agreed to by the related parties.
Related party transactions for the years ended June 30, 2018, 2017
and 2016 and balances as at those dates, not disclosed elsewhere in
these consolidated financial statements are:
a)
During
the year ended June 30, 2018, the Company received $nil (June 30,
2017 – $2,420; June 30, 2016 – $20,302) in advances
from related parties, for working capital purposes;
b)
During
the year ended June 30, 2018, the Company purchased equipment
valued at $44,439 (June 30, 2017 – $nil; June 30, 2016
– $nil) from a corporation related by virtue of a common
officer and a director;
c)
During
the year ended June 30, 2018, the Company expensed $508,399 (June
30, 2017 – $nil; June 30, 2016 – $nil) in fees payable
to Officers and Directors of the Company and in fees payable to a
corporation related by virtue of a common officer and director. As
at June 30, 2018, the Company has a prepaid expense amount paid to
the related corporation in the amount of $74,147 and fees payable
to Officers and Directors of the Company of $59,518;
and
d)
During
the year ended June 30, 2018, the Company expensed $2,286,120 (June
30, 2017 – $nil; June 30, 2016 – $nil) in stock-based
compensation related to Officers and Directors of the
Company.
10.
WARRANTS
|
|
|
Weighted Average
Exercise Price
|
Weighted Average
Life Remaining (yrs)
|
|
Beginning
of year, July 1, 2017
|
-
|
$
-
|
-
|
|
Issued
|
6,650,000
|
0.54
|
1.37
|
|
Expired
|
-
|
-
|
-
|
|
End
of year,
June
30, 2018
|
6,650,000
|
$
0.54
|
1.37
|
a)
On
November 1, 2017 and in connection to a consulting agreement with a
director and officer of the Company, the Company issued warrants
for the purchase of 3,000,000 common shares of the Company
exercisable until October 31, 2019 at an exercise price of $0.10
per share. On issuance, warrants for the purchase of 1,000,000
common shares vested immediately and the remaining 2,000,000 vested
during the year ended June 30, 2018.
CordovaCann
Corp.
(formerly LiveReel
Media Corporation)
Notes to the
Consolidated Financial Statements
For the years ended
June 30, 2018, 2017 and 2016
(Expressed in
Canadian Dollars)
10.
WARRANTS (continued)
The
fair value of these issued warrants of $261,401 was determined
using the Black-Scholes Option Pricing Model with the following
assumptions:
|
Stock
price
|
$
0.10
|
|
Risk-free interest
rate
|
1.41
%
|
|
Expected
life
|
|
|
Estimated
volatility in the market price of the common shares
|
214
%
|
|
Dividend
yield
|
|
For
the year ended June 30, 2018, the Company fully expensed $261,401
of the fair value of the warrants as share based compensation (June
30, 2017 – $nil; June 30, 2016 – $nil).
b)
On
November 1, 2017 and in connection to a consulting agreement, the
Company issued warrants for the purchase of 750,000 common shares
of the Company exercisable until April 30, 2019 at an exercise
price of $0.15 per share. On issuance, warrants for the purchase of
250,000 common shares vested immediately and the remaining 500,000
vested during the year ended June 30, 2018.
The
fair value of these issued warrants of $44,087 was determined using
the Black-Scholes Option Pricing Model with the following
assumptions:
|
Stock
price
|
$
0.10
|
|
Risk-free interest
rate
|
1.41
%
|
|
Expected
life
|
|
|
Estimated
volatility in the market price of the common shares
|
155
%
|
|
Dividend
yield
|
|
For
the year ended June 30, 2018, the Company fully expensed $44,087 of
the fair value of the warrants as share based compensation (June
30, 2017 – $nil; June 30, 2016 – $nil).
c)
On
November 1, 2017 and in connection to a consulting agreement, the
Company issued warrants for the purchase of 250,000 common shares
of the Company exercisable until April 30, 2019 at an exercise
price of $0.10 per share, such warrants vesting upon the consultant
meeting certain deliverables as set forth in the consulting
agreement. As at June 30, 2018, the deliverables were not
met.
The
fair value of these issued warrants of $16,499 was determined using
the Black-Scholes Option Pricing Model with the following
assumptions:
|
Stock
price
|
$
0.10
|
|
Risk-free interest
rate
|
1.41
%
|
|
Expected
life
|
|
|
Estimated
volatility in the market price of the common shares
|
155
%
|
|
Dividend
yield
|
|
For
the year ended June 30, 2018, the Company expensed $4,125 of the
fair value of the warrants as share based compensation (June 30,
2017 – $nil; June 30, 2016 – $nil).
CordovaCann
Corp.
(formerly LiveReel
Media Corporation)
Notes to the
Consolidated Financial Statements
For the years ended
June 30, 2018, 2017 and 2016
(Expressed in
Canadian Dollars)
10.
WARRANTS (continued)
d)
On
March 9, 2018 and in connection to a consulting agreement with a
director and officer of the Company, the Company issued warrants
for the purchase of 1,500,000 common shares of the Company
exercisable until March 8, 2020 at an exercise price of $1.15 per
share, such warrants vesting immediately upon
issuance.
The
fair value of these issued warrants of $1,336,934 was determined
using the Black-Scholes Option Pricing Model with the following
assumptions:
|
Stock
price
|
$
1.14
|
|
Risk-free interest
rate
|
1.83
%
|
|
Expected
life
|
|
|
Estimated
volatility in the market price of the common shares
|
173
%
|
|
Dividend
yield
|
|
For
the year ended June 30, 2018, the Company fully expensed $1,336,934
of the fair value of the warrants as share based compensation (June
30, 2017 – $nil; June 30, 2016 – $nil).
e)
On
March 9, 2018 and in connection to a consulting agreement, the
Company issued warrants for the purchase of 750,000 common shares
of the Company exercisable until March 8, 2020 at an exercise price
of $1.15 per share, such warrants vesting upon the consultant
meeting certain deliverables as set forth in the consulting
agreement. As at June 30, 2018, the deliverables were not
met.
The
fair value of these issued warrants of $668,467 was determined
using the Black-Scholes Option Pricing Model with the following
assumptions:
|
Stock
price
|
$
1.14
|
|
Risk-free interest
rate
|
1.83
%
|
|
Expected
life
|
|
|
Estimated
volatility in the market price of the common shares
|
173
%
|
|
Dividend
yield
|
|
For
the year ended June 30, 2018, the Company expensed $501,350 of the
fair value of the warrants as share based compensation (June 30,
2017 – $nil; June 30, 2016 – $nil).
f)
On
March 15, 2018 and in connection to a consulting agreement, the
Company issued warrants for the purchase of 400,000 common shares
of the Company exercisable until September 14, 2019 at an exercise
price of $1.45 per share, such warrants vesting upon the consultant
meeting certain deliverables as set forth in the consulting
agreement. As at June 30, 2018, the deliverables were not
met.
The
fair value of these issued warrants of $324,775 was determined
using the Black-Scholes Option Pricing Model with the following
assumptions:
CordovaCann
Corp.
(formerly LiveReel
Media Corporation)
Notes to the
Consolidated Financial Statements
For the years ended
June 30, 2018, 2017 and 2016
(Expressed in
Canadian Dollars)
10.
WARRANTS (continued)
|
Stock
price
|
$
1.42
|
|
Risk-free interest
rate
|
1.75
%
|
|
Expected
life
|
|
|
Estimated
volatility in the market price of the common shares
|
129
%
|
|
Dividend
yield
|
|
For
the year ended June 30, 2018, the Company expensed $121,791 of the
fair value of the warrants as share based compensation (June 30,
2017 – $nil; June 30, 2016 – $nil).
On November 22,
2017, the Company’s shareholders approved and the Company
adopted a new rolling stock option plan (the “Option
Plan”), under which the Board of Directors may from time to
time, in its discretion, grant to directors, officers, employees
and consultants of the Company. Pursuant to the Option Plan, the
Company may issue options for such period and exercise price as may
be determined by the Board of Directors, and in any case not
exceeding ten (10) years from the date of grant with the total
options issued under the Option Plan not exceeding ten percent
(10%) of the common shares of the Company, outstanding at the time
of the granting of such options. The minimum exercise price of an
option granted under the Option plan must not be less than the
market value of the common shares on the date such option is
granted.
Outstanding options
as at June 30, 2018 are as follows:
|
|
|
Weighted Average
Exercise Price
|
Weighted Average
Life Remaining (yrs)
|
|
Executive
Officers
|
900,000
|
$
0.78
|
2.62
|
|
Directors
|
100,000
|
$
0.40
|
2.55
|
|
Consultants
|
750,000
|
$
0.70
|
2.60
|
|
|
1,750,000
|
|
|
|
Grant
Date
|
Expiry
Date
|
|
|
|
|
|
January 16,
2018
(i)
|
January 15,
2021
|
1,000,000
|
1,000,000
|
$
0.40
|
$
377,024
|
|
March 9,
2018
(ii)
|
March 8,
2021
|
750,000
|
750,000
|
$
1.15
|
$
800,703
|
(i)
The options fully
vested on issuance and the fair value of $377,024 was determined
using the Black-Scholes Option Pricing Model with the following
assumptions:
CordovaCann
Corp.
(formerly LiveReel
Media Corporation)
Notes to the
Consolidated Financial Statements
For the years ended
June 30, 2018, 2017 and 2016
(Expressed in
Canadian Dollars)
11.
OPTIONS (continued)
|
Stock
price
|
$
0.40
|
|
Risk-free interest
rate
|
1.78
%
|
|
Expected
life
|
|
|
Estimated
volatility in the market price of the common shares
|
218
%
|
|
Dividend
yield
|
|
(ii)
The options fully
vested on issuance and the fair value of $800,703 was determined
using the Black-Scholes Option Pricing Model with the following
assumptions:
|
Stock
price
|
$
1.14
|
|
Risk-free interest
rate
|
1.83
%
|
|
Expected
life
|
|
|
Estimated
volatility in the market price of the common shares
|
213
%
|
|
Dividend
yield
|
|
During the year
ended June 30, 2018, the Company fully expensed $1,177,727 of the
fair value of the options as a result of the issuances which have
been recorded as share based compensation (June 30, 2017 –
$nil; June 30, 2016 – $nil).
12.
COMMITMENTS
On March 7, 2018,
the Company entered into a memorandum of understanding (the
“MOU”) with a third party which granted the Company an
exclusivity option on a transaction to acquire a majority stake in
real estate and intellectual property assets owned by the third
party. Under the terms of the MOU, the Company agreed to pay the
third party up to USD $100,000 for such exclusivity until
termination by either party. During the year ended June 30, 2018,
the Company paid $42,550 to the third party and expensed $42,550 as
an exclusivity fee (June 30, 2017 – $nil; June 30, 2016
– $nil).
(b)
Employment
Agreements
The Company is
party to certain employments agreements with key executives of the
Company that contain clauses requiring additional payments of up to
two times the annual entitlements under these agreements upon
occurrence of certain events, such as a change of control. As a
triggering event has not taken place, the contingent payments have
not been reflected in these consolidated financial
statements.
CordovaCann
Corp.
(formerly LiveReel
Media Corporation)
Notes to the
Consolidated Financial Statements
For the years ended
June 30, 2018, 2017 and 2016
(Expressed in
Canadian Dollars)
13.
INCOME TAXES
Canadian
Current
Income Taxes
The major factors
that cause variations from the Company’s combined federal and
provincial statutory Canadian income tax rates were the
following:
|
|
|
|
|
|
Loss from Canadian
operations
|
$
(4,860,659
)
|
$
(88,405
)
|
$
(73,712
)
|
|
Combined Canadian
statutory income tax rates
|
26.50
%
|
26.50
%
|
26.50
%
|
|
Income tax recovery
at statutory income tax rates
|
$
(1,288,075
)
|
$
(23,427
)
|
$
(19,534
)
|
|
Increase (decrease)
in taxes resulting from:
|
|
|
|
|
Stock-based
compensation expense
|
913,565
|
-
|
-
|
|
Other
|
4,790
|
-
|
-
|
|
Unrecognized
benefit of non-capital losses
|
369,720
|
23,427
|
19,534
|
|
Provision for
income taxes
|
$
-
|
$
-
|
$
-
|
Deferred
Income Taxes
Deferred tax assets
have not been recognized in respect of the following deductible
temporary differences:
|
|
|
|
|
Amounts
related to tax loss carry forwards
|
$
4,868,000
|
$
3,474,000
|
A deferred tax
asset has not been recognized in respect of the above because it is
not probable that future taxable profits will be available against
which the temporary difference can be utilized.
Non-capital
Losses, Canadian
As at June 30,
2018, the Company has accumulated non-capital tax loss carry
forwards for income tax purposes of carry-forward of approximately
$4,868,000 which may be applied against future Canadian taxable
income and expire as detailed below. No deferred taxes have been
recognized in these consolidated financial statements in respect of
the following as the probability that future taxable profit will
allow the deferred tax asset to be recognized cannot be predicted
at this time. The Company is in the process of filing its corporate
tax returns for the years ended June 30, 2015 to June 30, 2018. The
net operating losses for these years will not be available to
reduce future taxable income until the returns are
filed.
CordovaCann
Corp.
(formerly LiveReel
Media Corporation)
Notes to the
Consolidated Financial Statements
For the years ended
June 30, 2018, 2017 and 2016
(Expressed in
Canadian Dollars)
13.
INCOME TAXES (continued)
|
2027
|
536,000
|
|
2028
|
868,000
|
|
2029
|
911,000
|
|
2030
|
260,000
|
|
2031
|
251,000
|
|
2032
|
153,000
|
|
2033
|
25,000
|
|
2034
|
131,000
|
|
2035
|
177,000
|
|
2036
|
74,000
|
|
2037
|
88,000
|
|
2038
|
1,394,000
|
|
|
$
4,868,000
|
United States
Current
Income Taxes
The major factors
that cause variations from the Company’s combined United
States federal and state level income tax rates were the
following:
|
|
|
|
|
|
|
Loss
from US operations
|
(5,274
)
|
|
Combined
federal and state level taxes
|
26.214
%
|
|
Expected
income tax recovery
|
(1,383
)
|
|
Temporary
difference, Equipment
|
(36,285
)
|
|
Unrecognized
benefit of non-capital losses
|
37,668
|
|
Provision
for income taxes (recovery)
|
-
|
Deferred
Income Taxes
Deferred tax assets
have not been recognized in respect of the following United States
deductible temporary differences:
|
|
|
|
Amounts
related to temporary difference, equipment
|
$
144,000
|
|
|
|
A deferred tax
asset has not been recognized in respect of the above because it is
not probable that future taxable profits will be available against
which the temporary difference can be utilized.
CordovaCann
Corp.
(formerly LiveReel
Media Corporation)
Notes to the
Consolidated Financial Statements
For the years ended
June 30, 2018, 2017 and 2016
(Expressed in
Canadian Dollars)
13.
INCOME
TAXES (continued)
Non-capital
Losses, United States
As at June 30,
2018, the Company has accumulated non-capital tax loss carry
forwards for income tax purposes of carry-forward of approximately
$144,000 which may be applied against future United States taxable
income and expire as detailed below. No deferred taxes have been
recognized in these consolidated financial statements in respect of
the following as the probability that future taxable profit will
allow the deferred tax asset to be recognized cannot be predicted
at this time.
14.
PROMISSORY NOTE
On
June 7, 2018, the Company entered into a revolving promissory note
with a customer (the “Promissory Note”). Under the
terms of the Promissory Note, the customer could draw up to the
principal sum of USD $50,000 at the sole discretion of the Company.
The Promissory Note is unsecured, bearing interest at 8% per annum
and due twelve months from the date of issuance. As at June 30,
2018, USD $12,000 was outstanding under the Promissory
Note.
15.
FINANCIAL INSTRUMENTS AND RISK FACTORS
The
fair value hierarchy that reflects the significance of inputs used
in making fair value measurements is as follows:
Level
1: quoted prices in active markets for identical assets or
liabilities;
Level
2: inputs other than quoted prices included in Level 1 that
are observable for the asset or liability, either directly (i.e. as
prices) or indirectly (i.e. from derived prices); and
Level
3: inputs for the asset or liability that are not based upon
observable market data.
Assets
are classified in their entirety based on the lowest level of input
that is significant to the fair value measurement.
The fair values of
the Company’s financial instruments consisting of accounts
payable and other accrued liabilities, due to related parties and
related party notes payable, approximate their carrying value due
to the relatively short term maturities of these
instruments.
Risk Management Policies
The
Company, through its financial assets and liabilities, is exposed
to various risks. The Company has established policies and
procedures to manage these risks, with the objective of minimizing
any adverse effect that changes in these variables could have on
the consolidated financial statements. The following analysis
provides a measurement of risks as at June 30, 2018:
CordovaCann
Corp.
(formerly LiveReel
Media Corporation)
Notes to the
Consolidated Financial Statements
For the years ended
June 30, 2018, 2017 and 2016
(Expressed in
Canadian Dollars)
15.
FINANCIAL INSTRUMENTS AND RISK FACTORS (continued)
Credit
Risk
Credit
risk is the risk of financial loss to the Company if a customer or
counterparty to a financial instrument fails to meet its
contractual obligations. The Company is not exposed to any
significant credit risk.
Liquidity Risk
Liquidity
risk is the risk that the Company will not be able to meet its
financial obligations as they fall due within one year. The
Company’s approach to managing liquidity risk is to ensure,
as far as possible, that it will have sufficient liquidity to meet
its liabilities when due, under both normal and stressed
conditions, without incurring unacceptable losses or risking damage
to the Company’s reputation. At June 30, 2018, there is
substantial doubt about the Company’s ability to continue as
a going concern primarily due to its history of losses. Liquidity
risk continues to be a key concern in the development of future
operations.
Market Risk
(i)
Interest Rate Risk
Interest
rate risk is the risk that the fair value or future cash flows of a
financial instrument will fluctuate because of changes in market
interest rates. The interest rates on all of the Company’s
existing debt are fixed, and therefore it is not currently subject
to any significant cash flow interest rate risk.
(ii) Foreign
Currency Risk
The
Company is exposed to foreign currency risk from fluctuations in
foreign exchange rates and the degree of volatility in these rates
due to the timing of their accounts payable balances. The risk is
mitigated by timely payment of creditors and monitoring of foreign
exchange fluctuations by management. As at June 30, 2018, the
Company did not use derivative instruments to hedge its exposure to
foreign currency risk.
(iii)
Price Risk
The
Company’s operations do not involve the direct input or
output of any commodities and therefore it is not subject to any
significant commodity price risk. In addition, the Company does not
have any equity investment in other listed public companies, and
therefore it is not subject to any significant stock market price
risk.
16.
CAPITAL MANAGEMENT
The Company
includes equity comprised of issued share capital, contributed
surplus, deficit in the definition of capital and accumulated other
comprehensive loss. As at June 30, 2018, the Company’s
shareholders’ equity was $4,555,271 (June 30, 2017 –
shareholders’ deficiency of $626,476). The Company’s
objectives when managing capital are as follows:
(i)
to safeguard the
Company’s ability to continue as a going concern;
and
(ii)
to raise sufficient
capital to meet its business objectives.
CordovaCann
Corp.
(formerly LiveReel
Media Corporation)
Notes to the
Consolidated Financial Statements
For the years ended
June 30, 2018, 2017 and 2016
(Expressed in
Canadian Dollars)
16.
CAPITAL MANAGEMENT (continued)
The Company manages
its capital structure and makes adjustments to it, based on the
general economic conditions, the Company’s long-term and
short-term capital requirements. To secure the additional capital
necessary to pursue these plans, the Company may attempt to raise
additional funds through the issuance of equity or
debt.
On September 18,
2018, the Company advanced $500,000 for the purchase of 500,000
convertible preferred shares of NWN Inc. (“NWN”) at a
price of one $1.00 per preferred share (each, a “Preferred
Share”). Each Preferred Share is convertible into one share
of NWN, subject to appropriate adjustments for any stock splits,
consolidations or other recapitalizations. The Company also agreed
to purchase an additional 3,500,000 Preferred Shares at a price of
$1.00 per share on or before December 31, 2018 under the same
terms and received a right of first refusal to participate in
any future equity offerings of NWN. NWN is considered to be a
related party by virtue of a common officer and
director.
On October 1, 2018
and in connection to a consulting agreement, the Company issued
warrants for the purchase of 250,000 common shares of the Company
exercisable until September 30, 2020 at an exercise price of $1.50
per share. Of these issued warrants, 100,000 vested immediately
while the remaining 150,000 warrants shall vest in 6 equal tranches
of 25,000 warrants every three months from the date of
issuance.
On October 15, 2018
and in connection to a consulting agreement, the Company issued
warrants for the purchase of 250,000 common shares of the Company
exercisable until October 14, 2020 at an exercise price of $2.00
per share. The warrants shall vest in 4 equal tranches of 62,500
warrants every three months from the date of issuance.
Certain comparative
figures have been reclassified to conform to the consolidated
financial statement presentation adopted for the current year. Such
reclassifications did not have an impact on previously reported net
loss.
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