Burcon NutraScience Corp 20-F for FY2022
Burcon NutraScience Corp (BRCNF)
About this 20-F
Burcon NutraScience Corp filed this 20-F on August 1, 2022, covering the fiscal year ended March 31, 2022 (FY2022).
Headline figures
Fiscal year ended March 31, 2022, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Revenue
- 171.47K CAD
- down 33.7% from 258.65K CAD a year earlier
- Net loss
- 10.26M CAD
- compared with a net loss of 617.49K CAD a year earlier
- Diluted EPS
- -0.09 CAD
- compared with -0.01 CAD a year earlier
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
OR
For the fiscal year ended
OR
OR
Date of event requiring this shell company report ...................................................
For the transition period from .................................... to ....................................
Commission file number
(Exact name of Registrant as specified in its charter)
British Columbia,
(Jurisdiction of incorporation or organization)
(Address of principal executive offices)
Telephone: (
Facsimile: (604) 733-8821
(Name, telephone, email and/or facsimile number and address of Company Contact Person)
Securities registered or to be registered pursuant to Section 12(b) of the Act:
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Title of Class |
Trading Symbol(s) |
Name of Each Exchange on Which Registered |
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Securities registered or to be registered pursuant to Section 12(g) of the Act: None
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act: None
Indicate the number of outstanding shares of each of the issuer's classes of capital or stock as of the closing of the period covered by the annual report:
Indicate by check mark if the registration is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
[ ] Yes [X]
If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.
[ ] Yes [X]
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days
[X]
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
[X]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, and/or an emerging growth company. See definition of "large accelerated filer," "accelerated filer," and "emerging growth company" in Rule 12b-2 of the Exchange Act:
| Large accelerated filer [ ] | Accelerated filer [ ] |
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Emerging growth company
If an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards† provided pursuant to Section 13(a) of the Exchange Act. [ ]
† The term "new or revised financial accounting standard" refers to any update issued by the Financial Accounting Standards Board to its Accounting Standards Codification after April 5, 2012.
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Indicate by check mark whether the registrant has filed a report on and attestation to its management's assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report.
Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:
U.S. GAAP [ ]
Other [ ]
If "Other" has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow
Item 17 [ ] Item 18 [ ]
If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
[ ] Yes
3
ANNUAL INFORMATION FORM, AUDITED ANNUAL CONSOLIDATED
FINANCIAL STATEMENTS AND MANAGEMENT'S DISCUSSION AND ANALYSIS
Annual Information Form
The Registrant's Annual Information Form for the fiscal year ended March 31, 2022 is attached as Exhibit 99.1 to this Annual Report on Form 20-F and is incorporated herein by reference.
Audited Annual Consolidated Financial Statements
The Registrant's audited annual consolidated financial statements for the fiscal year ended March 31, 2022, including the report of the independent registered public accounting firm (PCAOB #
We have determined that our equity method investment in Merit Functional Foods Corporation (“Merit”), which is not consolidated in our financial statements, was significant under the income test of Rule 1-02(w) of Regulation S-X in relation to our consolidated financial results for the year ended March 31, 2022. The consolidated financial statements of Merit as of and for the year ended December 31, 2021 as required under by Rule 3-09 of Regulation S-X (“Rule 3-09”) have not been presented as they cannot be provided without unreasonable effort or expense.
We requested that the staff of the U.S. Securities and Exchange Commission (the “SEC”) grant relief from the financial statement filing requirements of Rule 3-09 pursuant to Section 2430 of the Division of Corporation Finance Financial Reporting Manual, with respect to our investment in Merit. The SEC has not granted our company’s waiver request and, as a result, our company was required to file with the SEC separate audited financial statements for Merit. However, it has been impracticable for our company to comply with this requirement, because the audit of Merit’s financial statements was completed in accordance with Canadian generally accepted auditing standards and do not meet the requirements for filing with the Form 20-F annual report. We do not have the contractual right to re-audit the Merit financial statements in accordance with United States generally accepted auditing standards. We believe that Merit’s financial statements would not provide additional material information to investors. However, we cannot assure you that that the SEC will not take actions against our company relating to our non-compliance, and, among other matters, we may be delisted from Nasdaq due to failure to file Merit’s financial statements with the Form 20-F, or in the event of a capital raise, our company may be temporarily unable to have a registration statement for a public offering of securities in the United States declared effective by the SEC. For more information, see Exhibit 99.5 Item 3.D. Key Information —Risk Factors—Our inability to provide audited financial statements for Merit in accordance with Rule 3-09 may result in enforcement actions by the SEC or may, among other matters, cause us to be unable to complete a public offering in the United States.” For more information on Merit, see notes 2 and 7 to our audited annual consolidated financial statements included in this annual report.
Management's Discussion and Analysis
The Registrant's Management's Discussion and Analysis for the fiscal year ended March 31, 2022 is attached as Exhibit 99.3 to this Annual Report on Form 20-F and is incorporated herein by reference.
Notice of Annual Meeting and Management Proxy Circular
The Registrant's Notice of Annual Meeting and Management Proxy Circular for the fiscal year ended March 31, 2022 is attached as Exhibit 99.4 to this Annual Report on Form 20-F and is incorporated herein by reference.
Additional Information
An Additional Information document is attached as Exhibit 99.5 to this Annual Report on Form 20-F and is incorporated herein by reference.
Cross Reference to Form 20-F
| Item No. | Exhibit | Pages | |
| Part I | |||
| Item 1 | Identity of Directors, Senior Management and Advisers | N/A | N/A |
| Item 2 | Offer Statistics and Expected Timetable | N/A | N/A |
| Item 3 | Key Information | ||
| A. [Reserved] | N/A | N/A | |
| B. Capitalization and indebtedness | N/A | N/A | |
| C. Reasons for the offer and use of proceeds | N/A | N/A | |
| D. Risk factors | 99.1 | 51-59 | |
| 99.3 | 30-32 | ||
| 99.5 | 1 | ||
| Item 4 | Information on the Company | ||
| A. History and development of the company | 99.1 | Cover page, 5-20, 91 |
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| Item No. | Exhibit | Pages | |
| Item 8 | Financial Information | ||
| A. Consolidated Statements and Other Financial Information | 99.1 | 60 | |
| 99.2 | All | ||
| 99.3 | All | ||
| B. Significant changes | 99.2 | 32-33 | |
| Item 9 | The Offer and Listing | ||
| A. Offer and listing details | 99.1 | 6, 60 | |
| B. Plan of distribution | N/A | N/A | |
| C. Markets | 99.1 | 6, 60 | |
| D. Selling shareholders | N/A | N/A | |
| E. Dilution | N/A | N/A | |
| F. Expenses of the issue | N/A | N/A | |
| Item 10 | Additional Information | ||
| A. Share Capital | N/A | N/A | |
| B. Memorandum and articles of association | 99.5 | 2-6 | |
| C. Material contracts | 99.1 | 78-89 | |
| D. Exchange controls | N/A | N/A | |
| E. Taxation | 99.5 | 6-13 | |
| F. Dividends and paying agents | N/A | N/A | |
| G. Statement by experts | N/A | N/A | |
| H. Documents on display | 99.1 | 91 | |
| 99.3 | 1 | ||
| 99.4 | 48 | ||
| I. Subsidiary information | N/A | N/A | |
| J. Annual Report to Security Holders | |||
| Item 11 | Quantitative and Qualitative Disclosures About Market Risk | 99.2 | 29-31 |
| 99.3 | 23-25 | ||
| Item 12 | Description of Securities Other than Equity Securities | N/A | N/A |
| Part II | |||
| Item 13 | Defaults, Dividend Arrearages and Delinquencies | N/A | N/A |
| Item 14 | Material Modifications to the Rights of Security Holders and Use of Proceeds | N/A | N/A |
| Item 15 | Controls and Procedures | 99.3 | 29-30 |
| 99.5 | 13-14 |
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| Item 16 | [Reserved] | ||
| Item 16A. | Audit committee financial expert | 99.1 | 89-90 |
| Item 16B. | Code of Ethics | 99.4 | 21, Schedule "B" |
| Item 16C. | Principal Accountant Fees and Services | 99.1 | 89-91 |
| Item 16D. | Exemptions from the Listing Standards for Audit Committees | N/A | N/A |
| Item 16E. | Purchases of Equity Securities by the Issuer and Affiliated Purchasers | N/A | N/A |
| Item 16F. | Change in Registrant's Certifying Accountant | N/A | N/A |
| Item 16G. | Corporate Governance | 99.5 | 14 |
| Item 16H. | Mine Safety Disclosure | N/A | N/A |
| Item 16I. | Disclosure Regarding Foreign Jurisdictions that Prevent Inspections | N/A | N/A |
| Item No. | Exhibit | Pages | |
| Part III | |||
| Item 17 | Financial Statements | N/A | N/A |
| Item 18 | Financial Statements | 99.2 | All |
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See “Audited Annual Consolidated Financial Statements” on page 1 hereof |
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| Item 19 | Exhibits | Exhibit Index | Exhibit Index |
7
SIGNATURES
The Registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and has duly caused and authorized the undersigned to sight this Annual Report on its behalf.
| BURCON NUTRASCIENCE CORPORATION | ||
| Date: August 1, 2022 | By: | /s/ Peter H. Kappel |
| Name: Peter H. Kappel | ||
| Title: Interim Chief Executive Officer |
8
EXHIBIT INDEX
9
10
DESCRIPTION OF BURCON NUTRASCIENCE COMMON SHARES
The common shares of Burcon NutraScience Corporation (the "Common Shares") are its only class of securities registered under Section 12 of the Securities Exchange Act of 1934, as amended (the "Exchange Act").
The following description of our Common Shares is a summary and does not purport to be complete. It is subject to and qualified in its entirety by reference to our Articles (the "Articles"), which is attached as an exhibit to the Annual Report on Form 20-F. We continued into the Province of British Columbia, Canada in 2020 and are subject to the Business Corporations Act (British Columbia).
Authorized Capital Shares
The Company is authorized to issue an unlimited number of Common Shares, without par value. The outstanding Common Shares are fully paid and nonassessable. No other classes of shares are currently authorized.
Voting Rights
Holders of Common Shares are entitled to receive notice of and to attend any meetings of shareholders of the Company and at any meetings of shareholders to cast one vote for each Common Share held. Holders of Common Shares do not have cumulative voting rights. A simple majority of votes cast on a resolution at a meeting of shareholders is required to pass an ordinary resolution; however, if the resolution is a special resolution, two-thirds of the votes cast on the special resolution at a meeting of shareholders are required to pass it.
Dividend Rights and Liquidation Rights
Holders of Common Shares are entitled to receive dividends as and when declared by the board of directors of the Company at its discretion from funds legally available therefor and to receive a pro rata share of the assets of the Company available for distribution to the shareholders in the event of the liquidation, dissolution or winding-up of the Company after payment of debts and other liabilities, in each case subject to the rights, privileges, restrictions and conditions attached to any other series or class of shares ranking senior in priority to or on a pro-rata basis with the holders of Common Shares with respect to dividends or liquidation.
Other Rights and Preferences
There are no pre-emptive, subscription, conversion or redemption rights attached to the Common Shares, nor do they contain any sinking or purchase fund provisions.
Tax Considerations for U.S. Holders
See "Certain Canadian Federal Income Tax Considerations for U.S. Holders" and "Certain U.S. Federal Income Tax Considerations" in Exhibit 99.5 to the Form 20-F.
Listing
The Common Shares are listed and posted for trading on the Nasdaq Capital Market under the trading symbol "BRCN" and on the Toronto Stock Exchange under the trading symbol "BU".
Exhibit 12.1
CERTIFICATION OF FORM 20-F
REQUIRED BY RULE 13a-14(a)
OR RULE 15d-14(a), PURSUANT TO SECTION 302
OF THE SARBANES-OXLEY ACT OF 2002
I, Peter H. Kappel, certify that:
1. I have reviewed this annual report on Form 20-F for the fiscal year ended March 31, 2022 of Burcon NutraScience Corporation;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the issuer as of, and for, the periods presented in this report;
4. The issuer's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the issuer and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the issuer, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the issuer's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the issuer's internal control over financial reporting that occurred during the period covered by the annual report that has materially affected, or is reasonably likely to materially affect, the issuer's internal control over financial reporting; and
5. The issuer's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the issuer's auditors and the audit committee of the issuer's board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the issuer's ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the issuer's internal control over financial reporting.
| Date: August 1, 2022 |
| /s/ Peter H. Kappel |
| Name: Peter H. Kappel |
| Title: Chairman and Interim Chief Executive Officer |
Exhibit 12.2
CERTIFICATION OF FORM 20-F
REQUIRED BY RULE 13a-14(a)
OR RULE 15d-14(a), PURSUANT TO SECTION 302
OF THE SARBANES-OXLEY ACT OF 2002
I, Jade Cheng, certify that:
1. I have reviewed this annual report on Form 20-F for the fiscal year ended March 31, 2022 of Burcon NutraScience Corporation;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the issuer as of, and for, the periods presented in this report;
4. The issuer's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the issuer and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the issuer, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the issuer's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the issuer's internal control over financial reporting that occurred during the period covered by the annual report that has materially affected, or is reasonably likely to materially affect, the issuer's internal control over financial reporting; and
5. The issuer's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the issuer's auditors and the audit committee of the issuer's board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the issuer's ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the issuer's internal control over financial reporting.
| Date: August 1, 2022 |
| /s/ Jade Cheng |
| Name: Jade Cheng |
| Title: Chief Financial Officer |
Exhibit 13.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
AS ENACTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report on Form 20-F for the fiscal year ended March 31, 2022 (the "Report") of Burcon NutraScience Corporation (the "Company"), the undersigned, in the capacity and on the date indicated below, hereby certifies pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
| Date: August 1, 2022 |
| /s/ Peter H. Kappel |
| Name: Peter H. Kappel |
| Title: Chairman and Interim Chief Executive Officer |
Exhibit 13.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
AS ENACTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report on Form 20-F for the fiscal year ended March 31, 2022 (the "Report") of Burcon NutraScience Corporation (the "Company"), the undersigned, in the capacity and on the date indicated below, hereby certifies pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
| Date: August 1, 2022 |
| /s/ Jade Cheng |
| Name: Jade Cheng |
| Title: Chief Financial Officer |
Consolidated Financial Statements
March 31, 2022, 2021 and 2020(In Canadian dollars)
MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Our management is responsible for establishing and maintaining adequate internal control over financial reporting in accordance with National Instrument 52-109 Certification of Disclosure in Issuers’ Annual Filings and Rules 13a-15(f) under the U.S. Exchange Act. Internal control over financial reporting is a process designed under the supervision and with the participation of our management, including our Interim Chief Executive Officer and Chief Financial Officer, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with IFRS.
As of March 31, 2022, our management assessed the effectiveness of our internal control over financial reporting using the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission ("COSO") in Internal Control - Integrated Framework (2013). Based on this assessment, our management concluded that, as of March 31, 2022, our internal control over financial reporting was not effective based on those criteria because a material weakness in internal control over financial reporting existed as of that date, as described below. The Company did not design and operate controls with sufficient precision over the share of loss in Merit Foods. The Company's controls related to the review of its share of loss were not designed or operated at a level of precision to allow the Company to prevent or detect potential material misstatements in a timely manner. The Company will implement remediation measures improving the review of the share of loss in Merit Foods by implementing additional controls at a greater level of precision.
The material weakness did not result in any identified material misstatements to the consolidated financial statements and there were no changes to previously released financial results.
Report of Independent Registered Public Accounting Firm
To the Shareholders and Board of Directors of Burcon Nutrascience Corporation
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheets of Burcon Nutrascience Corporation and its subsidiaries (together, the Company) as of March 31, 2022 and 2021, and the related consolidated statements of operations and comprehensive loss, of changes in shareholders' equity and of cash flows for each of the three years in the period ended March 31, 2022, including the related notes (collectively referred to as the consolidated financial statements). We also have audited the Company's internal control over financial reporting as of March 31, 2022, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of March 31, 2022 and 2021, and its financial performance and its cash flows for each of the three years in the period ended March 31, 2022 in conformity with International Financial Reporting Standards as issued by the International Accounting Standards Board. Also in our opinion, the Company did not maintain, in all material respects, effective internal control over financial reporting as of March 31, 2022, based on criteria established in Internal Control - Integrated Framework (2013) issued by the COSO because a material weakness in internal control over financial reporting existed as of that date related to the design and operation of controls with sufficient precision over the share of loss in Merit Functional Foods Corporation.
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis. The material weakness referred to above is described in the accompanying Management's Report on Internal Control over Financial Reporting. We considered this material weakness in determining the nature, timing, and extent of audit tests applied in our audit of the March 31, 2022 consolidated financial statements, and our opinion regarding the effectiveness of the Company's internal control over financial reporting does not affect our opinion on those consolidated financial statements.
Basis for Opinions
The Company's management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management's Report on Internal Control over Financial Reporting. Our responsibility is to express opinions on the Company's consolidated financial statements and on the Company's internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the
PricewaterhouseCoopers LLP
PricewaterhouseCoopers Place, 250 Howe Street, Suite 1400, Vancouver, British Columbia, Canada V6C 3S7
T: +1 604 806 7000, F: +1 604 806 7806
"PwC" refers to PricewaterhouseCoopers LLP, an Ontario limited liability partnership.
U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
Definition and Limitations of Internal Control over Financial Reporting
A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Critical Audit Matters
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that (i) relates to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Assessment of objective evidence of impairment of the investment in Merit Functional Foods Corporation
As described in Notes 2 and 7 to the consolidated financial statements, the Company has an investment in Merit Functional Foods Corporation (Merit), which is accounted for under the equity method of accounting. Under the equity method of accounting, investments are recorded at historical cost as an asset and adjusted for dividends received, capital contributions, other transactions that result in changes in ownership interest held by the Company, and the Company's share of Merit's earnings or losses, which is recorded as a component of loss and comprehensive loss for the year. Management considers whether there is any objective evidence that its investment is impaired. Objective evidence that the investment is impaired includes observable data about one or more of the following events; (i) significant financial difficulty; (ii) breach of contract, such as a default or delinquency in payments; (iii) the Company granting to Merit a concession that the Company would not otherwise consider; (iv) it becoming probable that Merit will enter bankruptcy or other financial reorganisation; or (v) the disappearance of an active market for the investment because of financial difficulties of Merit. Objective evidence of impairment also includes information about changes with an adverse effect that has taken place in the technological, market, economic or legal environment and whether there has been a significant or prolonged decline in the fair value of an investment below cost. When such objective evidence of impairment exists, the carrying amount of the investment is tested for impairment by comparing the recoverable amount of the investment with its carrying amount. As at March 31, 2022, the Company's investment in Merit amounted to $13.4 million and management concluded that there was no objective evidence of impairment.
The principal considerations for our determination that performing procedures relating to the assessment of objective evidence of impairment of the investment in Merit is a critical audit matter are (i) the judgment required by management when assessing whether there was objective evidence of impairment that would require a formal impairment test to be performed; and (ii) a high degree of auditor judgment, subjectivity and effort in performing procedures to evaluate audit evidence related to management's assessment of objective evidence of impairment.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to management's assessment of objective evidence of impairment of the investment in Merit. These procedures also included, among others, evaluating the reasonableness of management's assessment of objective evidence of impairment for the investment in Merit, which includes observable data about one or more of the following events: (i) significant financial difficulty; (ii) breach of contract, such as a default or delinquency in payments; (iii) the Company granting to Merit a concession that the Company would not otherwise consider; (iv) it becoming probable that Merit will enter bankruptcy or financial reorganisation; (v) the disappearance of an active market for the investment because of financial difficulties of Merit; or (vi) information about changes with an adverse effect that has taken place in the technological, market, economic or legal environment and whether there has been a significant or prolonged decline in the fair value of an investment below cost by considering (i) current financial position of Merit; (ii) relevant agreements between Merit and its lenders; (iii) third-party investment in Merit during the years and (iv) evidence obtained in other areas of the audit.
/s/
Chartered Professional Accountants
June 27, 2022
We have served as the Company's auditor since 2001.
Consolidated Balance Sheets
As at March 31, 2022 and March 31, 2021
(In Canadian dollars)
| March 31, 2022 $ |
March 31, 2021 $ |
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| ASSETS | ||||||
| Current assets | ||||||
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Cash and cash equivalents |
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Restricted cash (note 5) |
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Amounts receivable (notes 7 and 13) |
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Inventory |
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Prepaid expenses |
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| Property and equipment (note 4) | ||||||
| Deferred development costs - net of accumulated amortization of $ |
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| Investment in and loan to Merit Functional Foods Corporation (note 7) | ||||||
| Goodwill | ||||||
| LIABILITIES | ||||||
| Current liabilities | ||||||
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Accounts payable and accrued liabilities (note 13) |
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Lease liability |
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Deferred revenue (note 5) |
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| Lease liability | ||||||
| SHAREHOLDERS' EQUITY (note 9) | ||||||
| Capital stock | ||||||
| Contributed surplus | ||||||
| Options | ||||||
| Restricted share units | ||||||
| Warrants | ||||||
| Deficit | ( |
) | ( |
) | ||
Subsequent events (note 19)
Approved by the Board of Directors
| “Douglas Gilpin” | “D. Lorne Tyrrell” | |
| Director | Director |
The accompanying notes are an integral part of these consolidated financial statements.
BURCON NUTRASCIENCE CORPORATION
Consolidated Statements of Operations and Comprehensive Loss
Years ended March 31, 2022, 2021 and 2020
(In Canadian dollars)
| 2022 $ |
2021 $ |
2020 $ |
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| REVENUE | |||||||||
| Royalty income (note 7 and 1(b)) | |||||||||
| Research income (note 5) | |||||||||
| EXPENSES | |||||||||
| Research and development (note 10) | |||||||||
| Intellectual property | |||||||||
| General and administrative (note 11) | |||||||||
| LOSS FROM OPERATIONS | ( |
) | ( |
) | ( |
) | |||
| INTEREST AND OTHER INCOME (notes 7 and 13) | |||||||||
| MANAGEMENT FEE INCOME (notes 7 and 13) | |||||||||
| GAIN ON DILUTION OF INVESTMENT IN MERIT FUNCTIONAL FOODS CORPORATION (note 7) | |||||||||
| SHARE OF LOSS IN MERIT FUNCTIONAL FOODS CORPORATION (note 7) | ( |
) | ( |
) | ( |
) | |||
| INTEREST AND OTHER EXPENSE (notes 7 and 8) | ( |
) | ( |
) | ( |
) | |||
| FOREIGN EXCHANGE (LOSS) GAIN | ( |
) | ( |
) | |||||
| LOSS ON DISPOSAL OF EQUIPMENT | ( |
) | |||||||
| CHANGE IN FAIR VALUE OF DERIVATIVE LIABILITY (note 8) | |||||||||
| LOSS AND COMPREHENSIVE LOSS FOR THE YEAR | ( |
) | ( |
) | ( |
) | |||
| BASIC AND DILUTED LOSS PER SHARE (note 12) | ( |
) | ( |
) | ( |
) | |||
The accompanying notes are an integral part of these consolidated financial statements.
BURCON NUTRASCIENCE CORPORATION
Consolidated Statements of Changes in Shareholders' Equity
Years ended March 31, 2022, 2021 and 2020
(In Canadian dollars, except share amounts)
| Number of fully paid common shares |
Capital stock $ |
Contributed surplus $ |
Options $ |
Warrants $ |
Restricted share units $ |
Convertible debentures $ |
Deficit $ |
Total shareholders' equity $ |
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| Balance - March 31, 2019 | ( |
) | ( |
) | |||||||||||||||||||||||
| Loss and comprehensive loss for the year | - | - | - | - | - | - | - | ( |
) | ( |
) | ||||||||||||||||
| Convertible debentures | - | - | - | - | - | - | - | ||||||||||||||||||||
| Shares issued | - | - | - | - | - | - | |||||||||||||||||||||
| Options exercised | - | ( |
) | - | - | - | - | ||||||||||||||||||||
| Options forfeited | - | - | ( |
) | - | - | - | - | - | ||||||||||||||||||
| Warrants exercised | - | - | ( |
) | - | - | - | ||||||||||||||||||||
| Warrants issued | - | - | - | - | - | - | - | ||||||||||||||||||||
| Warrant adjustment | - | - | - | - | - | - | - | ||||||||||||||||||||
| Share issue costs | - | ( |
) | - | - | - | - | - | - | ( |
) | ||||||||||||||||
| Warrant issue costs | - | - | - | - | ( |
) | - | - | - | ( |
) | ||||||||||||||||
| Stock-based compensation | - | - | - | - | - | - | - | ||||||||||||||||||||
| Balance - March 31, 2020 | ( |
) | |||||||||||||||||||||||||
| Loss and comprehensive loss for the year | - | - | - | - | - | - | - | ( |
) | ( |
) | ||||||||||||||||
| Conversion of convertible debentures | - | - | - | - | ( |
) | - | ||||||||||||||||||||
| Options exercised | - | ( |
) | - | - | - | - | ||||||||||||||||||||
| Options expired | - | - | ( |
) | - | - | - | - | - | ||||||||||||||||||
| Warrants exercised | - | - | ( |
) | - | - | - | ||||||||||||||||||||
| Share issue costs | - | ( |
) | - | - | - | - | - | - | ( |
) | ||||||||||||||||
| Warrant issue costs | - | - | - | - | ( |
) | - | - | - | ( |
) | ||||||||||||||||
| Stock-based compensation expense | - | - | - | - | - | - | - | ||||||||||||||||||||
| Balance - March 31, 2021 | ( |
) | |||||||||||||||||||||||||
| Loss and comprehensive loss for the year | - | - | - | - | - | - | - | ( |
) | ( |
) | ||||||||||||||||
| Options exercised | - | ( |
) | - | - | - | - | ||||||||||||||||||||
| Options expired | - | - | ( |
) | - | - | - | - | - | ||||||||||||||||||
| Options forfeited | - | - | ( |
) | - | - | - | - | - | ||||||||||||||||||
| RSUs granted | - | - | - | - | - | - | - | ||||||||||||||||||||
| Warrants exercised | - | - | ( |
) | - | - | - | ||||||||||||||||||||
| Warrants expired | - | - | - | ( |
) | - | - | - | - | ||||||||||||||||||
| Stock-based compensation expense | - | - | - | - | - | - | - | ||||||||||||||||||||
| Balance - March 31, 2022 | ( |
) |
The accompanying notes are an integral part of these consolidated financial statements.
BURCON NUTRASCIENCE CORPORATION
Consolidated Statements of Cash Flows
Years ended March 31, 2022, 2021 and 2020
(In Canadian dollars)
| |
2022 $ |
2021 $ |
2020 $ |
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| CASH FLOWS FROM OPERATING ACTIVITIES | |||||||||
| Loss for the year | ( |
) | ( |
) | ( |
) | |||
| Items not affecting cash | |||||||||
| Amortization of property and equipment | |||||||||
| Amortization of deferred development costs | |||||||||
| Inventory expensed as research and development costs | |||||||||
| Unrealized foreign exchange loss (gain) | ( |
) | |||||||
| Interest accretion | ( |
) | ( |
) | ( |
) | |||
| Finance income | ( |
) | ( |
) | |||||
| Interest and other expense | |||||||||
| Change in fair value of derivative liability | ( |
) | |||||||
| Loss on disposal of equipment | |||||||||
| Financing expense | |||||||||
| Gain on dilution of investment in Merit Functional Foods Corporation | ( |
) | ( |
) | |||||
| Share of loss in Merit Functional Foods Corporation | |||||||||
| Stock-based compensation expense | |||||||||
| ( |
) | ( |
) | ( |
) | ||||
| Changes in non-cash working capital items | |||||||||
| Amounts receivable | ( |
) | ( |
) | |||||
| Inventory | ( |
) | ( |
) | |||||
| Prepaid expenses | ( |
) | |||||||
| Accounts payable and accrued liabilities | ( |
) | |||||||
| Deferred revenue | ( |
) | |||||||
| ( |
) | ( |
) | ( |
) | ||||
| Interest received | ( |
) | ( |
) | ( |
) | |||
| Interest paid | ( |
) | ( |
) | |||||
| Net cash used in operating activities | ( |
) | ( |
) | ( |
) | |||
| CASH FLOWS FROM INVESTING ACTIVITIES | |||||||||
| Interest received | |||||||||
| Investment in Merit Functional Foods Corporation | ( |
) | |||||||
| Development costs deferred | ( |
) | ( |
) | ( |
) | |||
| Acquisition of property and equipment | ( |
) | ( |
) | ( |
) | |||
| ( |
) | ( |
) | ( |
) | ||||
| CASH FLOWS FROM FINANCING ACTIVITIES | |||||||||
| Issue of capital stock | |||||||||
| Issue costs | ( |
) | ( |
) | |||||
| Issue of warrants | |||||||||
| Issue of convertible debentures | |||||||||
| Short-term loan | |||||||||
| Repayment of convertible note | ( |
) | |||||||
| Repayment of short-term loan | ( |
) | |||||||
| Lease liability | ( |
) | |||||||
| Lease payments | ( |
) | |||||||
| FOREIGN EXCHANGE (LOSS) GAIN ON CASH AND CASH EQUIVALENTS | ( |
) | ( |
) | |||||
| (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS | ( |
) | ( |
) | |||||
| CASH AND CASH EQUIVALENTS - BEGINNING OF YEAR | |||||||||
| CASH AND CASH EQUIVALENTS - END OF YEAR |
The accompanying notes are an integral part of these consolidated financial statements.
|
BURCON NUTRASCIENCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2022, 2021 and 2020 (In Canadian dollars) 1. Nature of operations Burcon NutraScience Corporation ("Burcon" or the "Company") is headquartered in Vancouver, British Columbia, Canada. Burcon is a research and development company that has developed plant protein extraction and purification technology in the field of functional, renewable plant proteins. The Company has an extensive portfolio of composition, application and process patents covering novel plant-based proteins derived from pea, canola, soy, hemp, sunflower seed and more. a) Pea and canola proteins Burcon has developed novel pea proteins that it has branded Peazazz® and Peazac® and three canola protein products, Puratein®, Supertein® and Nutratein®. In May 2019, Burcon and two other entities formed Merit Functional Foods Corporation ("Merit Foods"). Merit Foods has completed the construction of and has commissioned a 94,000 square foot commercial protein production facility in Manitoba, Canada to produce, under license, Burcon's pea and canola protein products. See note 7 for further details. b) CLARISOY® Burcon had a license and production agreement (the "Soy Agreement") with Archer Daniels Midland Company ("ADM") to license its CLARISOY® technology to ADM on an exclusive basis to produce, market and sell CLARISOY® soy protein worldwide. On August 7, 2020, Burcon and ADM agreed to terminate the Soy Agreement. As part of the agreement to terminate the exclusive license, the CLARISOY trademark reverted back to Burcon. |
2. Significant accounting policies
Basis of presentation
These consolidated financial statements are prepared in accordance with International Financial Reporting Standards ("IFRS") as issued by the International Accounting Standards Board ("IASB") and interpretations issued by the IFRS Interpretations Committee ("IFRIC").
The Company has consistently applied the same accounting policies throughout all periods presented. Certain comparatives have been restated to conform with this year's presentation. The board of directors approved these consolidated financial statements on June 24, 2022.
1
BURCON NUTRASCIENCE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS March 31, 2022, 2021 and 2020 (In Canadian dollars) |
Principles of consolidation
These consolidated financial statements include the accounts of the Company and its subsidiaries, Burcon NutraScience (MB) Corp. ("Burcon-MB") and Burcon NutraScience Holdings Corp. ("Burcon Holdings"). A subsidiary is an entity in which the Company has control, directly or indirectly. Under IFRS 10, an investor controls an investee if and only if the investor has power over the investee, exposure, or rights, to variable returns from its involvement with the investee, and the ability to use its power over the investee to affect the amount of the investor's returns. All material intercompany transactions and balances have been eliminated on consolidation.
Details of the Company's subsidiaries at March 31, 2022 are as follows:
| Place of incorporation |
Interest % |
Principal activity | ||||
| Burcon NutraScience (MB) Corp. | Research and development | |||||
| Burcon NutraScience Holdings Corp. | Investment holding |
Investment in Associates
An associate is an entity over which the Company has significant influence. Significant influence is the power to participate in the financial and operating policy of the investee without the power to control or jointly control those policies.
The Company has an investment in Merit Functional Foods Corporation which is accounted for under the equity method of accounting. Under the equity method of accounting, investments are recorded at historical cost as an asset and adjusted for dividends received, capital contributions, other transactions that result in changes in ownership interest held by the Company, and the Company’s share of Merit Foods’ earnings or losses, which is recorded as a component of Loss and Comprehensive Loss for the year. When the Company’s share of losses of an associate exceeds the Company’s interest in the associate, which includes any long-term interests that, in substance, form part of the Company’s net investment in the associate, the Company discontinues recognizing its share of further losses. Additional losses are recognized only to the extent that the Company has incurred legal or constructive obligations or made payments on behalf of the associate.
Management considers whether there is any objective evidence of impairment as a result of one or more of the following events, which include (i) significant financial difficulty; (ii) breach of contract, such as a default or delinquency in payments; (iii) the Company granting to Merit Foods a concession that the Company would not otherwise consider; (iv) it becoming probable that Merit Foods will enter bankruptcy or other financial reorganization; or (v) the disappearance of an active market for the net investment because of financial difficulties of Merit Foods to determine whether it is necessary to test the Company's investment in Merit Foods for impairment. Objective evidence of impairment also includes information about changes with an adverse effect that has taken place in the technological, market, economic or legal environment and whether there has been a significant or prolonged decline in the fair value of an investment below cost. When such objective evidence of impairment exists, the carrying amount of the investment is tested for impairment by comparing the recoverable amount of the investment with its carrying amount. Any reversal of that impairment loss is recognized to the extent that the recoverable amount of the investment subsequently increases.
2
BURCON NUTRASCIENCE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS March 31, 2022, 2021 and 2020 (In Canadian dollars) |
Revenue recognition
The Company recognizes revenue when the amount of revenue can be reliably measured, and it is probable that future economic benefits will flow to the Company. The Company may earn revenues from licensing agreements under which third parties are granted rights to use the Company's technologies.
If the substantive rights to the technologies are retained by the Company, or the Company has remaining performance obligations under the licensing agreements, and as such not all of the risks and rewards have been transferred to the licensee, the Company recognizes amounts received or receivable as royalties when earned on an accrual basis.
At the point when all of the risks and rewards associated with the use of the technologies have, in substance, been relinquished under the licensing agreements, the Company recognizes the fair value of future payments expected to be received as proceeds from the sale of the technologies in the consolidated statements of operations and comprehensive loss, once the expected future payments can be reliably measured.
Upfront payments and similar non-refundable payments received under these agreements are initially recognized as deferred revenue. Subsequently, if the Company recognizes royalty revenue, the amounts deferred are recognized as revenue on a straight-line basis over the estimated period royalties are expected to be earned commencing in the period royalties are first recognized as revenue. Otherwise, the deferred amounts are recognized as sale proceeds at the date of sale of the technologies.
License agreements may consist of multiple elements and provide for varying consideration terms, such as upfront payments and milestone or similar payments. Revenue arrangements with multiple elements are reviewed in order to determine whether the multiple elements can be divided into separate units of accounting. If separable, the consideration received is allocated among the separate units of accounting based on their respective fair values, and the applicable revenue recognition criteria are applied to each of the separate units. Otherwise, the applicable revenue recognition criteria are applied to the revenue arrangement as a single unit.
3
BURCON NUTRASCIENCE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS March 31, 2022, 2021 and 2020 (In Canadian dollars) |
Government assistance
The Company carries out research and development in Canada that is eligible for Scientific Research and Experimental Development ("SR&ED") Investment Tax Credits ("ITC") at both the federal and provincial level. The Company has recognized the refundable portion of ITC at the provincial level but has not recognized the benefits of ITC at the federal level because realization of these benefits is not probable at this time. The Company's determination of ITC involves uncertainty with respect to management's interpretation of complex tax regulations. The ITC claims are subject to review and acceptance by the Canada Revenue Agency prior to collection.
Government grants that are receivable as compensation for expenses or losses already incurred or for the purpose of giving immediate financial support to the Company with no future related costs are recognized in the statement of profit or loss in the period in which they become receivable.
Accounting estimates and judgements
The preparation of consolidated financial statements in accordance with IFRS requires management to apply judgment in applying accounting policies. The judgments that have the most significant effect on the amounts recognized in the consolidated financial statements are outlined below. In addition, IFRS requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the consolidated financial statements, the reported amount of revenue and expenses during the reporting period, and disclosures made in the accompanying notes to the consolidated financial statements. Outlined below are the assumptions and other sources of estimation uncertainty as at March 31, 2022 that have a risk of resulting in material adjustments to the carrying amounts of assets and liabilities within the next year.
a) Areas of judgement
Assessment of indicators of impairment of the Investment in Merit Functional Foods Corporation
Judgment is required in assessing whether there is objective evidence of impairment of its investment in Merit Foods. The information management considered included whether there was evidence of significant financial difficulty, breach of contract, the granting of concessions, probable bankruptcy or financial reorganization or the disappearance of an active market for the investment in Merit Foods. Management also considered whether there was information about changes with an adverse effect that has taken place in technological, market, economic or legal environment and whether there has been a significant or prolonged decline in the fair value of an investment below cost. Management also considered the investment of Bunge Limited in fiscal 2022 and the resulting dilution gain. As a result, at March 31, 2022 management concluded that there was no objective evidence of impairment related to its investment in Merit Foods.
4
BURCON NUTRASCIENCE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS March 31, 2022, 2021 and 2020 (In Canadian dollars) |
Assessment of indicators of impairment of long-lived assets including property and equipment and deferred development costs
Judgment is required in assessing whether there are indicators of impairment of long-lived assets. Management considers both internal and external information to determine whether there is an indicator of impairment and, accordingly, whether impairment testing is required. The information management considered included plant-based protein market information, the Company's market capitalization, Bunge's investment in Merit, internal financial models and actual results. As a result, at March 31, 2022 management concluded that there were no impairment indicators related to its long-lived assets.
Commencement of amortization of deferred development costs
On July 1, 2019, the Company commenced deferring development costs related to its pea and canola technologies. Judgement is required to assess when amortization of deferred development costs commences. Management considered whether there was sufficient evidence to conclude that the Merit production facility was capable of operating in the manner intended by management. Based on the Merit production facility's output, management concluded that the facility was effectively commissioned on December 31, 2021. As a result, the Company ceased capitalization of costs and commenced amortization on January 1, 2022. Deferred development costs are amortized over estimated useful life of 15 years.
b) Sources of estimation uncertainty
Expected credit losses on Merit Foods loan receivable
The Company estimates the expected credit losses on Merit Foods' loan receivable based on management's best estimate of the lifetime expected credit loss calculated based on probability of default, loss given default, and outstanding balance of the loan. At March 31, 2022, the total lifetime expected credit loss on the Merit Foods loan receivable was estimated to be $
Goodwill impairment assessment
The Company determines the recoverable amount of its cash generating unit when performing its annual impairment test for goodwill. In determining the recoverable amount, the Company considers its market capitalization, any recent investments in Merit Foods by third parties, and internal projected cash flows. The estimate of recoverable amount is based on management's best estimates of what an independent market participant would consider appropriate. At March 31, 2022, the recoverable amount of the Burcon cash generating unit exceeded the carrying amount, and therefore no impairment charge has been recognized.
5
BURCON NUTRASCIENCE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS March 31, 2022, 2021 and 2020 (In Canadian dollars) |
Cash and cash equivalents
Cash and cash equivalents consist of cash on deposit with banks and highly liquid short-term interest bearing securities with maturities at the date of purchase of three months or less.
Financial instruments
Financial assets and liabilities are recognized when the Company becomes a party to the contractual provisions of the instrument. Financial assets are derecognized when rights to receive cash flows from assets have expired or have been transferred and the Company has transferred substantially all risks and rewards of ownership. Financial assets and liabilities are offset and the net amount is reported in the consolidated balance sheets when there is a legally enforceable right to offset the recognized amounts and there is an intention to settle on a net basis, or realize the asset and settle the liability simultaneously.
At initial recognition, the Company classifies its financial instruments in one of the following categories: amortized cost, fair value through profit or loss, and fair value through other comprehensive income.
Derivatives are recognized initially and subsequently at fair value. Transaction costs are expensed in the consolidated statements of operations and comprehensive loss. Gains and losses arising from changes in fair value are presented in the consolidated statements of operations and comprehensive loss, through profit or loss, in the period in which they arise.
Financial assets carried at amortized cost, which include loans and receivables initially recognized at the amount expected to be received, less a provision for the expected credit loss. Subsequently, financial assets carried at amortized cost are measured at amortized cost using the effective interest method less a provision for the expected credit loss. The Company classifies its cash and cash equivalents and amounts receivable as financial assets carried at amortized cost.
Other financial liabilities are initially recognized at the amount required to be paid, less, when material, a discount to reduce the payables to fair value. Subsequently, other financial liabilities are measured at amortized cost using the effective interest method.
At each reporting date, the Company assesses whether there is objective evidence that a financial asset is impaired. If such evidence exists, the Company recognizes an impairment loss, as follows:
Financial assets carried at amortized cost: the impairment loss is the difference between the carrying value of the asset and the amortized cost of the financial asset, less the expected credit loss. The carrying amount of the asset is reduced by this amount which is recognized in the consolidated statements of operations and comprehensive loss, through profit or loss. Impairment losses on financial assets carried at amortized cost are reversed in subsequent periods if the amount of the expected credit loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognized.
6
BURCON NUTRASCIENCE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS March 31, 2022, 2021 and 2020 (In Canadian dollars) |
Transaction costs of an equity transaction are accounted for as a deduction from equity to the extent that they are incremental costs directly attributable to the equity transaction that otherwise would have been avoided. Qualifying transaction costs incurred prior to the Company's year-end in anticipation of an issuance of equity instruments subsequent to the Company's year-end are deferred on the consolidated balance sheets until the equity instruments are issued.
Property and equipment
Property and equipment are recorded at cost less accumulated amortization. The Company provides for amortization at the following annual rates:
| Equipment | |
| Computer equipment | |
| Leasehold improvements | |
| Right-of-use assets |
Inventories
Inventories are recorded at the lower of cost and net realizable value.
Research and development costs
Research costs are expensed in the year incurred. Development costs are also expensed in the year incurred unless the related process is clearly defined and the costs attributable thereto can be reliably measured; the technical feasibility of the process has been established so that it will be available for use or sale; management has indicated its intention to produce and market, or use, the process; an ability to use or sell the process exists; the process will generate probable future economic benefits; and adequate resources exist, or are expected to be available, to complete the development and to use or sell the process. The residual value and useful life are reviewed at each reporting date. Where an indicator of impairment exists the deferred development costs are subject to impairment testing as described in "Impairment of long-lived assets" below.
Impairment of long-lived assets
The Company tests property and equipment and development costs for impairment whenever events or circumstances indicate that the carrying value of an asset or group of assets may not be recoverable. Intangible assets that are not being amortized are tested annually for impairment and also if the Company identifies indicators of impairment. For the purpose of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash inflows (cash-generating units). The evaluation is based on the higher of the asset's fair value less costs of disposal and its value in use, which is the present value of future cash flows expected to be derived from the asset in its current state. An impairment loss is recognized in the period it is determined to the extent that the carrying value exceeds the higher of fair value less costs to sell and value in use of the asset or group of assets.
7
BURCON NUTRASCIENCE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS March 31, 2022, 2021 and 2020 (In Canadian dollars) |
Goodwill
Goodwill represents the excess at the date of acquisition of the cost of the acquired business over the fair values attributed to the underlying net tangible assets and the identifiable intangible assets. Goodwill is not amortized.
On at least an annual basis, or when circumstances indicate the carrying value of goodwill may not be recoverable, the Company subjects goodwill to an impairment test. For impairment testing purposes, the carrying value of goodwill is allocated to the group of assets that realize the benefits of the acquisition. The impairment assessment is performed by comparing the carrying value of the group of assets, including the allocated carrying value of goodwill, to the higher of its fair value less costs to sell and its value in use, which is the present value of future cash flows expected to be derived from the group of assets in their current state. If the carrying amount of the group of assets exceeds the recoverable amount, an impairment loss is charged to operations in the period such impairment is identified, allocated first to reducing the carrying amount of the goodwill allocated to the group, and then to the other assets of the group.
Income taxes
The Company uses the balance sheet liability method of accounting for income taxes. Under this method, current income taxes are recognized for the estimated income taxes payable for the current year. Deferred income tax assets and liabilities are recognized in the current year for temporary differences between the tax and accounting bases of assets and liabilities as well as for the benefit of losses available to be carried forward to future years for tax purposes. Deferred income tax assets and liabilities are measured using substantively enacted tax rates and laws expected to apply in the years in which those temporary differences are expected to be recovered or settled. Deferred income tax assets are recognized only to the extent they are considered probable to be realized.
8
BURCON NUTRASCIENCE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS March 31, 2022, 2021 and 2020 (In Canadian dollars) |
Stock-based compensation
Stock-based compensation expense relates to stock options as well as equity settled restricted share units ("RSUs"). The compensation cost is measured at the fair value of the equity instrument granted at the date of grant and is expensed to operations over the award's vesting period. When stock options are exercised, capital stock is credited by the sum of the consideration paid and by the related portion previously recorded in options. Upon vesting of equity settled RSUs, the related amount recorded as RSUs is reclassified into capital stock. Additional information related to the stock option plan and the assumptions used in the Black-Scholes option pricing model are provided in note 9(c).
Earnings (loss) per share
Basic loss per share is computed by dividing the net loss for the year available to common shareholders by the weighted average number of common shares outstanding during the year. The Company applies the treasury stock method to calculate diluted loss per share. Diluted loss per share excludes all dilutive potential common shares if their effect is anti-dilutive.
Foreign currency translation
a) Functional and presentation currency
Items included in the financial statements of each consolidated entity are measured using the currency of the primary economic environment in which the entity operates (the "functional currency"). These consolidated financial statements are presented in Canadian dollars, which is the Company's and its subsidiaries' functional currency.
b) Transactions and balances
Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the date of the transactions. Generally, foreign exchange gains and losses resulting from the settlement of foreign currency transactions and from the translation at period end exchange rates of monetary assets and liabilities denominated in currencies other than an operation's functional currency are recognized in the consolidated statements of operations and comprehensive loss.
9
BURCON NUTRASCIENCE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS March 31, 2022, 2021 and 2020 (In Canadian dollars) |
Newly adopted accounting standards and amendments
IFRS 16 - Leases
Effective April 1, 2019, the Company adopted IFRS 16 - Leases, which requires, among other things, to recognize leases traditionally recorded as operating leases in the same manner as a financing lease.
The Company had a short-term lease in fiscal 2020 which was included as part of rent expense under general and administrative expenses (note 11). During fiscal 2021, the Company entered into a long-term lease, which was accounted for in accordance with IFRS 16.
Accounting standard and amendments issued and not yet adopted
Amendments to IAS 1 - Classification of Liabilities as Current or Non-Current
The amendment clarifies the classification requirements to determine if a liability should be presented as current or non-current in the statement of financial position. Under the new requirement, the assessment of whether a liability is presented as current or non-current is based on the contractual arrangements in place as at the reporting date and does not impact the amount or timing or recognition. The amendment is effective for annual reporting periods beginning on or after January 1, 2023 and is to be applied retrospectively, with earlier application permitted. The Company does not expect the new standard will have a significant impact on the consolidated financial statements.
3. COVID-19
The COVID-19 outbreak was declared as a pandemic by the World Health Organization on March 11, 2020. Since the outbreak, global economies have been impacted as governments have imposed restrictions such as travel bans, self-imposed quarantines, social distancing and temporary closures of non-essential businesses. Since March 2021, the supply of vaccines has become more secure and immunization rates are continuing to improve in Canada, the United States and many developed countries in the world. However, the emergence of COVID variants continues to create uncertainty for economies worldwide. The duration and long-term effects of the pandemic are unknown at this time.
Burcon's operations have not been materially impacted by the COVID-19 pandemic. Since March 2020, Burcon has implemented measures to ensure the safety of work conditions for its staff at the Winnipeg Technical Centre and at its head office in Vancouver. Burcon's COVID-19 protocols continue to evolve in response to government health and safety guidelines. While the COVID-19 pandemic has caused certain disruptions and delays in Merit Foods' business operations, including the commissioning process of Merit Foods' Flex Production Facility, it is not possible to predict how long the pandemic will continue to last and whether the financial and business conditions of Burcon and Merit Foods will be impacted in future periods.
10
BURCON NUTRASCIENCE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS March 31, 2022, 2021 and 2020 (In Canadian dollars) |
Governments worldwide, including Canada, have implemented significant monetary and fiscal relief programs designed to stabilize their economies. Burcon has received Canadian government assistance through the CEWS and CERS programs. See notes 10 and 11 for details.
4. Property and equipment
| Equipment | Right-of-Use Assets |
Computer Equipment |
Leasehold improvements |
Total | |||||||
| $ | $ | $ | $ | $ | |||||||
| Cost at March 31, 2021 | |||||||||||
| Additions | |||||||||||
| Cost at March 31, 2022 | |||||||||||
| Accumulated amortization at March 31, 2021 | |||||||||||
| Amortization | |||||||||||
| Accumulated amortization at March 31, 2022 | |||||||||||
| Net book value at March 31, 2022 |
| Equipment | Right-of-Use Assets |
Computer Equipment |
Leasehold improvements |
Total | |||||||
| $ | $ | $ | $ | $ | |||||||
| Cost at March 31, 2020 | |||||||||||
| Additions | |||||||||||
| Cost at March 31, 2021 | |||||||||||
| Accumulated amortization at March 31, 2020 | |||||||||||
| Amortization | |||||||||||
| Accumulated amortization at March 31, 2021 | |||||||||||
| Net book value at March 31, 2021 |
Additions to property and equipment have been reduced by a cash grant received from the government of Manitoba of $
5. Deferred Revenue
Protein Industries Canada
In March 2022, Burcon entered into a collaborative agreement with Protein Industries Canada ("PIC") for the development of protein ingredients from sunflower seeds. PIC is an industry-led, not-for-profit organization committed to positioning Canada as a global source of high-quality plant protein ingredients. It is one of Canada's five innovation superclusters, which are government-initiated efforts to significantly boost Canada's job market, GDP, research and innovations.
11
BURCON NUTRASCIENCE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS March 31, 2022, 2021 and 2020 (In Canadian dollars) |
Burcon will partner with Pristine Gourmet, a processor of Canadian non-GMO cold pressed virgin oils, to further develop Burcon's novel process for the production of sunflower protein ingredients. In March 2022, PIC provided Burcon an upfront payment of $
Nestle
In January 2020, Burcon, Société Des Produits Nestlé ("Nestlé ") and Merit Foods entered into a joint development agreement (the "JDA") to tailor Burcon and Merit's plant-based proteins for use in Nestlé food and beverage applications. The JDA covered ongoing innovation and the future supply of Burcon and Merit's plant-based proteins from the Flex Production Facility. The partnership was intended to combine Nestlé's expertise in the development, production and commercialization of plant-based foods and beverages with Burcon's proprietary plant protein extraction and purification technology, while leveraging Merit Foods' plant protein production capabilities. During the year ended March 31, 2021, Burcon conducted research work and provided various samples to Nestlé for testing and analysis. The research conducted by Burcon was successful in identifying processing techniques to modify and improve the functionality of Burcon's and Merit's plant-based proteins and as such, Burcon's role in the JDA ended in January 2021, Merit has continued to work with Nestlé for the supply of Merit Foods' plant protein products. During the year ended March 31, 2021, Burcon recorded $
12
BURCON NUTRASCIENCE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS March 31, 2022, 2021 and 2020 (In Canadian dollars) |
6. Deferred development costs
On July 1, 2019, the Company commenced deferring development costs related to its pea and canola technologies. The Company ceased capitalization of costs and commenced amortization on January 1, 2022. Deferred development costs are amortized over the useful life of 15 years.
| $ | |||
| Cost at March 31, 2021 | |||
| Additions | |||
| Cost at March 31, 2022 | |||
| Amortization and impairment at March 31, 2021 | |||
| Amortization | |||
| Amortization and impairment at March 31, 2022 | |||
| Net book value at March 31, 2022 | |||
| Cost at March 31, 2020 | |||
| Additions | |||
| Cost at March 31, 2021 | |||
| Amortization and impairment at March 31, 2020 | |||
| Amortization | |||
| Amortization and impairment at March 31, 2021 | |||
| Net book value at March 31, 2021 |
7. Investment in and loan to Merit Functional Foods Corporation
On May 23, 2019, Burcon NutraScience Holdings Corp. ("Burcon Holdings") entered into a shareholders' agreement (the "Shareholders' Agreement") with two other entities (the "Partners") to become shareholders of Merit Foods, to build and own a commercial production facility (the "Flex Production Facility") in Manitoba, Canada to produce, sell, market and distribute Burcon's Peazazz® and Peazac® pea proteins, Burcon's Puratein®, Supertein® and Nutratein® canola proteins, as well as Burcon's pea and canola protein blends that it has branded Nutratein-PS® and Nutratein-TZ®. The construction of the Flex Production Facility was completed by December 31, 2020.
On inception, Burcon Holdings held
13
BURCON NUTRASCIENCE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS March 31, 2022, 2021 and 2020 (In Canadian dollars) |
On August 27, 2020, Bunge Limited ("Bunge") made an investment of $
In October 2021, Bunge exercised its right to subscribe for additional common shares of Merit Foods for an aggregate subscription price of $
Merit completed the commissioning process on December 31, 2021. In addition, the pea and canola protein technology that is currently under license with Merit Foods was capable of operating in the manner intended by management with the commissioning of the Flex Production Facility, Burcon ceased capitalization of costs to deferred development and commenced amortization of deferred development costs on January 1, 2022. Merit commenced the amortization of the facility on January 1, 2022.
Under the amended license and production agreement (the "Amended License Agreement"), Burcon receives running royalties on the net revenue (as defined in the Amended License Agreement) from sales of pea and canola products (the "Licensed Products") by Merit Foods. Burcon is responsible for technology transfer to Merit Foods, and has been providing assistance, under a services agreement (the "Services Agreement"), to support design, construction and commissioning of the commercial protein production facility, as well as providing other services and sample production services.
As of March 31, 2022, Burcon Holdings has made capital loan advances of $
14
BURCON NUTRASCIENCE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS March 31, 2022, 2021 and 2020 (In Canadian dollars) |
| Investment in Share capital $ |
Capital Contribution $ |
Loan receivable $ |
Total net investment $ |
|||||||||
| At inception | ||||||||||||
| Modification to loan terms | ( |
) | ||||||||||
| Capital loan advance | ||||||||||||
| Share of loss in Merit Foods | ( |
) | ( |
) | ||||||||
| Interest accretion | ||||||||||||
| Net investment in Merit Foods, March 31, 2020 | ||||||||||||
| Share of loss in Merit Foods | ( |
) | ( |
) | ||||||||
| Dilution gain of investment in Merit Foods | ||||||||||||
| Interest accretion | ||||||||||||
| Expected credit loss provision | ( |
) | ( |
) | ||||||||
| Net Investment in Merit Foods, March 31, 2021 | ||||||||||||
| Share of loss in Merit Foods | ( |
) | ( |
) | ||||||||
| Dilution gain of investment in Merit Foods | ||||||||||||
| Interest accretion | ||||||||||||
| Expected credit loss provision | ( |
) | ( |
) | ||||||||
| Net Investment in Merit Foods, March 31, 2022 |
From inception to December 2019, the Merit Shareholder Loans were recorded as loan receivable. In December 2019, the terms of the Merit Shareholder Loans were finalized. The loans are non-interest bearing, unsecured, subordinated to Merit Foods' other secured and unsecured debts, have a term of
15
BURCON NUTRASCIENCE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS March 31, 2022, 2021 and 2020 (In Canadian dollars) |
Subsequent to March 31, 2022, the Company made an additional capital loan advance of $
During fiscal 2021, Merit Foods secured a debt financing package of up to $
In connection with the LC, Burcon Holdings entered into a short-term loan agreement (the "Merit Loan Agreement") with Merit Foods in the amount of $
During fiscal 2021, Merit Foods secured additional debt financing of $
During fiscal 2021, Merit Foods secured a total of $
16
BURCON NUTRASCIENCE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS March 31, 2022, 2021 and 2020 (In Canadian dollars) |
During fiscal 2022, Merit Foods and three of its partners received a further co-investment from PIC for the development and distribution of a line of meat alternatives to pork and Wagyu beef, which will be sold under two of its partners' branded products. The new line of meat alternatives is expected to be distributed throughout Europe, Asia and North America. The project has a total investment of $
During fiscal 2022, the shareholders of the Partners (the "EDC Guarantors") provided guarantees of $
During the year ended March 31, 2022, Burcon recorded royalty revenues of $
For the year ended March 31, 2022, included in management fee income is $
Merit Foods also provides certain consulting services to Burcon. For the year ended March 31, 2022, Burcon recorded professional fee expense of $
17
BURCON NUTRASCIENCE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS March 31, 2022, 2021 and 2020 (In Canadian dollars) |
Summary financial position for Merit Foods as at March 31, 2022 and 2021
| As at March 31, 2022 |
As at March 31, 2021 |
|||||
| $ | $ | |||||
| Current assets | ||||||
| Non-current assets | ||||||
| Current liabilities | ||||||
| Non-current liabilities |
Summary financial results for Merit Foods
| Year ended March 31, 2022 |
Year ended March 31, 2021 |
Period ended March 31, 20201 |
|||||||
| $ | $ | $ | |||||||
| Total revenue | |||||||||
| Loss for the period | ( |
) | ( |
) | ( |
) |
| 1Merit Foods was incorporated on May 15, 2019. As a result, information in this table represents certain financial information of Merit Foods from the date of its incorporation to March 31, 2020. |
18
BURCON NUTRASCIENCE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS March 31, 2022, 2021 and 2020 (In Canadian dollars) |
8. Convertible debentures, convertible note, and short-term loan
Convertible debentures
On December 10, 2019, the Company issued convertible debentures (the "Debentures") through a non-brokered private placement for an aggregate principal amount of $
The Debentures were convertible at the option of the holder, in whole or in part, into common shares of the Company at a conversion price of $
For the year ended March 31, 2022, the Company recorded interest expense of $ (2021 - $
Convertible note
The Company had a convertible note (the "Note") with Large Scale Investments Limited ("Large Scale'), a wholly owned subsidiary of Firewood Elite Limited ("Firewood"), for the principal amount of $
On May 21, 2019, the Company and Large Scale amended (the "Amendment") the Note's Maturity Date to June 21, 2019, as well as providing Large Scale with the right to offset any amounts due to it under the Note against any obligations of Large Scale to pay for subscription proceeds of any rights offering that Burcon may conduct. In connection with the 2019 Rights Offering (note 9(a)), Large Scale exercised its right to offset the amounts due under the Note against its obligations to pay for subscription proceeds under the 2019 Rights Offering. The offset was completed on June 25, 2019. The total amount offset under the Note included the principal amount and accrued interest of $
The conversion option was recorded as a derivative liability. Under the terms of the Note, there are certain conditions where the conversion price may be adjusted. Therefore, in accordance with IFRS, an obligation to issue shares for a price that is not fixed must be classified as a derivative liability and measured at fair value, with changes recognized in change in fair value of conversion option in the consolidated statement of operations and comprehensive loss.
19
BURCON NUTRASCIENCE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS March 31, 2022, 2021 and 2020 (In Canadian dollars) |
The conversion and prepayment options were recorded as a net derivative liability and measured at fair value, with changes in fair value recorded in the consolidated statement of operations and comprehensive loss. The fair value of the conversion and prepayment options was estimated based on a methodology for pricing convertible bonds using the Partial Differential Equation Method, with the following initial assumptions: expected volatility of
Short-term loan
During the year ended March 31, 2020, the Company had a short-term loan with Large Scale to provide Burcon with an unsecured loan for up to $
9. Shareholders' equity
a) Capital stock
Authorized
Unlimited number of common shares without par value
2020 Equity Offering
On February 19, 2020, the Company completed a bought deal equity offering of
Each Unit consisted of one common share of the Company and one-half of one common share purchase warrant (each whole common share purchase warrant, a "Warrant"). Each Warrant was exercisable to acquire one common share until February 19, 2022 at an exercise price of $
20
BURCON NUTRASCIENCE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS March 31, 2022, 2021 and 2020 (In Canadian dollars) |
2019 Rights Offering
On June 25, 2019, the Company completed a rights offering (the "2019 Rights Offering") for
The Company's directors, officers and persons controlling over 10% of the common shares of the Company agreed to exercise at least all of the 2019 Rights they were issued in connection with the 2019 Rights Offering for
Of the net proceeds of the 2019 Rights Offering, $
c) Contributed surplus
Contributed surplus comprises the value ascribed to expired warrants and options and forfeited vested options, previously categorized in either warrants or options, as applicable, within shareholders' equity.
d) Options
The Company has a stock option plan in which all directors, officers, employees and consultants of the Company and its subsidiaries are eligible to participate.
At March 31, 2022,
21
BURCON NUTRASCIENCE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS March 31, 2022, 2021 and 2020 (In Canadian dollars) |
| 2022 | 2021 | ||||||||||||
| Number of options |
Weighted average exercise price $ |
Number of options |
Weighted average exercise price $ |
||||||||||
| Outstanding - Beginning of year | |||||||||||||
| Granted | |||||||||||||
| Exercised | ( |
) | ( |
) | |||||||||
| Forfeited | ( |
) | |||||||||||
| Expired | ( |
) | ( |
) | |||||||||
| Outstanding - End of year | |||||||||||||
The following table summarizes information about stock options outstanding and exercisable at March 31, 2022:
| Options outstanding | Options exercisable | |||||||||||||||
| Range of exercise prices $ |
Number outstanding at March 31, 2022 |
Weighted average remaining contractual life (years) |
Weighted average exercise price $ |
Number exercisable at March 31, 2022 |
Weighted average exercise price $ |
|||||||||||
22
BURCON NUTRASCIENCE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS March 31, 2022, 2021 and 2020 (In Canadian dollars) |
The fair value of each option is estimated as at the date of grant or other measurement date using the Black-Scholes option pricing model and the following weighted average assumptions:
| 2022 | 2021 | 2020 | |||||||
| Dividend yield | |||||||||
| Expected volatility | |||||||||
| Risk-free interest rate | |||||||||
| Expected forfeitures | |||||||||
| Expected average option term (years) |
The expected volatility and expected forfeitures are based on historical volatility and forfeitures. The risk-free rate of return is the yield on a zero-coupon Canadian treasury bill of a term consistent with the expected average option term. The expected average option term is the average expected period to exercise, based on the historical activity patterns for each individually vesting tranche.
The weighted average fair value of the options granted during the year ended March 31, 2022 was $
Included in research and development expenses is $
e) Restricted Share Units ("RSU") Plan
At the annual general meeting held in September 2021, the shareholders of the Company approved a new RSU plan in which all directors, officers, employees and consultants of the Company and its subsidiaries are eligible to participate. Each RSU is intended to be redeemable for one common share of the Company but, at the election of the Company, may be redeemed for cash in the amount equal to the market value of the Company's shares on vesting date, or a common share acquired by the Company on a public exchange. The RSUs must be redeemed no later than December 31st of the third year after the date of grant. The vesting terms are determined at the discretion of the board of directors at the time of grant. The fair value of the grants is determined on the date of grant and is recognized using graded vesting, with each vesting tranche being valued separately, and the fair value of each tranche recognized over its respective vesting period. During the year,
23
BURCON NUTRASCIENCE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS March 31, 2022, 2021 and 2020 (In Canadian dollars) |
10. Research and development
| 2022 $ |
2021 $ |
2020 $ |
|||||||
| Salaries and benefits (note 9) | |||||||||
| Laboratory operation | |||||||||
| Amortization of property and equipment | |||||||||
| Rent | |||||||||
| Inventory written off to research and development | |||||||||
| Amortization of deferred development costs | |||||||||
| Analyses and testing | |||||||||
| Travel and meals | |||||||||
| Gross research and development expenses | |||||||||
| Allocated to deferred development costs | ( |
) | ( |
) | ( |
) | |||
| Allocated to inventory production | ( |
) | ( |
) | |||||
| Net research and development expenses |
For the year ended March 31, 2022, total research and development expenses have been reduced by COVID-19 subsidies of $
As Merit Foods began producing its own samples after completion of the Flex Production Facility to provide to its customers, Merit Foods no longer required Burcon to supply samples. As a result, Burcon wrote off its pea and canola inventory on-hand during the year ended March 31, 2022.
24
BURCON NUTRASCIENCE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS March 31, 2022, 2021 and 2020 (In Canadian dollars) |
11. General and administrative
| 2022 $ |
2021 $ |
2020 $ |
|||||||
| Salaries and benefits (note 9) | |||||||||
| Professional fees | |||||||||
| Investor relations | |||||||||
| Office supplies and services (note 13) | |||||||||
| Transfer agent and filing fees | |||||||||
| Financing expense (notes 7 and 13) | |||||||||
| Travel and meals | |||||||||
| Amortization | |||||||||
| Other | |||||||||
| Rent | |||||||||
For the year ended March 31, 2022, salaries and benefits have been reduced by $
12. Basic and diluted loss per share
The following table sets forth the computation of basic and diluted loss per share:
| 2022 $ |
2021 $ |
2020 $ |
|||||||
| Loss for the year, being loss attributable to common shareholders - basic and diluted | ( |
) | ( |
) | ( |
) | |||
| Shares | Shares | Shares | |||||||
| Weighted average common shares - basic and diluted | |||||||||
| Basic and diluted loss per share | ( |
) | ( |
) | ( |
) |
For the years ended March 31, 2022, 2021 and 2020, the Company excluded all potential common share equivalents from the diluted loss per share calculation as they were anti-dilutive.
13. Related party transactions
Burcon engaged Burcon Group Limited, a company that is related by virtue of common officers up to March 31, 2022, for the office space rental to April 2020. For the year ended March 31, 2022, the Company made payments of $
25
BURCON NUTRASCIENCE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS March 31, 2022, 2021 and 2020 (In Canadian dollars) |
Burcon had the following transactions with Regent Park Realty Inc., a company that is controlled by an entity with common directors (and also with common officers prior to September 1, 2021) with the Company. One of these directors also has indirect significant influence over the Company:
● For the year ended March 31, 2022, included in general and administrative expenses (management fees) is $
Burcon had the Loan (note 8) and Note (note 8) with Large Scale, a company wholly owned by Firewood. For the year ended March 31, 2022, included in interest expense is $
Upon completion of the 2019 Rights Offering, the exercise price for the share purchase warrants issued to Dr. Yap, the Company's former Chief Executive Officer, was adjusted from $
Burcon has a services agreement (the "Services Agreement") with Merit Foods to provide technical, administrative and general management services, research and analytical services and sample production services based on rates set out in the Services Agreement. Merit Foods also provides certain technical and consulting services to Burcon. See note 7 for details.
In connection with the LC, Burcon Holdings entered into the Merit Loan Agreement with Merit Foods in the amount of $
Certain directors and an officer subscribed for $
26
BURCON NUTRASCIENCE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS March 31, 2022, 2021 and 2020 (In Canadian dollars) |
14. Key management compensation
Key management includes the Company's CEO and CFO. Remuneration of directors and key management personnel comprises:
| 2022 $ |
2021 $ |
2020 $ |
|||||||
| Short-term benefits | |||||||||
| Option-based awards | |||||||||
Short-term benefits comprise salaries, director fees and employment benefits.
Option-based awards represent the cost of the group of senior management and directors' participation in the incentive stock option plan. The costs are measured by the fair value of instruments granted, accounted for in accordance with IFRS 2, Share-based Payment. For details of these plans refer to note 9 to these consolidated financial statements.
The recovery of income taxes differs from the amount obtained by applying the statutory Canadian federal and provincial income tax rates to loss for the years as follows:
| 2022 $ |
2021 $ |
2020 $ |
|||||||
| Recovery of income taxes based on the combined statutory income tax rate of |
( |
) | ( |
) | ( |
) | |||
| Changes in unrecognized deferred tax assets | ( |
) | |||||||
| Financing costs | ( |
) | ( |
) | |||||
| Non-deductible items and tax adjustments | |||||||||
| Recovery of income taxes |
27
BURCON NUTRASCIENCE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS March 31, 2022, 2021 and 2020 (In Canadian dollars) |
As at March 31, 2022 the Company has non-capital losses of approximately $
| $ | ||
| 2026 | ||
| 2027 | ||
| 2028 | ||
| 2029 | ||
| 2030 | ||
| 2031 | ||
| 2032 | ||
| 2033 | ||
| 2034 | ||
| 2035 | ||
| 2036 | ||
| 2037 | ||
| 2038 | ||
| 2039 | ||
| 2040 | ||
| 2041 | ||
| 2042 | ||
In addition, the Company has SR&ED expenditures of approximately $
28
BURCON NUTRASCIENCE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS March 31, 2022, 2021 and 2020 (In Canadian dollars) |
| 2022 $ |
2021 $ |
|||||
| Deferred income tax assets (liability) | ||||||
| SR&ED expenditures | ||||||
| Losses from operations carried forward | ||||||
| Investment in Merit Foods | ( |
) | ( |
) | ||
| Deferred development costs | ( |
) | ( |
) | ||
| Financing costs | ||||||
| Property and equipment | ||||||
| Right-of-Use assets/liability | ( |
) | ( |
) | ||
| Unrecognized deferred income tax assets |
Management believes the realization of income tax benefits related to these losses and other potential deferred income tax assets is uncertain at this time and cannot be viewed as probable. Accordingly, the Company has not recognized these deferred income tax assets.
16. Financial instruments
Credit risk
The financial instruments that expose the Company to a concentration of credit risk are cash and cash equivalents, amounts receivable and capital loan receivable from Merit Foods. The Company's cash and cash equivalents may comprise interest-bearing savings instruments with Canadian chartered banks. The Company limits its exposure to credit loss by placing its cash and cash equivalents with two Canadian chartered banks.
The capital loan receivable at March 31, 2022 with a carrying value of $
Interest rate risk
All of the Company's financial instruments are non-interest bearing except for cash and cash equivalents that earn interest at variable market rates, short-term deposits that earn interest at fixed interest rates, and the Merit Loan that bore interest at a fixed interest rate. Burcon's cash and cash equivalents are held at two Canadian chartered banks to maximize interest and to diversify risk. For the year ended March 31, 2022, the weighted average interest rate earned on the Company's cash and cash equivalents was
29
BURCON NUTRASCIENCE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS March 31, 2022, 2021 and 2020 (In Canadian dollars) |
Liquidity risk
The Company manages liquidity risk through the management of its capital structure (note 17). It also manages liquidity risk by monitoring actual and forecasted cash flows taking into account current and planned operations. The Company's estimated minimum contractual undiscounted cash flow requirement for its financial liabilities at March 31, 2022 is $
Fair value
The fair value of the Company's short-term financial assets and financial liabilities, including cash and cash equivalents, restricted cash, amounts receivable, accounts payable and accrued liabilities approximates their carrying values due to the short-term maturities of these financial instruments.
The fair value of the loan to Merit Foods is a level 3 fair value and was estimated based on the loan discounted at the market rate.
The carrying values and fair values of financial instruments, by class, are as follows as at March 31, 2022 and 2021:
| As at March 31, 2022 | ||||||||||||
| At fair value through profit or loss |
Financial assets at amortized cost |
Financial liabilities at amortized cost |
Fair value | |||||||||
| Financial assets | $ | $ | $ | $ | ||||||||
| Cash and cash equivalents | ||||||||||||
| Restricted cash | ||||||||||||
|
Amounts receivable |
||||||||||||
|
Loan to Merit Foods |
- | |||||||||||
| Total | ||||||||||||
| Financial liabilities | ||||||||||||
| Accounts payable and accrued liabilities | ||||||||||||
| Deferred revenue | ||||||||||||
| Total |
30
BURCON NUTRASCIENCE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS March 31, 2022, 2021 and 2020 (In Canadian dollars) |
| As at March 31, 2021 | ||||||||||||
| At fair value through profit or loss |
Financial assets at amortized cost |
Financial liabilities at amortized cost |
Fair value | |||||||||
| Financial assets | $ | $ | $ | $ | ||||||||
| Cash and cash equivalents | ||||||||||||
| Amounts receivable | ||||||||||||
| Loan to Merit Foods | ||||||||||||
| Total | ||||||||||||
| Financial liabilities | ||||||||||||
| Accounts payable and accrued liabilities | ||||||||||||
| Total | ||||||||||||
Currency risk
The Company has not hedged its exposure to currency fluctuations. As at March 31, 2022 and 2021, the Company is exposed to currency risk through the following assets and liabilities denominated in U.S. dollars:
| March 31, 2022 |
March 31, 2021 |
|||||
| U.S. Dollars | ||||||
| Cash and cash equivalents | $ | $ | ||||
| Amounts receivable | ||||||
| Accounts payable and accrued liabilities | ( |
) | ||||
| Net exposure | $ | $ | ||||
| Canadian dollar equivalent | $ | $ |
Based on the above net exposure at March 31, 2022, a
31
BURCON NUTRASCIENCE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS March 31, 2022, 2021 and 2020 (In Canadian dollars) |
17. Capital disclosures
The Company considers its capital to be its shareholders' equity.
The Company manages its capital structure to have sufficient resources available to meet day-to-day operating requirements, continue as a going concern and fund its research and development program. The Company is dependent on non-operating sources of cash, primarily from issuing equity and debt, to fund its operations and research development programs. The Company monitors its capital and the expected cash flows required to achieve its business objectives to determine its future financing needs. It seeks additional capital when deemed appropriate, but there is no assurance that it will be able to secure the necessary capital when required.
The Company is not subject to externally imposed capital requirements and there has been no change with respect to the overall capital risk management strategy during the year ended March 31, 2022.
18. Segment information
The Company operates in a single reportable operating segment and geographic location involving the development of plant-based proteins. All non-current assets are located in Canada.
All revenues are generated in Canada, Switzerland, and the USA. For the year ended March 31, 2022, revenues of $
19. Subsequent events
Subsequent to March 31, 2022:
a) The Company made an additional capital loan advance to Merit Functional Foods for $
b) As a result of the $
c) Burcon entered into a loan agreement with Large Scale for a secured loan (the “Secured Loan”) of up to $
32
BURCON NUTRASCIENCE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS March 31, 2022, 2021 and 2020 (In Canadian dollars) |
d) Burcon received a letter from the Listings Qualification Department of the Nasdaq Stock Market LLC ("Nasdaq") notifying the Company that it has not met the listing rule that requires the listed securities of the Company to maintain a minimum bid price of US$
33
Exhibit 99.5 - Additional Information
Part I
Item 3
D. Risk factors
Our inability to provide audited financial statements for Merit Functional Foods Corporation in accordance with Rule 3-09 may result in enforcement actions by the SEC or may, among other matters, cause us to be unable to complete a public offering in the United States
We have been unable to provide certain financial statements of Merit Functional Foods Corporation (“Merit”) that are required by Rule 3-09 to be included in our company’s annual report. Under Rule 3-09, we are required to present or generate financial statements of Merit as of and for the fiscal year ended December 31, 2021, 2020 and 2019 audited in accordance with U.S. generally accepted auditing standards. We are unable to comply with this requirement, because the audit of Merit’s financial statements was completed in accordance with Canadian generally accepted auditing standards and do not meet the requirements for filing with the Form 20-F annual report.
We believe that the information presented by separate financial statements of Merit would not provide to our company’s investors additional material information not already included in our company’s own consolidated financial statements included in this annual report. As a result, we do not believe that the omission of those financial statements will have a material impact on a reader’s understanding of our financial condition or results of operations. Nevertheless, we requested a waiver from the SEC from the requirement to file the consolidated financial statements of Merit described above, and the SEC has not granted our waiver request.
As a result, we are currently not fully compliant with our reporting requirements with the U.S. Securities Exchange Act of 1934 (the “Exchange Act”). The SEC may impose penalties or otherwise take action against our company. In addition, the SEC may not declare effective any registration statement that we file that requires the financial statements under Rule 3-09 to be included. If, as a result, we are unable to complete a registered offering, our ability to access the public capital markets in the United States would be impaired. Furthermore, the Rule 144 safe harbor for certain sales of our common shares in the United States is currently unavailable and Nasdaq may not consider us to be in compliance with ongoing listing standards and our common shares may be delisted from Nasdaq.
Item 4
D. Property, plants and equipment
The semi-works production facility in Winnipeg, Manitoba of Burcon NutraScience Corporation ("Burcon" or the "Company") has an annual production capacity of 15 tonnes.
Item 7
A. Major Shareholders
Major shareholders do not have different voting rights from other holders of Common Shares.
Item 10
B. Articles of Continuation
Incorporation
Burcon continued into the Province of British Columbia, Canada on September 25, 2020 and is subject to the Business Corporations Act (British Columbia) (the "BCA"). Our British Columbia incorporation number is C1267387. The following is a summary of certain provision of the Company's articles as well as certain provisions of the BCA and is qualified in its entirety by reference to the provisions of the Company's articles and the BCA.
Objects and Purposes of Our Company
Our articles do not contain a description of our objects and purposes and do not place any limitations on the business that we may carry on.
Voting on Proposals. Arrangements, Contracts or Compensation by Directors
Our articles provide that a director who holds a disclosable interest (as that term is used in the BCA) in a contract or transaction into which the Company has entered or proposes to enter is not entitled to vote on any directors' resolution to approve that contract or transaction, unless all the directors have a disclosable interest in that contract or transaction, in which case any or all of those directors may vote on such resolution. A director who holds a disclosable interest in a contract or transaction into which the Company has entered or proposes to enter and who is present at the meeting of the board at which the contract or transaction is considered for approval may be counted in the quorum at the meeting whether or not the director votes on any or all of the resolutions considered at the meeting.
Borrowing Powers of Directors
Our articles provide that we, if authorized by our directors, may:
- borrow money in the manner and amount, on the security, from the sources and on the terms and conditions that they consider appropriate;
- issue bonds, debentures and other debt obligations either outright or as security for any liability or obligation of our company or any other person and at such discounts or premiums and on such other terms as they consider appropriate;
- guarantee the repayment of money by any other person or the performance of any obligation of any other person; and
- mortgage, charge, whether by way of specific or floating charge, grant a security interest in, or give other security on, the whole or any part of the present and future assets and undertaking of our company.
Quorum
The quorum necessary for the transaction of the business at a meeting of the directors may be set by the directors and, if not so set, is deemed to be set at a majority of the number of directors then in office.
Qualifications of Directors
Under our articles, a director is not required to hold a share in the capital of the Company as qualification for his or her office but must be qualified as required by the BCA to become, act or continue to act as a director. Our articles contain no provisions regarding retirement or non-retirement of directors under an age limit requirement.
Share Rights
The holders of our common shares are entitled to
- Dividends as and when declared by the board of directors from time to time. The board may set a date as the record date for the purpose of determining shareholders entitled to receive payment of a dividend. The record date must not precede the date on which the dividend is to be paid by more than two months. If no record date is set, the record date is 5 p.m. on the date on which the board passes the resolution declaring the dividend. Any dividend unclaimed after a period of six years from the date on which the same has been declared to be payable shall be forfeited and shall revert to the Company. The Company shall not be liable to any person in respect of any dividend which is forfeited to the Company or delivered to any public official pursuant to any applicable abandoned property, escheat or similar law.
- Vote, as follows. On a vote by show of hands (or its functional equivalent), every person present who is a shareholder or proxy holder and entitled to vote on the matter has one vote; and on a poll, every shareholder entitled to vote on the matter has one vote in respect of each share entitled to be voted on the matter and held by that shareholder and may exercise that vote either in person or by proxy. Directors do not stand for re-election at staggered intervals. Each director elected at an annual shareholder meeting holds office until the conclusion of the next annual meeting of shareholders of the Company or until his or her successor is elected or appointed, unless his or her office is earlier vacated in accordance with our articles or with the provisions of the BCA.
- Participate ratably in any distribution of property or assets upon the liquidation, winding-up or other dissolution of the Company. Our common shares carry no pre-emptive rights, conversion or exchange rights, redemption, retraction, repurchase, sinking fund or purchase fund provisions. There are no provisions requiring the holders of our common shares to contribute additional capital and there are no restrictions on the issuance of additional securities by the Company. There are no restrictions on the repurchase or redemption of the common shares by the Company except to the extent that any such repurchase or redemption would render the Company insolvent pursuant to the BCA.
Procedures to Change the Rights of Shareholders
Our articles state that subject to the special rights or restrictions attached to the shares of any class or series of shares and the BCA, the Company may by ordinary resolution of its shareholders: (a) create one or more classes or series of shares or, if none of the shares of a class or series of shares are allotted or issued, eliminate that class or series of shares; (b) increase, reduce or eliminate the maximum number of shares that the Company is authorized to issue out of any class or series of shares or establish a maximum number of shares that the Company is authorized to issue out of any class or series of shares for which no maximum is established; (c) subdivide or consolidate all or any of its unissued, or fully paid issued shares; (d) if the Company is authorized to issue shares of a class of shares with par value: (i) decrease the par value of those shares, or (ii) if none of the shares of that class of shares are allotted or issued, increase the par value of those shares); (e) change all or any of its unissued or fully paid issued shares with par value into shares without par value or all or any of its unissued shares without par value into shares with par value; (f) alter the identifying name of any of its shares; or (g) otherwise alter its shares or authorized share structure when required or permitted to do so by the BCA.
A right or special right attached to issued shares must not be prejudiced or interfered with under the BCA, the notice of articles or the articles unless the holders of shares of the class or series of shares to which the right or special right is attached consent by a special separate resolution of the holders of such class or series of shares.
Under the general provisions of the BCA, the Articles may be amended by the affirmative vote of the holders of two-thirds (2/3) of the votes cast by the shareholders at a special meeting
Shareholder Meetings
Each director holds office until our next annual general meeting or until his office is earlier vacated in accordance with our articles or with the provisions of the BCA. A director appointed or elected to fill a vacancy on our board also holds office until our next annual general meeting.
Our articles and the BCA provide that our annual meetings of shareholders must be held at least once in each calendar year and not more than 15 months after the last annual general meeting at such time and place as our board may determine. Our directors may, at any time, call a meeting of our shareholders.
Under the BCA, the holders of not less than five percent of our issued common shares that carry the right to vote at a meeting may requisition our directors to call a meeting of shareholders for the purposes of transacting any business that may be transacted at a general meeting.
Under our articles, a quorum for the transaction of business at a meeting of shareholders is present if shareholders who, in the aggregate, hold at least 5% of the issued shares entitled to be voted at the meeting are present in person or represented by proxy, irrespective of the number of persons actually present at the meeting.
Our articles state that in addition to those persons who are entitled to vote at a meeting of shareholders, the only other persons entitled to be present at the meeting are the directors, the officers, any lawyer for the Company, the auditor of the Company, any persons invited to be present at the meeting by the board or by the chair of the meeting and any other persons who, although not entitled to vote, are entitled or required under the BCA or these Articles to be present at the meeting; but if any of those persons does attend the meeting, that person is not to be counted in the quorum and is not entitled to vote at the meeting unless that person is a shareholder or proxy holder entitled to vote at the meeting.
Our articles require that advance notice be given to the Company in circumstances where nominations of persons for election as a director are made by shareholders. Among other things, our articles fix a deadline by which shareholders must submit a notice of director nominations to the Company prior to any annual or special meeting of shareholders where directors are to be elected and set forth the information that a shareholder must include in the notice for it to be valid. Our articles provide that in the case of an annual meeting of shareholders, notice must be given to the Company no less than 30 nor more than 50 days prior to the date of the annual meeting, provided, however, that in the event that the annual meeting is to be held on a date that is less than 50 days after the date on which the first public announcement of the date of the annual meeting was made, notice may be given no later than the close of business on the 10th day following such public announcement. In the case of a special meeting of shareholders (which is not also an annual meeting), notice must be given to the Company no later than the close of business on the 15th day following the day on which the first public announcement of the date of the special meeting was made.
Limitations on Ownership of Securities
There is no limitation imposed by Canadian law or by the Company's articles on the right of a non-Canadian resident to hold or vote shares, other than discussed below.
Competition Act
Limitations on the ability to acquire and hold shares may be imposed by the Competition Act (Canada). This legislation permits the Commissioner of Competition (Commissioner), to review any acquisition or establishment, directly or indirectly, including through the acquisition of shares, of control over or of a significant interest in us. This legislation grants the Commissioner jurisdiction, for up to one year after the acquisition has been substantially completed, to challenge this type of acquisition by seeking a remedial order, including an order to prohibit the acquisition or require divestitures, from the Canadian Competition Tribunal, which may be granted where the Competition Tribunal finds that the acquisition substantially prevents or lessens, or is likely to substantially prevent or lessen, competition.
This legislation also requires any person or persons who intend to acquire more than 20% of the Company's voting shares or, if such person or persons already own more than 20% of the Company's voting shares prior to the acquisition, more than 50% of the Company's voting shares, to file a notification with the Canadian Competition Bureau if certain financial thresholds are exceeded. Where a notification is required, unless an exemption is available, the legislation prohibits completion of the acquisition until the expiration of the applicable statutory waiting period, unless the Commissioner either waives or terminates such waiting period or issues an advance ruling certificate. The Commissioner's review of a notifiable transaction for substantive competition law considerations may take longer than the statutory waiting period.
Investment Canada Act
The Investment Canada Act requires each "non Canadian" (as defined in the Investment Canada Act) who acquires "control" of an existing "Canadian business", to file a notification in prescribed form with the responsible federal government department(s) not later than 30 days after closing, provided the acquisition of control is not a reviewable transaction under the Investment Canada Act. Subject to certain exemptions, a transaction that is reviewable under the Investment Canada Act may not be implemented until an application for review has been filed and the responsible Minister of the federal cabinet has determined that the investment is likely to be of "net benefit to Canada" taking into account certain factors set out in the Investment Canada Act. Under the Investment Canada Act, an investment in shares by a non-Canadian that is ultimately controlled in a country that has a free trade agreement with Canada, including a United States investor, would be reviewable only if it were an investment to acquire control of us pursuant to the Investment Canada Act and the Company's enterprise value (as determined pursuant to the Investment Canada Act and its regulations) was equal to or greater than the amount specified, which is currently C$1.711 billion. For other investors who are not state-owned enterprises and who are ultimately controlled by World Trade Organization members, the threshold is currently C$1.141 billion for 2022.
The Company is not aware of any governmental laws, decrees, regulations or other legislation in Canada that restrict the export or import of capital, including the availability of cash and cash equivalents for use by the Company's affiliated companies, or that affect the remittance of dividends, interest or other payments to non-resident holders of the Company's securities. Any remittances of dividends to residents of the United States and to other non-resident holders are, however, subject to withholding tax.
Change in Control
There are no provisions in our articles or in the BCA that would have the effect of delaying, deferring or preventing a change in control of our company, and that would operate only with respect to a merger, acquisition or corporate restructuring involving our Company or our subsidiaries.
Ownership Threshold
Our articles or the BCA do not contain any provisions governing the ownership threshold above which shareholder ownership must be disclosed. Securities legislation in Canada, however, requires that we disclose in our information circular for our annual general meeting, holders who beneficially own more than 10% of our issued and outstanding shares. Most state corporation statutes do not contain provisions governing the threshold above which shareholder ownership must be disclosed. We expect that the United States federal securities laws will require us to disclose holders who own 5% or more of our issued and outstanding shares of the Company.
E. Taxation
CERTAIN CANADIAN FEDERAL INCOME TAX CONSIDERATIONS FOR U.S. HOLDERS
The following is a general summary of the principal Canadian federal income tax considerations generally applicable under Income Tax Act (Canada) (the “Tax Act”) to a beneficial owner of Common Shares, each of whom, at all relevant times, for the purposes of the Tax Act, holds such Common Shares as capital property, deals at arm’s length with the Company, is not affiliated with the Company and, for purposes of the Tax Act, is not, is not deemed to be, a resident of Canada and has not and will not use or hold or be deemed to use or hold the Common Shares in the course of carrying on business in Canada (a “Non-Resident Holder”). Special rules, which are not discussed below, may apply to a non-resident of Canada that is an insurer which carries on business in Canada and elsewhere or that is an “authorized foreign bank” as defined in the Tax Act.
The Common Shares will generally be considered capital property to a Non-Resident Holder unless either (i) the Non-Resident Holder holds the Common Shares in the course of carrying on a business of buying and selling securities or (ii) the Non-Resident Holder has acquired the Common Shares in a transaction or transactions considered to be an adventure or concern in the nature of trade.
The term “U.S. Holder,” for the purposes of this section, means a Non-Resident Holder who, for purposes of the Canada-United States Tax Convention (1980) as amended, (the “Convention”), is at all relevant times a resident of the United States and is a “qualifying person” within the meaning of the Convention. In some circumstances, fiscally transparent entities (including limited liability companies) will be entitled to benefits under the Convention. U.S. Holders are urged to consult with their own tax advisors to determine their entitlement to benefits under the Convention based on their particular circumstances.
This summary is based on the current provisions of the Tax Act, the regulations thereunder (the “Regulations”), the current provisions of the Convention, counsel’s understanding of the current published administrative policies and assessing practices of the Canada Revenue Agency (the “CRA”) publicly available prior to the date hereof. This summary also takes into account all specific proposals to amend the Tax Act and Regulations publicly announced by or on behalf of the Minister of Finance (Canada) prior to the date hereof (collectively, the “Proposed Tax Amendments”). No assurances can be given that the Proposed Tax Amendments will be enacted or will be enacted as proposed. Other than the Proposed Tax Amendments, this summary does not take into account or anticipate any changes in law or the administration policies or assessing practice of CRA, whether by judicial, legislative, governmental or administrative decision or action, nor does it take into account provincial, territorial or foreign income tax legislation or considerations, which may differ significantly from those discussed herein.
This summary is of a general nature only and is not intended to be, nor should it be construed to be, legal or tax advice to any particular Non-Resident Holder and no representations with respect to the income tax consequences to any particular Non-Resident Holder are made. This summary is not exhaustive of all Canadian federal income tax considerations. Accordingly, Non-Resident Holders should consult their own tax advisors with respect to their own particular circumstances. The discussion below is qualified accordingly.
Currency Conversion
Subject to certain exceptions that are not discussed herein, for purposes of the Tax Act, all amounts relating to the acquisition, holding or disposition of Common Shares, including dividends, adjusted cost base and proceeds of dispositions must be determined in Canadian dollars using the daily exchange rate of the Bank of Canada on the particular date the particular amount arose or such other rate of exchange as acceptable to the Minister of National Revenue (Canada).
Disposition of Common Shares
A Non-Resident Holder will not be subject to tax under the Tax Act in respect of any capital gain realized by such Non-Resident Holder on a disposition of the Common Shares, nor will capital losses arising from the disposition be recognized under the Tax Act, unless the Common Shares constitute “taxable Canadian property” (as defined in the Tax Act) of the Non-Resident Holder at the time of disposition and the Non-Resident Holder is not entitled to relief under an applicable income tax treaty or convention. As long as the shares are then listed on a “designated stock exchange” (as defined in the Tax Act) (which currently includes the TSX and NASDAQ) at the time of disposition, the Common Shares generally will not constitute taxable Canadian property of a Non-Resident Holder, unless at any time during the 60-month period immediately preceding the disposition the following two conditions are met concurrently: (i) the Non-Resident Holder, persons with whom the Non-Resident Holder did not deal at arm’s length, partnerships in which the Non-Resident Holder or persons with whom the Non-Resident Holder did not deal at arm’s length holds a membership interest directly or indirectly through one or more partnerships, or the Non-Resident Holder together with all such persons, owned or was considered to own 25% or more of the issued shares of any class or series of shares of the capital stock of the Company; and (ii) more than 50% of the fair market value of the Common Shares was derived directly or indirectly from one or any combination of real or immovable property situated in Canada, “Canadian resource properties” (as defined in the Tax Act), “timber resource properties” (as defined in the Tax Act) or a options in respect of, or interests in, or civil law rights in, such properties, whether or not it exists. Notwithstanding the foregoing, a Common Share may otherwise be deemed to be taxable Canadian property to a Non-Resident Holder for purposes of the Tax Act.
If the Common Shares are taxable Canadian property to a Non-Resident Holder, any capital gain realized on the disposition or deemed disposition of such shares, may not be subject to Canadian federal income tax pursuant to the terms of an applicable income tax treaty or convention between Canada and the country of residence of a Non-Resident Holder, including the Convention. Non-Resident Holders who may hold Common Shares as “taxable Canadian property” should consult their own tax advisors.
A Non-Resident Holder whose shares are taxable Canadian property should consult their own advisors.
Dividends on Common Shares
Under the Tax Act, dividends on Common Shares paid or credited to a Non-Resident Holder will be subject to Canadian withholding tax at the rate of 25% of the gross amount of the dividends. This withholding tax may be reduced pursuant to the terms of an applicable income tax treaty or convention between Canada and the country of residence of a Non-Resident Holder. Under the Convention, a U.S. Holder will generally be subject to Canadian withholding tax at a rate of 15% of the gross amount of such dividends (or 5% in the case of a U.S. Holder that is a company beneficially owning at least 10% of the Company’s voting shares).
CERTAIN UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS
The following is a general summary of certain material U.S. federal income tax considerations applicable to a U.S. Holder (as defined below) arising from and relating to the acquisition, ownership, and disposition of 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 considerations that may apply to a U.S. Holder arising from and relating to 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 to such U.S. Holder, including without limitation specific tax consequences to a U.S. Holder under an applicable income tax treaty. 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. This summary does not address the U.S. federal net investment income, U.S. federal alternative minimum, U.S. federal estate and gift, U.S. state and local, and non-U.S. tax consequences to U.S. Holders of the acquisition, ownership, and disposition of Common Shares. In addition, except as specifically set forth below, this summary does not discuss applicable tax reporting requirements. Each prospective U.S. Holder should consult its own tax advisor regarding the U.S. federal, U.S. federal net investment income, U.S. federal alternative minimum, U.S. federal estate and gift, U.S. state and local, and non-U.S. tax consequences relating to the acquisition, ownership, and disposition of Common Shares. No legal opinion from U.S. legal counsel or ruling from the Internal Revenue Service (the "IRS") has been requested, or will be obtained, regarding the U.S. federal income tax consequences of the acquisition, ownership, and disposition of Common Shares. This summary is not binding on the IRS, and the IRS is not precluded from taking a position that is different from, and contrary to, the positions taken in this summary. In addition, because the authorities on which this summary is based are subject to various interpretations, the IRS and the U.S. courts could disagree with one or more of the conclusions described in this summary.
Scope of this Summary
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 IRS, published administrative positions of the IRS, and U.S. court decisions that are applicable and, in each case, as in effect and available, as of the date of this document. 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 or prospective basis which could affect the U.S. federal income tax considerations described in this summary. 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, current or prospective basis.
U.S. Holders
For purposes of this summary, the term "U.S. Holder" means a beneficial owner of Common Shares that is for U.S. federal income tax purposes:
- an individual who is a citizen or resident of the U.S.;
- a corporation (or other entity taxable as a corporation for U.S. federal income tax purposes) organized under the laws of the U.S., any state thereof or the District of Columbia;
- an estate whose income is subject to U.S. federal income taxation regardless of its source; or
- a trust that (1) is subject to the primary supervision of a court within the U.S. and the control of one or more U.S. persons for all substantial decisions or (2) has a valid election in effect under applicable Treasury Regulations to be treated as a U.S. person.
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 considerations applicable to U.S. Holders that are subject to special provisions under the Code, including, but not limited to, the following U.S. Holders that: (a) are tax-exempt organizations, qualified retirement plans, individual retirement accounts, or other tax-deferred accounts; (b) are financial institutions, underwriters, insurance companies, real estate investment trusts, or regulated investment companies; (c) are broker-dealers, dealers, or traders in securities or currencies that elect to apply a mark-to-market accounting method; (d) have a "functional currency" other than the USD; (e) own Common Shares as part of a straddle, hedging transaction, conversion transaction, constructive sale, or other integrated transaction; (f) acquired Common Shares in connection with the exercise of employee stock options or otherwise as compensation for services; (g) hold Common Shares other than as a capital asset within the meaning of Section 1221 of the Code (generally, property held for investment purposes); (h) are subject to taxing jurisdictions other than, or in addition to, the United States; (i) are partnerships and other pass-through entities (and investors in such partnerships and entities); (j) are S corporations (and shareholders or investors in such S corporations); (k) own, have owned or will own (directly, indirectly, or by attribution) 10% or more of the total combined voting power or value of the outstanding shares of the Company; (l) U.S. expatriates or former long-term residents of the U.S., or (m) are subject to special tax accounting rules with respect to Common Shares. U.S. Holders that are subject to special provisions under the Code, including, but not limited to, U.S. Holders described immediately above, should consult their own tax advisor regarding the U.S. federal, U.S. federal net investment income, U.S. federal alternative minimum, U.S. federal estate and gift, U.S. state and local, and non-U.S. tax consequences relating to the acquisition, ownership and disposition of Common Shares.
If an entity or arrangement that is classified as a partnership (or other "pass-through" entity) for U.S. federal income tax purposes holds Common Shares, the U.S. federal income tax consequences to such entity and the partners (or other owners) of such entity generally will depend on the activities of the entity and the status of such partners (or owners). This summary does not address the tax consequences to any such owner. Partners (or other owners) of entities or arrangements that are classified as partnerships or as "pass-through" entities for U.S. federal income tax purposes should consult their own tax advisors regarding the U.S. federal income tax consequences arising from and relating to the acquisition, ownership, and disposition of Common Shares.
Ownership and Disposition of Common Shares
The following discussion is subject to the rules described below under the heading "Passive Foreign Investment Company Rules".
Taxation of Distributions
A U.S. Holder that receives a distribution, including a constructive distribution, with respect to a share will be required to include the amount of such distribution in gross income as a dividend (without reduction for any foreign income tax withheld from such distribution) to the extent of the current or accumulated "earnings and profits" of the Company, as computed for U.S. federal income tax purposes. A dividend generally will be taxed to a U.S. Holder at ordinary income tax rates if the Company is a PFIC for the tax year of such distribution or the preceding tax year. To the extent that a distribution exceeds the current and accumulated "earnings and profits" of the Company, such distribution will be treated first as a tax-free return of capital to the extent of a U.S. Holder's tax basis in the Common Shares and thereafter as gain from the sale or exchange of such Common Shares (see "Sale or Other Taxable Disposition of Common Shares" below). However, the Company may not maintain the calculations of its earnings and profits in accordance with U.S. federal income tax principles, and each U.S. Holder may have to assume that any distribution by the Company with respect to the Common Shares will constitute ordinary dividend income. Dividends received on Common Shares by corporate U.S. Holders generally will not be eligible for the "dividends received deduction". Subject to applicable limitations and provided the Common Shares are readily tradable on a United States securities market, dividends paid by the Company to non-corporate U.S. Holders, including individuals, generally will be eligible for the preferential tax rates applicable to long-term capital gains for dividends, provided certain holding period and other conditions are satisfied, including that the Company not be classified as a PFIC (as defined below) in the tax year of distribution or in the preceding tax year. The dividend rules are complex, and each U.S. Holder should consult its own tax advisor regarding the application of such rules.
Sale or Other Taxable Disposition of Common Shares
A U.S. Holder will generally 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 such 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, at the time of the sale or other disposition, such Common Shares are held for more than one year.
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 are subject to significant limitations under the Code.
Passive Foreign Investment Company ("PFIC") Rules
If the Company were to constitute a PFIC for any year during a U.S. Holder's holding period, then certain potentially adverse rules would affect the U.S. federal income tax consequences to a U.S. Holder resulting from the acquisition, ownership and disposition of Common Shares. The Company believes that it was not a PFIC for the tax year ended March 31, 2022 and based on current business plans and financial expectations, the Company does not anticipate that it will be a PFIC for its current tax year. No opinion of legal counsel or ruling from the IRS concerning the status of the Company as a PFIC has been obtained or is currently planned to be requested. However, PFIC classification is fundamentally factual in nature, generally cannot be determined until the close of the tax year in question and is determined annually. Additionally, the analysis depends, in part, on the application of complex U.S. federal income tax rules, which are subject to differing interpretations. Consequently, there can be no assurance that the Company has never been and will not become a PFIC for any tax year during which U.S. Holders hold Common Shares.
In addition, in any year in which the Company is classified as a PFIC, a U.S. Holder will be required to file an annual report with the IRS containing such information as Treasury Regulations and/or other IRS guidance may require. A failure to satisfy such reporting requirements may result in an extension of the time period during which the IRS can assess a tax. U.S. Holders should consult their own tax advisors regarding the requirements of filing such information returns under these rules, including the requirement to file an IRS Form 8621 annually.
The Company generally will be a PFIC under Section 1297 of the Code if, after the application of certain "look-through" rules with respect to subsidiaries in which the Company holds at least 25% of the value of such subsidiary, for a tax year, (a) 75% or more of the gross income of the Company for such tax year is passive income (the "income test") or (b) 50% or more of the value of the Company's assets either produce passive income or are held for the production of passive income (the "asset test"), based on the quarterly average of the fair market value of such assets. "Gross income" generally includes all sales revenues less the cost of goods sold, plus income from investments and incidental or outside operations or sources, and "passive income" generally includes, for example, dividends, interest, certain rents and royalties, certain gains from the sale of stock and securities, and certain gains from commodities transactions. Active business gains arising from the sale of commodities generally are excluded from passive income if substantially all of a foreign corporation's commodities are stock in trade or inventory, depreciable property used in a trade or business or supplies regularly used or consumed in the ordinary course of its trade or business, and certain other requirements are satisfied.
If the Company were a PFIC in any tax year during which a U.S. Holder held Common Shares, such holder generally would be subject to special rules with respect to "excess distributions" made by the Company on the Common Shares and with respect to gain from the disposition of Common Shares. An "excess distribution" generally is defined as the excess of distributions with respect to the Common Shares received by a U.S Holder in any tax year over 125% of the average annual distributions such U.S. Holder has received from the Company during the shorter of the three preceding tax years, or such U.S. Holder's holding period for the Common Shares. Generally, a U.S. Holder would be required to allocate any excess distribution or gain from the disposition of the Common Shares ratably over its holding period for the Common Shares. Such amounts allocated to the year of the disposition or excess distribution would be taxed as ordinary income, and amounts allocated to prior tax years would be taxed as ordinary income at the highest tax rate in effect for each such year and an interest charge at a rate applicable to underpayments of tax would apply.
While there are U.S. federal income tax elections that sometimes can be made to mitigate these adverse tax consequences (including the "QEF Election" under Section 1295 of the Code and the "Mark-to-Market Election" under Section 1296 of the Code), such elections are available in limited circumstances and must be made in a timely manner.
U.S. Holders should be aware that, for each tax year, if any, that the Company is a PFIC, the Company can provide no assurances that it will satisfy the record-keeping requirements of a PFIC, or that it will make available to U.S. Holders the information such U.S. Holders require to make a QEF Election with respect to the Company or any subsidiary that also is classified as a PFIC.
Certain additional adverse rules may apply with respect to a U.S. Holder if the Company is a PFIC, regardless of whether the U.S. Holder makes a QEF Election. These rules include special rules that apply to the amount of foreign tax credit that a U.S. Holder may claim on a distribution from a PFIC. Subject to these special rules, foreign taxes paid with respect to any distribution in respect of stock in a PFIC are generally eligible for the foreign tax credit. U.S. Holders should consult their own tax advisors regarding the potential application of the PFIC rules to the ownership and disposition of Common Shares, and the availability of certain U.S. tax elections under the PFIC rules.
Additional Considerations
Receipt of Foreign Currency
The amount of any distribution paid to a U.S. Holder in foreign currency, or payment received on the sale, exchange or other taxable disposition of Common Shares, generally will be equal to the USD value of such foreign currency based on the exchange rate applicable on the date of receipt (regardless of whether such foreign currency is converted into USD at that time). A U.S. Holder will have a basis in the foreign currency equal to its USD value on the date of receipt. Any U.S. Holder who converts or otherwise disposes of the foreign currency after the date of receipt may have a foreign currency exchange gain or loss that would be treated as ordinary income or loss, and generally will be U.S. source income or loss for foreign tax credit purposes. Different rules apply to U.S. Holders who use the accrual method with respect to foreign currency received upon the sale, exchange or other taxable disposition of the Common Shares. Each U.S. Holder should consult its own U.S. tax advisor regarding the U.S. federal income tax consequences of receiving, owning, and disposing of foreign currency.
Foreign Tax Credit
Subject to the PFIC rules discussed above, a U.S. Holder that pays (whether directly or through withholding) foreign 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 foreign income tax. 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. The foreign tax credit rules are complex and involve the application of rules that depend on a U.S. Holder's particular circumstances. Each U.S. Holder should consult its own U.S. tax advisor regarding the foreign tax credit rules.
Backup Withholding and Information Reporting
Under U.S. federal income tax law and Treasury Regulations, certain categories of U.S. Holders must file information returns with respect to their investment in, or involvement in, a foreign corporation. For example, U.S. return disclosure obligations (and related penalties) are imposed on individuals who are U.S. Holders that hold certain specified foreign financial assets in excess of certain threshold amounts. The definition of specified foreign financial assets includes not only financial accounts maintained in foreign financial institutions, but also, unless held in accounts maintained by a financial institution, any stock or security issued by a non-U.S. person, any financial instrument or contract held for investment that has an issuer or counterparty other than a U.S. person and any interest in a foreign entity. U.S. Holders may be subject to these reporting requirements unless their Common Shares are held in an account at certain financial institutions. Penalties for failure to file certain of these information returns are substantial. U.S. Holders should consult their own tax advisors regarding the requirements of filing information returns, including the requirement to file an IRS Form 8938.
Payments made within the U.S. or by a U.S. payor or U.S. middleman, of dividends on, and proceeds arising from the sale or other taxable disposition of, Common Shares will generally be subject to information reporting and backup withholding tax, currently at the rate of 24%, 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, certain exempt persons generally are excluded from these information reporting and backup withholding rules. Backup withholding is not an additional tax. 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 in a timely manner.
The discussion of reporting requirements set forth above is not intended to constitute a complete description of all reporting requirements that may apply to a U.S. Holder. A failure to satisfy certain reporting requirements may result in an extension of the time period during which the IRS can assess a tax, and under certain circumstances, such an extension may apply to assessments of amounts unrelated to any unsatisfied reporting requirement. Each U.S. Holder should consult its own tax advisor regarding the information reporting and backup withholding rules.
THE ABOVE SUMMARY IS NOT INTENDED TO CONSTITUTE A COMPLETE ANALYSIS OF ALL TAX CONSIDERATIONS APPLICABLE TO U.S. HOLDERS WITH RESPECT TO THE ACQUISITION, OWNERSHIP, AND DISPOSITION OF COMMON SHARES. U.S. HOLDERS SHOULD CONSULT THEIR OWN TAX ADVISORS AS TO THE TAX CONSIDERATIONS APPLICABLE TO THEM IN LIGHT OF THEIR OWN PARTICULAR CIRCUMSTANCES.
Part II
Item 15 Controls and Procedures
The following language amends and restates the “Evaluation of Disclosure Controls and Procedures” contained in Management’s Discussion and Analysis:
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed by us in the reports we file or submit in accordance with National Instrument 51-102 - Continuous Disclosure Obligations ("NI 51-102") and under the U.S. Securities Exchange Act of 1934, as amended (the "Exchange Act") is recorded, processed, summarized and reported within the time periods specified by NI 51-102 and the Canadian Securities Administrators and the U.S. Securities and Exchange Commission's rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to provide reasonable assurance that information required to be disclosed by us in the reports we file or submit under NI 51-102 and the Exchange Act is accumulated and communicated by management, including the Interim Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure.
As required by National Instrument 52-109 - Certification of Disclosure in Issuers' Annual and Interim Filings ("NI 52-109") and Rule 13a-15(b) under the Exchange Act, our management, including our Interim Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of March 31, 2022. Based on the evaluation, our Interim Chief Executive Officer and Chief Financial Officer concluded that, as of March 31, 2022, our disclosure controls and procedures are not effective at a reasonable assurance level due to the material weakness described in Management’s Report on Internal Control over Financial Reporting and inability to file the Merit financial statements as required by Rule 3-09 of Regulation S-X.
Item 16G
Corporate Governance
NASDAQ STATEMENT OF CORPORATE GOVERNANCE DIFFERENCES
We are a foreign private issuer and our common shares are listed on the NASDAQ Capital Market ("NASDAQ"). Nasdaq Marketplace Rule 5615(a)(3) permits a foreign private issuer to follow its home country practice in lieu of most of the requirements of the 5600 Series of the NASDAQ Marketplace Rules. In order to claim such an exemption, we must disclose the significant differences between our corporate governance practices and those required to be followed by U.S. domestic issuers under NASDAQ's corporate governance requirements. Set forth below is a summary of such differences.
Shareholder Meeting Quorum Requirements
The NASDAQ minimum quorum requirement under NASDAQ Marketplace Rule 5620(c) for a shareholder meeting is 33-1/3% of the outstanding shares of common stock. We follow applicable Canadian laws with respect to quorum requirements. Our quorum requirement is set forth in our articles, which currently provide that a quorum is met if shareholders who, in the aggregate, hold at least 5% of the issued shares entitled to be voted at the meeting are present in person or represented by proxy, irrespective of the number of persons actually present at the meeting.