CordovaCann Corp 20-F for FY2021
CordovaCann Corp. (LVRLF)
About this 20-F
CordovaCann Corp filed this 20-F on December 15, 2021, covering the fiscal year ended June 30, 2021 (FY2021).
Headline figures
Fiscal year ended June 30, 2021, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Revenue
- 10.32M CAD
- up 6087.4% from 166.77K CAD a year earlier
- Net loss
- $2.56M
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM
☐ REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934
OR
For the fiscal year ended
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______________ to __________________
OR
☐ SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15D OF THE SECURITIES EXCHANGE ACT OF 1934
Date of event requiring this shell company report
Commission file number:
(Exact name of Registrant as specified in its charter) |
(Jurisdiction of incorporation or organization)
(Address of principal executive offices)
Thomas M. Turner, Jr., T: 917-843-2169, F: 416-640-3183,
217 Queen Street West, Suite 401,
Toronto, Ontario, M5V 0R2, Canada
(Name, Telephone, Facsimile number and Address of Company Contact Person)
Securities registered or to be registered pursuant to Section 12(b) of the Act: None
Securities registered or to be registered pursuant to Section 12(g) of the Act.
Common shares without par value
(Title of Class)
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 common stock as of the close of the period covered by the annual report
Common shares without par value – 93,151,074 as at June 30, 2021
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. ☐ Yes ☒ No
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 ☐ No
Note - Checking the box above will not relieve any registrant required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 from their obligations under those Sections.
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 report) and (2) has been subject to such filing requirements for the past 90 days. ☒
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or such shorter period that the registrant was required to submit and post such files). ☒
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of "accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer ☐ | Accelerated filer ☐ |
Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:
US GAAP | ☐ | International Financial Reporting Standards as issued by the International Accounting Standards Board | ☒ |
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).
TABLE OF CONTENTS
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Foreign Private Issuer Status and Currencies and Exchange Rates |
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Material Modifications to the Rights of Security Holders and Use of Proceeds |
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Audit Committee, Code of Ethics, and Principal Accountant's Fees, and Services |
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FORWARD-LOOKING STATEMENTS
This annual report on Form 20-F (this “Annual Report”) includes "forward-looking statements." All statements, other than statements of historical facts, included in this Annual Report that address activities, events or developments, which we expect or anticipate, will or may occur in the future are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended and Section 21E of the Securities Exchange Act of 1934, as amended.
The words "believe", "intend", "expect", "anticipate", "project", "estimate", "predict" and similar expressions are also intended to identify forward-looking statements.
These forward-looking statements address, among others, such issues as:
| - | Future earnings and cash flow; |
| - | Expansion and growth of our business and operations; and |
| - | Our prospective operational and financial information. |
These statements are based on assumptions and analyses made by us in light of our experience and our perception of historical trends, current conditions and expected future developments, as well as other factors we believe are appropriate in particular circumstances. However, whether actual results and developments will meet our expectations and predictions depends on a number of risks and uncertainties, which could cause actual results to differ materially from our expectations, including the risks set forth in "Item 3 - Key Information - Risk Factors" and the following:
| - | Fluctuations in prices of our products and services; |
| - | Potential investments, acquisitions or other business opportunities; |
| - | Availability of financing opportunities, legal and regulatory risks; |
| - | General economic, market and business conditions; and |
| - | Other risks and factors beyond our control. |
Consequently, all of the forward-looking statements made in this Annual Report are qualified by these cautionary statements. We cannot assure you that the actual results or developments anticipated by us will be realized or, even if substantially realized, that they will have the expected effect on us or our business or operations.
Unless the context indicates otherwise, the terms "CordovaCann Corp.", “the "Company”, "CordovaCann", “we”, “us”, “our” and “Registrant” are used interchangeably in this Annual Report and mean CordovaCann Corp. and its subsidiaries.
FOREIGN PRIVATE ISSUER STATUS AND CURRENCIES AND EXCHANGE RATES
Foreign Private Issuer Status
CordovaCann Corp. (formerly, LiveReel Media Corporation) is a Canadian corporation governed under the Canada Business Corporations Act of Canada. Approximately 80% of its common shares is held by approximately 474 non-United States citizens and residents as of the day of its most recently completed fiscal year and our business is administered principally outside the United States. As a result, we believe that we qualify as a "foreign private issuer" for continuing to report regarding the registration of our common shares using this Annual Report on Form 20-F format.
Currency
The financial information presented in this Annual Report is expressed in Canadian Dollars ("CDN” or “$") and the financial data in this Annual Report is presented in accordance with International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board ("IASB").
All dollar amounts set forth in this report are in Canadian Dollars, except where otherwise indicated.
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PART I
ITEM 1 - IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISORS
Not applicable.
ITEM 2 - OFFER STATISTICS AND EXPECTED TIMETABLE
Not applicable.
ITEM 3 - KEY INFORMATION
(A) SELECTED FINANCIAL DATA
This Report includes audited consolidated financial statements of the Company for the years ended June 30, 2021, 2020 and 2019. These audited consolidated financial statements have been prepared in accordance with IFRS as issued by the IASB.
The following is selected financial data for the Company for each of the last three fiscal years ended 2019 through 2021 on a consolidated basis. The data is extracted from the audited consolidated financial statements of the Company for each of the said years.
Summary of Financial Information in Accordance with International Financial Reporting Standards (IFRS) (CDN)
Operating data – Fiscal year ended June 30
For the Years Ending June 30, |
| 2021 |
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| 2020 |
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| 2019 |
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| $ |
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| $ |
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| $ |
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Revenue |
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| 10,318,845 |
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| 166,773 |
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| - |
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Net loss for year |
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| (4,786,514 | ) |
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| (4,650,900 | ) |
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| (5,836,536 | ) |
Net loss per share |
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| (0.06 | ) |
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| (0.10 | ) |
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| (0.15 | ) |
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Working capital (deficit) |
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| (4,721,484 | ) |
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| (4,464,323 | ) |
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| (3,236,359 | ) |
Total assets |
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| 17,274,041 |
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| 14,693,789 |
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| 4,645,132 |
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Total liabilities |
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| 9,955,668 |
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| 8,417,100 |
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| 4,282,562 |
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Capital stock |
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| 26,145,146 |
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| 19,697,180 |
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| 14,636,828 |
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Contingently issuable shares |
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| - |
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| 2,040,000 |
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| - |
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Shares to be issued |
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| 923,590 |
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| 510,000 |
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| - |
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Share subscriptions received in advance |
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| 647,296 |
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| - |
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| - |
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Contributed surplus |
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| 7,844,814 |
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| 6,709,782 |
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| 5,226,156 |
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Equity portion of convertible debentures |
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| 306,877 |
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| 862,913 |
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| 62,498 |
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Accumulated deficit |
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| (29,453,390 | ) |
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| (24,159,690 | ) |
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| (19,570,801 | ) |
Accumulated other comprehensive income |
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| 77,875 |
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| (41,599 | ) |
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| 7,889 |
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Non-controlling interest |
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| 826,165 |
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| 658,103 |
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| - |
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Shareholders’ equity (deficiency) |
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| 7,318,373 |
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| 6,276,789 |
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| 362,570 |
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Summary of Financial Information in Accordance with U.S. GAAP (CDN)
Operating data – Fiscal year ended June 30
For the Years Ending June 30, |
| 2021 |
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| 2020 |
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| 2019 |
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| $ |
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| $ |
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| $ |
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Revenue |
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| 10,318,845 |
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| 166,773 |
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| - |
|
Net loss for year |
|
| (4,786,514 | ) |
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| (4,650,900 | ) |
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| (5,836,536 | ) |
Net loss per share |
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| (0.06 | ) |
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| (0.10 | ) |
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| (0.15 | ) |
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Working capital (deficit) |
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| (4,721,484 | ) |
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| (4,464,323 | ) |
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| (3,236,359 | ) |
Total assets |
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| 17,274,041 |
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| 14,693,789 |
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| 4,645,132 |
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Total liabilities |
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| 9,955,668 |
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| 8,417,100 |
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| 4,282,562 |
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Capital stock |
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| 26,145,146 |
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| 19,697,180 |
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| 14,636,828 |
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Contingently issuable shares |
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| - |
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| 2,040,000 |
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| - |
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Shares to be issued |
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| 923,590 |
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| 510,000 |
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| - |
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Share subscriptions received in advance |
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| 647,296 |
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| - |
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| - |
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Contributed surplus |
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| 7,844,814 |
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| 6,709,782 |
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| 5,226,156 |
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Equity portion of convertible debentures |
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| 306,877 |
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| 862,913 |
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| 62,498 |
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Accumulated deficit |
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| (29,453,390 | ) |
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| (24,159,690 | ) |
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| (19,570,801 | ) |
Accumulated other comprehensive income |
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| 77,875 |
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| (41,599 | ) |
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| 7,889 |
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Non-controlling interest |
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| 826,165 |
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| 658,103 |
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| - |
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Shareholders’ equity (deficiency) |
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| 7,318,373 |
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| 6,276,789 |
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| 362,570 |
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The Company has not declared or paid any dividends in any of its last three fiscal years.
Exchange Rates
In this Annual Report on Form 20-F, unless otherwise specified, all monetary amounts are expressed in Canadian Dollars. The exchange rates used herein were obtained from Bank of Canada; however, they cannot be guaranteed.
On November 30, 2021, being the last day of November 2021, the exchange rate, based on the daily buying rates, for the conversion of Canadian Dollars into United States Dollars (the “Daily Rate of Exchange”) was $0.7817.
The following table sets out the high and low exchange rates for each of the last six months.
2021 |
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High for period |
| $ | 0.8085 |
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| $ | 0.8111 |
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| $ | 0.7988 |
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| $ | 0.8002 |
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| $ | 0.8102 |
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| $ | 0.8306 |
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Low for period |
| $ | 0.7817 |
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| $ | 0.7903 |
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| $ | 0.7795 |
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| $ | 0.7778 |
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| $ | 0.7838 |
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| $ | 0.8052 |
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The following table sets out the average exchange rates for the five most recent financial years calculated by using the average of the Daily Rate of Exchange on the last day of each month during the period.
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| Year Ended June 30, |
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| 2021 |
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| 2020 |
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| 2019 |
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| 2018 |
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| 2017 |
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Average for the year |
| $ | 0.7807 |
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| $ | 0.7453 |
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| $ | 0.7855 |
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| $ | 0.7875 |
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| $ | 0.7564 |
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(B) CAPITALIZATION AND INDEBTEDNESS
Not applicable.
(C) REASONS FOR THE OFFER AND USE OF PROCEEDS
Not applicable.
(D) RISK FACTORS
The following is a brief discussion of those distinctive or special characteristics of the Company’s operations and industry that may have a material adverse impact on, or constitute risk factors in respect of, the Company’s future financial performance.
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Summary of Regulatory Environment
Although cannabis is federally illegal in the U.S., the U.S. federal government’s approach to enforcement of such laws has trended toward non-enforcement. On August 29, 2013, the U.S. Department of Justice (the “DOJ”), issued a memorandum known as the “Cole Memorandum” to all U.S. Attorneys’ offices (federal prosecutors). The Cole Memorandum generally directed U.S. Attorneys not to prioritize the enforcement of federal cannabis laws against individuals and businesses that comply with state laws legalizing cannabis. While not legally binding, and merely prosecutorial guidance, the Cole Memorandum laid a framework for managing the tension between state and federal laws concerning state regulated cannabis businesses.
On January 4, 2018, the Cole Memorandum was revoked by Attorney General Jeff Sessions, an opponent of state-regulated medical and recreational cannabis. While this did not create a change in federal law, as the Cole Memorandum was not itself legally binding upon federal prosecutors, the revocation removed the DOJ’s guidance to U.S. Attorneys that state-regulated cannabis industries substantively in compliance with the Cole Memorandum’s guidelines should not be a prosecutorial priority.
In addition to his revocation of the Cole Memorandum, Attorney General Sessions also issued a one-page memorandum known as the “Sessions Memorandum.” The Sessions Memorandum confirmed the rescission of the Cole Memorandum and explained the rationale for such rescission. According to the Sessions Memorandum, the Cole Memorandum was “unnecessary” due to existing general enforcement guidance set forth in the U.S. Attorney's Manual (the “USAM”). The USAM enforcement priorities, similar to the Cole Memorandum priorities, consider the “seriousness” of the alleged crimes, the “deterrent effect of criminal prosecution” and “the cumulative impact of particular crimes on the community”. Accordingly, U.S. Attorneys presently possess the same prosecutorial discretion they held while the Cole Memorandum was in place.
U.S. legal counsel continuously monitors all U.S. Attorney comments related to regulated medical and recreational cannabis laws to assess various risks and enforcement priorities within each jurisdiction. Dozens of U.S. Attorneys across the U.S. have affirmed that their prosecutorial discretion and/or federal enforcement priorities have not changed.
In addition, federal money laundering statutes may be violated in the event that financial institutions take any proceeds from cannabis sales or any other Schedule I substance, and Canadian banks are hesitant to deal with cannabis companies, due to the uncertain legal and regulatory framework of the industry. Banks and other financial institutions could be prosecuted and possibly convicted of money laundering for providing services to cannabis businesses. Under U.S. federal law, banks or other financial institutions that provide a cannabis business with a checking account, debit or credit card, small business loan, or any other service could be found guilty of money laundering or conspiracy. Nevertheless, the U.S. Department of the Treasury issued a memorandum in February of 2014 (the “FinCEN Memorandum”) outlining the pathways for financial institutions to bank state-sanctioned cannabis businesses. Under these guidelines, financial institutions must submit a “suspicious activity report” (“SAR”) as required by federal money laundering laws. These cannabis related SARs are divided into three categories: cannabis limited, cannabis priority, and cannabis terminated, based on the financial institution’s belief that the cannabis business follows state law, is operating out of compliance with applicable state law, or where the banking relationship has been terminated.
Attorney General Sessions’ revocation of the Cole Memorandum and the 2014 Cole Memo has not affected the status of the FinCEN Memorandum, nor has the Department of the Treasury given any indication that it intends to rescind the FinCEN Memorandum.
Despite the revocation of the Cole Memorandum, a legislative safeguard for the medical cannabis industry remains in place. Congress utilized a rider provision in the FY 2015, 2016 and 2017 Consolidated Appropriations Acts (currently the “Leahy Amendment”) to prevent the federal government from using congressionally appropriated funds to enforce federal cannabis laws against regulated medical cannabis actors operating in compliance with applicable state law. The Leahy Amendment was included in the FY 2018 budget passed on March 23, 2018, meaning that, the Leahy Amendment is still in effect as of today’s date and will remain in effect until September 30, 2018, when FY 2019 begins.
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Compliance with Applicable State Law
Each licensee of the Intellectual Property complies with applicable U.S. state licensing requirements as follows: (1) each licensee is licensed pursuant to applicable U.S. state law to cultivate, possess and/or distribute cannabis in such state; (2) renewal dates for such licenses are docketed by legal counsel and/or other advisors; (3) random internal audits of the licensee’s business activities are conducted by the applicable state regulator and by the respective investee to ensure compliance with applicable state law; (4) each employee is provided with an employee handbook that outlines internal standard operating procedures in connection with the cultivation, possession and distribution of cannabis to ensure that all cannabis inventory and proceeds from the sale of such cannabis are properly accounted for and tracked, using scanners to confirm each customer’s legal age and the validity of each customer’s drivers’ license; (5) each room that cannabis inventory and/or proceeds from the sale of such inventory enter is monitored by video surveillance; (6) software is used to track cannabis inventory from seed-to-sale; and (7) each licensee is contractually obligated to comply with applicable state law in connection with the cultivation, possession and/or distribution of cannabis. CordovaCann’s U.S. legal counsel reviews, from time to time, the licenses and documents referenced above in order to confirm such information and identify any deficiencies.
Colorado’s Cannabis Regulatory Environment
For the purposes of Staff Notice 51-352, the assets and interests held by CordovaCann in Colorado are classified as “ancillary” involvement in the U.S. cannabis industry.
Colorado authorized the cultivation, possession and distribution of cannabis by certain licensed Colorado cannabis businesses. The Colorado Marijuana Enforcement Division regulates Colorado’s cannabis regulatory program. CordovaCann is advised by U.S. legal counsel and/or other advisors in connection with Colorado’s cannabis regulatory program. CordovaCann only engages in transactions with Colorado cannabis businesses that hold licenses that are in good standing to cultivate, possess and/or distribute cannabis in Colorado in compliance with Colorado’s cannabis regulatory program. To the extent required by Colorado’s cannabis regulatory program, CordovaCann has fully disclosed and/or registered each financial interest CordovaCann holds in such Colorado cannabis business.
Oregon’s Cannabis Regulatory Environment
For the purposes of Staff Notice 51-352, the assets and interests held by CordovaCann in Oregon are classified as “ancillary” involvement in the U.S. cannabis industry.
Oregon authorized the cultivation, possession and distribution of cannabis by certain licensed Oregon cannabis businesses. The Oregon Liquor Control Commission regulates Oregon’s cannabis regulatory program. CordovaCann is advised by U.S. legal counsel and/or other advisors in connection with Oregon’s cannabis regulatory program. CordovaCann only engages in transactions with Oregon cannabis businesses that hold licenses that are in good standing to cultivate, possess and/or distribute cannabis in Oregon in compliance with Oregon’s cannabis regulatory program. To the extent required by Oregon’s cannabis regulatory program, CordovaCann has fully disclosed and/or registered each financial interest CordovaCann holds in such Oregon cannabis business.
California’s Cannabis Regulatory Environment
For the purposes of Staff Notice 51-352, the assets and interests contemplated to be held by CordovaCann in California are classified as “ancillary” involvement in the U.S. cannabis industry.
California authorized the cultivation, possession and distribution of cannabis by certain licensed California cannabis businesses. The California Bureau of Cannabis Control regulates California’s cannabis regulatory program. CordovaCann is advised by U.S. legal counsel and/or other advisors in connection with California’s cannabis regulatory program. CordovaCann only engages in transactions with California cannabis businesses that hold licenses that are in good standing to cultivate, possess and/or distribute cannabis in California in compliance with California’s cannabis regulatory program. To the extent required by California’s cannabis regulatory program, CordovaCann has fully disclosed and/or registered each financial interest CordovaCann holds in such California cannabis business.
The following are certain risk factors relating to the business carried on by the Company that prospective holders of Common Shares should carefully consider.
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Risks specifically related to the United States regulatory system.
The Company’s investments operate in a new industry which is highly regulated, highly competitive and evolving rapidly. As such, new risks may emerge, and management may not be able to predict all such risks or be able to predict how such risks may result in actual results differing from the results contained in any forward-looking statements.
The Company’s investments incur ongoing costs and obligations related to regulatory compliance. Failure to comply with regulations may result in additional costs for corrective measures, penalties or in restrictions of operations. In addition, changes in regulations, more vigorous enforcement thereof or other unanticipated events could require extensive changes to operations, increased compliance costs or give rise to material liabilities, which could have a material adverse effect on the business, results of operations and financial condition of the Company’s investments and, therefore, on the Company’s prospective returns. Further, the Company may be subject to a variety of claims and lawsuits. Adverse outcomes in some or all of these claims may result in significant monetary damages or injunctive relief that could adversely affect our ability to conduct our business. Litigation and other claims are subject to inherent uncertainties and management’s view of these matters may change in the future. A material adverse impact on our financial statements could also occur for the period in which the effect of an unfavorable final outcome becomes probable and reasonably capable of being estimated. The industry is subject to extensive controls and regulations which may significantly affect the financial condition of market participants. The marketability of any product may be affected by numerous factors that are beyond the control of the Company’s investments and which cannot be predicted, such as changes to government regulations, including those relating to taxes and other government levies which may be imposed. Changes in government levies, including taxes, could reduce the Company’s investments’ earnings and could make future capital investments or the Company’s investments’ operations uneconomic. The industry is also subject to numerous legal challenges, which may significantly affect the financial condition of market participants and which cannot be reliably predicted.
CordovaCann is expected to continue to derive a portion of its revenues from the cannabis industry in certain states of the United States, which is illegal under United States federal law. While the Company’s business activities are compliant with applicable state and local laws, such activities remain illegal under United States federal law. CordovaCann is involved in the cannabis industry in the United States where local and state laws permit such activities or provide limited defenses to criminal prosecutions. The enforcement of relevant laws is a significant risk.
Over half of the U.S. states have enacted comprehensive legislation to regulate the sale and use of medical cannabis. Notwithstanding the permissive regulatory environment of medical cannabis at the state level, cannabis continues to be categorized as a Schedule 1 controlled substance under the United States Controlled Substances Act of 1970. As such, cannabis-related practices or activities, including without limitation, the cultivation, manufacture, importation, possession, use or distribution of cannabis, are illegal under United States federal law. Strict compliance with state laws with respect to cannabis will neither absolve the Company of liability under United States federal law, nor will it provide a defense to any federal proceeding which may be brought against the Company. Any such proceedings brought against the Company may adversely affect the Company’s operations and financial performance.
Because of the conflicting views between state legislatures and the federal government of the United States regarding cannabis, investments in cannabis businesses in the United States are subject to inconsistent legislation, regulation, and enforcement. Unless and until the United States Congress amends the United States Controlled Substances Act with respect to cannabis or the Drug Enforcement Agency reschedules or de-schedules cannabis (and as to the timing or scope of any such potential amendments there can be no assurance), there is a risk that federal authorities may enforce current federal law, which would adversely affect the current and future investments of the Company in the United States. As a result of the tension between state and federal law, there are a number of risks associated with the Company’s existing and future investments in the United States.
For the reasons set forth above, the Company’s existing interests in the United States cannabis market may become the subject of heightened scrutiny by regulators, stock exchanges, clearing agencies and other authorities in Canada. It has been reported by certain publications in Canada that the Canadian Depository for Securities Limited may implement policies that would see its subsidiary, CDS Clearing and Depository Services Inc. (“CDS”), refuse to settle trades for cannabis companies that have investments in the United States. CDS is Canada’s central securities depository, clearing and settlement hub settling trades in the Canadian equity, fixed income and money markets. The TMX Group, the owner and operator of CDS, subsequently issued a statement on August 17, 2017 reaffirming that there is no CDS ban on the clearing of securities of companies with cannabis-related activities in the United States, despite media reports to the contrary and that the TMX Group was working with regulators to arrive at a solution that will clarify this matter, which would be communicated at a later time.
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On February 8, 2018, following discussions with the Canadian Securities Administrators (“CSA”) and recognized Canadian securities exchanges, the TMX Group announced the signing of a Memorandum of Understanding (“TMX MOU”) with Aequitas NEO Exchange Inc., the Canadian Securities Exchange (“CSE”), the Toronto Stock Exchange, and the TSX Venture Exchange. The TMX MOU outlines the parties’ understanding of Canada’s regulatory framework applicable to the rules, procedures, and regulatory oversight of the exchanges and CDS as it relates to companies with cannabis-related activities in the United States. The TMX MOU confirms, with respect to the clearing of listed securities, that CDS relies on the exchanges to review the conduct of listed companies. As a result, there is no CDS ban on the clearing of securities of companies with cannabis-related activities in the United States. However, there can be no guarantee that this approach to regulation will continue in the future. If such a ban were to be implemented, it would have a material adverse effect on the ability of holders of Common Shares to make and settle trades. In particular, the Common Shares would become highly illiquid as until an alternative was implemented, investors would have no ability to effect a trade of the Common Shares through the facilities of a stock exchange. The Company has obtained eligibility with the Depository Trust Company (“DTC”) for its Common Share quotation on the OTCQB and such DTC eligibility provides another possible avenue to clear Common Shares in the event of a CDS ban.
The activities of CordovaCann’s investments are, and will continue to be, subject to evolving regulation by governmental authorities. The Company’s investments are directly or indirectly engaged in the medical and recreational cannabis industry in the United States and Canada, where local state laws permit such activities. The legality of the production, extraction, distribution and use of cannabis differs among each North American jurisdictions.
CordovaCann’s investments have been focused in three states that have legalized the medical and/or recreational use of cannabis, being Oregon, Colorado and California. Over half of the U.S. states have enacted legislation to legalize and regulate the sale and use of medical cannabis. However, the U.S. federal government has not enacted similar legislation. As such, the cultivation, manufacture, distribution, sale and use of cannabis remains illegal under U.S. federal law.
Further, on January 4, 2018, U.S. Attorney General, Jeff Sessions, formally rescinded the standing DOJ federal policy guidance governing enforcement of marijuana laws, as set forth in a series of memos and guidance from 2009-2014, principally the Cole Memorandum. The Cole Memorandum generally directed U.S. Attorneys not to enforce the federal marijuana laws against actors who are compliant with state laws, provided enumerated enforcement priorities were not implicated. The rescission of this memo and other Obama-era prosecutorial guidance did not create a change in federal law as the Cole Memorandums were never legally binding; however, the revocation removed the DOJ’s guidance to U.S. Attorneys that state-regulated cannabis industries substantively in compliance with the Cole Memorandum’s guidelines should not be a prosecutorial priority. The federal government of the United States has always reserved the right to enforce federal law regarding the sale and disbursement of medical or recreational marijuana, even if state law sanctioned such sale and disbursement. Although the rescission of the above memorandums does not necessarily indicate that marijuana industry prosecutions are now affirmatively a priority for the DOJ, there can be no assurance that the federal government will not enforce such laws in the future.
Additionally, there can be no assurance that state laws legalizing and regulating the sale and use of cannabis will not be repealed or overturned, or that local governmental authorities will not limit the applicability of state laws within their respective jurisdictions. It is also important to note that local and city ordinances may strictly limit and/or restrict the distribution of cannabis in a manner that could make it extremely difficult or impossible to transact business in the cannabis industry. If the federal government begins to enforce federal laws relating to cannabis in states where the sale and use of cannabis is currently legal, or if existing state laws are repealed or curtailed, the Company’s investments in such businesses would be materially and adversely affected notwithstanding the fact that the Company is not directly engaged in the sale or distribution of cannabis. Federal actions against any individual or entity engaged in the marijuana industry or a substantial repeal of marijuana related legislation could adversely affect the Company, its business and its investments.
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In light of the political and regulatory uncertainty surrounding the treatment of U.S. cannabis-related activities, including the rescission of the Cole Memorandum discussed above, on February 8, 2018, the CSA published Staff Notice 51-352 setting out the CSA’s disclosure expectations for specific risks facing companies with cannabis-related activities in the United States. Staff Notice 51-352 confirms that a disclosure-based approach remains appropriate for companies with U.S. cannabis-related activities. Staff Notice 51-352 includes additional disclosure expectations that apply to all companies with U.S. cannabis-related activities, including those with direct and indirect involvement in the cultivation and distribution of cannabis, as well as companies that provide goods and services to third parties involved in the U.S. cannabis industry. The Company views Staff Notice 51-352 favourably, as it provides increased transparency and greater certainty regarding the views of the exchanges and the regulators regarding the Company’s existing operations and strategic business plan as well as the Company’s ability to pursue further investments and opportunities in the United States.
The Company’s investments in the United States are subject to applicable anti-money laundering laws and regulations.
The Company is subject to a variety of laws and regulations domestically and in the United States that involve money laundering, financial recordkeeping and proceeds of crime, including the U.S. Currency and Foreign Transactions Reporting Act of 1970 (commonly known as the Bank Secrecy Act), as amended by Title III of the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (USA PATRIOT Act), the Proceeds of Crime (Money Laundering) and Terrorist Financing Act (Canada), as amended and the rules and regulations thereunder, and any related or similar rules, regulations or guidelines, issued, administered or enforced by governmental authorities in the United States and Canada. Further, under U.S. federal law, banks or other financial institutions that provide a cannabis business with a checking account, debit or credit card, small business loan, or any other service could be found guilty of money laundering, aiding and abetting, or conspiracy.
Despite these laws, FinCEN issued a memorandum on February 14, 2014 outlining the pathways for financial institutions to bank marijuana businesses in compliance with federal enforcement priorities. The FinCEN Memorandum states that in some circumstances, it is permissible for banks to provide services to cannabis-related businesses without risking prosecution for violation of federal money laundering laws. It refers to supplementary guidance that Deputy Attorney General Cole issued to federal prosecutors relating to the prosecution of money laundering offenses predicated on cannabis-related violations of the United States Controlled Substances Act on the same day (the “2014 Cole Memo”). The 2014 Cole Memo has been rescinded as of January 4, 2018, along with the Cole Memorandum, removing guidance that enforcement of applicable financial crimes was not a DOJ priority.
Attorney General Sessions’ revocation of the Cole Memorandum and the 2014 Cole Memo has not affected the status of the FinCEN Memorandum, nor has the Department of the Treasury given any indication that it intends to rescind the FinCEN Memorandum itself. Though it was originally intended for the 2014 Cole Memo and the FinCEN Memorandum to work in tandem, the FinCEN Memorandum appears to remain in effect as a standalone document which explicitly lists the eight enforcement priorities originally cited in the rescinded Cole Memorandum. Although the FinCEN Memorandum remains intact, indicating that the Department of the Treasury and FinCEN intend to continue abiding by its guidance, it is unclear whether the current administration will continue to follow the guidelines of the FinCEN Memorandum.
The Company’s investments, and any proceeds thereof, are considered proceeds of crime due to the fact that cannabis remains illegal federally in the United States. This restricts the ability of the Company to declare or pay dividends, effect other distributions or subsequently repatriate such funds back to Canada. Furthermore, while the Company has no current intention to declare or pay dividends on its Common Shares in the foreseeable future, the Company may decide or be required to suspend declaring or paying dividends without advance notice and for an indefinite period of time.
The Company’s investments in the United States may be subject to heightened scrutiny by Canadian authorities.
For the reasons set forth above, the Company’s existing investments in the United States, and any future investments, may become the subject of heightened scrutiny by regulators, stock exchanges and other authorities in Canada. As a result, the Company may be subject to significant direct and indirect interaction with public officials. There can be no assurance that this heightened scrutiny will not in turn lead to the imposition of certain restrictions on the Company’s ability to invest in the United States or any other jurisdiction, in addition to those described herein.
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Although the TMX MOU has confirmed that there is currently no CDS ban on the clearing of securities of companies with cannabis-related activities in the United States, there can be no guarantee that this approach to regulation will continue in the future. If such a ban were to be implemented, it would have a material adverse effect on the ability of holders of Common Shares to make and settle trades. In particular, the Common Shares would become highly illiquid as until an alternative was implemented, investors would have no ability to effect a trade of the Common Shares through the facilities of a stock exchange.
Change in laws, regulations and guidelines.
Each investment’s current and proposed operations are subject to a variety of laws, regulations and guidelines, including, but not limited to, those relating to the manufacture, management, transportation, storage and disposal of cannabis, as well as laws and regulations relating to health and safety (including those for consumable products), the conduct of operations and the protection of the environment. These laws and regulations are broad in scope and subject to evolving interpretations. If any changes to such laws, regulations and guidelines occur, which are matters beyond the control of the Company, the Company may incur significant costs in complying with such changes or it may be unable to comply therewith, which in turn may result in a material adverse effect on the Company’s business, financial condition and results of operation. In addition, violations of these laws, or allegations of such violations, could disrupt certain aspects of the Company’s business plan and result in a material adverse effect on certain aspects of its planned operations.
Changes in regulations, more vigorous enforcement thereof, the imposition of restrictions on the Company’s ability to operate in the U.S. as a result of the federally illegal nature of cannabis in the U.S. or other unanticipated events could require extensive changes to the Company’s operations, increased compliance costs or give rise to material liabilities, which could have a material adverse effect on the business, results of operations and financial condition of the Company.
United States tax residence of the Company.
The Company, which is and will continue to be a Canadian corporation generally would be classified as a non-United States corporation (and, therefore, as a non-United States tax resident) under general rules of United States federal income taxation. Section 7874 of the United States Tax Code, however, contains rules that can cause a non-United States corporation to be taxed as a United States corporation for United States federal income tax purposes. The rules described in this paragraph are relatively new, their application is complex and there is little guidance regarding their application. Under section 7874 of the United States Tax Code, a corporation created or organized outside the United States (i.e., a non-United States corporation) will nevertheless be treated as a United States corporation for United States federal income tax purposes (such treatment is referred to as an “Inversion”) if each of the following three conditions are met (i) the non-United States corporation acquires, directly or indirectly, or is treated as acquiring under applicable United States Treasury Regulations, substantially all of the assets held, directly or indirectly, by a United States corporation, (ii) after the acquisition, the former stockholders of the acquired United States corporation hold at least 80% (by vote or value) of the shares of the non-United States corporation by reason of holding shares of the United States acquired corporation, and (iii) after the acquisition, the non-United States corporation’s expanded affiliated group does not have substantial business activities in the non-United States corporation’s country of organization or incorporation when compared to the expanded affiliated group’s total business activities (clauses (i) – (iii), collectively, the “Inversion Conditions”). For this purpose, “expanded affiliated group” means a group of corporations where (i) the non-United States corporation owns stock representing more than 50% of the vote and value of at least one member of the expanded affiliated group, and (ii) stock representing more than 50% of the vote and value of each member is owned by other members of the group. The definition of an “expanded affiliated group” includes partnerships where one or more members of the expanded affiliated group own more than 50% (by vote and value) of the interests of the partnership.
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If the Company is treated as a United States corporation for United States federal income tax purposes under section 7874 of the United States Tax Code (which is considered likely, although no definitive determination of this matter has been reached, and no tax ruling has been sought or obtained in this regard), the Company would be considered a United States tax resident and subject to United States federal income tax on its worldwide income. However, for Canadian tax purposes, the Company is expected, regardless of any application of section 7874 of the United States Tax Code, to be treated as a Canadian resident Company (as defined in the Tax Act) for Canadian income tax purposes. As a result, if the Company is considered a United States corporation under section 7874, the Company would be subject to taxation both in Canada and the United States which could have a material adverse effect on its financial condition and results of operations. In addition, any distributions paid by the Company to a holder of Common Shares may be subject to United States withholding tax as well as any applicable Canadian withholding tax. A Non-United States Holder may also be subject to United States tax, including withholding tax, on disposition of its Common Shares.
Passive Foreign Investment Company.
There is a risk that the Company may, in the future, be construed as a passive foreign investment Company (“PFIC”). If the Company is a PFIC, its shareholders in the U.S. are likely subject to adverse U.S. tax consequences. Under U.S. federal income tax laws, if a Company is a PFIC for any year, it could have adverse U.S. federal income tax consequences to a U.S. shareholder with respect to its investment in Common Shares. The Company may earn royalty and franchise revenue which may be treated as passive income unless the royalty and franchise revenue is derived in the active conduct of a trade or business. Assessing whether royalty or franchise revenue received by the Company and its subsidiaries is derived in the active conduct of a trade or business involves substantial factual and legal ambiguity. Based on current business plans and financial expectations, the Company expects that it will not be a PFIC for its current tax year. PFIC classification is fundamentally factual in nature, generally cannot be determined until the close of the tax year in question, and is determined annually. Furthermore, because PFIC determinations are made annually, it is possible that the Company will meet the requirements to be treated as a PFIC in one or more years, but not meet such requirements in other years. U.S. shareholders should consult their own tax advisors regarding the potential adverse tax consequences to owning PFIC stock, and whether they are able to and should make any elections or take other actions to mitigate such potential adverse tax consequences.
If the Company is deemed to be an investment Company under the United States Investment Company Act of 1940, as amended (the “Investment Company Act”), it may be required to institute burdensome compliance requirements and its activities may be restricted.
The Company intends to conduct its operations so that it is not required to register as an investment Company under the Investment Company Act. Section 3(a)(1)(C) of the Investment Company Act defines an investment Company as any Company that is engaged or proposes to engage in the business of investing, reinvesting, owning, holding or trading in securities and owns or proposes to acquire investment securities having a value exceeding 40.0% of the value of the Company’s total assets (exclusive of government securities and cash items) on an unconsolidated basis. However, any Company primarily engaged, directly or through a wholly-owned subsidiary or subsidiaries, in a business or businesses other than that of investing, reinvesting, owning, holding, or trading in securities is exempt from the requirements of the Investment Company Act under Section 3(b)(1).
If the Company is deemed to be an investment Company under the Investment Company Act, its activities may be restricted, including restrictions on the nature of the Company’s investments and restrictions on the issuance of securities. In addition, the Company may have imposed upon it burdensome requirements, including:
● | registration as an investment Company; |
● | adoption of a specific form of corporate structure; and |
● | reporting, record keeping, voting, proxy and disclosure requirements and other rules and regulations. |
In sum, if the Company were to be characterized as an investment Company, the inability of the Company to satisfy such regulatory requirements, whether on a timely basis or at all, could, under certain circumstances, have a material adverse effect on the Company and its ability to continue pursuing its business plan could be limited.
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The Company's Common Shares are considered to be penny stock, which may adversely affect the liquidity of its Common Shares.
The capital stock of the Company would be classified as “penny stock” as defined in Reg. § 240.3a51-1 promulgated under the Securities Exchange Act of 1934 (the “1934 Act”). In response to perceived abuse in the penny stock market generally, the 1934 Act was amended in 1990 to add new requirements in connection with penny stocks. In connection with effecting any transaction in a penny stock, a broker or dealer must give the customer a written risk disclosure document that (a) describes the nature and level of risk in the market for penny stocks in both public offerings and secondary trading, (b) describes the broker’s or dealer’s duties to the customer and the rights and remedies available to such customer with respect to violations of such duties, (c) describes the dealer market, including “bid” and “ask” prices for penny stock and the significance of the spread between the bid and ask prices, (d) contains a toll-free telephone number for inquiries on disciplinary histories of brokers and dealers, and (e) define significant terms used in the disclosure document or the conduct of trading in penny stocks. In addition, the broker-dealer must provide to a penny stock customer a written monthly account statement that discloses the identity and number of shares of each penny stock held in the customer’s account, and the estimated market value of such shares. The extensive disclosure and other broker-dealer compliance related to penny stocks may result in reducing the level of trading activity in the secondary market for such stocks, thus limiting the ability of the holder to sell such stock.
Additional financing.
The continued development of the Company will require additional financing. There is no guarantee that the Company will be able to achieve its business objectives. The Company intends to fund its future business activities by way of additional offerings of equity and/or debt financing as well as through anticipated positive cash flow from operations in the future. The failure to raise or procure such additional funds or the failure to achieve positive cash flow could result in the delay or indefinite postponement of current business objectives. There can be no assurance that additional capital or other types of financing will be available if needed or that, if available, will be on terms acceptable to the Company. If additional funds are raised by offering equity securities, existing shareholders could suffer significant dilution. Any debt financing secured in the future could involve the granting of security against assets of the Company and also contain restrictive covenants relating to capital raising activities and other financial and operational matters, which may make it more difficult for the Company to obtain additional capital and to pursue business opportunities, including potential acquisitions. The Company will require additional financing to fund its operations until positive cash flow is achieved.
The Company’s access to both public and private capital and its ability to access financing to support continuing operations and investments may be further restricted due to uncertainty and the changing nature of the marijuana regulatory environment in jurisdictions in which the Company operates.
Investments may be pre-revenue.
The Company has made and may make future investments in entities that have no significant sources of operating cash flow and no revenue from operations. As such, the Company’s investments are subject to risks and uncertainties including the risk that the Company’s investments will not be able to:
● | implement or execute their current business plan, or create a business plan that is sound; |
● | maintain their anticipated management team; and/or |
● | raise sufficient funds in the capital markets or otherwise to effectuate their business plan. |
If the Company’s investments cannot execute any one of the foregoing, their businesses may fail, which could have a materially adverse impact on the business, financial condition and operating results of the Company.
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Lack of control over operations of investments.
The Company relies on its investments to execute on their business plans and to produce medical and/or recreational cannabis products, and holds contractual rights and minority equity interests relating to the operation of the Company’s investments. The operators of the Company’s investments have significant influence over the results of operations of the Company’s investments. Further, the interests of the Company and the operators of the Company’s investments may not always be aligned. As a result, the cash flows of the Company are dependent upon the activities of third parties which creates the risk that at any time those third parties may: (i) have business interests or targets that are inconsistent with those of the Company; (ii) take action contrary to the Company’s policies or objectives; (iii) be unable or unwilling to fulfill their obligations under their agreements with the Company; or (iv) experience financial, operational or other difficulties, including insolvency, which could limit or suspend a third party’s ability to perform its obligations. In addition, payments may flow through the Company’s investments, and there is a risk of delay and additional expense in receiving such revenues. Failure to receive payments in a timely fashion, or at all, under the agreements to which the Company is entitled may have a material adverse effect on the Company. In addition, the Company must rely, in part, on the accuracy and timeliness of the information it receives from the Company’s investments, and use such information in its analyses, forecasts and assessments relating to its own business. If the information provided by investment entities to the Company contains material inaccuracies or omissions, the Company’s ability to accurately forecast or achieve its stated objectives, or satisfy its reporting obligations, may be materially impaired.
Private companies and illiquid securities.
The Company may invest in securities of private companies. In some cases, the Company may be restricted by contract or generally by applicable securities laws from selling such securities for a period of time. Such securities may not have a ready market and the inability to sell such securities or to sell such securities on a timely basis or at acceptable prices may impair the Company’s ability to exit such investments when the Company considers it appropriate.
Unfavourable publicity or consumer perception.
The regulated cannabis industry in the United States and Canada is at an early stage of its development. The Company believes the medical and recreational cannabis industry is highly dependent on consumer perception regarding the safety and efficacy of recreational and medical cannabis. Consumer perceptions regarding legality, morality, consumption, safety, efficacy and quality of cannabis are mixed and evolving. Consumer perception can be significantly influenced by scientific research or findings, regulatory investigations, litigation, media attention and other publicity regarding the consumption of cannabis products. There can be no assurance that future scientific research, findings, regulatory proceedings, litigation, media attention or other research findings or publicity will be favourable to the cannabis market or any particular product, or consistent with earlier publicity. Future research reports, findings, regulatory proceedings, litigation, media attention or other publicity that are perceived as less favourable than, or that question, earlier research reports, findings or publicity could have a material adverse effect on the demand for cannabis and on the business, results of operations, financial condition and cash flows of the Company. Further, adverse publicity reports or other media attention regarding cannabis in general, or associating the consumption of cannabis with illness or other negative effects or events, could have such a material adverse effect on the business of the Company. Such adverse publicity reports or other media attention could arise even if the adverse effects associated with such products resulted from consumers’ failure to consumer such products legally, appropriately or as directed.
Public opinion and support for medical and recreational cannabis use has traditionally been inconsistent and varies from jurisdiction to jurisdiction. Legalization of medical and recreational cannabis remains a controversial issue subject to differing opinions surrounding the level of legalization (for example, legalization of medical marijuana as opposed to legalization in general).
Limited operating history.
Since March 1997, when it was created by amalgamation, the Company has had no significant revenues or earnings from operations. The Company has operated at a loss to date and may continue to sustain operating losses for the foreseeable future. There is no assurance that the Company will ever be profitable. Therefore, it is difficult for investors to evaluate the Company’s operations and prospects which may increase the risks associated with an investment in the Company.
Although the Company expects to generate some revenues from its investments, many of the investments will only start generating revenues in future periods and, accordingly, the Company is therefore expected to remain subject to many of the risks common to early-stage enterprises for the foreseeable future, including challenges related to laws, regulations, licensing, integrating and retaining qualified employees; making effective use of limited resources; achieving market acceptance of existing and future solutions; competing against companies with greater financial and technical resources; acquiring and retaining customers; and developing new solutions. There is no assurance that the Company will be successful in achieving a return on shareholders’ investment and the likelihood of success must be considered in light of the early stage of operations.
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Competition.
The Company competes with other companies for financing and investment opportunities in the cannabis industry. Some of these companies may possess greater financial resources than the Company. Such competition may result in the Company being unable to enter into desirable strategic agreements or similar transactions, to recruit or retain qualified employees or to acquire the capital necessary to fund its investments. Existing or future competition in the cannabis industry, including, without limitation, the entry of large multinational entities into the industry, could materially adversely affect the Company’s prospects for entering into additional agreements in the future. In addition, the Company currently competes with other cannabis streaming and royalty companies, some of which may possess greater financial resources than the Company.
There is potential that the Company will face intense competition from other companies, some of which can be expected to have longer operating histories and more financial resources and experience than the Company. Increased competition by larger and better financed competitors, including competitors to the Company’s investments, could materially and adversely affect the business, financial condition and results of operations of the Company. It is possible that larger competitors could establish price setting and cost controls which would effectively “price out” certain of the Company’s investments operating within and in support of the medical and recreational cannabis industry.
Because of the early stage of the industry in which the Company will operate, the Company expects to face additional competition from new entrants. To become and remain competitive, the Company will require research and development, marketing, sales and support. The Company may not have sufficient resources to maintain research and development, marketing, sales and support efforts on a competitive basis, which could materially and adversely affect the business, financial condition and results of operations of the Company.
Banking.
Since the production and possession of cannabis is currently illegal under U.S. federal law, it is possible that banks may refuse to open bank accounts for the deposit of funds from businesses involved with the cannabis industry. The inability to open bank accounts with certain institutions could materially and adversely affect the business of the Company.
Currency fluctuations.
Certain revenues and expenses of the Company are expected to be denominated in U.S. dollars, and therefore may be exposed to significant currency exchange fluctuations. Recent events in the global financial markets have been coupled with increased volatility in the currency markets. Fluctuations in the exchange rate between the U.S. dollar and the Canadian dollar may have a material adverse effect on the Company’s business, financial condition and operating results. CordovaCann may, in the future, establish a program to hedge a portion of its foreign currency exposure with the objective of minimizing the impact of adverse foreign currency exchange movements; however, there can be no assurance that such a program will effectively mitigate currency risks.
Risks associated with strategic transactions.
As part of the Company’s overall business strategy, the Company intends to pursue select strategic acquisitions, leasing and lending transactions and licensing agreements which would provide additional product offerings, vertical integrations, additional industry expertise, and a stronger industry presence in both existing and new jurisdictions. The success of any such strategic transactions will depend, in part, on the ability of the Company to realize the anticipated benefits and synergies from integrating the Company’s investments into the businesses of the Company. Future strategic actions may expose it to potential risks, including risks associated with: (a) the integration of new operations, services and personnel; (b) unforeseen or hidden liabilities; (c) the diversion of resources from the Company’s existing business and technology; (d) potential inability to generate sufficient revenue to offset new costs; (e) the expenses of acquisitions; and (f) the potential loss of or harm to relationships with both employees and existing users resulting from its integration of new businesses. In addition, any proposed acquisitions may be subject to regulatory approval.
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While the Company intends to conduct reasonable due diligence in connection with such strategic transactions, there are risks inherent in any transaction. Specifically, there could be unknown or undisclosed risks or liabilities of such companies for which the Company is not sufficiently indemnified. Any such unknown or undisclosed risks or liabilities could materially and adversely affect the Company’s financial performance and results of operations. The Company could encounter additional transaction and integration related costs or other factors such as the failure to realize all of the benefits from the strategic actions. All of these factors could cause dilution to the Company’s earnings per share or decrease or delay the anticipated accretive effect of the transaction and cause a decrease in the market price of the Company’s Common Shares.
Bankruptcy or insolvency of investments.
There is no guarantee that the Company will be able to effectively enforce any interests it may have in the Company’s investments. A bankruptcy or other similar event related to an investment of CordovaCann that precludes a party from performing its obligations under an agreement may have a material adverse effect on the Company. Furthermore, as an equity investor, should an investment have insufficient assets to pay its liabilities, it is possible that other liabilities will be satisfied prior to the liabilities owed to the Company. In addition, bankruptcy or other similar proceedings are often a complex and lengthy process, the outcome of which may be uncertain and could result in a material adverse effect on the Company.
Research and market development.
Although the Company, itself and through its investments, is committed to researching and developing new markets and products and improving existing products, there can be no assurances that such research and market development activities will prove profitable or that the resulting markets and/or products, if any, will be commercially viable or successfully produced and marketed.
The Company must rely largely on its own market research to forecast sales as detailed forecasts are not generally obtainable from other sources at this early stage of the medical and recreational cannabis industry in North America.
The Company is operating its business in a relatively new medical and recreational cannabis industry and market. Accordingly, there are no assurances that this industry and market will continue to exist or grow as currently estimated or anticipated, or function and evolve in a manner consistent with management’s expectations and assumptions. Any event or circumstance that affects the recreational or medical cannabis industry or market could have a material adverse effect on the Company’s business, financial condition and results of operations. Due to the early stage of the regulated cannabis industry, forecasts regarding the size of the industry and the sales of products by the Company’s investments are inherently difficult to prepare with a high degree of accuracy and reliability. A failure in the demand for products to materialize as a result of competition, technological change or other factors could have a material adverse effect on the business, results of operations and financial condition of the Company’s investments, and consequently, the Company.
Reliance on management.
The success of the Company is dependent upon the ability, expertise, judgment, discretion and good faith of its senior management. Qualified individuals are in high demand, and the Company may incur significant costs to attract and retain them. In addition, the Company’s lean management structure may be strained as the Company pursues growth opportunities in the future. The loss of the services of such individuals or an inability to attract other suitably qualified persons when needed, could have a material adverse effect on the Company’s ability to execute on its business plan and strategy, and the Company may be unable to find adequate replacements on a timely basis, or at all.
CordovaCann’s future success depends substantially on the continued services of its executive officers, consultants and advisors. If one or more of its executive officers or key personnel were unable or unwilling to continue in their present positions, the Company might not be able to replace them easily or at all. In addition, if any of its executive officers or key employees joins a competitor or forms a competing Company, the Company may lose know-how, key professionals and staff members. These executive officers and key employees could compete with and take customers away which could materially and adversely affect the Company’s prospects, financial performance and results of operations.
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Operation permits and authorizations.
The Company’s investments may not be able to obtain or maintain the necessary licenses, permits, authorizations or accreditations, or may only be able to do so at great cost, to operate their respective businesses. In addition, the Company’s investments may not be able to comply fully with the wide variety of laws and regulations applicable to the cannabis industry. Failure to comply with or to obtain the necessary licenses, permits, authorizations or accreditations could result in restrictions on an investment’s ability to operate in the cannabis industry, which could have a material adverse effect on the Company’s business.
Litigation.
CordovaCann may become party to litigation from time to time in the ordinary course of business which could adversely affect its business. Should any litigation in which the Company becomes involved be determined against the Company, such a decision could adversely affect the Company’s ability to continue operating and the market price for the Common Shares and could use significant resources. Even if the Company is involved in litigation and wins, litigation can redirect significant resources. Litigation may also create a negative perception of the Company.
Liability, enforcement complaints, etc.
CordovaCann’s participation in the cannabis industry may lead to litigation, formal or informal complaints, enforcement actions, and inquiries by various federal, state, or local governmental authorities into or against the Company or its investments. Litigation, complaints, and enforcement actions involving either of the Company or its investments could consume considerable amounts of financial and other corporate resources, which could have an adverse effect on the Company’s future cash flows, earnings, results of operations and financial condition.
Product liability.
Certain of the Company’s investments manufacture, process and/or distribute products designed to be ingested by humans, and therefore face an inherent risk of exposure to product liability claims, regulatory action and litigation if products are alleged to have caused significant loss or injury. In addition, previously unknown adverse reactions resulting from human consumption of cannabis alone or in combination with other medications or substances could occur. A product liability claim or regulatory action against an investment entity of CordovaCann could result in increased costs, could adversely affect the Company’s reputation, and could have a material adverse effect on the results of operations and financial condition of the Company.
Reliance on key inputs.
The cultivation, extraction and processing of cannabis and derivative products is dependent on a number of key inputs and their related costs including raw materials, electricity, water and other local utilities. Any significant interruption or negative change in the availability or economics of the supply chain for key inputs could materially impact the business, financial condition and operating results of the Company’s investments. Some of these inputs may only be available from a single supplier or a limited group of suppliers. If a sole source supplier was to go out of business, the relevant investment entity might be unable to find a replacement for such source in a timely manner or at all. Any inability to secure required supplies and services or to do so on appropriate terms could have a materially adverse impact on the business, financial condition and operating results of an investment, and consequently, the Company.
Price volatility of publicly traded securities.
In recent years, the securities markets in the United States and Canada have experienced a high level of price and volume volatility, and the market prices of securities of many companies have experienced wide fluctuations in price which have not necessarily been related to the operating performance, underlying asset values or prospects of such companies. There can be no assurance that continuing fluctuations in price will not occur. It may be anticipated that any quoted market for the Common Shares of CordovaCann will be subject to market trends generally, notwithstanding any potential success of CordovaCann in creating revenues, cash flows or earnings. The value of the Common Shares would be affected by such volatility. An active public market for the Company’s Common Shares might not develop or be sustained. If an active public market for the Company’s Common Shares does not develop, the liquidity of a shareholder’s investment may be limited and the share price may decline.
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Management of growth.
CordovaCann may experience a period of significant growth in the number of personnel that may place a strain upon its management systems and resources. Its future will depend in part on the ability of its officers and other key personnel to implement and improve financial and management controls, reporting systems and procedures on a timely basis and to expand, train, motivate and manage the workforce. CordovaCann’s current and planned personnel, systems, procedures and controls may be inadequate to support its future operations.
Dividends.
CordovaCann has not paid dividends in the past and the Company does not anticipate paying any dividends in the foreseeable future. Dividends paid by the Company would be subject to tax and, potentially, withholdings.
Any decision to declare and pay dividends in the future will be made at the discretion of the Company’s Board of Directors and will depend on, among other things, financial results, cash requirements, contractual restrictions and other factors that the Company’s Board of Directors may deem relevant. As a result, investors may not receive any return on an investment in the Common Shares unless they sell their Common Shares for a price greater than that which such investors paid for them.
Risk factors related to dilution.
The Company may issue additional securities in the future, which may dilute a shareholder’s holdings in the Company. The Company’s articles permit the issuance of an unlimited number of Common Shares. The directors of the Company have discretion to determine the price and the terms of further issuances. Moreover, additional Common Shares will be issued by the Company on the exercise of options under the Company’s Option Plan and upon the exercise of outstanding warrants.
Intellectual property and proprietary protection.
The success of the Company will depend, in part, on the ability of the Company and the Company’s investments to maintain, enhance and protect its intellectual property, including various existing and potential proprietary techniques and processes. The Company and the Company’s investments may be vulnerable to competitors who develop competing technology, whether independently or as a result of acquiring access to the proprietary products and trade secrets of the Company or the Company’s investments. In addition, effective future patent, copyright and trade secret protection may be unavailable or limited in certain foreign countries and may be unenforceable under the laws of certain jurisdictions.
The Company relies on a combination of laws and contractual provisions to establish and protect its rights in it intellectual property. There can be no assurance that the steps taken to protect proprietary rights will be adequate to deter misappropriation of intellectual property or technology. The Company may face claims alleging infringement of intellectual property rights held by others. Such claims, whether or not meritorious, may result in the expenditure of significant financial and managerial resources, legal fees, result in injunctions, temporary restraining orders and/or require the payment of damages. An adverse determination in legal proceedings, a costly litigation process or a costly settlement could have a material adverse effect on the Company’s business, prospects, revenues, operating results and financial condition.
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Insurance coverage.
CordovaCann currently does not have insurance coverage. The Company is likely to require insurance coverage in the future. There can be no assurance that adequate insurance coverage will be available to the Company in the future, or that if available, that such insurance will be obtainable by the Company at a commercially justifiable premium. There also can be no assurance that any insurance coverage obtained by the Company will be sufficient to cover claims to which the Company may become subject. If insurance coverage is unavailable to cover any such claims, the Company’s financial resources, results of operations and prospects could be adversely affected. If the Company were to incur substantial liability and such damages were in excess of policy limits, there could be a material adverse effect on the Company’s business, financial condition and results of operations.
Operational risks.
CordovaCann and its investments may be affected by a number of operational risks and may not be adequately insured for certain risks, including: labour disputes; catastrophic accidents; fires; blockades or other acts of social activism; changes in the regulatory environment; impact of non-compliance with laws and regulations; natural phenomena, such as inclement weather conditions, floods, earthquakes and ground movements. There is no assurance that the foregoing risks and hazards will not result in damage to, or destruction of, the Company’s investments’ properties, grow facilities and extraction facilities, personal injury or death, environmental damage, adverse impacts on the Company’s investments’ operations, costs, monetary losses, potential legal liability and adverse governmental action, any of which could have an adverse impact on the Company’s future cash flows, earnings and financial condition on the Company. Also, the Company’s investments may be subject to or affected by liability or sustain loss for certain risks and hazards against which they may elect not to insure because of the cost. This lack of insurance coverage could have an adverse impact on the Company’s future cash flows, earnings, results of operations and financial condition.
Costs of maintaining a public listing.
As a public company, there are costs associated with legal, accounting and other expenses related to regulatory compliance. Securities legislation and the rules and policies of securities exchanges require listed companies to, among other things, adopt corporate governance and related practices, and to continuously prepare and disclose material information, all of which add to a company’s legal and financial compliance costs. CordovaCann may also elect to devote greater resources than it otherwise would have on communication and other activities typically considered important by publicly traded companies.
Holding Company.
CordovaCann is a holding Company and essentially all of its assets are the capital stock of its material subsidiaries. As a result, investors in CordovaCann are subject to the risks attributable to its subsidiaries. Consequently, CordovaCann’s cash flows and ability to complete current or desirable future enhancement opportunities are dependent on the earnings of its subsidiaries and investments and the distribution of those earnings to CordovaCann. The ability of these entities to pay dividends and other distributions will depend on their operating results and will be subject to applicable laws and regulations which require that solvency and capital standards be maintained by such companies and contractual restrictions contained in the instruments governing any debt arrangements. In the event of a bankruptcy, liquidation or reorganization of any of CordovaCann’s material subsidiaries, holders of indebtedness and trade creditors may be entitled to payment of their claims from the assets of those subsidiaries before CordovaCann.
Difficulty implementing business strategy.
The growth and expansion of the Company is heavily dependent upon the successful implementation of its business strategy. There can be no assurance that the Company will be successful in the implementation of its business strategy.
Conflicts of interest.
Certain of the Company’s directors and officers are, and may continue to be, involved in other business ventures through their direct and indirect participation in, among other things, corporations, partnerships and joint ventures, that may become potential competitors of the technologies, products and services the Company intends to provide. Situations may arise in connection with potential acquisitions or opportunities where the other interests of these directors and officers conflict with or diverge from the Company’s interests. In accordance with applicable corporate law, directors who have a material interest in or who are parties to a material contract or a proposed material contract with the Company are required, subject to certain exceptions, to disclose that interest and generally abstain from voting on any resolution to approve the transaction. In addition, the directors and officers are required to act honestly and in good faith with a view to the Company’s best interests. However, in conflict of interest situations, the Company’s directors and officers may owe the same duty to another Company and will need to balance their competing interests with their duties to the Company. Circumstances (including with respect to future corporate opportunities) may arise that may be resolved in a manner that is unfavourable to the Company.
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Previous operations.
The Company recently changed its focus from the identification and evaluation of assets for purchase in the media, technology and consumer industries, to a provider of services and investment capital to companies in the cannabis sector. The Company also changed its name on January 3, 2018 from “LiveReel Media Corporation” to “CordovaCann Corp.”. While the Company has now divested all of its assets relating to its previous business, there is no guarantee that liabilities relating to the previous business will not negatively impact the Company’s current or future operations or financial performance. Management is not aware of any liabilities relating to its previous business operations.
Resale of Common Shares.
Although the Common Shares are listed on the CSE and the OTCQB, there can be no assurance that an active and liquid market for the Common Shares will develop or be maintained and an investor may find it difficult to resell any securities of the Company. In addition, there can be no assurance that the publicly-traded stock price of the Company will be high enough to create a positive return for investors. Further, there can be no assurance that the Common Shares will be sufficiently liquid so as to permit investors to sell their position in the Company without adversely affecting the stock price. In such event, the probability of resale of the Common Shares would be diminished.
ITEM 4 - INFORMATION ON THE COMPANY
(A) HISTORY AND DEVELOPMENT OF THE COMPANY
CordovaCann was originally named “Biolink Corp.” and was formed as a result of an amalgamation completed between “Biolink Corp.”, “1149250 Ontario Inc.” and “I.D. Investments Inc.” under the Business Corporation Act (Ontario) (“OBCA”) on March 18, 1997. In connection with a number of corporate reorganizations, the Company changed its name to “First Empire Entertainment.com Inc.”, “First Empire Corporation Inc.”, “Noble House Entertainment Inc.” and “Live Reel Media Corporation”. On October 20, 2006, the Company completed its continuance from the OBCA to the Business Corporation Act (Canada) and concurrently changed its name from “Live Reel Media Corporation” to “LiveReel Media Corporation”. On January 3, 2018, the Company changed its name to its current name, “CordovaCann Corp.”
The Company is a “reporting issuer” in the Province of Ontario, Canada which is governed by the Ontario Securities Commission. The Company’s common shares are listed for trading on the Canadian Securities Exchange (the “CSE”) under the symbol “CDVA”. Furthermore, the Company is also a fully reporting OTC Markets company and its common shares are currently listed and trade on the OTCQB under the trading symbol “LVRLF”. CordovaCann’s head office and registered office is located at 217 Queen Street West, Suite 401, Toronto, Ontario, M5V 0R2.
CordovaCann is a Canadian-domiciled company focused on building a leading, diversified cannabis products business across multiple jurisdictions including Canada and the United States. CordovaCann primarily provides services and investment capital to the processing and production vertical markets of the cannabis industry. On January 3, 2018, the Company changed its name from LiveReel Media Corporation to CordovaCann Corp. to reflect the Company’s new initiative in the cannabis sector. Prior to the most recent name change, the Company was engaged in the identification and evaluation of assets for purchase in the media, technology and consumer industries.
On September 22, 2017, Graham Simmonds resigned as Chief Executive Officer and was replaced by Thomas (Taz) M. Turner, Jr.
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On November 22, 2017, the Company held its annual and special meeting of the shareholders (the “Meeting”). At the Meeting, shareholders voted in favor of all of the matters submitted before the meeting as further set out in the notice of annual and special meeting of the shareholders and management information circular, both dated October 20, 2017. Furthermore, at the Meeting, the shareholders elected Graham Simmonds, Henry J. Kloepper, Thomas (Taz) M. Turner, Jr., Ashish Kapoor, Nathan Nienhuis and Eric Lowy to serve as Directors of the Company until the next annual shareholders meeting of the Company.
On January 16, 2018, the Company incorporated CordovaCann Holdings, Inc., a wholly-owned Delaware corporation (“CordovaCann USA”) to act as the Company’s parent holding company in the United States.
On January 17, 2018, the Company incorporated Cordova CO Holdings, LLC, a Colorado limited liability company (“Cordova CO”), as a wholly-owned subsidiary of CordovaCann USA to act as the Company’s primary operating subsidiary in the State of Colorado.
On February 26, 2018, the Company incorporated Cordova OR Holdings, LLC, an Oregon limited liability Company (“Cordova OR”), as a wholly-owned subsidiary of CordovaCann USA to act as the Company’s primary operating subsidiary in the State of Oregon.
On April 3, 2018, the Company changed the name of its wholly-owned Ontario-based subsidiary from “LiveReel Productions Corporation” to “CordovaCann Holdings Canada, Inc.” (“Cordova Canada”) to act as the Company’s primary operating subsidiary in Canada.
On May 17, 2018, Graham Simmonds resigned as a Director of the Company and Thomas (Taz) M. Turner, Jr. replaced Mr. Simmonds as Chairman of the Company. Furthermore, the Board of Directors also appointed Nathan Nienhuis to serve as the Company’s Chief Operating Officer.
On September 4, 2018, the Company incorporated Cordova Investments Canada, Inc., a wholly-owned Ontario-based subsidiary (“Cordova Investments Canada”) to act as the Company’s parent holding company in Canada.
On October 17, 2018, the Company’s Board of Directors and Audit Committee requested that MNP LLP resign as the Company’s auditor to facilitate the appointment of Marcum LLP as the Company’s new auditor until the next annual general meeting, effective immediately on the date thereof.
On November 6, 2018, the Company incorporated Cordova CA Holdings, LLC, a California limited liability company (“Cordova CA”), as a wholly-owned subsidiary of CordovaCann USA to act as the Company’s primary holding subsidiary in the State of California.
On October 28, 2019, Eric Lowy resigned as a Director of the Company.
On April 8, 2020, Ashish Kapoor resigned as a Director of the Company. Furthermore, Benjamin Higham and Jakob Ripshtein were appointed as Directors of the Company.
On May 19, 2020, the Company acquired 50.1% ownership in 2734158 Ontario Inc., as disclosed below.
On May 16, 2020, Nathan Nienhuis resigned as a Director and chief operating officer of the Company. Dale Rasmussen was appointed as a Director of the Company.
On August 17, 2020, Henry Kloepper resigned as a Director of the Company.
On September 21, 2020, the Company acquired an additional 10.35% equity stake in 2734158 Ontario Inc. bringing its total ownership of the corporation to 60.45%.
On November 20, 2020, Cannabilt Farms, LLC, a wholly-owned subsidiary the Company, was granted a Marijuana Production License in Oregon.
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On December 2, 2020, the Company acquired a 51% stake in 10062771 Manitoba Inc.
On December 8, 2020, the Company incorporated Cordova WA Holdings, LLC, a Washington limited liability Company (“Cordova WA”), as a wholly-owned subsidiary of CordovaCann USA to act as the Company’s primary operating subsidiary in the State of Washington.
On February 26, 2021, the Company completed the acquisition of Extraction Technologies, LLC, as noted below.
Transaction Summaries
Summary of Star Buds Asset Acquisition.
On April 8, 2020, the Company, through its wholly-owned subsidiary, Cordova Investments Canada, Inc., completed the purchase of certain real assets and intellectual property (the “Assets”) of an arm’s length Canadian cannabis corporation (the “Star Buds Transaction”). The Assets acquired will enable the Company to open five recreational cannabis stores and four medical cannabis clinics in Western Canada under an established brand name, with the exclusive right to open more stores in Canada. In conjunction with the Star Buds Transaction, seasoned industry veterans, Mr. Jakob Ripshtein and Mr. Ben Higham joined the Company’s board of directors.
Starbuds International Inc., the vendor of the Assets (the “Vendor” or “Star Buds”) is a British Columbia based cannabis venture that owns one of the most significant medical cannabis clinic footprints in Western Canada, in addition to a network of recreational cannabis retail stores awaiting final provincial regulatory approvals. The Company has purchased the Assets related to five such recreational stores and four such medical clinics and expects to have them opened in 2020. These stores will leverage the Star Buds brand name and proven business model that has created one of the most profitable cannabis retail companies in the United States over the last six years. These stores also expect to be able to utilize the intellectual property of well-established Star Buds product lines of flower, concentrates, and edibles. The Company plans on leveraging the Star Buds business model and the platform to open additional stores across Canada in 2020 and beyond.
As consideration to the Vendor for the Star Buds Transaction, the Company:
(i) | issued twelve million five hundred thousand (12,500,000) common shares of the Company at close, in exchange for the Assets held related to five retail cannabis stores and four medical cannabis clinics; |
(ii) | issued three million (3,000,000) common shares of the Company for each additional lease assignment in Alberta to the Company, for a total of six million (6,000,000) common shares of the Company; |
(iii) | agreed to issue three million (3,000,000) common shares of the Company for the opening of each retail store, up to a maximum of fifteen million (15,000,000) common shares of the Company. Each store must be opened by April 8, 2021 for the Vendor to receive this additional consideration; |
(iv) | issued a three-year promissory note for five hundred twenty-seven thousand and three hundred dollars (CDN $527,967) accruing interest at six percent per annum payable upon maturity (the “Closing Promissory Note”); and |
(v) | issued two additional three-year promissory notes in amounts of two hundred twenty-two thousand and five hundred dollars (CDN $222,500) and one hundred ninety-six thousand and eight hundred (CDN $196,832) for obtaining assignment of two specific leases to Company. Such additional notes to have same terms as the Closing Promissory Note. |
Summary of Investment in 2734158 Ontario Inc.
On May 15, 2020, the Company completed the purchase of its initial stake of 2734158 Ontario Inc. (“273”), an arm’s length Ontario-based cannabis retail venture (the “Ontario Transaction”). Cordova invested seven hundred twenty-three thousand dollars ($723,000) in 273 in exchange for 50.1% of 273. Cordova invested two hundred thousand dollars ($200,000) for 21.7% of 273 at the close of the Transaction, and invested (i) two hundred thousand dollars ($200,000) on June 15, 2020, (ii) two hundred thousand dollars ($200,000) on July 15, 2020, and (iii) one hundred twenty-three thousand dollars ($123,000) on August 15, 2020, which collectively gave the Company ownership of 50.1% of 273 after all payments were made. The Transaction is subject to approval from the Alcohol and Gaming Commission of Ontario and compliance with all applicable laws, rules and regulations. Cordova holds 4 of 6 board seats of 273 and has a right of first refusal on any future sale of primary or secondary shares in 273. The retail stores are operated by 273 under the Star Buds brand name, and Cordova is leveraging its assets of Starbuds International Inc. to provide 273 with retail store designs and layouts, standard operating procedures, staff training, financing resources and systems support. On September 17, 2020, the Company acquired an additional 10.35% of the common shares of 273 not previously owned by Cordova (the “Additional Shares”) bringing its accumulated ownership of 273 to 60.45%. The total purchase price for the Additional Shares amounted to $305,267, of which $72,539 was paid on closing, $157,167 was paid on January 15, 2021 and the remaining amounts are payable within a year from close. As at the date of this Report, the total amount outstanding for the Additional Shares has been paid.
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Summary of Oregon Transaction
On April 4, 2018, Cordova OR entered into an agreement to acquire Cordova OR Operations, LLC (“OR Operations”) for the acquisition of land and building for a total purchase price of US $1,440,000. Under the terms of the agreement, Cordova OR acquired a 27.5% membership interest in OR Operations for $534,311 (US $400,000) on April 4, 2018, and acquired the remaining 72.5% interest on June 19, 2019 for $1,361,048 (US $1,040,000). The Company spent $1,760,861 in relation to construction in progress during the year ended June 30, 2019. The assets of OR Operations consists of land, building and construction in progress with the construction in progress funded by Cordova OR. The total assets acquired through the transaction amounted to $3,645,389. The Company intends to continue its buildout the Oregon property to complete the construction and establish cultivation and processing facilities on the premises. On November 20, 2020, Cannabilt Farms, LLC, a wholly-owned subsidiary the Company, was granted a Marijuana Production License in Oregon. On August 4, 2021, the Company sold all of its land, building and equipment (the “Oregon Property”) for US $2,200,000 and entered into an agreement to lease the Oregon Property from the buyer (the “Sale Leaseback”). The Sale Leaseback will allow the Company to operate the Oregon Property for ten years, and provides options for two subsequent ten-year renewal periods. Proceeds from the sale were used to retire debts related to the Oregon Property and finance the planned Oregon expansion. A total of US $600,000 of the purchase price has been placed in escrow by the buyer to allow the Company to complete its buildout of the facility. The Sale Leaseback was signed on July 20, 2021 and commenced on August 1, 2021.
Summary of Manitoba Transaction
On December 1, 2020, the Company, through its wholly owned subsidiary Cordova Investments Canada, Inc., completed the purchase of a 51% stake in 10062771 Manitoba Ltd. (“Manitoba Ltd.”) a Manitoba-based cannabis retail venture (the “Manitoba Transaction”). The purchase price for the shares was one hundred fifty thousand dollars ($150,000) payable to Manitoba Ltd. and six million (6,000,000) warrants of the Company to be granted to the current shareholders of Manitoba Ltd., with each warrant entitling the holder thereof to purchase one common share in the capital of the Company at an exercise price of $0.32 until November 30, 2022. In addition, the Company has agreed to loan up to one hundred fifty thousand dollars ($150,000) to Manitoba Ltd. to enable the opening of the second store in Manitoba. The stores will be operated by Manitoba Ltd. under the Star Buds brand name, and the Company will provide the financing resources and systems support as needed. The Company also has a right of first refusal regarding any future primary issuance or secondary sale of shares of Manitoba Ltd., and has a call option to purchase all of the outstanding equity interests of Manitoba Ltd. at any time following the two-year anniversary of the closing date at a valuation equivalent to four times the trailing twelve months normalized EBITDA of Manitoba Ltd.
Summary of Washington Transaction
On February 26, 2021, Cordova WA entered into an agreement to acquire 100% of Extraction Technologies, LLC (“Extraction Tech”), a Washington-based company that provides cannabis extraction services to multiple cannabis licensed processors and will enable Cordova to provide manufactured cannabis products on both a white label and branded basis throughout the state of Washington. Extraction Tech owns a manufacturing building, processing equipment and contracts with tolling and white label customers. The consideration for the Transaction was three million (3,000,000) common shares of the Company on the closing date and an earnout payment of five hundred thousand (500,000) common shares of the Company for every $125,000 US dollars in EBITDA generated by Extraction Tech during the 12-month period beginning on the 3-month anniversary of the closing date and ending of the 15-month anniversary of the closing date. The maximum earnout payment that can be earned by Extraction Tech is four million (4,000,000) common shares, which will be earned if the business generates $1,000,000 US dollars or greater in EBITDA over that 12-month period.
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(B) BUSINESS OVERVIEW
CordovaCann is committed to assembling a premier cannabis business with a vision to becoming a worldwide industry leader. The Company is focused on working with leading cannabis production, processing and retail operators in key jurisdictions that will enable CordovaCann to serve national and international markets that have legal and regulated medical and/or recreational cannabis industries. The Company intends to leverage its production, processing and retail investments to establish a global multi-jurisdictional platform that delivers consistent formulations of best-of-breed brands and predictable consumer experiences.
CordovaCann has entered into strategic relationships and investments with cannabis operators in Canada and the United States. The Company will provide a variety of resources and services to these respective operators including, but not limited to: capital commitments, strategic positioning, brand development, best operating practices, access to intellectual property, administrative assistance, and general business consulting. Over the next twelve months, CordovaCann is focused on growing its retail operations through its assets acquired as part of the Star Buds acquisition and the acquisition of 273, as well as expanding the throughput of its Oregon operations. Moving forward, the Company will also seek partnerships with cannabis operators in key legal markets not currently served by CordovaCann, as well as seek to expand operations in those markets where the Company already has a presence. CordovaCann plans to develop various end products for distribution in each of its current markets as well as to service other brands and intellectual property owners with its growing processing and manufacturing platforms with a view to allowing these clients and prospective clients to gain access to our channels to market and to also generate additional revenue for the Company. The platform that the Company is building will seek to ensure that the end products are consistent across all jurisdictions by maintaining strict and professional standard operating procedures covering everything from marketing, sales, packaging, and branding through to the ultimate end user experience.
CordovaCann’s long-term focus is to continue expanding its reach into additional legal markets, and the Company expects to organically build and forge strategic relationships with cannabis producers, processors and retailers globally. As the Company works to penetrate new markets with its branded products, the Company will likely develop and/or acquire new brands and products to further leverage its channels to market through the broadening of its product offerings. Additionally, CordovaCann may invest in additional parts of the cannabis value chain in markets where such assets are legal and provide a competitive advantage and significant operating leverage for the Company.
Competition
The Company competes with other companies for financing and investment opportunities in the cannabis industry. Some of these companies may possess greater financial resources than the Company. Such competition may result in the Company being unable to enter into desirable strategic agreements or similar transactions, to recruit or retain qualified employees or to acquire the capital necessary to fund its investments. Existing or future competition in the cannabis industry, including, without limitation, the entry of large multinational entities into the industry, could materially adversely affect the Company’s prospects for entering into additional agreements in the future. In addition, the Company currently competes with other cannabis streaming and royalty companies, some of which may possess greater financial resources than the Company.
There is potential that the Company will face intense competition from other companies, some of which can be expected to have longer operating histories and more financial resources and experience than the Company. Increased competition by larger and better financed competitors, including competitors to the Company’s investments, could materially and adversely affect the business, financial condition and results of operations of the Company. It is possible that larger competitors could establish price setting and cost controls which would effectively “price out” certain of the Company’s investments operating within and in support of the medical and recreational cannabis industry.
Because of the early stage of the industry in which the Company will operate, the Company expects to face additional competition from new entrants. To become and remain competitive, the Company will require research and development, marketing, sales and support. The Company may not have sufficient resources to maintain research and development, marketing, sales and support efforts on a competitive basis, which could materially and adversely affect the business, financial condition and results of operations of the Company.
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(C) ORGANIZATIONAL STRUCTURE
The following table presents the corporate subsidiaries and the respective percentage ownership of the Company (the “Subsidiaries”) as at June 30, 2021:
Subsidiary Name | Jurisdiction of Incorporation | Percentage of Ownership |
CordovaCann Holdings Canada, Inc. | Ontario (Canada) | 100% |
Cordova Investments Canada, Inc. | Ontario (Canada) | 100% |
2734158 Ontario Inc. | Ontario (Canada) | 60.45% |
10062771 Manitoba Ltd. | Manitoba (Canada) | 51.00% |
CordovaCann Holdings, Inc. | Delaware (USA) | 100% |
Cordova CO Holdings, LLC | Colorado (USA) | 100% |
Cordova CA Holdings, LLC | California (USA) | 100% |
CDVA Enterprises, LLC | California (USA) | 100% |
Extraction Technologies, LLC | Washington (USA) | 100% |
Cordova WA Holdings, LLC | Washington (USA) | 100% |
Cordova OR Holdings, LLC | Oregon (USA) | 100% |
Cordova OR Operations, LLC | Oregon (USA) | 100% |
Cannabilt Holdings, Inc. | Oregon (USA) | 100% |
Cannabilt Farms, LLC | Oregon (USA) | 100% |
Cannabilt OR Retail, LLC | Oregon (USA) | 100% |
Future Processing, LLC | Oregon (USA) | 100% |
Note:
| (1) | 2734158 Ontario Inc is a 60.45% subsidiary of Cordova Investments Canada, Inc. |
| (2) | 10062771 Manitoba Ltd. is a 51% subsidiary of Cordova Investments Canada, Inc. |
| (3) | Cordova CO Holdings, LLC is a 100% subsidiary of CordovaCann Holdings, Inc. |
| (4) | Cordova CA Holdings, LLC is a 100% subsidiary of CordovaCann Holdings, Inc. |
| (5) | CDVA Enterprises, LLC is a 100% subsidiary of CordovaCann Holdings, Inc. |
| (6) | Extraction Technologies, LLC is a 100% subsidiary of Cordova WA Holdings, LLC |
| (7) | Cordova WA Holdings, LLC is a 100% subsidiary of CordovaCann Holdings, Inc. |
| (8) | Cordova OR Holdings, LLC is a 100% subsidiary of CordovaCann Holdings, Inc. |
| (9) | Cordova OR Operations, LLC is a 100% subsidiary of Cordova OR Holdings, LLC. |
| (10) | Cannabilt Holdings, Inc. is a 100% subsidiary of CordovaCann Holdings, Inc. |
| (11) | Cannabilt Farms, LLC is a 100% subsidiary of Cannabilt Holdings, Inc. |
| (12) | Cannabilt OR Retail, LLC is a 100% subsidiary of Cannabilt Holdings, Inc. |
| (13) | Future Processing, LLC is a 100% subsidiary of Cannabilt Holdings, Inc. |
(D) PROPERTY PLANTS AND EQUIPMENT
The Company’s leased property relates to rental leases entered into during the year ended June 30, 2021 related to the acquisition of 273 , the Star Buds Transaction, the acquisition of Manitoba Ltd., and the sale-lease back transaction of the Company’s Oregon property, as disclosed above.
The Company owns real property through its wholly-owned subsidiary, Extraction Tech.
The Company’s registered office is 217 Queen Street West, Suite 401, Toronto, Ontario, Canada, M5V 0R2. It is not charged monthly rent under this arrangement.
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ITEM 5 - OPERATING AND FINANCIAL REVIEW AND PROSPECTS
(A) OPERATING RESULTS
The following discussion should be read in conjunction with the audited consolidated financial statements of the Company and notes thereto contained elsewhere in this report. The following is stated in CAD.
Results of operations
For the Years Ending June 30, |
| 2021 |
|
| 2020 |
|
| 2019 |
| |||
|
| $ |
|
| $ |
|
| $ | - |
| ||
Revenue |
|
| 10,318,845 |
|
|
| 166,773 |
|
|
| - |
|
Cost of sales |
|
| 6,826,605 |
|
|
| 106,742 |
|
|
| 30,529 |
|
Expenses |
|
| 6,049,280 |
|
|
| 3,368,656 |
|
|
| 5,547,863 |
|
Other expense |
|
| 1,927,871 |
|
|
| 1,396,624 |
|
|
| 258,144 |
|
Net loss for year |
|
| (4,484,911 | ) |
|
| (4,705,249 | ) |
|
| (5,836,536 | ) |
Net loss per share |
|
| (0.06 | ) |
|
| (0.10 | ) |
|
| (0.15 | ) |
Revenues
For the year ended June 30, 2021, the Company earned $10,318,845 (June 30, 2020 - $166,773; June 30, 2019 - $nil) of revenue. The significant increase in revenue relates to the expanding retail operations of the Company initiated during the year ended June 30, 2021 in the provinces of Ontario, Manitoba and Alberta.
Expenses
The Company incurred the following operating expenses over the years ended June 30, 2021, 2020 and 2019:
For the Years Ending June 30, |
| 2021 |
|
| 2020 |
|
| 2019 |
| |||
|
| $ |
|
| $ |
|
| $ |
| |||
Consulting fees |
|
| 1,302,191 |
|
|
| 1,295,829 |
|
|
| 2,448,560 |
|
Share based compensation |
|
| 941,854 |
|
|
| 1,048,661 |
|
|
| 1,413,919 |
|
Professional fees |
|
| 362,479 |
|
|
| 488,902 |
|
|
| 371,079 |
|
Shareholders information services |
|
| 358,516 |
|
|
| 135,181 |
|
|
| 379,058 |
|
Salaries and wages |
|
| 1,030,580 |
|
|
| 23,039 |
|
|
| - |
|
Advertising costs |
|
| - |
|
|
| 2,825 |
|
|
| 88,917 |
|
Office and general |
|
| 749,522 |
|
|
| 208,484 |
|
|
| 605,334 |
|
Depreciation |
|
| 383,476 |
|
|
| 5,768 |
|
|
| - |
|
Amortization of right-of-use assets |
|
| 434,837 |
|
|
| 92,167 |
|
|
| - |
|
Amortization of licenses |
|
| 141,249 |
|
|
| - |
|
|
| - |
|
Lease and utilities |
|
| 344,576 |
|
|
| 67,800 |
|
|
| - |
|
Exclusivity fee |
|
| - |
|
|
| - |
|
|
| 48,367 |
|
Impairment of promissory note receivable |
|
| - |
|
|
| - |
|
|
| 85,114 |
|
Impairment of equipment |
|
| - |
|
|
| - |
|
|
| 107,515 |
|
|
|
| 6,049,280 |
|
|
| 3,368,656 |
|
|
| 5,547,863 |
|
The overall analysis of the key operating expenses above is as follows:
Consulting Fees
Consulting fees for the year ended June 30, 2021 were $1,302,191 (June 30, 2020 - $1,295,829; June 30, 2019 - $2,448,560). Changes in consulting fees are due to the overall changes in the number of consultants during the year ended June 30, 2021.
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Share Based Compensation
Share based compensation expense for the year ended June 30, 2021 were $941,854 (June 30, 2020 – $1,048,661; June 30, 2019 – $1,413,919). The share-based compensation expense for the year ended June 30, 2021 was a result of vesting of warrants that were issued in the prior fiscal year.
Professional Fees
Professional fees for the year ended June 30, 2021 were $362,479 (June 30, 2020 – $488,902; June 30, 2019 – $371,079). Professional fees for the year ended June 30, 2021, 2020 and 2019 were comprised of legal and audit fees.
Shareholder Information Services
Shareholder information services for the year ended June 30, 2021 were $358,516 (June 30, 2020 – $135,181; June 30, 2019 – $379,058). Shareholder information services for the year ended June 30, 2021, 2020 and 2019 were comprised of director fees, transfer agent fees, other filing fees and investor relation services.
Salaries and wages
Salaries and wages during the year ended June 30, 2021 were $1,030,580 (June 30, 2020 – $23,039; June 30, 2019 – $nil). The salaries and wages expenses are related to the employees hired for the Company’s retail cannabis operations.
Office and General
Office and general costs for the year ended June 30, 2021 were $749,522 (June 30, 2020 – $208,484; June 30, 2019 – $605,334). Office and general costs were primarily comprised of administrative, travel and other expenses incurred by the Company and its employees and consultants. The increase in office and general costs for the year ended June 30, 2021 was primarily a result of increased activity related to the retail cannabis stores and associated administrative expenses for those locations.
Depreciation
Depreciation for the year ended June 30, 2021 were $383,476 (June 30, 2020 – $5,768; June 30, 2019 – $nil). Depreciation mostly relates to the depreciation of tangible assets purchased for the Company’s retail cannabis stores.
Amortization of right-of-use assets
Amortization of right-of-use assets for the year ended June 30, 2021 were $434,837 (June 30, 2020 – $92,167; June 30, 2019 – $nil). Amortization relates to the new leases entered into through the Star Buds and 273 acquisitions and the additional leases entered into in the provinces of Ontario and Manitoba since the acquisitions.
Amortization of licenses
Amortization of licenses for the year ended June 30, 2021 were $141,249 (June 30, 2020 – $nil; June 30, 2019 – $nil). Amortization of licenses relates to the retail cannabis license acquired as part of the acquisition of 273 during the year ended June 30, 2020 and the acquisition of Manitoba Ltd. during the year ended June 30, 2021.
Leases and utilities
Leases and utilities for the year ended June 30, 2021 was $344,576 (June 30, 2020 - $67,800; June 30, 2019 - $nil). Lease and utilities expenses relate to the new leases entered into through the Star Buds and 273 acquisitions during the year ended June 30, 2020 and the new leases entered into during the year ended June 30, 2021.
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Other Expense (Income)
The Company incurred the following other expense (income) over the years ended June 30, 2021, 2020 and 2019:
For the Years Ending June 30, |
| 2021 |
|
| 2020 |
|
| 2019 |
| |||
|
| $ |
|
| $ |
|
| $ |
| |||
Interest expense |
|
| 606,830 |
|
|
| 564,897 |
|
|
| 39,215 |
|
Interest on lease obligation |
|
| 223,798 |
|
|
| 46,171 |
|
|
| - |
|
Accretion expense |
|
| 184,410 |
|
|
| 249,518 |
|
|
| 24,680 |
|
Loss on settlement of fees |
|
| - |
|
|
| - |
|
|
| 12,700 |
|
Loss on settlement of other investment |
|
| - |
|
|
| 184,440 |
|
|
| - |
|
Impairment of assets |
|
| 664,543 |
|
|
| 16,316 |
|
|
| - |
|
Foreign exchange loss |
|
| 307,673 |
|
|
| 56,225 |
|
|
| 57,121 |
|
Gain on settlement |
|
| - |
|
|
| (51,023 | ) |
|
| - |
|
Other income |
|
| (66,805 | ) |
|
| (65,920 | ) |
|
| - |
|
Loss on disposal of assets |
|
| 7,422 |
|
|
| - |
|
|
| - |
|
Loss on deposit |
|
| - |
|
|
| 396,000 |
|
|
| 124,428 |
|
|
|
| 1,927,871 |
|
|
| 1,396,624 |
|
|
| 258,144 |
|
The overall analysis of the key other expense (income) above is as follows:
Interest expense
During the year ended June 30, 2021, the Company incurred interest expense in the amount of $606,830 (June 30, 2020 - $564,897; June 30, 2019 - $39,215). The interest expense during the year ended June 30, 2021 and 2020 was primarily in relation to convertible debentures, promissory notes and mortgages issued.
Interest on lease liability
Interest on lease liability during the year ended June 30, 2021 was $223,798 (June 30, 2020 - $46,161; June 30, 2019 - $nil). The increase in the expense reflects the new leases entered into through the Star Buds and 273 acquisitions as well as the new leases entered into in the provinces of Ontario and Manitoba during the year ended June 30, 2021.
Accretion expense
During the year ended June 30, 2021, the Company recorded accretion expenses in the amount of $184,410 (June 30, 2020 - $249,518; June 30, 2019 - $24,680). Accretion expense primarily relates to a discount on convertible debentures and promissory notes issued in relation to the Star Buds transaction as noted above.
Foreign exchange loss
Foreign exchange loss for the year ended June 30, 2021 was $307,673 (June 30, 2020 - $56,225; June 30, 2019 - $57,121). The foreign exchange losses during the year ended June 30, 2021, 2020 and 2019 were a result of the exchange rate fluctuations related to transactions based in United States Dollars.
Impairment of assets
Impairment of assets for the year ended June 30, 2021 was $664,543 (June 30, 2020 - $16,316; June 30, 2019 - $nil). The impairment of assets relates to the write-down of the Oregon land, building and construction-in-progress during the year ended June 30, 2021.
Loss on deposit
The Company’s loss on deposit during the year ended June 30, 2020 amounted to $396,000 (June 30, 2019 - $124,428). This loss on deposit relates to the Company’s non-refundable deposits made towards a transaction in California (the “California Transaction”) during fiscal year ended June 30, 2019. During the year ended June 30, 2020, the Company terminated the California Transaction resulting in this loss.
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Other income
Other income during the year ended June 30, 2021 amounted to $66,805 (June 30, 2020 - $65,920; June 30, 2019 - $nil). Other income is related to rental of the Company’s Washington property as well sale of date related to its retail operations.
(B) LIQUIDITY AND CAPITAL RESOURCES
Working Capital
As at June 30, 2021, the Company had total assets of $17,274,041 (June 30, 2020 – $14,693,789) consisting of the following:
As at |
| June 30, 2021 |
|
| June 30, 2020 |
| ||
|
| $ |
|
| $ |
| ||
ASSETS |
|
|
|
|
|
| ||
Current |
|
|
|
|
|
| ||
Cash and cash equivalents |
|
| 1,058,494 |
|
|
| 647,739 |
|
Accounts receivable |
|
| 7,924 |
|
|
| - |
|
Prepaid expenses and deposits |
|
| 332,771 |
|
|
| 188,674 |
|
Inventory |
|
| 504,521 |
|
|
| 118,682 |
|
Biological assets |
|
| 26,611 |
|
|
| - |
|
Harmonized sales tax receivable |
|
| - |
|
|
| 27,118 |
|
Other deposit - current portion |
|
| 199,463 |
|
|
| 74,450 |
|
Total current assets |
|
| 2,129,784 |
|
|
| 1,056,663 |
|
|
|
|
|
|
|
|
|
|
Other deposit |
|
| 101,351 |
|
|
| 330,764 |
|
Right-of-use assets |
|
| 3,169,655 |
|
|
| 2,539,670 |
|
Property and equipment, net |
|
| 6,059,622 |
|
|
| 4,979,813 |
|
Intangible assets |
|
| 5,243,967 |
|
|
| 5,243,967 |
|
Licenses |
|
| 569,662 |
|
|
| 542,912 |
|
Total assets |
|
| 17,274,041 |
|
|
| 14,693,789 |
|
The increase in assets from June 30, 2020 to June 30, 2021 was primarily the result of the increase in cash, inventory, right-of-use assets and increases in licenses and property and equipment as result of the Manitoba Transaction and the Washington Transaction, respectively, during the year ended June 30, 2021.
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As at June 30, 2021, the Company had total liabilities of $9,955,668 (June 30, 2020 – $8,417,100) consisting of the following:
As at |
| June 30, 2021 |
|
| June 30, 2020 |
| ||
|
| $ |
|
| $ |
| ||
LIABILITIES |
|
|
|
|
|
| ||
Current |
|
|
|
|
|
| ||
Accounts payable and accrued liabilities |
|
| 3,326,171 |
|
|
| 2,800,206 |
|
Harmonized sales tax payable |
|
| 98,916 |
|
|
| - |
|
Mortgage payable |
|
| 1,566,067 |
|
|
| 766,531 |
|
Consideration payable |
|
| 39,292 |
|
|
| - |
|
Convertible debentures |
|
| - |
|
|
| 381,678 |
|
Income taxes payable |
|
| 315,362 |
|
|
| - |
|
Contract liability |
|
| 48,832 |
|
|
| - |
|
Lease liability |
|
| 438,856 |
|
|
| 253,205 |
|
Promissory notes payable |
|
| 1,017,772 |
|
|
| 1,314,427 |
|
Total current liabilities |
|
| 6,851,268 |
|
|
| 5,516,047 |
|
|
|
| 0 |
|
|
|
|
|
Promissory notes payable |
|
| - |
|
|
| 566,835 |
|
Deferred tax liability |
|
| 36,540 |
|
|
| 4,939 |
|
Contract liability |
|
| 178,071 |
|
|
| - |
|
Lease liability |
|
| 2,889,789 |
|
|
| 2,329,279 |
|
Total liabilities |
|
| 9,955,668 |
|
|
| 8,417,100 |
|
The increase in liabilities from June 30, 2020 to June 30, 2021 was primarily related to the consideration payable for the acquisition of an additional equity interest in 273 as described above as well as mortgage debt incurred. During the year ended June 30, 2020, the Company issued debt through convertible debentures to assist in financing its operations and investments.
As at June 30, 2021, the Company had a working capital deficiency of $4,721,484 as compared to a working capital deficiency of $4,464,323 as at June 30, 2020. The Company’s ability to continue as a going concern is dependent upon its ability to access sufficient capital until it has profitable operations and raises a material concern. To this point, all cashflow shortfall from operational activities and overhead costs have been funded through equity issuances, debt issuances and related party advances.
Cash Used in Operating Activities
The Company used cash in operating activities in the amount of $221,155 (June 30, 2020 – $946,908) for the year ended June 30, 2021 due to the reasons discussed above.
Cash Used in Investing Activities
The Company used cash in investing activities in the amount of $872,052 (June 30, 2020 - $145,587) for the year ended June 30, 2021. The investing activities during the year ended June 30, 2021 were primarily related to the purchase of additional shares in 273 and additional property and equipment acquired for the 273 retail stores.
Cash From Financing Activities
The Company received proceeds from financing activities in the amount of $1,571,358 (June 30, 2020 - $1,632,643) during the year ended June 30, 2021. The financing activities proceeds during the year ended June 30, 2021 were in relation to the proceeds received from a common share offering that closed on August 17, 2020, and share subscriptions received for a common share offering that closed on February 19, 2021 and shares received in advance for an offering that closed subsequent to June 30, 2021. This was net of payments of lease liabilities and partial repayments of mortgages payable, convertible debentures, and promissory notes.
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(C) RESEARCH AND DEVELOPMENT, PATENTS AND LICENSES
The Company has not spent any funds on research and development during the fiscal years ended 2021, 2020 and 2019.
(D) TREND INFORMATION
There are no trends, commitments, events or uncertainties presently known to management that are reasonably expected to have a material effect on the Company’s business, financial condition or results of operation other than the nature of the business (Refer to the heading entitled “Risk Factors”).
(E) OFF-BALANCE SHEET ARRANGEMENTS
As at June 30, 2021, the Company did not have any off balance sheet arrangements, including any relationships with unconsolidated entities or financial partnerships to enhance perceived liquidity.
(F) CONTRACTUAL OBLIGATIONS
As at June 30, 2021, the Company did not have any key contractual obligations.
(G) SAFE HARBOR
Statements in Item 5 of this Annual Report on Form 20-F that are not statements of historical fact, constitute “forward-looking statements.” See “Forward-Looking Statements” on page 1 of this Annual Report. The Company is relying on the safe harbor provided in Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, in making such forward-looking statements.
ITEM 6 - DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
(A) DIRECTORS AND SENIOR MANAGEMENT
Mr. Thomas (Taz) M. Turner, Jr. joined the Board of Directors on November 22, 2017 and as Chief Executive Officer of the Company on September 22, 2017. Mr. Turner is currently the Chairman of the Board of Directors. Mr. Turner has over 20 years of experience in the capital markets focused on both debt and equity securities in the technology and consumer industries. He founded Southshore Capital Partners, LP in 2009 and has guided the growth of Southshore’s global equity hedge fund as General Partner. Through his fund, Mr. Turner has invested in public and private cannabis companies since 2012. Prior to Southshore, Mr. Turner held progressive positions at hedge funds and private equity funds with Tala Investments, Trafelet Delta Funds and ABS Capital Partners, where he specialized in technology and consumer investments. Mr. Turner graduated from the University of Virginia with a Bachelor of Science in both Commerce and Mathematics.
We believe Mr. Turner is well-qualified to serve as Chairman of the Board of Directors due to his investment experience, operational experience and business contacts.
Mr. Dale Rasmussen joined the Board of Directors on May 15, 2020. Mr. Rasmussen has provided consulting services to growth companies in a variety of industries. He previously served as Chairman of Quantum Fuel System Technologies Worldwide and Chairman of Fisker Automotive. He was also the Senior Vice President and Secretary of IMPCO Technologies. He has helped facilitate numerous international transactions including several cross-border acquisitions and exchange agreements with leading Canadian companies in solar, wind, battery, and clean technology and alternative fuel automotive sectors. Prior to these roles, Mr. Rasmussen was a commercial banker responsible for the bank’s investment portfolio and corporate development initiatives.
We believe Mr. Rasmussen is well-qualified to serve as a member of the Board of Directors and Chairman of the Audit Committee due to his public company experience, financial markets knowledge and business contacts.
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Mr. Jakob Ripshtein joined the Board of Directors on April 8, 2020. Mr. Ripshtein previously served as the President of Aphria, a leading global cannabis company. Mr. Ripshtein’s diverse career began in the Canadian spirits, pharmaceutical, and financial sectors, where he oversaw business, sales and tax functions. Joining Diageo in 2008 as VP of Finance, Mr. Ripshtein operated in a series of senior roles in Canada, the US, and the UK, becoming President of Diageo Canada, and, in 2016, CFO of Diageo North America. Mr. Ripshtein holds a CPA and International Tax designation, and a Bachelor of Business Administration Honours Degree from York University.
We believe Mr. Riphstein is well-qualified to serve as a member of the Board of Directors due to his public company experience, financial markets knowledge and business contacts.
Mr. Benjamin Higham joined the Board of Directors on April 8, 2020. Mr. Higham was instrumental in the creation and growth of Starbuds International and served on its Board of Directors over the past eight months. Prior to entering business, he practiced law in Canada and the United States, working in private practice and as corporate counsel. Mr. Higham brings significant retail cannabis experience gained from his deep personal network of industry leaders and proven success as a cannabis entrepreneur. Admitted to the New York and Massachusetts Bars in 2004 and called to the Bar of Ontario in 2006, Mr. Higham practiced law in both Canada and United States in private practice and as corporate counsel to a large multinational.
We believe Mr. Higham is well-qualified to serve as a member of the Board of Directors due to his public company experience, financial markets knowledge and business contacts.
Mr. Ashish Kapoor assumed the roles of Chief Financial Officer and Corporate Secretary of the Company, effective March 10, 2015. Mr. Kapoor has over 20 years of experience in providing capital markets advisory and assurance services as a finance professional. After obtaining his Chartered Accountant designation at Ernst & Young, Mr. Kapoor has gained over 10 years of experience in investment banking; advising clients across various industries. As a senior vice president at Macquarie Capital Markets Canada Ltd., Mr. Kapoor was responsible for the Canadian telecom, media, entertainment and technology investment banking and principal investing group. During his 10 years at Macquarie, Mr. Kapoor completed in excess of $3 billion in successful principal investments and advised on a further $4 billion of mergers and acquisitions for third party clients. Mr. Kapoor was formerly the CFO of DealNet Capital Corp., a consumer finance company, and Transeastern Power Trust (prior to its current name, Blockchain Power Trust), an independent power producer focused on renewable energy sources. Mr. Kapoor was awarded the Gold Medal for first place in Ontario, and the Bronze Medal for third place in Canada on the 2000 Chartered Accountancy Uniform Final Examination. Mr. Kapoor is also a CFA Charter holder and holds a Masters of Accounting and a Bachelor of Arts degree from University of Waterloo.
(B) COMPENSATION
The compensation payable to directors and officers of the Company and its subsidiary is summarized below:
1. General
The Company recognizes that remuneration plays an important role in attracting, motivating, rewarding and retaining knowledgeable and skilled individuals to the Company’s management team. However, the Company has not, as yet, generated any significant income or cash flow from operations. The Board of Directors has to consider not only the financial situation of the Company at the time of the determination of executive compensation, but also the estimated financial situation in the mid and long-term. The Board of Directors plans to ensure that, at all times, its compensation arrangements adequately reflect the responsibilities and risks involved in being an effective Director and/or Officer of the Company.
Given the Issuer’s size and stage of operations, the Board does not have a separate compensation committee and such functions are addressed by the entire Board.
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| Table of Contents |
On November 22, 2018, the Company’s shareholders approved and the Company adopted a new rolling stock option plan (the “Option Plan”), under which the Board of Directors may from time to time, in its discretion, grant to directors, officers, employees and consultants of the Company. Pursuant to the Option Plan, the Company may issue options for such period and exercise price as may be determined by the Board of Directors, and in any case not exceeding ten (10) years from the date of grant with the total options issued under the Option Plan not exceeding ten percent (10%) of the common shares of the Company, outstanding at the time of the granting of such options. The minimum exercise price of an option granted under the Option plan must not be less than the market value of the common shares on the date such option is granted. The Option Plan is filed as Exhibit 4.(d) to this Annual Report and is incorporated herein by reference.
2. Statement of Executive Compensation
The following table and accompanying notes set forth all compensation expensed by the Company to all persons who served as the Company’s Directors and Officers during the fiscal year ended June 30, 2021. The information is provided for the fiscal years ended 2021, 2020 and 2019.
Name and principal position | Year | Salary (CAD $) | Share-based awards (CAD $) | Option-based awards (CAD $) | Non-equity incentive plan compensation (CAD $) | Pension value (CAD $) | All other compensation (CAD $) | Total compensation (CAD $) | |
|
|
|
|
| Annual incentive plans | Long-term incentive plans |
|
|
|
Thomas M, Turner, Jr., Chairman and Chief Executive Officer | 2021 2020 2019 | 190,000 204,270 264,740 | - - - | - 25,959(1) - | - - - | - - - | - - - | 100,000 - - | 290,000 230,229 264,740 |
Ashish Kapoor, Director, Chief Financial Officer and Corporate Secretary | 2021 2020 2019 | 190,000 204,270 264,740 | - - - | - 12,980(1) - | - - - | - - - | - - - | 100,000 - - | 290,000 217,250 264,740 |
Nathan Nienhuis, Former Director and Former Chief Operating Officer | 2021 2020 2019 | - 169,270 264,740 | - - - | - 277,004(1) - | - - - | - - - | - - - | - - - | - 446,274 264,740 |
Henry J. Kloepper, Director | 2021 2020 2019 | - 31,112 31,769 | - - - | - 6,490(1) - | - - - | - - - | - - - | - - - | - 37,602 31,769 |
Jakob Ripshtein, Director | 2021 2020 2019 | 45,000 7,500 - | - - - | - 184,713(1) - | - - - | - - - | - - - | 45,000 - - | 90,000 192,213 - |
Benjamin Higham, Director | 2021 2020 2019 | 45,000 7,500 - | - - - | - 184,713(1) - | - - - | - - - | - - - | 45,000 - - | 90,000 192,213 - |
Dale Rasmussen, Director | 2021 2020 2019 | 45,000 3,750 - | - - - | - 132,012(1) - | - - - | - - - | - - - | 37,500 - - | 82,500 135,762 - |
Eric Lowy, Former Director | 2021 2020 2019 | - 8,056 31,769 | - - - | - - - | - - - | - - - | - - - | - - - | - 8,056 31,769 |
Note:
| (1) | See Item 6(E) below for details of option based awards. |
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| Table of Contents |
Employment Agreements; Termination and Change of Control Benefits
As at the date of this Annual Report, the Company is a party to the following employment agreements with the Company’s Directors and Officers:
Thomas (Taz) M. Turner, Jr. Pursuant to the employment agreement entered into with Mr. Turner, Mr. Turner serves as Chief Executive Officer of the Company and is entitled to an annual base salary of CAD $240,000 and is eligible to earn a cash performance bonus.
Mr. Turner’ employment agreement may be terminated by the Company without notice or payment in lieu of notice for just cause. Mr. Turner may terminate his employment for any reason by providing at least two months’ notice in writing. If the Company elects to terminate the employment of Mr. Turner without cause, and provided Mr. Turner is in compliance with the relevant terms and conditions of his employment agreement, the Company shall be obligated to pay Mr. Turner eighteen months of his monthly base salary and any accrued and unpaid expenses and fees.
If (i) there has been a Change of Control (as defined below) of the Company, and (ii) the Involuntary Termination (as defined below) of the employment of Mr. Turner has occurred within twelve months of the date of the Change of Control, the Company shall pay Mr. Turner, in a lump sum, an amount equal to the sum of the following:
(a) | twenty-four months of the base salary immediately prior to the date of the Change of Control; |
(b) | the annual premium cost to the Company of all the benefits provided to Mr. Turner by the Company under his employment agreement immediately prior to the date of the Change of Control; and |
(c) | any other outstanding amounts owed to Mr. Turner under his employment agreement. |
Furthermore, the Company shall also be required to pay to Mr. Turner the lump sum of any other outstanding amounts owed to Mr. Turner (including entities related to or controlled by Mr. Turner) regardless of the terms of such amounts which will become immediately due and payable upon Involuntary Termination.
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Ashish Kapoor. Pursuant to the employment agreement entered into with Mr. Kapoor, Mr. Kapoor serves as Chief Financial Officer of the Company and is entitled to an annual base salary of CAD $240,000 and is eligible to earn a 2cash performance bonus.
Mr. Kapoor’ employment agreement may be terminated by the Company without notice or payment in lieu of notice for just cause. Mr. Kapoor may terminate his employment for any reason by providing at least two months’ notice in writing. If the Company elects to terminate the employment of Mr. Kapoor without cause, and provided Mr. Kapoor is in compliance with the relevant terms and conditions of his employment agreement, the Company shall be obligated to pay Mr. Kapoor eighteen months of his monthly base salary and any accrued and unpaid expenses and fees.
If (i) there has been a Change of Control (as defined below) of the Company, and (ii) the Involuntary Termination (as defined below) of the employment of Mr. Kapoor has occurred within twelve months of the date of the Change of Control, the Company shall pay Mr. Kapoor, in a lump sum, an amount equal to the sum of the following:
(a) | twenty-four months of the base salary immediately prior to the date of the Change of Control; |
(b) | the annual premium cost to the Company of all the benefits provided to Mr. Kapoor by the Company under his employment agreement immediately prior to the date of the Change of Control; and |
(c) | any other outstanding amounts owed to Mr. Kapoor under his employment agreement. |
Furthermore, the Company shall also be required to pay to Mr. Kapoor the lump sum of any other outstanding amounts owed to Mr. Kapoor (including entities related to or controlled by Mr. Kapoor) regardless of the terms of such amounts which will become immediately due and payable upon Involuntary Termination.
Director Compensation
The Company has no formal agreements for compensating its Directors for their services in their capacity as directors. The Company’s Board of Directors agreed to pay each of the Company’s non-executive directors $2,500 per month for their services. The payment or non-payment of non-executive director fees is made by the Board of Directors from time to time. Directors are expected in the future to receive stock options to purchase Common Shares as may be awarded by the Board of Directors.
Long Term Incentive Plan (LTIP) Awards
The Company does not have a LTIP, pursuant to which cash or non-cash compensation intended to serve as an incentive for performance (whereby performance is measured by reference to financial performance or the price of the Company’s securities) was paid or distributed during the most recently completed fiscal year.
Defined Benefit or Actuarial Plan Disclosure
There is no pension plan or retirement benefit plan that has been instituted by the Company and none are proposed at this time.
(C) BOARD PRACTICES
The Board is currently comprised of four (4) directors; being; Thomas (Taz) M. Turner, Jr. (Chairman); Dale Rasmussen, Jakob Ripshtein, and Benjamin Higham; who were each elected by the Company’s shareholders to hold office until the next annual meeting of shareholders or until a successor is duly elected or appointed, unless his office is earlier vacated in accordance with the by-laws of the Company. Mr. Rasmussen, Mr Ripshtein and Mr. Higham are “independent” directors. Mr. Turner, the Company’s Chief Executive Officer; is not considered to be independent. The Board has determined that a board of four (4) members will be effective in the governance and supervision of the management of the Company’s business and affairs at this time.
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| Table of Contents |
Other than the Audit Committee, the Board has no other committees. The directors are regularly informed of or are actively involved in the operations of the Issuer. The scope and size of the Issuer’s operations and development does not currently warrant an increase in the size of the Board or the formation of additional committees, however, the Board periodically examines its size and constitution and may from time to time establish ad hoc committees to deal with specific situations.
Mandate of the Board
The Board has adopted a mandate, in which it has explicitly assumed responsibility for the stewardship of the Company. In carrying out its mandate the Board holds at least four meetings (or consent resolutions, where applicable) annually. The frequency of meetings, as well as the nature of the matters dealt with, will vary from year to year depending on the state of our business and the opportunities or risks, which we face from time to time. To assist in the discharge of its responsibilities, the Board has designated an Audit Committee, as more particularly discussed below.
Audit Committee
The current members of the Company’s Audit Committee are Dale Rasmussen, who is also the Chair of the Audit Committee, Thomas (Taz) M. Turner, Jr., Jakob Ripshtein and Benjamin Higham. Mr. Rasmussen, Mr Ripshtein and Mr. Higham are “independent” directors. Mr. Turner, the Company’s Chief Executive Officer; is not considered to be independent. All members of the Audit Committee are considered to be financially literate.
The Audit Committee’s primary function is to assist the Board of Directors in fulfilling its oversight responsibilities with respect to accounting and financial reporting processes, the integrity of the financial statements the Company, compliance with legal and regulatory requirements, the overall adequacy and maintenance of the systems of internal controls that management has established and the overall responsibility for the Company’s external and internal audit processes including the external auditor’s qualifications, independence and performance.
The Audit Committee has the duty to review and ensure that the Company’s financial disclosures are complete and accurate, are in accordance with generally accepted accounting principles and fairly present the financial position and risks of the organization. The Audit Committee should, where it deems appropriate, review compliance with laws and regulations and the Company’s own policies.
The Audit Committee provides the Board of Directors with such recommendations and reports with respect to the financial disclosures of the Company as it deems advisable. A copy of the Audit Committee Charter is filed as Exhibit 14(a)(ii) to this Annual Report and is incorporated herein by reference.
Corporate Governance Committee
The Company does not currently have a Corporate Governance Committee. The directors determined that, in light of the Company’s size and resources, setting up such a committee would not be practical for the Company at this time.
Compensation Committee
The Company does not currently have a Compensation Committee. The directors determined that, in light of the Company’s size and resources, setting up such a committee would be too expensive for the Company at this time.
(D) EMPLOYEES
The Company presently has no permanent employees. It uses the services of consultants from time to time.
(E) SHARE OWNERSHIP
The Corporation had the following plans as at June 30, 2021 and the date of this Annual Report:
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| Table of Contents |
2017 Stock Option Plan - On November 22, 2018, the Company’s shareholders approved and the Company adopted a new rolling stock option plan (the “Option Plan”), under which the Board of Directors may from time to time, in its discretion, grant to directors, officers, employees and consultants of the Company.8Pursuant to the Option Plan, the Company may issue options for such period and exercise price as may be determined by the Board of Directors, and in any case not exceeding ten (10) years from the date of grant with the total options issued under the Option Plan not exceeding ten percent (10%) of the common shares of the Company, outstanding at the time of the granting of such options. The minimum exercise price of an option granted under the Option plan must not be less than the market value of the common shares on the date such option is granted. The Option Plan is filed as Exhibit 4.(d) to this Annual Report and is incorporated herein by reference.
The objective of the Option Plan is to provide for and encourage ownership of common shares of the Company by its directors, officers, consultants and employees and those of any subsidiary companies so that such persons may increase their stake in the Company and benefit from increases in the value of the common shares. The Option Plan is designed to be competitive with other companies in the industry. It is the view of management that the Option Plan is a significant incentive for the directors, officers, consultants and employees to continue and to increase their efforts in promoting the Company’s operations to the mutual benefit of both the Company and such individuals and also allow the Company to avail of the services of experienced persons with minimum cash outlay.
The following table sets forth the share ownership of those persons listed in subsection 6.B above and includes details of all warrants held by such persons as at June 30, 2021:
|
|
|
| Option-Based Awards |
| Share-Based Awards |
| |||||||||||||||
Name |
| Number of Shares Held |
|
| Number of securities underlying unexercised options (#) |
|
| Option exercised price (CAD $) |
|
| Option expiration date |
| Number of shares or units of shares that have not vested (#) |
|
| Market or payout value of share based awards that have not vested (CAD $) |
| |||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Thomas M, Turner, Jr., |
|
| 2,947,523 | (1) |
|
| 200,000 | (3) |
|
| 0.25 |
|
| Feb 24, 2023 |
|
| - |
|
|
| - |
|
Chairman and Chief Executive Officer |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ashish Kapoor, |
|
| 4,497,380 | (2) |
|
| 100,000 | (3) |
|
| 0.25 |
|
| Feb 24, 2023 |
|
| - |
|
|
| - |
|
Chief Financial Officer and Corporate Secretary, |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Former Director |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nathan Nienhuis, |
|
| - |
|
|
| 1,000,000 | (3) |
|
| 0.45 |
|
| May 15, 2023 |
|
| - |
|
|
| - |
|
Former Director and Former Chief Operating Officer |
|
|
|
|
|
| 100,000 | (3) |
|
| 0.25 |
|
| Feb 24, 2023 |
|
| - |
|
|
| - |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Henry J. Kloepper, Former Director |
|
| - |
|
|
| 50,000 | (3) |
|
| 0.25 |
|
| Feb 24, 2023 |
|
| - |
|
|
| - |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Jakob Ripshtein, Director |
|
| 1,734,877 |
|
|
| 1,500,000 | (3) |
|
| 0.25 |
|
| Apr 6, 2023 |
|
| - |
|
|
| - |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benjamin Higham, Director |
|
| 1,973,831 |
|
|
| 1,500,000 | (3) |
|
| 0.25 |
|
| Apr 6, 2023 |
|
| - |
|
|
| - |
|
|
|
|
|
|
|
| 3,000,000 | (4) |
|
| 0.32 |
|
| Nov 30, 2022 |
|
| - |
|
|
| - |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dale Rasmussen, Director |
|
| - |
|
|
| 500,000 | (3) |
|
| 0.45 |
|
| May 15, 2023 |
|
| - |
|
|
| - |
|
Note:
| (1) | Includes 2,947,523 Common Shares owned by T3 Research, LLC. Mr. Turner also may be seen to have control or direction over an additional 2,947,523 Common Shares held by Southshore Capital Partners, LP, a private investment fund. |
| (2) | Includes 4,395,046 Common Shares owned by 2364201 Ontario Corp. and 35,000 Common Shares held by Mr. Kapoor’s spouse. |
| (3) | Option-based awards issued under the Option Plan; all of which are fully vested and exercisable. |
| (4) | Share-purchase warrants issued to Benjamin Higham. |
There were 93,151,074 Common Shares issued and outstanding as at June 30, 2021 and 96,730,453 Common Shares issued and outstanding as at the date of this Annual Report. There were 5,300,000 options and 15,589,500 warrants issued and outstanding as at June 30, 2021 and 5,200,000 options and 17,279,000 warrants issued and outstanding as at the date of this Annual Report.
ITEM 7 - MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
(A) MAJOR SHAREHOLDERS
The Company's securities are recorded on the books of its transfer agent in registered form. The majority of such shares are, however, registered in the name of intermediaries such as brokerage houses and clearing-houses on behalf of their respective clients. The Company does not have knowledge of the beneficial owners thereof.
As at the date of this Annual Report, intermediaries like CDS & Co, of Toronto, Canada and Cede & Co of New York, USA held approximately 59% of the issued and outstanding common shares of the Company on behalf of several beneficial shareholders whose individual holdings details were not available.
The following table shows the record and, where known to us, the beneficial ownership of our shares by each shareholder holding at least 5% of our common shares as at June 30, 2021. As used herein, the term beneficial ownership with respect to a security is defined by Rule 13d-3 under the Securities Exchange Act of 1934.
Name of Shareholder |
| No. of Shares Held |
|
| % of Issued Shares |
| ||
|
|
|
|
|
|
| ||
Southshore Capital Partners, LP |
|
| 2,947,523 |
|
|
| 3.05 | % |
T3 Research, LLC |
|
| 2,947,523 |
|
|
| 3.05 | % |
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| Table of Contents |
All of the Company’s shareholders have the same voting rights.
As at the date of this Annual Report, the Company had 96,730,453 common shares outstanding, which, as per the details provided by TSX Trust Company, the Company’s registrar and transfer agent, were held by approximately 594 record holders (excluding the beneficial shareholders held through the intermediaries) of which 128 shareholders are based in the United States (including the beneficial shareholders held through the intermediaries) and hold an aggregate of 30,779,882 shares or less than 32% of the Common Shares.
The Registrant is a publicly owned Canadian corporation, the shares of which are owned by Canadian residents, U.S. residents, and residents of other countries. The Registrant is not owned or controlled directly or indirectly by another corporation (other than as indicated in the chart above) or any foreign government. There are no arrangements, known to the Company, the operation of which may at a subsequent date result in a change of control of the Company.
(B) RELATED PARTY TRANSACTIONS
Related party transactions for the year ended June 30, 2021, 2020 and 2019 and the balances as at those dates, not disclosed elsewhere are:
| a) | During the year ended June 30, 2021, the Company expensed $842,500 (June 30, 2020 - $662,284; June 30, 2019 - $1,116,103), in fees payable to officers and directors of the Company and in fees payable to a corporation related by virtue of a common officer and director. As at June 30, 2021, the Company had fees payable to officers and directors of the Company of $1,494,228 (June 30, 2020 - $1,278,106); and |
|
|
|
| b) | During the year ended June 30, 2021, the Company expensed $740,200 (June 30, 2020 - $559,846; June 30, 2019 - $nil) in share based compensation related to officers and directors of the Company. |
Indebtedness to Company of Directors, Executive Officers and Senior Officers
None of the directors, consultants, executive officers and senior officers of the Company or any of its subsidiaries, proposed nominees for election or associates of such persons is or has been indebted to the Company at any time for any reason whatsoever, including the purchase of securities of the Company or any of its subsidiaries.
(C) INTERESTS OF EXPERTS AND COUNSEL
Not applicable.
ITEM 8 - FINANCIAL INFORMATION
(A) CONSOLIDATED STATEMENTS AND OTHER FINANCIAL INFORMATION
Information regarding our financial statements is contained under the caption "Item 18. Financial Statements" below.
Legal Proceedings
The Company is not currently involved in any litigation nor is it aware of any litigation pending or threatened.
Dividend Policy
Since its incorporation, the Company has not declared or paid, and has no present intention to declare or to pay in the foreseeable future, any cash dividends with respect to its common shares. Earnings will be retained to finance further growth and development of the business of the Company. However, if the Board of Directors declares dividends, all common shares will participate equally in the dividends, and, in the event of liquidation, in the net assets, of the Company.
| 38 |
| Table of Contents |
(B) SIGNIFICANT CHANGES
On September 22, 2017, Graham Simmonds resigned as Chief Executive Officer and was replaced by Thomas M. Turner, Jr., effective immediately.
On November 22, 2017, the Company’s shareholders elected Graham Simmonds, Henry J. Kloepper, Thomas (Taz) M. Turner, Jr., Ashish Kapoor, Nathan Nienhuis and Eric Lowy to serve as Directors of the Company.
On May 17, 2018, Graham Simmonds resigned as a Director of the Company and Thomas (Taz) M. Turner, Jr. replaced Mr. Simmonds as Chairman of the Company. Furthermore, the Board of Directors also appointed Nathan Nienhuis to serve as the Company’s Chief Operating Officer.
On October 28, 2019, Eric Lowy resigned as a Director of the Company.
On April 8, 2020, Ashish Kapoor resigned as a Director of the Company. Furthermore, Benjamin Higham and Jakob Ripshtein were appointed as Directors of the Company.
On May 16, 2020, Nathan Nienhuis resigned as a Director and chief operating officer of the Company. Dale Rasmussen was appointed as a Director of the Company.
On August 17, 2020, Henry Kloepper resigned as a Director of the Company
ITEM 9 - THE OFFER AND LISTING
(A) OFFER AND LISTING DETAILS
The Company’s Common Shares are listed for trading on the CSE under the symbol “CDVA” and are quoted on the OTCQB marketplace in the United States under the symbol “LVRLF”.
| 39 |
| Table of Contents |
The following table sets forth the reported high and low prices and the trading volume of the Common Shares on the CSE for each month for the twelve (12) months prior to the date of this Annual Report.
Date |
| High ($) |
|
| Low ($) |
|
| Volume |
| |||
November, 2021 |
|
| 0.47 |
|
|
| 0.30 |
|
|
| 859,433 |
|
October, 2021 |
|
| 0.36 |
|
|
| 0.28 |
|
|
| 1,205,749 |
|
September, 2021 |
|
| 0.32 |
|
|
| 0.24 |
|
|
| 557,470 |
|
August, 2021 |
|
| 0.36 |
|
|
| 0.29 |
|
|
| 702,446 |
|
July, 2021 |
|
| 0.34 |
|
|
| 0.27 |
|
|
| 244,234 |
|
June, 2021 |
|
| 0.32 |
|
|
| 0.27 |
|
|
| 452,100 |
|
May, 2021 |
|
| 0.35 |
|
|
| 0.20 |
|
|
| 897,611 |
|
April, 2021 |
|
| 0.35 |
|
|
| 0.23 |
|
|
| 718,102 |
|
March, 2021 |
|
| 0.41 |
|
|
| 0.30 |
|
|
| 1,081,723 |
|
February, 2021 |
|
| 0.48 |
|
|
| 0.33 |
|
|
| 782,317 |
|
January, 2021 |
|
| 0.55 |
|
|
| 0.24 |
|
|
| 1,408,296 |
|
December, 2020 |
|
| 0.36 |
|
|
| 0.24 |
|
|
| 1,867,608 |
|
The following table sets forth the reported high and low prices and the trading volume of the Common Shares on the OTCQB marketplace for each month for the twelve (12) months prior to the date of this Annual Report.
Date |
| High (USD $) |
|
| Low (USD $) |
|
| Volume |
| |||
November, 2021 |
|
| 0.38 |
|
|
| 0.24 |
|
|
| 2,136,100 |
|
October, 2021 |
|
| 0.29 |
|
|
| 0.22 |
|
|
| 2,414,800 |
|
September, 2021 |
|
| 0.25 |
|
|
| 0.22 |
|
|
| 1,170,500 |
|
August, 2021 |
|
| 0.28 |
|
|
| 0.21 |
|
|
| 1,624,500 |
|
July, 2021 |
|
| 0.28 |
|
|
| 0.20 |
|
|
| 619,700 |
|
June, 2021 |
|
| 0.30 |
|
|
| 0.23 |
|
|
| 1,532,000 |
|
May, 2021 |
|
| 0.38 |
|
|
| 0.16 |
|
|
| 1,981,000 |
|
April, 2021 |
|
| 0.38 |
|
|
| 0.22 |
|
|
| 1,262,500 |
|
March, 2021 |
|
| 0.36 |
|
|
| 0.23 |
|
|
| 1,750,500 |
|
February, 2021 |
|
| 0.49 |
|
|
| 0.25 |
|
|
| 1,751,600 |
|
January, 2021 |
|
| 0.41 |
|
|
| 0.17 |
|
|
| 2,250,900 |
|
December, 2020 |
|
| 0.28 |
|
|
| 0.18 |
|
|
| 2,708,900 |
|
(B) PLAN OF DISTRIBUTION
Not applicable.
(C) MARKETS
The Company’s Common Shares are listed for trading on the CSE under the symbol “CDVA” and the OTCQB marketplace in the United States under the symbol “LVRLF”.
(D) SELLING SHAREHOLDERS
Not applicable.
| 40 |
| Table of Contents |
(E) DILUTION
Not applicable.
(F) EXPENSES OF THE ISSUE
Not applicable.
ITEM 10 - ADDITIONAL INFORMATION
(A) SHARE CAPITAL
This Form 20-F is being filed as an Annual Report under the Exchange Act and, as such, there is no requirement to provide any information under this section.
(B) MEMORANDUM AND ARTICLES OF ASSOCIATION
Following approval by the shareholders in a special meeting held on October 4, 2006 as explained in item 8(B) above, the Company applied for authorization to continue from being governed by the OBCA and was granted approval on October 26, 2006 to continue under the jurisdiction of the CBCA. An application for authorization to continue is included in Exhibits 1.1 and 1.2 hereof, which exhibits have been incorporated by reference into this report.
New by-laws were adopted in the special meeting of shareholders on October 4, 2006 in compliance with the requirements of the CBCA. The new by-laws were included in Exhibit 1.3 thereof, which exhibit has been incorporated by reference into this report.
On January 3, 2018, the Company changed its name to its current name, “CordovaCann Corp.” The Company’s certificate of amendment is filed as Exhibit 1.16 to this Annual Report and is incorporated herein by reference.
(C) MATERIAL CONTRACTS
Except as set forth herein, under “Item 5(A) – Operating and Financial Review Prospects – Operating Results – Overview” or “Item 7(B) – Major Shareholders and Related Party Transactions – Related Party Transactions”, all material contracts entered into in last two fiscal years were in the ordinary course of its business.
(D) EXCHANGE CONTROLS
Limitations on the ability to acquire and hold shares of the Company may be imposed by the Competition Act (Canada) (the “Competition Act”). This legislation permits the Commissioner of Competition to review any acquisition of a significant interest in us. This legislation grants the Commissioner jurisdiction, for up to three years, to challenge this type of acquisition before the Competition Tribunal if the Commissioner believes that it would, or would be likely to, result in a substantial lessening or prevention of competition in any market in Canada.
The Competition Act requires that any person proposing to acquire any of the assets in Canada of an operating business file a notification with the Competition Bureau where (a) "size of the parties" threshold - the parties to the transaction, together with their respective affiliates, have (i) assets in Canada the value of which exceeds $400 million in the aggregate, or (ii) annual gross revenues from sales in, from or into Canada that exceed $400 million in the aggregate; and (b) "size of the transaction" threshold - the aggregate value of those assets, or the gross revenues from sales in or from Canada generated from those assets, would exceed an annually established threshold (2014 - $82 million), based on the book value of the subject assets or Company in Canada, or gross revenues from sales in or from Canada generated from those assets or by the Company). For the purposes of the Competition Act, asset values and gross revenues are to be determined as of the last day of the period covered by the most recent audited financial statements in which the assets or gross revenues are accounted for.
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| Table of Contents |
In the case of share acquisitions, an additional "shareholding threshold" must be exceeded. This legislation requires any person who intends to acquire shares to file a notification with the Competition Bureau if certain financial thresholds are exceeded, and that person would hold more than 20% of our voting shares as a result of the acquisition. If a person already owns 20% or more of our voting shares, a notification must be filed when the acquisition would bring that person’s holdings over 50%. Where a notification is required, the legislation prohibits completion of the acquisition until the expiration of a statutory waiting period, unless the Commissioner provides written notice that he does not intend to challenge the acquisition.
There are no governmental laws, decrees or regulations in Canada that restrict the export or import of capital or that affect the remittance of dividends, interest or other payments to non-resident holders of our securities. However, any such remittance to a resident of the United States may be subject to a withholding tax pursuant to the Income Tax Act (Canada). For further information concerning such withholding tax, see “Taxation" below.
Except as may be provided under the Investment Canada Act (the "ICA"), there are no specific limitations under the laws of Canada or in the Articles of the Company with respect to the rights of non-residents of Canada to hold and/or vote securities of the Company.
The ICA requires each individual, government or agency thereof, corporation, partnership, trust or joint venture that is not a “Canadian” as defined in the ICA (a “non-Canadian”) making an investment to acquire control of a Canadian business, the gross assets of which exceed certain defined threshold levels, to file an application for review with the Investment Review Division of Industry Canada. The threshold level for non-Canadians who are private sector World Trade Organization investors (as defined in the ICA) is in excess of $600 million in enterprise value and from non-Canadians who are state-owned World Trade Organization investors is in excess of $369 million in asset value, subject to an annual adjustment on the basis of a prescribed formula in the ICA to reflect inflation and real growth within Canada.
In the context of the Company, in essence, three methods of acquiring control of a Canadian business are regulated by the ICA: (i) the acquisition of all or substantially all of the assets used in carrying on business in Canada; (ii) the acquisition, directly or indirectly, of voting shares of a Canadian corporation carrying on business in Canada; (iii) the acquisition of voting shares of an entity which controls, directly or indirectly, another entity carrying on business in Canada. An acquisition of a majority of the voting interests of an entity, including a corporation, is deemed to be an acquisition of control under the ICA. However, under the ICA, there is a rebuttable presumption that control is acquired if one-third of the voting shares of a Canadian corporation or an equivalent undivided interest in the voting shares of such corporation are held by a non-Canadian person or entity. An acquisition of less than one-third of the voting shares of a Canadian corporation is deemed not to be an acquisition of control. An acquisition of less than a majority, but one-third or more, of the voting shares of a Canadian corporation is presumed to be an acquisition of control unless it can be established that on the acquisition the Canadian corporation is not, in fact, controlled by the acquirer through the ownership of voting shares. Certain transactions relating to the acquisition of common shares would be exempt from review from the ICA, including:
(a) | acquisition of common shares by a person in the ordinary course of a person’s business as a trader or dealer in securities; |
(b) | acquisition of control of a Canadian corporation in connection with the realization of security granted for a loan or other financial assistance and not for any purpose related to the provisions of the ICA; and |
(c) | acquisition of control of a Canadian corporation by reason of an amalgamation, merger, consolidation or corporate reorganization following which the ultimate direct or indirect control in fact of the corporation, through the ownership of voting interests, remains unchanged. |
In addition, if less than a majority of voting interests of a Canadian corporation are owned by Canadians, the acquisition of control of any other Canadian corporation by such corporation may be subject to review unless it can be established that the corporation is not in fact controlled through the ownership of voting interests and that two-thirds of the members of the board of directors of the corporation are Canadians.
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| Table of Contents |
Where an investment is reviewable under the ICA, it may not be implemented unless it is likely to be of net benefit to Canada. If an applicant is unable to satisfy the Minister responsible for Industry Canada that the investment is likely to be of net benefit to Canada, the applicant may not proceed with the investment. Alternatively, an acquiror may be required to divest control of the Canadian business that is the subject of the investment.
In addition to the foregoing, the ICA requires formal notification to the Canadian government of all other acquisitions of control of Canadian businesses by non-Canadians. These provisions require a foreign investor to give notice in the required form, which notices are for information, as opposed to review purposes.
(E) TAXATION
Canadian Federal Income Tax Consequences
We consider that the following general summary fairly describes the principal Canadian federal income tax considerations applicable to holders of our common shares who, for purposes of the Income Tax Act (Canada) (the “ITA”), deal at arm’s length with the Company, hold such shares as capital property, do not carry on business in Canada, have not been at any time residents of Canada for purposes of the ITA and are residents of the United States (“U.S. Residents”) under the Canada-United States Income Tax Convention (1980) (the “Convention”).
This summary is based upon the current provisions of the ITA, the Income Tax Regulations (the “Regulations”), the current publicly announced administrative and assessing policies of the Canada Revenue Agency (formerly Canada Customs and Revenue Agency), and all specific proposals (the “Tax Proposals”) to amend the ITA and Regulations publicly announced prior to the date hereof by the Minister of Finance (Canada). This description is not exhaustive of all possible Canadian federal income tax consequences and, except for the Tax Proposals, does not take into account or anticipate any changes in law, whether by legislative, governmental or judicial action, nor does it take into account provincial or foreign tax considerations which may differ significantly from those discussed herein.
The following discussion is for general information only and it is not intended to be, nor should it be construed to be, legal or tax advice to any holder or prospective holder of our common shares and no opinion or representation with respect to any Canadian federal, provincial or foreign tax consequences to any such holder or prospective holder is made. Accordingly, holders and prospective holders of our common shares should consult with their own tax advisors about the Canadian federal, provincial and foreign tax consequences of purchasing, owning and disposing of our common shares.
Dividends
Dividends, including stock dividends, paid or credited or deemed to be paid or credited on our common shares to a U.S. Resident will be subject to withholding tax at a rate of 25%. The Convention provides that the normal 25% withholding tax rate will generally be reduced to 15% on dividends paid on shares of a corporation resident in Canada for federal income tax purposes (such as the Company) to U.S. Residents, and also provides for a further reduction of this rate to 5% where the beneficial owner of the dividends is a corporation which is a resident of the United States and owns at least 10% of the voting shares of the corporation paying the dividend. These Convention reductions are not available to beneficial owners who are a U.S. LLC corporation.
Capital Gains
The Convention provides that a U.S. Resident will not be subject to tax under the ITA in respect of any capital gain on the disposition of our common shares unless such shares constitute taxable Canadian property of the U.S. Resident and the U.S. Resident is not entitled to the benefits of the Convention with regards to capital gains. Our common shares will constitute taxable Canadian property if at any time during the five year period immediately preceding the disposition of our common shares, the U.S. Resident, or persons with whom the U.S. Resident did not deal at arm’s length, or the U.S. Resident together with persons with whom the U.S. resident did not deal at arm’s length owned 25% or more of the issued shares of any class of our capital stock.
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Where a U.S. Resident realizes a capital gain on a disposition of shares that constitute “taxable Canadian property”, the Convention relieves the U.S. Resident from liability for Canadian tax on such capital gains unless:
(a) | the value of the shares is derived principally from “real property” in Canada, including the right to explore for or exploit natural resources and rights to amounts computed by reference to production, |
(b) | the shareholder was resident in Canada for 120 months during any period of 20 consecutive years preceding the disposition, was resident in Canada at any time during the 10 years immediately preceding the disposition and the shares were owned by him when he ceased to be resident in Canada, or |
(c) | the shares formed part of the business property of a “permanent establishment” or pertained to a fixed base used for the purpose of performing independent personal services that the shareholder has or had in Canada within the 12 months preceding the disposition. |
These Convention benefits are generally not available to beneficial owners who are a U.S. LLC corporation.
U.S. Federal Income Tax Consequences
The following is a summary of the anticipated material U.S. federal income tax consequences to a U.S. Holder (as defined below) arising from and relating to the acquisition, ownership, and disposition of our common shares (“Common Shares”).
This summary is for general information purposes only and does not purport to be a complete analysis or listing of all potential U.S. federal income tax consequences that may apply to a U.S. Holder as a result of the acquisition, ownership, and disposition of Common Shares. In addition, this summary does not take into account the individual facts and circumstances of any particular U.S. Holder that may affect the U.S. federal income tax consequences of the acquisition, ownership, and disposition of Common Shares. Accordingly, this summary is not intended to be, and should not be construed as, legal or U.S. federal income tax advice with respect to any U.S. Holder. Each U.S. Holder should consult its own financial advisor, legal counsel, or accountant regarding the U.S. federal, U.S. state and local, and foreign tax consequences of the acquisition, ownership, and disposition of Common Shares.
Scope of this Disclosure
Authorities
This summary is based on the Internal Revenue Code of 1986, as amended (the “Code”), Treasury Regulations (whether final, temporary, or proposed), published rulings of the Internal Revenue Service (“IRS”), published administrative positions of the IRS, the Convention Between Canada and the United States of America with Respect to Taxes on Income and on Capital, signed September 26, 1980, as amended (the “Canada-U.S. Tax Convention”), and U.S. court decisions that are applicable and, in each case, as in effect and available, as of the date of this Annual Report. Any of the authorities on which this summary is based could be changed in a material and adverse manner at any time, and any such change could be applied on a retroactive basis. This summary does not discuss the potential effects, whether adverse or beneficial, of any proposed legislation that, if enacted, could be applied on a retroactive basis.
U.S. Holders
For purposes of this summary, a “U.S. Holder” is a beneficial owner of Common Shares that, for U.S. federal income tax purposes, is (a) an individual who is a citizen or resident of the U.S., (b) a corporation, or any other entity classified as a corporation for U.S. federal income tax purposes, that is created or organized in or under the laws of the U.S. or any state in the U.S., including the District of Columbia, (c) an estate if the income of such estate is subject to U.S. federal income tax regardless of the source of such income, or (d) a trust if (i) such trust has validly elected to be treated as a U.S. person for U.S. federal income tax purposes or (ii) a U.S. court is able to exercise primary supervision over the administration of such trust and one or more U.S. persons have the authority to control all substantial decisions of such trust.
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Non-U.S. Holders
For purposes of this summary, a “non-U.S. Holder” is a beneficial owner of Common Shares other than a U.S. Holder. This summary does not address the U.S. federal income tax consequences of the acquisition, ownership, and disposition of Common Shares to non-U.S. Holders. Accordingly, a non-U.S. Holder should consult its own financial advisor, legal counsel, or accountant regarding the U.S. federal, U.S. state and local, and foreign tax consequences (including the potential application of and operation of any tax treaties) of the acquisition, ownership, and disposition of Common Shares.
U.S. Holders Subject to Special U.S. Federal Income Tax Rules Not Addressed
This summary does not address the U.S. federal income tax consequences of the acquisition, ownership, and disposition of Common Shares to U.S. Holders that are subject to special provisions under the Code, including the following U.S. Holders: (a) U.S. Holders that are tax-exempt organizations, qualified retirement plans, individual retirement accounts, or other tax-deferred accounts; (b) U.S. Holders that are financial institutions, insurance companies, real estate investment trusts, or regulated investment companies; (c) U.S. Holders that are dealers in securities or currencies or U.S. Holders that are traders in securities that elect to apply a mark-to-market accounting method; (d) U.S. Holders that have a “functional currency” other than the U.S. dollar; (e) U.S. Holders that are liable for the alternative minimum tax under the Code; (f) U.S. Holders that own Common Shares as part of a straddle, hedging transaction, conversion transaction, constructive sale, or other arrangement involving more than one position; (g) U.S. Holders that acquired Common Shares in connection with the exercise of employee stock options or otherwise as compensation for services; (h) U.S. Holders that hold Common Shares other than as a capital asset within the meaning of Section 1221 of the Code; or (i) U.S. Holders that own, directly or indirectly, 10% or more, by voting power or value, of our outstanding shares. U.S. Holders that are subject to special provisions under the Code, including U.S. Holders described immediately above, should consult their own financial advisor, legal counsel or accountant regarding the U.S. federal, U.S. state and local, and foreign tax consequences of the acquisition, ownership, and disposition of Common Shares.
If an entity that is classified as partnership (or “pass-through” entity) for U.S. federal income tax purposes holds Common Shares, the U.S. federal income tax consequences to such partnership (or “pass-through” entity) and the partners of such partnership (or owners of such “pass-through” entity) generally will depend on the activities of the partnership (or “pass-through” entity) and the status of such partners (or owners). Partners of entities that are classified as partnerships (or owners of “pass-through” entities) for U.S. federal income tax purposes should consult their own financial advisor, legal counsel or accountant regarding the U.S. federal income tax consequences of the acquisition, ownership, and disposition of Common Shares.
Tax Consequences Other than U.S. Federal Income Tax Consequences Not Addressed
This summary does not address the U.S. state and local, U.S. federal estate and gift, or foreign tax consequences to U.S. Holders of the acquisition, ownership, and disposition of Common Shares. Each U.S. Holder should consult its own financial advisor, legal counsel, or accountant regarding the U.S. state and local, U.S. federal estate and gift, and foreign tax consequences of the acquisition, ownership, and disposition of Common Shares. (See “Taxation—Canadian Federal Income Tax Consequences” above).
U.S. Federal Income Tax Consequences of the Acquisition, Ownership, and Disposition of Common Shares
Distributions on Common Shares
General Taxation of Distributions
A U.S. Holder that receives a distribution, including a constructive distribution, with respect to the Common Shares will be required to include the amount of such distribution in gross income as a dividend (without reduction for any Canadian income tax withheld from such distribution) to the extent of our current or accumulated “earnings and profits”. To the extent that a distribution exceeds our current and accumulated “earnings and profits”, such distribution will be treated (a) first, as a tax-free return of capital to the extent of a U.S. Holder’s tax basis in the Common Shares and, (b) thereafter, as gain from the sale or exchange of such Common Shares. (See more detailed discussion at “Disposition of Common Shares” below).
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Reduced Tax Rates for Certain Dividends
For taxable years beginning after December 31, 2002 and before January 1, 2011, a dividend paid by us generally will be taxed at the preferential tax rates applicable to long-term capital gains if (a) we are a “qualified foreign corporation” (as defined below), (b) the U.S. Holder receiving such dividend is an individual, estate, or trust, and (c) such dividend is paid on Common Shares that have been held by such U.S. Holder for at least 61 days during the 121-day period beginning 60 days before the “ex-dividend date” (i.e., the first date that a purchaser of such Common Shares will not be entitled to receive such dividend).
We generally will be a “qualified foreign corporation” under Section 1(h)(11) of the Code (a “QFC”) if (a) we are incorporated in a possession of the U.S., (b) we are eligible for the benefits of the Canada-U.S. Tax Convention, or (c) the Common Shares are readily tradable on an established securities market in the U.S. However, even if we satisfy one or more of such requirements, we will not be treated as a QFC if we are a “passive foreign investment company” (as defined below) for the taxable year during which we pay a dividend or for the preceding taxable year. In 2003, the U.S. Department of the Treasury (the “Treasury”) and the IRS announced that they intended to issue Treasury Regulations providing procedures for a foreign corporation to certify that it is a QFC. Although these Treasury Regulations were not issued in 2004, the Treasury and the IRS have confirmed their intention to issue these Treasury Regulations. It is expected that these Treasury Regulations will obligate persons required to file information returns to report a distribution with respect to a foreign security issued by a foreign corporation as a dividend from a QFC if the foreign corporation has, among other things, certified under penalties of perjury that the foreign corporation was not a “passive foreign investment company” for the taxable year during which the foreign corporation paid the dividend or for the preceding taxable year.
We do not believe that we were a “passive foreign investment company” for the taxable year ended June 30, 2008. (See more detailed discussion at “Additional Rules that May Apply to U.S. Holders” below). There can be no assurance that the IRS will not challenge the determination made by us concerning our “passive foreign investment company” status or that we will not be a “passive foreign investment company” for the current or any future taxable year. Accordingly, there can be no assurances that we will be a QFC for the current or any future taxable year, or that we will be able to certify that it is a QFC in accordance with the certification procedures issued by the Treasury and the IRS.
If we are not a QFC, a dividend paid by us to a U.S. Holder, including a U.S. Holder that is an individual, estate, or trust, generally will be taxed at ordinary income tax rates (and not at the preferential tax rates applicable to long-term capital gains). The dividend rules are complex, and each U.S. Holder should consult its own financial advisor, legal counsel, or accountant regarding the dividend rules.
Distributions Paid in Foreign Currency
The amount of a distribution paid to a U.S. Holder in foreign currency generally will be equal to the U.S. dollar value of such distribution based on the exchange rate applicable on the date of receipt. A U.S. Holder that does not convert foreign currency received as a distribution into U.S. dollars on the date of receipt generally will have a tax basis in such foreign currency equal to the U.S. dollar value of such foreign currency on the date of receipt. Such a U.S. Holder generally will recognize ordinary income or loss on the subsequent sale or other taxable disposition of such foreign currency (including an exchange for U.S. dollars).
Dividends Received Deduction
Dividends paid on the Common Shares generally will not be eligible for the “dividends received deduction.” The availability of the dividends received deduction is subject to complex limitations that are beyond the scope of this discussion, and a U.S. Holder that is a corporation should consult its own financial advisor, legal counsel, or accountant regarding the dividends received deduction.
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Disposition of Common Shares
A U.S. Holder will recognize gain or loss on the sale or other taxable disposition of Common Shares in an amount equal to the difference, if any, between (a) the amount of cash plus the fair market value of any property received and (b) such U.S. Holder’s tax basis in the Common Shares sold or otherwise disposed of. Any such gain or loss generally will be capital gain or loss, which will be long-term capital gain or loss if the Common Shares are held for more than one year. Gain or loss recognized by a U.S. Holder on the sale or other taxable disposition of Common Shares generally will be treated as “U.S. source” for purposes of applying the U.S. foreign tax credit rules. (See more detailed discussion at “Foreign Tax Credit” below).
Preferential tax rates apply to long-term capital gains of a U.S. Holder that is an individual, estate, or trust. There are currently no preferential tax rates for long-term capital gains of a U.S. Holder that is a corporation. Deductions for capital losses and net capital losses are subject to complex limitations. For a U.S. Holder that is an individual, estate, or trust, capital losses may be used to offset capital gains and up to US$3,000 of ordinary income. An unused capital loss of a U.S. Holder that is an individual, estate, or trust generally may be carried forward to subsequent taxable years, until such net capital loss is exhausted.
For a U.S. Holder that is a corporation, capital losses may be used to offset capital gains, and an unused capital loss generally may be carried back three years and carried forward five years from the year in which such net capital loss is recognized.
Foreign Tax Credit
A U.S. Holder who pays (whether directly or through withholding) Canadian income tax with respect to dividends paid on the Common Shares generally will be entitled, at the election of such U.S. Holder, to receive either a deduction or a credit for such Canadian income tax paid. Generally, a credit will reduce a U.S. Holder’s U.S. federal income tax liability on a dollar-for-dollar basis, whereas a deduction will reduce a U.S. Holder’s income subject to U.S. federal income tax. This election is made on a year-by-year basis and applies to all foreign taxes paid (whether directly or through withholding) by a U.S. Holder during a year.
Complex limitations apply to the foreign tax credit, including the general limitation that the credit cannot exceed the proportionate share of a U.S. Holder’s U.S. federal income tax liability that such U.S. Holder’s “foreign source” taxable income bears to such U.S. Holder’s worldwide taxable income. In applying this limitation, a U.S. Holder’s various items of income and deduction must be classified, under complex rules, as either “foreign source” or “U.S. source.” In addition, this limitation is calculated separately with respect to specific categories of income (including “passive income,” “high withholding tax interest,” “financial services income,” “general income,” and certain other categories of income). Dividends paid by us generally will constitute “foreign source” income and generally will be categorized as “passive income” or, in the case of certain U.S. Holders, “financial services income.” However, for taxable years beginning after December 31, 2006, the foreign tax credit limitation categories are reduced to “passive income” and “general income” (and the other categories of income, including “financial services income,” are eliminated). The foreign tax credit rules are complex, and each U.S. Holder should consult its own financial advisor, legal counsel, or accountant regarding the foreign tax credit rules.
Information Reporting; Backup Withholding Tax
Payments made within the U.S., or by a U.S. payor or U.S. middleman, of dividends on, and proceeds arising from certain sales or other taxable dispositions of, Common Shares generally will be subject to information reporting and backup withholding tax, at the rate of 28%, if a U.S. Holder (a) fails to furnish such U.S. Holder’s correct U.S. taxpayer identification number (generally on Form W-9), (b) furnishes an incorrect U.S. taxpayer identification number, (c) is notified by the IRS that such U.S. Holder has previously failed to properly report items subject to backup withholding tax, or (d) fails to certify, under penalty of perjury, that such U.S. Holder has furnished its correct U.S. taxpayer identification number and that the IRS has not notified such U.S. Holder that it is subject to backup withholding tax. However, U.S. Holders that are corporations generally are excluded from these information reporting and backup withholding tax rules. Any amounts withheld under the U.S. backup withholding tax rules will be allowed as a credit against a U.S. Holder’s U.S. federal income tax liability, if any, or will be refunded, if such U.S. Holder furnishes required information to the IRS. Each U.S. Holder should consult its own financial advisor, legal counsel, or accountant regarding the information reporting and backup withholding tax rules.
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Additional Rules that May Apply to U.S. Holders
If we are a “controlled foreign corporation,” or a “passive foreign investment company” (each as defined below), the preceding sections of this summary may not describe the U.S. federal income tax consequences to U.S. Holders of the acquisition, ownership, and disposition of Common Shares.
Controlled Foreign Corporation
We generally will be a “controlled foreign corporation” under Section 957 of the Code (a “CFC”) if more than 50% of the total voting power or the total value of our outstanding shares are owned, directly or indirectly, by citizens or residents of the U.S., domestic partnerships, domestic corporations, domestic estates, or domestic trusts (each as defined in Section 7701(a)(30) of the Code), each of which own, directly or indirectly, 10% or more of the total voting power of our outstanding shares (a “10% Shareholder”).
If we are a CFC, a 10% Shareholder generally will be subject to current U.S. federal income tax with respect to (a) such 10% Shareholder’s pro rata share of the “subpart F income” (as defined in Section 952 of the Code) of the Company and (b) such 10% Shareholder’s pro rata share of our earnings invested in “United States property” (as defined in Section 956 of the Code). In addition, under Section 1248 of the Code, any gain recognized on the sale or other taxable disposition of Common Shares by a U.S. Holder that was a 10% Shareholder at any time during the five-year period ending with such sale or other taxable disposition generally will be treated as a dividend to the extent of the “earnings and profits” of the Company that are attributable to such Common Shares. If we are both a CFC and a “passive foreign investment company” (as defined below), we generally will be treated as a CFC (and not as a “passive foreign investment company”) with respect to any 10% Shareholder.
We do not believe that the Company has previously been, or currently is a CFC. However, there can be no assurance that we will not be a CFC for the current or any future taxable year.
Passive Foreign Investment Company
We generally will be a “passive foreign investment company” under Section 1297 of the Code (a “PFIC”) if, for a taxable year, (a) 75% or more of our gross income for such taxable year is passive income or (b) 50% or more of the assets held by us either produce passive income or are held for the production of passive income, based on the fair market value of such assets (or on the adjusted tax basis of such assets, if we are not publicly traded and either is a “controlled foreign corporation” or makes an election). “Passive income” includes, for example, dividends, interest, certain rents and royalties, certain gains from the sale of stock and securities, and certain gains from commodities transactions.
For purposes of the PFIC income test and asset test described above, if we own, directly or indirectly, 25% or more of the total value of the outstanding shares of another foreign corporation, we will be treated as if it (a) held a proportionate share of the assets of such other foreign corporation and (b) received directly a proportionate share of the income of such other foreign corporation. In addition, for purposes of the PFIC income test and asset test described above, “passive income” does not include any interest, dividends, rents, or royalties that are received or accrued by us from a “related person” (as defined in Section 954(d)(3) of the Code), to the extent such items are properly allocable to the income of such related person that is not passive income.
We do not believe that the Company has previously been, or currently are a PFIC. However, there can be no assurance that the IRS will not challenge our determination concerning our PFIC status or that we will not be a PFIC for the current or any future taxable year.
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Default PFIC Rules Under Section 1291 of the Code
If we are a PFIC, the U.S. federal income tax consequences to a U.S. Holder of the acquisition, ownership, and disposition of Common Shares will depend on whether such U.S. Holder makes an election to treat the Company as a “qualified electing fund” or “QEF” under Section 1295 of the Code (a “QEF Election”) or a mark-to-market election under Section 1296 of the Code (a “Mark-to-Market Election”). A U.S. Holder that does not make either a QEF Election or a Mark-to-Market Election will be referred to in this summary as a “Non-Electing U.S. Holder.”
A Non-Electing U.S. Holder will be subject to the rules of Section 1291 of the Code with respect to (a) any gain recognized on the sale or other taxable disposition of Common Shares and (b) any excess distribution paid on the Common Shares. A distribution generally will be an “excess distribution” to the extent that such distribution (together with all other distributions received in the current taxable year) exceeds 125% of the average distributions received during the three preceding taxable years (or during a U.S. Holder’s holding period for the Common Shares, if shorter).
Under Section 1291 of the Code, any gain recognized on the sale or other taxable disposition of Common Shares, and any excess distribution paid on the Common Shares, must be ratably allocated to each day in a Non-Electing U.S. Holder’s holding period for the Common Shares. The amount of any such gain or excess distribution allocated to prior years of such Non-Electing U.S. Holder’s holding period for the Class Common Shares (other than years prior to the first taxable year of the Company during such Non-Electing U.S. Holder’s holding period and beginning after December 31, 1986 for which we was not a PFIC) will be subject to U.S. federal income tax at the highest tax applicable to ordinary income in each such prior year. A Non-Electing U.S. Holder will be required to pay interest on the resulting tax liability for each such prior year, calculated as if such tax liability had been due in each such prior year. Such a Non-Electing U.S. Holder that is not a corporation must treat any such interest paid as “personal interest,” which is not deductible. The amount of any such gain or excess distribution allocated to the current year of such Non-Electing U.S. Holder’s holding period for the Common Shares will be treated as ordinary income in the current year, and no interest charge will be incurred with respect to the resulting tax liability for the current year.
If we are a PFIC for any taxable year during which a Non-Electing U.S. Holder holds Common Shares, we will continue to be treated as a PFIC with respect to such Non-Electing U.S. Holder, regardless of whether we cease to be a PFIC in one or more subsequent years. A Non-Electing U.S. Holder may terminate this deemed PFIC status by electing to recognize gain (which will be taxed under the rules of Section 1291 of the Code discussed above) as if such Common Shares were sold on the last day of the last taxable year for which the Company was a PFIC.
QEF Election
A U.S. Holder that makes a QEF Election generally will not be subject to the rules of Section 1291 of the Code discussed above. However, a U.S. Holder that makes a QEF Election will be subject to U.S. federal income tax on such U.S. Holder’s pro rata share of (a) the net capital gain of the Company, which will be taxed as long-term capital gain to such U.S. Holder, and (b) and the ordinary earnings of the Company, which will be taxed as ordinary income to such U.S. Holder. Generally, “net capital gain” is the excess of (a) net long-term capital gain over (b) net short-term capital loss, and “ordinary earnings” are the excess of (a) “earnings and profits” over (b) net capital gain. A U.S. Holder that makes a QEF Election will be subject to U.S. federal income tax on such amounts for each taxable year in which we are a PFIC, regardless of whether such amounts are actually distributed to such U.S. Holder by us.
However, a U.S. Holder that makes a QEF Election may, subject to certain limitations, elect to defer payment of current U.S. federal income tax on such amounts, subject to an interest charge. If such U.S. Holder is not a corporation, any such interest paid will be treated as “personal interest,” which is not deductible.
A U.S. Holder that makes a QEF Election generally also (a) may receive a tax-free distribution from us to the extent that such distribution represents “earnings and profits” of the Company that were previously included in income by the U.S. Holder because of such QEF Election and (b) will adjust such U.S. Holder’s tax basis in the Common Shares to reflect the amount included in income or allowed as a tax-free distribution because of such QEF Election. In addition, a U.S. Holder that makes a QEF Election generally will recognize capital gain or loss on the sale or other taxable disposition of Common Shares.
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The procedure for making a QEF Election, and the U.S. federal income tax consequences of making a QEF Election, will depend on whether such QEF Election is timely. A QEF Election will be treated as “timely” if such QEF Election is made for the first year in the U.S. Holder’s holding period for the Common Shares in which we were a PFIC. A U.S. Holder may make a timely QEF Election by filing the appropriate QEF Election documents at the time such U.S. Holder files a U.S. federal income tax return for such first year. However, if we were a PFIC in a prior year, then in addition to filing the QEF Election documents, a U.S. Holder must elect to recognize (a) a gain (which will be taxed under the rules of Section 1291 of the Code discussed above) as if the Common Shares were sold on the qualification date or (b) if we were also a CFC, such U.S. Holder’s pro rata share of the post-1986 “earnings and profits” of the Company as of the qualification date. The “qualification date” is the first day of the first taxable year in which we were a QEF with respect to such U.S. Holder. The election to recognize such gain or “earnings and profits” can only be made if such U.S. Holder’s holding period for the Common Shares includes the qualification date. By electing to recognize such gain or “earnings and profits,” such U.S. Holder will be deemed to have made a timely QEF Election. In addition, under very limited circumstances, a U.S. Holder may make a retroactive QEF Election if such U.S. Holder failed to file the QEF Election documents in a timely manner.
A QEF Election will apply to the taxable year for which such QEF Election is made and to all subsequent taxable years, unless such QEF Election is invalidated or terminated or the IRS consents to revocation of such QEF Election. If a U.S. Holder makes a QEF Election and, in a subsequent taxable year, we cease to be a PFIC, the QEF Election will remain in effect (although it will not be applicable) during those taxable years in which we are not a PFIC. Accordingly, if we become a PFIC in another subsequent taxable year, the QEF Election will be effective and the U.S. Holder will be subject to the QEF rules described above during any such subsequent taxable year in which we qualify as a PFIC. In addition, the QEF Election will remain in effect (although it will not be applicable) with respect to a U.S. Holder even after such U.S. Holder disposes of all of such U.S. Holder’s direct and indirect interest in the Common Shares. Accordingly, if such U.S. Holder reacquires an interest in the Company, such U.S. Holder will be subject to the QEF rules described above for each taxable year in which we are a PFIC.
Each U.S. Holder should consult its own financial advisor, legal counsel, or accountant regarding the availability of, and procedure for making, a QEF Election. U.S. Holders should be aware that there can be no assurance that we will satisfy record keeping requirements that apply to a QEF, or that we will supply U.S. Holders with information that such U.S. Holders require to report under the QEF rules, in event that we are a PFIC and a U.S. Holder wishes to make a QEF Election.
Mark-to-Market Election
A U.S. Holder may make a Mark-to-Market Election only if the Common Shares are marketable stock. The Common Shares generally will be “marketable stock” if the Common Shares are regularly traded on (a) a national securities exchange that is registered with the Securities and Exchange Commission, (b) the national market system established pursuant to section 11A of the Securities and Exchange Act of 1934, or (c) a foreign securities exchange that is regulated or supervised by a governmental authority of the country in which the market is located, provided that (i) such foreign exchange has trading volume, listing, financial disclosure, and other requirements and the laws of the country in which such foreign exchange is located, together with the rules of such foreign exchange, ensure that such requirements are actually enforced and (ii) the rules of such foreign exchange ensure active trading of listed stocks.
A U.S. Holder that makes a Mark-to-Market Election generally will not be subject to the rules of Section 1291 of the Code discussed above. However, if a U.S. Holder makes a Mark-to-Market Election after the beginning of such U.S. Holder’s holding period for the Common Shares and such U.S. Holder has not made a timely QEF Election, the rules of Section 1291 of the Code discussed above will apply to certain dispositions of, and distributions on, the Common Shares.
A U.S. Holder that makes a Mark-to-Market Election will include in ordinary income, for each taxable year in which we are a PFIC, an amount equal to the excess, if any, of (a) the fair market value of the Common Shares as of the close of such taxable year over (b) such U.S. Holder’s tax basis in such Common Shares. A U.S. Holder that makes a Mark-to-Market Election will be allowed a deduction in an amount equal to the lesser of (a) the excess, if any, of (i) such U.S. Holder’s adjusted tax basis in the Common Shares over (ii) the fair market value of such Common Shares as of the close of such taxable year or (b) the excess, if any, of (i) the amount included in ordinary income because of such Mark-to-Market Election for prior taxable years over (ii) the amount allowed as a deduction because of such Mark-to-Market Election for prior taxable years.
A U.S. Holder that makes a Mark-to-Market Election generally also will adjust such U.S. Holder’s tax basis in the Common Shares to reflect the amount included in gross income or allowed as a deduction because of such Mark-to-Market Election. In addition, upon a sale or other taxable disposition of Common Shares, a U.S. Holder that makes a Mark-to-Market Election will recognize ordinary income or loss (not to exceed the excess, if any, of (a) the amount included in ordinary income because of such Mark-to-Market Election for prior taxable years over (b) the amount allowed as a deduction because of such Mark-to-Market Election for prior taxable years).
A Mark-to-Market Election applies to the taxable year in which such Mark-to-Market Election is made and to each subsequent taxable year, unless the Common Shares cease to be “marketable stock” or the IRS consents to revocation of such election. Each U.S. Holder should consult its own financial advisor, legal counsel, or accountant regarding the availability of, and procedure for making, a Mark-to-Market Election.
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Other PFIC Rules
Under Section 1291(f) of the Code, the IRS has issued proposed Treasury Regulations that, subject to certain exceptions, would cause a U.S. Holder that had not made a timely QEF Election to recognize gain (but not loss) upon certain transfers of Common Shares that would otherwise be tax-deferred (e.g., gifts and exchanges pursuant to corporate reorganizations). However, the specific U.S. federal income tax consequences to a U.S. Holder may vary based on the manner in which Common Shares are transferred.
Certain additional adverse rules will apply with respect to a U.S. Holder if we are a PFIC, regardless of whether such U.S. Holder makes a QEF Election. For example under Section 1298(b)(6) of the Code, a U.S. Holder that uses Common Shares as security for a loan will, except as may be provided in Treasury Regulations, be treated as having made a taxable disposition of such Common Shares.
The PFIC rules are complex, and each U.S. Holder should consult its own financial advisor, legal counsel, or accountant regarding the PFIC rules and how the PFIC rules may affect the U.S. federal income tax consequences of the acquisition, ownership, and disposition of Common Shares.
This summary is of a general nature only and is not intended to be relied on as legal or tax advice or representations to any particular investor. Consequently, potential investors are urged to seek independent tax advice in respect of the consequences to them of the acquisition of common stock having regard to their particular circumstances.
(F) DIVIDEND AND PAYING AGENTS
Not applicable.
(G) STATEMENT BY EXPERTS
Not applicable.
(H) DOCUMENTS ON DISPLAY
The documents concerning the Company referred to in this Annual Report may be inspected at the Company's office at 217 Queen Street West, Suite 401, Toronto, Ontario, Canada, M5V 0R2. The Company may be reached at (917) 843-2169. Documents filed with the Securities and Exchange Commission ("SEC") may also be read and copied at the SEC's public reference room at 100 F Street, N.E., Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for further information on the public reference rooms.
The Company is subject to reporting requirements as a “reporting issuer” under applicable securities legislation in Canada and as a “foreign private issuer” under the Securities Exchange Act of 1934 (the “Exchange Act”). As a result, we must file periodic reports and other information with the Canadian securities regulatory authorities and the Securities and Exchange Commission.
A copy of this Form 20-F Annual Report and certain other documents referred to in this Annual Report and other documents filed by us may be retrieved from the system for electronic document analysis and retrieval (“SEDAR”) system maintained by the Canadian securities regulatory authorities at www.sedar.ca or from the Securities and Exchange Commission electronic data gathering, analysis and retrieval system (“EDGAR”) at www.sec.gov/edgar.
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(I) SUBSIDIARY INFORMATION
The documents concerning the Company’s subsidiaries referred to in this Annual Report may be inspected at the Company's office at 217 Queen Street West, Suite 401, Toronto, Ontario, Canada, M5V 0R2.
ITEM 11 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company, through its financial assets and liabilities, is exposed to various risks. The Company has established policies and procedures to manage these risks, with the objective of minimizing any adverse effect that changes in these variables could have on these consolidated financial statements. The following analysis provides a measurement of risks as at June 30, 2021:
Credit risk is the risk of financial loss to the Company if a customer or counterparty to a financial instrument fails to meet its contractual obligations. The Company is not exposed to any significant credit risk.
Liquidity risk is the risk that the Company will not be able to meet its financial obligations as they fall due within one year. The Company’s approach to managing liquidity risk is to ensure, as far as possible, that it will have sufficient liquidity to meet its liabilities when due, under both normal and stressed conditions, without incurring unacceptable losses or risking damage to the Company’s reputation. As at June 30, 2021, there is substantial doubt about the Company’s ability to continue as a going concern primarily due to its history of losses and negative working capital. Liquidity risk continues to be a key concern in the development of future operations.
Interest rate risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market interest rates. The interest rates on all of the Company’s existing debt are fixed, and therefore it is not currently subject to any significant interest rate risk.
The Company is exposed to foreign currency risk from fluctuations in foreign exchange rates and the degree of volatility in these rates due to the timing of their accounts payable balances. The risk is mitigated by timely payment of creditors and monitoring of foreign exchange fluctuations by management. As at June 30, 2021, the Company did not use derivative instruments to hedge its exposure to foreign currency risk.
The Company’s operations do not involve the direct input or output of any commodities and therefore it is not subject to any significant commodity price risk. In addition, the Company does not have any equity investment in other listed public companies, and therefore it is not subject to any significant stock market price risk.
ITEM 12 - DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
Not required since this is an annual report.
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PART II
ITEM 13 - DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
None.
ITEM 14 - MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS
No modifications or qualifications have been made to the instruments defining the rights of the holders of our Common Shares and no material amount of assets securing our securities has been withdrawn or substituted by us or anyone else (other than in the ordinary course of business).
As explained earlier, we have moved the jurisdiction of our company from the OBCA to the CBCA and have revised the by-laws which govern rights of the security holders. We do not believe that these changes have materially affected or modified the said rights.
On January 3, 2018, the Company changed its name to its current name, “CordovaCann Corp.” The Company’s certificate of amendment is filed as Exhibit 1.16 to this Annual Report and is incorporated herein by reference.
ITEM 15 - CONTROLS AND PROCEDURES
A. Evaluation of Our Disclosure Controls and Internal Controls
Under the supervision and with the participation of our senior management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, (the “Exchange Act”) as of the end of the period covered by this annual report (the “Evaluation Date”).
Our disclosure controls and procedures include controls and procedures designed to ensure that information required to be disclosed in reports filed or submitted under the Exchange Act is accumulated and communicated to our management, including our Interim Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. Based on that evaluation, our Interim Chief Executive Officer and our Chief Financial Officer concluded that our disclosure controls and procedures were not effective as of June 30, 2021.
B. Management’s Annual Report on Internal Control over Financial Reporting
Our 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 of International Financial Reporting Standards as issued by the International Accounting Standards Board. It is our management’s responsibility to establish and maintain adequate internal control over financial reporting for the Company. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Therefore, even those systems determined to be effective can provide only reasonable assurance of achieving their control objectives. In evaluating the effectiveness of our internal control over financial reporting, our management used the criteria set for the by the 2013 framework in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“2013 COSO”). Based on the Company’s evaluation and the material weaknesses described below, management concluded that the Company did not maintain effective internal control over financial reporting as at June 30, 2021 based on the 2013 COSO framework criteria. Management has identified control deficiencies regarding the: (i) lack of segregation of duties; (ii) reliance on independent consultants for review of critical accounting areas and disclosures; and (iii) lack of sufficient financial and personnel resources to design, document and effectuate internal controls over financial reporting. Management of the Company believes that these material weaknesses are due to the small size of the Company’s accounting staff. The small size of the Company’s accounting staff may prevent adequate controls in the future, such as segregation of duties, due to the cost/benefit of such remediation. To mitigate the current limited resources and limited staff, the Company relies heavily on direct management oversight of transactions, along with the use of legal and accounting professionals. As the Company grows, the number of employees is expected to increase, which will enable the Company to implement adequate segregation of duties within the internal control framework.
These control deficiencies could result in a misstatement of account balances that would result in a reasonable possibility that a material misstatement to the Company’s consolidated financial statements may not be prevented or detected on a timely basis. Accordingly, the Company has determined that these control deficiencies as described above together constitute a material weakness.
In light of these material weaknesses, the Company performed additional analyses and procedures in order to conclude that its consolidated financial statements for the year ended June 30, 2021 included in this Annual Report on Form 20-F were fairly stated in accordance with the accounting principles generally accepted in Canada. Accordingly, management believes that despite the Company’s material weaknesses, its consolidated financial statements for the year ended June 30, 2021 are fairly stated, in all material respects, in accordance with the accounting principles generally accepted in Canada.
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This Annual Report does not include an attestation report of our independent registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by our independent registered public accounting firm pursuant to temporary rules of the SEC that permit us to provide only management’s report in this report.
The Company’s management, including its Chief Executive Officer and Chief Financial Officer, does not expect that the Company’s disclosure controls and procedures or internal controls will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include, but are not limited to, the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.
C. Changes in Internal Controls
There have been no changes in the Company's internal controls over financial reporting that occurred during the year ended June 30, 2021 that have materially affected or are reasonably likely to materially affect the Company’s internal control over financial reporting.
ITEM 16 - [RESERVED]
ITEM 16A - AUDIT COMMITTEE FINANCIAL EXPERTS
As at the Company’s financial year ended June 30, 2021 the audit committee consisted of four directors, all of whom would be qualified as an audit committee financial expert, as that term is defined under Section 407 of the Sarbanes-Oxley Act of 2002. The background of the directors is described under Item 6(A) Directors and senior management.
The current members of the Company’s Audit Committee are Dale Rasmussen, who is also the Chair of the Audit Committee, Thomas (Taz) M. Turner, Jr., Jakob Ripshtein and Benjamin Higham. Mr. Rasmussen, Mr. Ripshtein, and Mr. Higham are “independent” members of the Audit Committee. Mr. Turner, the Company’s Chief Executive Officer is not considered to be independent members of the Audit Committee; however, the Board of Directors has made a subjective determination that no relationships exist which would interfere with the exercise of independent judgment in Mr. Turner carrying out the responsibilities of a director.
ITEM 16B CODE OF ETHICS
On February 9, 2007, the Company adopted a Code of Ethics that applies to its principal executive officer and principal financial officer, or persons performing similar functions. A copy of our Code of Ethics will be provided to any person requesting same without charge. To request a copy of our Code of Ethics, please make a written request to our Chief Financial Officer at 217 Queen Street West, Suite 401, Toronto, Ontario, M5V 0R2.
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ITEM 16C PRINCIPAL ACCOUNTANT’S FEES AND SERVICES
The following outlines the expenditures for accounting fees for the last two fiscal years ended:
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Under our existing policies, the audit committee must pre-approve all audit and non-audit related services provided by the auditors.
ITEM 16D EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES
Not applicable.
ITEM 16E PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS
Not applicable.
ITEM 16F CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT
On October 15, 2020, the Company’s Board of Directors and Audit Committee requested that Marcum LLP (the “Former Auditor”) resign as the Company’s auditor to facilitate the appointment of Kreston GTA LLP (the “Successor Auditor”) as the Company’s new auditor until the next annual general meeting, effective immediately on the date thereof.
The audit report of the Former Auditor on the Company’s consolidated financial statements as of and for the years ended June 30, 2019 and 2018 did not contain any adverse opinion or disclaimer of opinion, nor were they qualified or modified as to uncertainty, audit scope, or accounting principles. During the two fiscal years ended June 30, 2019 and June 30, 2018 and through October 15, 2020, there were no (i) disagreements with the Former Auditor on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedures, which disagreements if not resolved to their satisfaction would have caused them to make reference in connection with their report to the subject matter of the disagreement, or (ii) reportable events as described in Item 16F(a)(1)(v) except for the material weakness disclosed in Item 15 of this Form 20-F.
ITEM 16G CORPORATE GOVERNANCE
Our securities are listed on the CSE and with the OTC Markets Group and trade on the OTC QB marketplace. There are no significant ways in which our corporate governance practices differ from those followed by domestic companies under the listing standards of that exchange except for proxy delivery requirements. The CSE and the OTC marketplace requires the solicitation of proxies and delivery of proxy statements for all shareholder meetings, and requires that these proxies be solicited pursuant to a proxy statement that conforms to the proxy rules of the U.S. Securities and Exchange Commission. As a foreign private issuer, the Company is exempt from the proxy rules set forth in Sections 14(a), 14(b), 14(c) and 14(f) of the Act. The Company solicits proxies in accordance with applicable rules and regulations in Canada.
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PART III
ITEM 17 - FINANCIAL STATEMENTS
Not applicable.
ITEM 18 - FINANCIAL STATEMENTS
See the Consolidated Financial Statements and Exhibits listed in Item 19 hereof and filed as part of this Annual Report.
These Consolidated Financial Statements of the Company have been prepared in Canadian Dollars in accordance with International Financial Reporting Standards (“IFRS”) as promulgated by the International Accounting Standards Board (“IASB”) on a going concern basis which presumes the realization of assets and discharge of liabilities in the normal course of business for the foreseeable future. For a history of exchange rates in effect for Canadian Dollars as against United States Dollars, see Item 3(A) Exchange Rates of this Annual Report.
ITEM 19 - EXHIBITS
(a) Financial Statements -
Description of Document |
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| F-1 |
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Index |
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Reports of Independent Registered Public Accounting Firms |
| F-2 – F-4 |
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Consolidated Statements of Financial Position as at June 30, 2021 and 2020 |
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Consolidated Statements of Operations and Comprehensive Loss for the Years Ended June 30, 2021, 2020 and 2019 |
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Consolidated Statements of Changes in Equity (Deficiency) for the Years Ended June 30, 2021, 2020 and 2019 |
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Consolidated Statements of Cash Flows for the Years Ended June 30, 2021, 2020 and 2019 |
| F-8 |
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Notes to the Consolidated Financial Statements |
| F-9 - F-36 |
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b) Exhibits
The following documents are filed as part of this Annual Report on Form 20-F
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SIGNATURE
The Company hereby certifies that it meets all of the requirements for filing on Form 20-F and has duly caused and authorized the undersigned to sign this Annual Report on its behalf.
Dated at Toronto, Ontario, Canada, this December 14, 2021.
| CORDOVACANN CORP. |
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| By: | /s/ Ashish Kapoor |
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| Name: | Ashish Kapoor |
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| Title: | Chief Financial Officer |
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CordovaCann Corp.
MANAGEMENT’S DISCUSSION AND ANALYSIS
FOR THE YEAR ENDED JUNE 30, 2021
Prepared as at October 28, 2021
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Management Discussion and Analysis
The following discussion and analysis by management of the financial results and condition of CordovaCann Corp. for the year ended June 30, 2021 should be read in conjunction with the consolidated financial statements for the year ended June 30, 2021. The financial statements and the financial information herein have been prepared in accordance with International Financial Reporting Standards (“IFRS”), as issued by the International Accounting Standards Board (“IASB”).
All dollars referred to herein are expressed in Canadian dollars except where indicated otherwise.
This management discussion and analysis is prepared by management as at October 28, 2021.
In this report, the words “us”, “we” “our”, the “Company” and “CordovaCann” have the same meaning unless otherwise stated and refer to CordovaCann Corp. and its subsidiaries.
Overview
Business Overview
CordovaCann Corp. (formerly LiveReel Media Corporation) (the “Company” or “CordovaCann”) is a Canadian-domiciled company focused on building a leading, diversified cannabis products business across multiple jurisdictions including Canada and the United States. CordovaCann primarily provides services and investment capital to the processing, production and retail vertical markets of the cannabis industry. On January 3, 2018, the Company changed its name from LiveReel Media Corporation to CordovaCann Corp. The Company’s principal address is 217 Queen Street West, Suite 401, Toronto, Ontario, M5V 0R2.
The Company’s common shares (the “Common Shares”) currently trade on the Canadian Securities Exchange under the symbol “CDVA” and in the United States on the OTCQB under the symbol “LVRLF”.
On September 4, 2018, the Company incorporated Cordova Investments Canada, Inc., a wholly-owned Ontario-based subsidiary (“Cordova Investments Canada”) to act as the Company’s parent holding company in Canada.
On November 6, 2018, the Company incorporated Cordova CA Holdings, LLC, a California limited liability company (“Cordova CA”), as a wholly-owned subsidiary of CordovaCann USA to act as the Company’s primary holding subsidiary in the State of California.
On November 6, 2018, the Company incorporated CDVA Enterprises, LLC, a California limited liability company (“CDVA Enterprises”), as a wholly-owned subsidiary of CordovaCann USA, to act as the Company’s primary operating subsidiary in the State of California.
On October 28, 2019, Eric Lowy resigned as a Director of the Company.
On April 8, 2020, Ashish Kapoor resigned as a Director of the Company. Furthermore, Benjamin Higham and Jakob Ripshtein were appointed as Directors of the Company.
On May 19, 2020, the Company acquired 50.1% ownership in 2734158 Ontario Inc., as disclosed below.
On May 16, 2020, Nathan Nienhuis resigned as a Director and chief operating officer of the Company. Dale Rasmussen was appointed as a Director of the Company.
On August 17, 2020, Henry Kloepper resigned as a Director of the Company.
On September 21, 2020, the Company acquired an additional 10.35% equity stake in 2734158 Ontario Inc. bringing its total ownership of the corporation to 60.45%.
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On November 20, 2020, Cannabilt Farms, LLC, a wholly-owned subsidiary the Company, was granted a Marijuana Production License in Oregon.
On December 2, 2020, the Company acquired 51% ownership in 10062771 Manitoba Ltd. as disclosed below.
On December 8, 2020, the Company incorporated Cordova WA Holdings, LLC, a Washington limited liability Company (“Cordova WA”), as a wholly-owned subsidiary of CordovaCann USA to act as the Company’s primary operating subsidiary in the State of Washington.
Key Transaction Summaries
Summary of Star Buds Asset Acquisition.
On April 8, 2020, the Company, through its wholly-owned subsidiary, Cordova Investments, Canada Inc., completed the purchase of certain real assets and intellectual property (the “Assets”) of an arm’s length Canadian cannabis corporation (the “Star Buds Transaction”). The Assets acquired will enable the Company to open five recreational cannabis stores in Western Canada under an established brand name, with the exclusive right to open more stores in Canada. In conjunction with the Star Buds Transaction, seasoned industry veterans, Mr. Jakob Ripshtein and Mr. Ben Higham joined the Company’s board of directors.
Starbuds International Inc., the vendor of the Assets (the “Vendor” or “Star Buds”) is a British Columbia based cannabis venture that owns a network of recreational cannabis retail stores in Western Canada awaiting final provincial regulatory approvals. The Company purchased the Assets related to five such recreational stores and expects to have them opened in 2021. These stores will leverage the Star Buds brand name and proven business model that has created one of the most profitable cannabis retail companies in the United States over the last seven years. These stores also expect to be able to utilize the intellectual property of well- established Star Buds product lines of flower, concentrates, and edibles. The Company plans on leveraging the Star Buds business model and the platform to open additional stores throughout Canada.
As consideration to the Vendor for the Star Buds Transaction, the Company:
(i) | issued twelve million five hundred thousand (12,500,000) common shares of the Company at close, in exchange for the Assets held related to five retail cannabis stores and four medical cannabis clinics; |
(ii) | issued three million (3,000,000) common shares of the Company for each additional lease assignment in Alberta to the Company, for a total of six million (6,000,000) common shares of the Company; |
(iii) | issued fifteen million (15,000,000) common shares of the Company for the first five (5) Star Buds stores opened before April 8, 2021; |
(iv) | issued a three-year promissory note for five hundred twenty-seven thousand and three hundred dollars (CDN $527,967.49) accruing interest at six percent per annum payable upon maturity (the “Closing Promissory Note”); and |
(v) | issued two additional three-year promissory notes in amounts of two hundred twenty-two thousand and five hundred dollars (CDN $222,500) and one hundred ninety-six thousand and eight hundred (CDN $196,832) for obtaining assignment of two specific leases to Company. Such additional notes to have same terms as the Closing Promissory Note. |
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Summary of Investment in 2734158 Ontario Inc.
On May 19, 2020, the Company completed the purchase of its initial stake of 2734158 Ontario Inc. (“273”), an arm’s length Ontario-based cannabis retail venture (the “Ontario Transaction”). Cordova invested seven hundred twenty-three thousand dollars ($723,000) in 273 in exchange for 50.1% of 273. Cordova invested two hundred thousand dollars ($200,000) for 21.7% of 273 at the close of the Transaction, and invested (i) two hundred thousand dollars ($200,000) on June 14, 2020, (ii) two hundred thousand dollars ($200,000) on July 14, 2020, and (iii) one hundred twenty-three thousand dollars ($123,000) on August 13, 2020, which collectively gave the Company ownership of 50.1% of 273 after all payments were made. The Transaction is subject to approval from the Alcohol and Gaming Commission of Ontario and compliance with all applicable laws, rules and regulations. Cordova holds 4 of 6 board seats of 273 and has a right of first refusal on any future sale of primary or secondary shares in 273. The retail stores are operated by 273 under the Star Buds brand name, and Cordova is leveraging its assets of Starbuds International Inc. to provide 273 with retail store designs and layouts, standard operating procedures, staff training, financing resources and systems support. On September 17, 2020, the Company acquired an additional 10.35% of the common shares of 273 not previously owned by Cordova (the “Additional Shares”) bringing its accumulated ownership of 273 to 60.45%. The total purchase price for the Additional Shares amounted to $305,267, of which $72,539 was paid on closing, $157,167 was paid on January 15, 2021 and the remaining amounts are payable within a year from close. As at the date of this Report, the total amount outstanding for the Additional Shares has been paid.
Summary of Manitoba Transaction
On December 2, 2020, the Company, through its wholly owned subsidiary Cordova Investments Canada, Inc., completed the purchase of a 51% stake in 10062771 Manitoba Ltd. (“Manitoba Ltd.”) a Manitoba-based cannabis retail venture (the “Manitoba Transaction”). The purchase price for the shares was one hundred fifty thousand dollars ($150,000) payable to Manitoba Ltd. and six million (6,000,000) warrants of the Company to be granted to the current shareholders of Manitoba Ltd., with each warrant entitling the holder thereof to purchase one common share in the capital of the Company at an exercise price of $0.32 until November 30, 2022. In addition, the Company has agreed to loan up to one hundred fifty thousand dollars ($150,000) to Manitoba Ltd. to enable the opening of the second store in Manitoba. The stores will be operated by Manitoba Ltd. under the Star Buds brand name, and the Company will provide the financing resources and systems support as needed. The Company also has a right of first refusal regarding any future primary issuance or secondary sale of shares of Manitoba Ltd., and has a call option to purchase all of the outstanding equity interests of Manitoba Ltd. at any time following the two-year anniversary of the closing date at a valuation equivalent to four times the trailing twelve months normalized EBITDA of Manitoba Ltd.
Summary of Oregon Transaction
On April 4, 2018, Cordova OR entered into an agreement to acquire Cordova OR Operations, LLC (“OR Operations) for the acquisition of land and building for a total purchase price of US $1,440,000. Under the terms of the agreement, Cordova OR acquired a 27.5% membership interest in OR Operations for $534,311 (US $400,000) on April 4, 2018, and acquired the remaining 72.5% interest on June 19, 2019 for $1,361,048 (US $1,040,000). The assets of OR Operations consists of land, building and construction in progress with the construction in progress funded by Cordova OR. The total assets acquired through the transaction amounted to $3,645,389. The Company intends to continue its buildout the Oregon property to complete the construction and establish cultivation and processing facilities on the premises. On November 20, 2020, Cannabilt Farms, LLC, a wholly-owned subsidiary the Company, was granted a Marijuana Production License in Oregon. On August 4, 2021, the Company sold all of its land, building and equipment (the “Oregon Property”) for US $2,200,000 and entered into an agreement to lease the Oregon Property from the buyer (the “Sale Leaseback”). The Sale Leaseback will allow the Company to operate the Oregon Property for ten years, and provides options for two subsequent ten-year renewal periods. Proceeds from the sale were used to retire debts related to the Oregon Property and finance the planned Oregon expansion. A total of US $600,000 of the purchase price has been placed in escrow by the buyer to allow the Company to complete its buildout of the facility. The Sale Leaseback was signed on July 20, 2021 and commenced on August 1, 2021.
| 4 |
Summary of Washington Transaction
On February 26, 2021, Cordova WA entered into an agreement to acquire 100% of Extraction Technologies, LLC (“Extraction Tech”), a Washington-based company that provides cannabis extraction services to multiple cannabis licensed processors and will enable Cordova to provide manufactured cannabis products on both a white label and branded basis throughout the state of Washington. Extraction Tech owns a manufacturing building, processing equipment and contracts with tolling and white label customers. The consideration for the Transaction was three million (3,000,000) common shares of the Company on the closing date and an earnout payment of five hundred thousand (500,000) common shares of the Company for every $125,000 US dollars in EBITDA generated by Extraction Tech during the 12-month period beginning on the 3-month anniversary of the closing date and ending of the 15-month anniversary of the closing date. The maximum earnout payment that can be earned by Extraction Tech is four million (4,000,000) common shares, which will be earned if the business generates $1,000,000 US dollars or greater in EBITDA over that 12-month period.
Selected Financings
On October 19, 2017 and pursuant to a debt conversion agreement, the Company issued 7,681,110 Common Shares and fully settled $384,055 owing under a shareholder loan at a price of $0.05 per Common Share.
On December 14, 2017 and in connection with a private placement, the Company issued 5,532,500 Common Shares at a price of $0.10 per Common Share for total gross proceeds of $553,250; of which $533,250 was received in cash and $20,000 was received in services provided by a consultant.
On March 12, 2018 and in connection with a private placement, the Company issued 890,074 Common Shares at a price of $1.08 per Common Share for total gross proceeds of $959,251; all of which was received in cash.
On June 12, 2018 and June 15, 2018 in connection with a private placement, the Company issued 2,390,800 and 20,000 Common Shares, respectively, at a price of $1.95 per Common Share for total gross proceeds of
$4,703,025; of which $4,400,163 was received in cash and $302,862 was received in services provided by consultants.
On March 13, 2019 and in connection with a private placement, the Company issued 600 unsecured subordinated convertible debenture units, each unit consisting of a principal amount of $1,000 and 500 warrants, for total gross proceeds of $600,000; of which $350,000 was received in cash and $250,000 was issued in settlement of outstanding fees.
On May 4, 2019, and in connection with warrants previously issued to a consultant, warrants were exercised for the purchase of 750,000 Common Shares of the Company at an exercise price of $0.15 per share for total gross proceeds of $112,500.
On August 14, 2019 and in connection with a private placement, the Company issued 713 unsecured subordinated convertible debenture units, each unit consisting of a principal amount of $1,000 and 500 warrants, for total gross proceeds of $713,000.
On April 24, 2020 and in connection with a private placement, the Company issued 1,164 unsecured subordinated convertible debenture units, each unit consisting of a principal amount of $1,000 and 2,000 warrants, for total gross proceeds of $1,164,000. 761 of the 1,164 issued unsecured subordinated convertible debenture units related to a prior private placement on August 14, 2019 where holders of such convertible debentures elected for early repayment allowing settlement of their convertible debentures plus accrued interest for an aggregate settlement amount of $761,000.
| 5 |
On May 25, 2020, the Company issued 6,210,190 common shares of the Company at a price of $0.25 per share for gross proceeds of $1,552,548; of which $1,411,680 was received in cash and $140,868 was issued in settlement of outstanding fees and debt.
On August 17, 2020, the Company issued 3,024,521 common shares of the Company for gross proceeds of $967,846; of which $552,501 was received in cash and $415,345 was issued in settlement of outstanding fees and debt.
On February 19, 2021, the Company issued 6,117,718 common shares of the Company for gross proceeds of $1,976,870; of which $1,380,400 was received in cash and $596,570 was issued in settlement of outstanding fees and debt.
The following table summarizes financial information for the 4th quarter of fiscal 2021 and the preceding seven quarters:
|
| Jun 30, |
|
| Mar 31, |
|
| Dec 31, |
|
| Sep 30, |
|
| Jun 30, |
|
| Mar 31, |
|
| Dec 31, |
|
| Sep 30, |
| ||||||||
|
|
| 2,021 |
|
|
| 2,021 |
|
|
| 2,020 |
|
|
| 2,020 |
|
|
| 2,020 |
|
|
| 2,020 |
|
|
| 2,019 |
|
|
| 2,019 |
|
Quarter Ended |
|
| $ |
|
| $ |
|
|
| $ |
|
| $ |
|
|
| $ |
|
| $ |
|
| $ |
|
| $ |
| |||||
Revenue |
|
| 3,255,490 |
|
|
| 2,784,686 |
|
|
| 2,441,857 |
|
|
| 1,836,812 |
|
|
| 166,773 |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations |
|
| (2,948,269 | ) |
|
| (443,400 | ) |
|
| (475,516 | ) |
|
| (617,726 | ) |
|
| (2,661,796 | ) |
|
| (22,910 | ) |
|
| (1,065,869 | ) |
|
| (900,325 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per share – basic and diluted |
|
| 0.032 |
|
|
| 0.005 |
|
|
| 0.006 |
|
|
| 0.009 |
|
|
| 0.050 |
|
|
| 0.021 |
|
|
| 0.026 |
|
|
| 0.022 |
|
Number of Common Shares
There were 93,151,074 Common Shares issued and outstanding as at June 30, 2021 and 96,730,452 Common Shares issued and outstanding as at October 28, 2021 being the date of this report. There were 5,300,000 options and 15,589,500 warrants issued and outstanding as at June 30, 2021 and 5,200,000 options and 17,279,190 warrants issued and outstanding as at October 28, 2021.
Business Environment
Compliance with Applicable State Law
Each licensee of the Intellectual Property complies with applicable U.S. state licensing requirements as follows: (1) each licensee is licensed pursuant to applicable U.S. state law to cultivate, possess and/or distribute cannabis in such state; (2) renewal dates for such licenses are docketed by legal counsel and/or other advisors; (3) random internal audits of the licensee’s business activities are conducted by the applicable state regulator and by the respective investee to ensure compliance with applicable state law; (4) each employee is provided with an employee handbook that outlines internal standard operating procedures in connection with the cultivation, possession and distribution of cannabis to ensure that all cannabis inventory and proceeds from the sale of such cannabis are properly accounted for and tracked, using scanners to confirm each customer’s legal age and the validity of each customer’s drivers’ license; (5) each room that cannabis inventory and/or proceeds from the sale of such inventory enter is monitored by video surveillance; (6) software is used to track cannabis inventory from seed-to-sale; and (7) each licensee is contractually obligated to comply with applicable state law in connection with the cultivation, possession and/or distribution of cannabis. CordovaCann’s U.S. legal counsel reviews, from time to time, the licenses and documents referenced above in order to confirm such information and identify any deficiencies.
| 6 |
Colorado’s Cannabis Regu latory Environment
For the purposes of Staff Notice 51-352 (Revised) – Companies with U.S. Marijuana-Related Activities) (“Staff Notice 51-352”), the assets and interests held by CordovaCann in Colorado are classified as “ancillary” involvement in the U.S. cannabis industry.
Colorado authorized the cultivation, possession and distribution of cannabis by certain licensed Colorado cannabis businesses. The Colorado Marijuana Enforcement Division regulates Colorado’s cannabis regulatory program. CordovaCann is advised by U.S. legal counsel and/or other advisors in connection with Colorado’s cannabis regulatory program. CordovaCann only engages in transactions with Colorado cannabis businesses that hold licenses that are in good standing to cultivate, possess and/or distribute cannabis in Colorado in compliance with Colorado’s cannabis regulatory program. To the extent required by Colorado’s cannabis regulatory program, CordovaCann has fully disclosed and/or registered each financial interest CordovaCann holds in such Colorado cannabis business.
Oregon’s Cannabis Regulatory Environment
For the purposes of Staff Notice 51-352, the assets and interests held by CordovaCann in Oregon are classified as “ancillary” involvement in the U.S. cannabis industry.
Oregon authorized the cultivation, possession and distribution of cannabis by certain licensed Oregon cannabis businesses. The Oregon Liquor Control Commission regulates Oregon’s cannabis regulatory program. CordovaCann is advised by U.S. legal counsel and/or other advisors in connection with Oregon’s cannabis regulatory program. CordovaCann only engages in transactions with Oregon cannabis businesses that hold licenses that are in good standing to cultivate, possess and/or distribute cannabis in Oregon in compliance with Oregon’s cannabis regulatory program. To the extent required by Oregon’s cannabis regulatory program, CordovaCann has fully disclosed and/or registered each financial interest CordovaCann holds in such Oregon cannabis business.
California’s Cannabis Regulatory Environme nt
For the purposes of Staff Notice 51-352, the assets and interests contemplated to be held by CordovaCann in California are classified as “ancillary” involvement in the U.S. cannabis industry.
California authorized the cultivation, possession and distribution of cannabis by certain licensed California cannabis businesses. The California Bureau of Cannabis Control regulates California’s cannabis regulatory program. CordovaCann is advised by U.S. legal counsel and/or other advisors in connection with California’s cannabis regulatory program. CordovaCann only engages in transactions with California cannabis businesses that hold licenses that are in good standing to cultivate, possess and/or distribute cannabis in California in compliance with California’s cannabis regulatory program. To the extent required by California’s cannabis regulatory program, CordovaCann has fully disclosed and/or registered each financial interest CordovaCann holds in such California cannabis business.
Washington’s Cannabis Regulatory Environment
For the purposes of Staff Notice 51-352, the assets and interests contemplated to be held by CordovaCann in Washington are classified as “ancillary” involvement in the U.S. cannabis industry.
Washington authorized the cultivation, possession and distribution of cannabis by certain licensed Washington cannabis businesses. The Washington State Liquor and Cannabis Board regulates Washington’s cannabis regulatory program. CordovaCann is advised by U.S. legal counsel and/or other advisors in connection with Washington’s cannabis regulatory program. CordovaCann only engages in transactions with Washington cannabis businesses that hold licenses that are in good standing to cultivate, possess and/or distribute cannabis in Washington in compliance with Washington’s cannabis regulatory program. To the extent required by Washington’s cannabis regulatory program, CordovaCann has fully disclosed and/or registered each financial interest CordovaCann holds in such Washington cannabis business.
| 7 |
COVID-19
On March 11, 2020, the World Health Organization declared the outbreak of the novel strain of coronavirus (“COVID-19”) a pandemic, which has resulted in governments worldwide enacting emergency measures to combat the spread of the virus. These measures, which include the implementation of travel bans, self- imposed quarantine periods and social distancing, have caused material disruption to businesses globally resulting in an economic slowdown. Global equity markets have experienced significant volatility and weakness. Governments and central banks have reacted with significant monetary and fiscal interventions designed to stabilize economic conditions. The duration and impact of the COVID-19 outbreak is unknown at this time, as is the efficacy of the government and central bank interventions. It is not possible to reliably estimate the length and severity of these developments and the impact on the financial results and condition of the Company and its operating subsidiaries in future periods as well as the Company’s ability to find new business opportunities, raise capital or restructure the Company’s finances.
Risk Factors
The following are certain risk factors relating to the business carried on by the Company that prospective holders of Common Shares should carefully consider.
Risks specifically related to the United States regulatory system.
The Company’s investments operate in a new industry which is highly regulated, highly competitive and evolving rapidly. As such, new risks may emerge, and management may not be able to predict all such risks or be able to predict how such risks may result in actual results differing from the results contained in any forward-looking statements.
The Company’s investments incur ongoing costs and obligations related to regulatory compliance. Failure to comply with regulations may result in additional costs for corrective measures, penalties or in restrictions of operations. In addition, changes in regulations, more vigorous enforcement thereof or other unanticipated events could require extensive changes to operations, increased compliance costs or give rise to material liabilities, which could have a material adverse effect on the business, results of operations and financial condition of the Company’s investments and, therefore, on the Company’s prospective returns. Further, the Company may be subject to a variety of claims and lawsuits. Adverse outcomes in some or all of these claims may result in significant monetary damages or injunctive relief that could adversely affect our ability to conduct our business. Litigation and other claims are subject to inherent uncertainties and management’s view of these matters may change in the future. A material adverse impact on our financial statements could also occur for the period in which the effect of an unfavorable final outcome becomes probable and reasonably capable of being estimated. The industry is subject to extensive controls and regulations which may significantly affect the financial condition of market participants. The marketability of any product may be affected by numerous factors that are beyond the control of the Company’s investments and which cannot be predicted, such as changes to government regulations, including those relating to taxes and other government levies which may be imposed. Changes in government levies, including taxes, could reduce the Company’s investments’ earnings and could make future capital investments or the Company’s investments’ operations uneconomic. The industry is also subject to numerous legal challenges, which may significantly affect the financial condition of market participants and which cannot be reliably predicted.
CordovaCann is expected to continue to derive a portion of its revenues from the cannabis industry in certain states of the United States, which is illegal under United States federal law. While the Company’s business activities are compliant with applicable state and local laws, such activities remain illegal under United States federal law. CordovaCann is involved in the cannabis industry in the United States where local and state laws permit such activities or provide limited defenses to criminal prosecutions. The enforcement of relevant laws is a significant risk.
| 8 |
Over half of the U.S. states have enacted comprehensive legislation to regulate the sale and use of medical cannabis. Notwithstanding the permissive regulatory environment of medical cannabis at the state level, cannabis continues to be categorized as a Schedule 1 controlled substance under the United States Controlled Substances Act of 1970. As such, cannabis-related practices or activities, including without limitation, the cultivation, manufacture, importation, possession, use or distribution of cannabis, are illegal under United States federal law. Strict compliance with state laws with respect to cannabis will neither absolve the Company of liability under United States federal law, nor will it provide a defense to any federal proceeding which may be brought against the Company. Any such proceedings brought against the Company may adversely affect the Company’s operations and financial performance.
Because of the conflicting views between state legislatures and the federal government of the United States regarding cannabis, investments in cannabis businesses in the United States are subject to inconsistent legislation, regulation, and enforcement. Unless and until the United States Congress amends the United States Controlled Substances Act with respect to cannabis or the Drug Enforcement Agency reschedules or de-schedules cannabis (and as to the timing or scope of any such potential amendments there can be no assurance), there is a risk that federal authorities may enforce current federal law, which would adversely affect the current and future investments of the Company in the United States. As a result of the tension between state and federal law, there are a number of risks associated with the Company’s existing and future investments in the United States.
For the reasons set forth above, the Company’s existing interests in the United States cannabis market may become the subject of heightened scrutiny by regulators, stock exchanges, clearing agencies and other authorities in Canada. It has been reported by certain publications in Canada that the Canadian Depository for Securities Limited may implement policies that would see its subsidiary, CDS Clearing and Depository Services Inc. (“CDS”), refuse to settle trades for cannabis companies that have investments in the United States. CDS is Canada’s central securities depository, clearing and settlement hub settling trades in the Canadian equity, fixed income and money markets. The TMX Group, the owner and operator of CDS, subsequently issued a statement on August 17, 2017 reaffirming that there is no CDS ban on the clearing of securities of companies with cannabis-related activities in the United States, despite media reports to the contrary and that the TMX Group was working with regulators to arrive at a solution that will clarify this matter, which would be communicated at a later time.
On February 8, 2018, following discussions with the Canadian Securities Administrators (“CSA”) and recognized Canadian securities exchanges, the TMX Group announced the signing of a Memorandum of Understanding (“TMX MOU”) with Aequitas NEO Exchange Inc., the Canadian Securities Exchange (“CSE”), the Toronto Stock Exchange, and the TSX Venture Exchange. The TMX MOU outlines the parties’ understanding of Canada’s regulatory framework applicable to the rules, procedures, and regulatory oversight of the exchanges and CDS as it relates to companies with cannabis-related activities in the United States. The TMX MOU confirms, with respect to the clearing of listed securities, that CDS relies on the exchanges to review the conduct of listed companies. As a result, there is no CDS ban on the clearing of securities of companies with cannabis-related activities in the United States. However, there can be no guarantee that this approach to regulation will continue in the future. If such a ban were to be implemented, it would have a material adverse effect on the ability of holders of Common Shares to make and settle trades. In particular, the Common Shares would become highly illiquid as until an alternative was implemented, investors would have no ability to affect a trade of the Common Shares through the facilities of a stock exchange. The Company has obtained eligibility with the Depository Trust Company (“DTC”) for its Common Share quotation on the OTCQB and such DTC eligibility provides another possible avenue to clear Common Shares in the event of a CDS ban.
The activities of CordovaCann’s investments are, and will continue to be, subject to evolving regulation by governmental authorities. The Company’s investments are directly or indirectly engaged in the medical and recreational cannabis industry in the United States and Canada, where local state laws permit such activities. The legality of the production, extraction, distribution and use of cannabis differs among each North American jurisdictions.
| 9 |
CordovaCann’s investments have been focused in three states that have legalized the medical and/or recreational use of cannabis, being Oregon, Colorado and California. Over half of the U.S. states have enacted legislation to legalize and regulate the sale and use of medical cannabis. However, the U.S. federal government has not enacted similar legislation. As such, the cultivation, manufacture, distribution, sale and use of cannabis remains illegal under U.S. federal law.
Further, on January 4, 2018, U.S. Attorney General, Jeff Sessions, formally rescinded the standing DOJ federal policy guidance governing enforcement of marijuana laws, as set forth in a series of memos and guidance from 2009-2014, principally the Cole Memorandum. The Cole Memorandum generally directed U.S. Attorneys not to enforce the federal marijuana laws against actors who are compliant with state laws, provided enumerated enforcement priorities were not implicated. The rescission of this memo and other Obama-era prosecutorial guidance did not create a change in federal law as the Cole Memorandums were never legally binding; however, the revocation removed the DOJ’s guidance to U.S. Attorneys that state- regulated cannabis industries substantively in compliance with the Cole Memorandum’s guidelines should not be a prosecutorial priority. The federal government of the United States has always reserved the right to enforce federal law regarding the sale and disbursement of medical or recreational marijuana, even if state law sanctioned such sale and disbursement. Although the rescission of the above memorandums does not necessarily indicate that marijuana industry prosecutions are now affirmatively a priority for the DOJ, there can be no assurance that the federal government will not enforce such laws in the future.
Additionally, there can be no assurance that state laws legalizing and regulating the sale and use of cannabis will not be repealed or overturned, or that local governmental authorities will not limit the applicability of state laws within their respective jurisdictions. It is also important to note that local and city ordinances may strictly limit and/or restrict the distribution of cannabis in a manner that could make it extremely difficult or impossible to transact business in the cannabis industry. If the federal government begins to enforce federal laws relating to cannabis in states where the sale and use of cannabis is currently legal, or if existing state laws are repealed or curtailed, the Company’s investments in such businesses would be materially and adversely affected notwithstanding the fact that the Company is not directly engaged in the sale or distribution of cannabis. Federal actions against any individual or entity engaged in the marijuana industry or a substantial repeal of marijuana related legislation could adversely affect the Company, its business and its investments.
In light of the political and regulatory uncertainty surrounding the treatment of U.S. cannabis-related activities, including the rescission of the Cole Memorandum discussed above, on February 8, 2018, the CSA published Staff Notice 51-352 setting out the CSA’s disclosure expectations for specific risks facing companies with cannabis-related activities in the United States. Staff Notice 51-352 confirms that a disclosure-based approach remains appropriate for companies with U.S. cannabis-related activities. Staff Notice 51-352 includes additional disclosure expectations that apply to all companies with U.S. cannabis- related activities, including those with direct and indirect involvement in the cultivation and distribution of cannabis, as well as companies that provide goods and services to third parties involved in the U.S. cannabis industry. The Company views Staff Notice 51-352 favourably, as it provides increased transparency and greater certainty regarding the views of the exchanges and the regulators regarding the Company’s existing operations and strategic business plan as well as the Company’s ability to pursue further investments and opportunities in the United States.
The Company’s investments in the United States are subject to applicable anti-money laundering laws and regulations.
The Company is subject to a variety of laws and regulations domestically and in the United States that involve money laundering, financial recordkeeping and proceeds of crime, including the U.S. Currency and Foreign Transactions Reporting Act of 1970 (commonly known as the Bank Secrecy Act), as amended by Title III of the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (USA PATRIOT Act), the Proceeds of Crime (Money Laundering) and Terrorist Financing Act (Canada), as amended and the rules and regulations thereunder, and any related or similar rules, regulations or guidelines, issued, administered or enforced by governmental authorities in the United States and Canada. Further, under U.S. federal law, banks or other financial institutions that provide a cannabis business with a checking account, debit or credit card, small business loan, or any other service could be found guilty of money laundering, aiding and abetting, or conspiracy.
| 10 |
Despite these laws, FinCEN issued a memorandum on February 14, 2014 outlining the pathways for financial institutions to bank marijuana businesses in compliance with federal enforcement priorities. The FinCEN Memorandum states that in some circumstances, it is permissible for banks to provide services to cannabis- related businesses without risking prosecution for violation of federal money laundering laws. It refers to supplementary guidance that Deputy Attorney General Cole issued to federal prosecutors relating to the prosecution of money laundering offenses predicated on cannabis-related violations of the United States Controlled Substances Act on the same day (the “2014 Cole Memo”). The 2014 Cole Memo has been rescinded as of January 4, 2018, along with the Cole Memorandum, removing guidance that enforcement of applicable financial crimes was not a DOJ priority.
Attorney General Sessions’ revocation of the Cole Memorandum and the 2014 Cole Memo has not affected the status of the FinCEN Memorandum, nor has the Department of the Treasury given any indication that it intends to rescind the FinCEN Memorandum itself. Though it was originally intended for the 2014 Cole Memo and the FinCEN Memorandum to work in tandem, the FinCEN Memorandum appears to remain in effect as a standalone document which explicitly lists the eight enforcement priorities originally cited in the rescinded Cole Memorandum. Although the FinCEN Memorandum remains intact, indicating that the Department of the Treasury and FinCEN intend to continue abiding by its guidance, it is unclear whether the current administration will continue to follow the guidelines of the FinCEN Memorandum.
The Company’s investments, and any proceeds thereof, are considered proceeds of crime due to the fact that cannabis remains illegal federally in the United States. This restricts the ability of the Company to declare or pay dividends, effect other distributions or subsequently repatriate such funds back to Canada. Furthermore, while the Company has no current intention to declare or pay dividends on its Common Shares in the foreseeable future, the Company may decide or be required to suspend declaring or paying dividends without advance notice and for an indefinite period of time.
The Company’s investments in the United States may be subject to heightened scrutiny by Canadian authorities.
For the reasons set forth above, the Company’s existing investments in the United States, and any future investments, may become the subject of heightened scrutiny by regulators, stock exchanges and other authorities in Canada. As a result, the Company may be subject to significant direct and indirect interaction with public officials. There can be no assurance that this heightened scrutiny will not in turn lead to the imposition of certain restrictions on the Company’s ability to invest in the United States or any other jurisdiction, in addition to those described herein.
Although the TMX MOU has confirmed that there is currently no CDS ban on the clearing of securities of companies with cannabis-related activities in the United States, there can be no guarantee that this approach to regulation will continue in the future. If such a ban were to be implemented, it would have a material adverse effect on the ability of holders of Common Shares to make and settle trades. In particular, the Common Shares would become highly illiquid as until an alternative was implemented, investors would have no ability to affect a trade of the Common Shares through the facilities of a stock exchange.
Change in laws, regulations and guidelines.
Each investment’s current and proposed operations are subject to a variety of laws, regulations and guidelines, including, but not limited to, those relating to the manufacture, management, transportation, storage and disposal of cannabis, as well as laws and regulations relating to health and safety (including those for consumable products), the conduct of operations and the protection of the environment. These laws and regulations are broad in scope and subject to evolving interpretations. If any changes to such laws, regulations and guidelines occur, which are matters beyond the control of the Company, the Company may incur significant costs in complying with such changes or it may be unable to comply therewith, which in turn may result in a material adverse effect on the Company’s business, financial condition and results of operation. In addition, violations of these laws, or allegations of such violations, could disrupt certain aspects of the Company’s business plan and result in a material adverse effect on certain aspects of its planned operations.
| 11 |
Changes in regulations, more vigorous enforcement thereof, the imposition of restrictions on the Company’s ability to operate in the U.S. as a result of the federally illegal nature of cannabis in the U.S. or other unanticipated events could require extensive changes to the Company’s operations, increased compliance costs or give rise to material liabilities, which could have a material adverse effect on the business, results of operations and financial condition of the Company.
United States tax residence of the Company.
The Company, which is and will continue to be a Canadian corporation generally would be classified as a non-United States corporation (and, therefore, as a non-United States tax resident) under general rules of United States federal income taxation. Section 7874 of the United States Tax Code, however, contains rules that can cause a non-United States corporation to be taxed as a United States corporation for United States federal income tax purposes. The rules described in this paragraph are relatively new, their application is complex and there is little guidance regarding their application. Under section 7874 of the United States Tax Code, a corporation created or organized outside the United States (i.e., a non-United States corporation) will nevertheless be treated as a United States corporation for United States federal income tax purposes (such treatment is referred to as an “Inversion”) if each of the following three conditions are met (i) the non-United States corporation acquires, directly or indirectly, or is treated as acquiring under applicable United States Treasury Regulations, substantially all of the assets held, directly or indirectly, by a United States corporation, (ii) after the acquisition, the former stockholders of the acquired United States corporation hold at least 80% (by vote or value) of the shares of the non-United States corporation by reason of holding shares of the United States acquired corporation, and (iii) after the acquisition, the non-United States corporation’s expanded affiliated group does not have substantial business activities in the non-United States corporation’s country of organization or incorporation when compared to the expanded affiliated group’s total business activities (clauses (i) – (iii), collectively, the “Inversion Conditions”). For this purpose, “expanded affiliated group” means a group of corporations where (i) the non-United States corporation owns stock representing more than 50% of the vote and value of at least one member of the expanded affiliated group, and (ii) stock representing more than 50% of the vote and value of each member is owned by other members of the group. The definition of an “expanded affiliated group” includes partnerships where one or more members of the expanded affiliated group own more than 50% (by vote and value) of the interests of the partnership.
If the Company is treated as a United States corporation for United States federal income tax purposes under section 7874 of the United States Tax Code (which is considered likely, although no definitive determination of this matter has been reached, and no tax ruling has been sought or obtained in this regard), the Company would be considered a United States tax resident and subject to United States federal income tax on its worldwide income. However, for Canadian tax purposes, the Company is expected, regardless of any application of section 7874 of the United States Tax Code, to be treated as a Canadian resident Company (as defined in the Tax Act) for Canadian income tax purposes. As a result, if the Company is considered a United States corporation under section 7874, the Company would be subject to taxation both in Canada and the United States which could have a material adverse effect on its financial condition and results of operations. In addition, any distributions paid by the Company to a holder of Common Shares may be subject to United States withholding tax as well as any applicable Canadian withholding tax. A Non-United States Holder may also be subject to United States tax, including withholding tax, on disposition of its Common Shares.
Passive Foreign Investment Company.
There is a risk that the Company may, in the future, be construed as a passive foreign investment Company (“PFIC”). If the Company is a PFIC, its shareholders in the U.S. are likely subject to adverse U.S. tax consequences. Under U.S. federal income tax laws, if a Company is a PFIC for any year, it could have adverse U.S. federal income tax consequences to a U.S. shareholder with respect to its investment in Common Shares. The Company may earn royalty and franchise revenue which may be treated as passive income unless the royalty and franchise revenue is derived in the active conduct of a trade or business. Assessing whether royalty or franchise revenue received by the Company and its subsidiaries is derived in the active conduct of a trade or business involves substantial factual and legal ambiguity. Based on current business plans and financial expectations, the Company expects that it will not be a PFIC for its current tax year. PFIC classification is fundamentally factual in nature, generally cannot be determined until the close of the tax year in question, and is determined annually. Furthermore, because PFIC determinations are made annually, it is possible that the Company will meet the requirements to be treated as a PFIC in one or more years, but not meet such requirements in other years. U.S. shareholders should consult their own tax advisors regarding the potential adverse tax consequences to owning PFIC stock, and whether they are able to and should make any elections or take other actions to mitigate such potential adverse tax consequences.
| 12 |
If the Company is deemed to be an investment Company under the United States Investment Company Act of 1940, as amended (the “Investment Company Act”), it may be required to institute burdensome compliance requirements and its activities may be restricted.
The Company intends to conduct its operations so that it is not required to register as an investment Company under the Investment Company Act. Section 3(a)(1)(C) of the Investment Company Act defines an investment Company as any Company that is engaged or proposes to engage in the business of investing, reinvesting, owning, holding or trading in securities and owns or proposes to acquire investment securities having a value exceeding 40.0% of the value of the Company’s total assets (exclusive of government securities and cash items) on an unconsolidated basis. However, any Company primarily engaged, directly or through a wholly-owned subsidiary or subsidiaries, in a business or businesses other than that of investing, reinvesting, owning, holding, or trading in securities is exempt from the requirements of the Investment Company Act under Section 3(b)(1).
If the Company is deemed to be an investment Company under the Investment Company Act, its activities may be restricted, including restrictions on the nature of the Company’s investments and restrictions on the issuance of securities. In addition, the Company may have imposed upon it burdensome requirements, including:
| · | registration as an investment Company; |
| · | adoption of a specific form of corporate structure; and |
| · | reporting, record keeping, voting, proxy and disclosure requirements and other rules and regulations. |
In summary, if the Company were to be characterized as an investment Company, the inability of the Company to satisfy such regulatory requirements, whether on a timely basis or at all, could, under certain circumstances, have a material adverse effect on the Company and its ability to continue pursuing its business plan could be limited.
The Company’s Common Shares are considered to be penny stock, which may adversely affect the liquidity of its Common Shares.
The capital stock of the Company would be classified as “penny stock” as defined in Reg. § 240.3a51-1 promulgated under the Securities Exchange Act of 1934 (the “1934 Act”). In response to perceived abuse in the penny stock market generally, the 1934 Act was amended in 1990 to add new requirements in connection with penny stocks. In connection with effecting any transaction in a penny stock, a broker or dealer must give the customer a written risk disclosure document that (a) describes the nature and level of risk in the market for penny stocks in both public offerings and secondary trading, (b) describes the broker’s or dealer’s duties to the customer and the rights and remedies available to such customer with respect to violations of such duties, (c) describes the dealer market, including “bid” and “ask” prices for penny stock and the significance of the spread between the bid and ask prices, (d) contains a toll-free telephone number for inquiries on disciplinary histories of brokers and dealers, and (e) define significant terms used in the disclosure document or the conduct of trading in penny stocks. In addition, the broker-dealer must provide to a penny stock customer a written monthly account statement that discloses the identity and number of shares of each penny stock held in the customer’s account, and the estimated market value of such shares. The extensive disclosure and other broker-dealer compliance related to penny stocks may result in reducing the level of trading activity in the secondary market for such stocks, thus limiting the ability of the holder to sell such stock.
| 13 |
Additional financing.
The continued development of the Company will require additional financing. There is no guarantee that the Company will be able to achieve its business objectives. The Company intends to fund its future business activities by way of additional offerings of equity and/or debt financing as well as through anticipated positive cash flow from operations in the future. The failure to raise or procure such additional funds or the failure to achieve positive cash flow could result in the delay or indefinite postponement of current business objectives. There can be no assurance that additional capital or other types of financing will be available if needed or that, if available, will be on terms acceptable to the Company. If additional funds are raised by offering equity securities, existing shareholders could suffer significant dilution. Any debt financing secured in the future could involve the granting of security against assets of the Company and also contain restrictive covenants relating to capital raising activities and other financial and operational matters, which may make it more difficult for the Company to obtain additional capital and to pursue business opportunities, including potential acquisitions. The Company will require additional financing to fund its operations until positive cash flow is achieved.
The Company’s access to both public and private capital and its ability to access financing to support continuing operations and investments may be further restricted due to uncertainty and the changing nature of the marijuana regulatory environment in jurisdictions in which the Company operates.
Investments may be pre-revenue.
The Company has made and may make future investments in entities that have no significant sources of operating cash flow and no revenue from operations. As such, the Company’s investments are subject to risks and uncertainties including the risk that the Company’s investments will not be able to:
| · | implement or execute their current business plan, or create a business plan that is sound; |
| · | maintain their anticipated management team; and/or |
| · | raise sufficient funds in the capital markets or otherwise to effectuate their business plan. |
If the Company’s investments cannot execute any one of the foregoing, their businesses may fail, which could have a materially adverse impact on the business, financial condition and operating results of the Company.
Lack of control over operations of investments.
The Company relies on its investments to execute on their business plans and to produce medical and/or recreational cannabis products, and holds contractual rights and minority equity interests relating to the operation of the Company’s investments. The operators of the Company’s investments have significant influence over the results of operations of the Company’s investments. Further, the interests of the Company and the operators of the Company’s investments may not always be aligned. As a result, the cash flows of the Company are dependent upon the activities of third parties which creates the risk that at any time those third parties may: (i) have business interests or targets that are inconsistent with those of the Company; (ii) take action contrary to the Company’s policies or objectives; (iii) be unable or unwilling to fulfill their obligations under their agreements with the Company; or (iv) experience financial, operational or other difficulties, including insolvency, which could limit or suspend a third party’s ability to perform its obligations. In addition, payments may flow through the Company’s investments, and there is a risk of delay and additional expense in receiving such revenues. Failure to receive payments in a timely fashion, or at all, under the agreements to which the Company is entitled may have a material adverse effect on the Company. In addition, the Company must rely, in part, on the accuracy and timeliness of the information it receives from the Company’s investments, and use such information in its analyses, forecasts and assessments relating to its own business. If the information provided by investment entities to the Company contains material inaccuracies or omissions, the Company’s ability to accurately forecast or achieve its stated objectives, or satisfy its reporting obligations, may be materially impaired.
| 14 |
Private companies and illiquid securities.
The Company may invest in securities of private companies. In some cases, the Company may be restricted by contract or generally by applicable securities laws from selling such securities for a period of time. Such securities may not have a ready market and the inability to sell such securities or to sell such securities on a timely basis or at acceptable prices may impair the Company’s ability to exit such investments when the Company considers it appropriate.
Unfavourable publicity or consumer perception.
The regulated cannabis industry in the United States and Canada is at an early stage of its development. The Company believes the medical and recreational cannabis industry is highly dependent on consumer perception regarding the safety and efficacy of recreational and medical cannabis. Consumer perceptions regarding legality, morality, consumption, safety, efficacy and quality of cannabis are mixed and evolving. Consumer perception can be significantly influenced by scientific research or findings, regulatory investigations, litigation, media attention and other publicity regarding the consumption of cannabis products. There can be no assurance that future scientific research, findings, regulatory proceedings, litigation, media attention or other research findings or publicity will be favourable to the cannabis market or any particular product, or consistent with earlier publicity. Future research reports, findings, regulatory proceedings, litigation, media attention or other publicity that are perceived as less favourable than, or that question, earlier research reports, findings or publicity could have a material adverse effect on the demand for cannabis and on the business, results of operations, financial condition and cash flows of the Company. Further, adverse publicity reports or other media attention regarding cannabis in general, or associating the consumption of cannabis with illness or other negative effects or events, could have such a material adverse effect on the business of the Company. Such adverse publicity reports or other media attention could arise even if the adverse effects associated with such products resulted from consumers’ failure to consumer such products legally, appropriately or as directed.
Public opinion and support for medical and recreational cannabis use has traditionally been inconsistent and varies from jurisdiction to jurisdiction. Legalization of medical and recreational cannabis remains a controversial issue subject to differing opinions surrounding the level of legalization (for example, legalization of medical marijuana as opposed to legalization in general).
Limited operating history.
Since March 1997, when it was created by amalgamation, the Company has had no significant revenues or earnings from operations. The Company has operated at a loss to date and may continue to sustain operating losses for the foreseeable future. There is no assurance that the Company will ever be profitable. Therefore, it is difficult for investors to evaluate the Company’s operations and prospects which may increase the risks associated with an investment in the Company.
Although the Company expects to generate some revenues from its investments, many of the investments will only start generating revenues in future periods and, accordingly, the Company is therefore expected to remain subject to many of the risks common to early-stage enterprises for the foreseeable future, including challenges related to laws, regulations, licensing, integrating and retaining qualified employees; making effective use of limited resources; achieving market acceptance of existing and future solutions; competing against companies with greater financial and technical resources; acquiring and retaining customers; and developing new solutions. There is no assurance that the Company will be successful in achieving a return on shareholders’ investment and the likelihood of success must be considered in light of the early stage of operations.
| 15 |
Competition.
The Company competes with other companies for financing and investment opportunities in the cannabis industry. Some of these companies may possess greater financial resources than the Company. Such competition may result in the Company being unable to enter into desirable strategic agreements or similar transactions, to recruit or retain qualified employees or to acquire the capital necessary to fund its investments. Existing or future competition in the cannabis industry, including, without limitation, the entry of large multinational entities into the industry, could materially adversely affect the Company’s prospects for entering into additional agreements in the future. In addition, the Company currently competes with other cannabis streaming and royalty companies, some of which may possess greater financial resources than the Company.
There is potential that the Company will face intense competition from other companies, some of which can be expected to have longer operating histories and more financial resources and experience than the Company. Increased competition by larger and better financed competitors, including competitors to the Company’s investments, could materially and adversely affect the business, financial condition and results of operations of the Company. It is possible that larger competitors could establish price setting and cost controls which would effectively “price out” certain of the Company’s investments operating within and in support of the medical and recreational cannabis industry.
Because of the early stage of the industry in which the Company will operate, the Company expects to face additional competition from new entrants. To become and remain competitive, the Company will require research and development, marketing, sales and support. The Company may not have sufficient resources to maintain research and development, marketing, sales and support efforts on a competitive basis, which could materially and adversely affect the business, financial condition and results of operations of the Company.
Banking.
Since the production and possession of cannabis is currently illegal under U.S. federal law, it is possible that banks may refuse to open bank accounts for the deposit of funds from businesses involved with the cannabis industry. The inability to open bank accounts with certain institutions could materially and adversely affect the business of the Company.
Currency fluctuations.
Certain revenues and expenses of the Company are expected to be denominated in U.S. dollars, and therefore may be exposed to significant currency exchange fluctuations. Recent events in the global financial markets have been coupled with increased volatility in the currency markets. Fluctuations in the exchange rate between the U.S. dollar and the Canadian dollar may have a material adverse effect on the Company’s business, financial condition and operating results. CordovaCann may, in the future, establish a program to hedge a portion of its foreign currency exposure with the objective of minimizing the impact of adverse foreign currency exchange movements; however, there can be no assurance that such a program will effectively mitigate currency risks.
Risks associated with strategic transactions.
As part of the Company’s overall business strategy, the Company intends to pursue select strategic acquisitions, leasing and lending transactions and licensing agreements which would provide additional product offerings, vertical integrations, additional industry expertise, and a stronger industry presence in both existing and new jurisdictions. The success of any such strategic transactions will depend, in part, on the ability of the Company to realize the anticipated benefits and synergies from integrating the Company’s investments into the businesses of the Company. Future strategic actions may expose it to potential risks, including risks associated with: (a) the integration of new operations, services and personnel; (b) unforeseen or hidden liabilities; (c) the diversion of resources from the Company’s existing business and technology; (d) potential inability to generate sufficient revenue to offset new costs; (e) the expenses of acquisitions; and (f) the potential loss of or harm to relationships with both employees and existing users resulting from its integration of new businesses. In addition, any proposed acquisitions may be subject to regulatory approval.
| 16 |
While the Company intends to conduct reasonable due diligence in connection with such strategic transactions, there are risks inherent in any transaction. Specifically, there could be unknown or undisclosed risks or liabilities of such companies for which the Company is not sufficiently indemnified. Any such unknown or undisclosed risks or liabilities could materially and adversely affect the Company’s financial performance and results of operations. The Company could encounter additional transaction and integration related costs or other factors such as the failure to realize all of the benefits from the strategic actions. All of these factors could cause dilution to the Company’s earnings per share or decrease or delay the anticipated accretive effect of the transaction and cause a decrease in the market price of the Company’s Common Shares.
Bankruptcy or insolvency of investments.
There is no guarantee that the Company will be able to effectively enforce any interests it may have in the Company’s investments. A bankruptcy or other similar event related to an investment of CordovaCann that precludes a party from performing its obligations under an agreement may have a material adverse effect on the Company. Furthermore, as an equity investor, should an investment have insufficient assets to pay its liabilities, it is possible that other liabilities will be satisfied prior to the liabilities owed to the Company. In addition, bankruptcy or other similar proceedings are often a complex and lengthy process, the outcome of which may be uncertain and could result in a material adverse effect on the Company.
Research and market development.
Although the Company, itself and through its investments, is committed to researching and developing new markets and products and improving existing products, there can be no assurances that such research and market development activities will prove profitable or that the resulting markets and/or products, if any, will be commercially viable or successfully produced and marketed.
The Company must rely largely on its own market research to forecast sales as detailed forecasts are not generally obtainable from other sources at this early stage of the medical and recreational cannabis industry in North America.
The Company is operating its business in a relatively new medical and recreational cannabis industry and market. Accordingly, there are no assurances that this industry and market will continue to exist or grow as currently estimated or anticipated, or function and evolve in a manner consistent with management’s expectations and assumptions. Any event or circumstance that affects the recreational or medical cannabis industry or market could have a material adverse effect on the Company’s business, financial condition and results of operations. Due to the early stage of the regulated cannabis industry, forecasts regarding the size of the industry and the sales of products by the Company’s investments are inherently difficult to prepare with a high degree of accuracy and reliability. A failure in the demand for products to materialize as a result of competition, technological change or other factors could have a material adverse effect on the business, results of operations and financial condition of the Company’s investments, and consequently, the Company.
Reliance on management.
The success of the Company is dependent upon the ability, expertise, judgment, discretion and good faith of its senior management. Qualified individuals are in high demand, and the Company may incur significant costs to attract and retain them. In addition, the Company’s lean management structure may be strained as the Company pursues growth opportunities in the future. The loss of the services of such individuals or an inability to attract other suitably qualified persons when needed, could have a material adverse effect on the Company’s ability to execute on its business plan and strategy, and the Company may be unable to find adequate replacements on a timely basis, or at all.
| 17 |
CordovaCann’s future success depends substantially on the continued services of its executive officers, consultants and advisors. If one or more of its executive officers or key personnel were unable or unwilling to continue in their present positions, the Company might not be able to replace them easily or at all. In addition, if any of its executive officers or key employees joins a competitor or forms a competing Company, the Company may lose know-how, key professionals and staff members. These executive officers and key employees could compete with and take customers away which could materially and adversely affect the Company’s prospects, financial performance and results of operations.
Operation permits and authorizations.
The Company’s investments may not be able to obtain or maintain the necessary licenses, permits, authorizations or accreditations, or may only be able to do so at great cost, to operate their respective businesses. In addition, the Company’s investments may not be able to comply fully with the wide variety of laws and regulations applicable to the cannabis industry. Failure to comply with or to obtain the necessary licenses, permits, authorizations or accreditations could result in restrictions on an investment’s ability to operate in the cannabis industry, which could have a material adverse effect on the Company’s business.
Litigation.
CordovaCann may become party to litigation from time to time in the ordinary course of business which could adversely affect its business. Should any litigation in which the Company becomes involved be determined against the Company, such a decision could adversely affect the Company’s ability to continue operating and the market price for the Common Shares and could use significant resources. Even if the Company is involved in litigation and wins, litigation can redirect significant resources. Litigation may also create a negative perception of the Company.
Liability, enforcement complaints, etc.
CordovaCann’s participation in the cannabis industry may lead to litigation, formal or informal complaints, enforcement actions, and inquiries by various federal, state, or local governmental authorities into or against the Company or its investments. Litigation, complaints, and enforcement actions involving either of the Company or its investments could consume considerable amounts of financial and other corporate resources, which could have an adverse effect on the Company’s future cash flows, earnings, results of operations and financial condition.
Product liability.
Certain of the Company’s investments manufacture, process and/or distribute products designed to be ingested by humans, and therefore face an inherent risk of exposure to product liability claims, regulatory action and litigation if products are alleged to have caused significant loss or injury. In addition, previously unknown adverse reactions resulting from human consumption of cannabis alone or in combination with other medications or substances could occur. A product liability claim or regulatory action against an investment entity of CordovaCann could result in increased costs, could adversely affect the Company’s reputation, and could have a material adverse effect on the results of operations and financial condition of the Company.
Reliance on key inputs.
The cultivation, extraction and processing of cannabis and derivative products is dependent on a number of key inputs and their related costs including raw materials, electricity, water and other local utilities. Any significant interruption or negative change in the availability or economics of the supply chain for key inputs could materially impact the business, financial condition and operating results of the Company’s investments. Some of these inputs may only be available from a single supplier or a limited group of suppliers. If a sole source supplier was to go out of business, the relevant investment entity might be unable to find a replacement for such source in a timely manner or at all. Any inability to secure required supplies and services or to do so on appropriate terms could have a materially adverse impact on the business, financial condition and operating results of an investment, and consequently, the Company.
| 18 |
Price volatility of publicly traded securities.
In recent years, the securities markets in the United States and Canada have experienced a high level of price and volume volatility, and the market prices of securities of many companies have experienced wide fluctuations in price which have not necessarily been related to the operating performance, underlying asset values or prospects of such companies. There can be no assurance that continuing fluctuations in price will not occur. It may be anticipated that any quoted market for the Common Shares of CordovaCann will be subject to market trends generally, notwithstanding any potential success of CordovaCann in creating revenues, cash flows or earnings. The value of the Common Shares would be affected by such volatility. An active public market for the Company’s Common Shares might not develop or be sustained. If an active public market for the Company’s Common Shares does not develop, the liquidity of a shareholder’s investment may be limited and the share price may decline.
Management of growth.
CordovaCann may experience a period of significant growth in the number of personnel that may place a strain upon its management systems and resources. Its future will depend in part on the ability of its officers and other key personnel to implement and improve financial and management controls, reporting systems and procedures on a timely basis and to expand, train, motivate and manage the workforce. CordovaCann’s current and planned personnel, systems, procedures and controls may be inadequate to support its future operations.
Dividends.
CordovaCann has not paid dividends in the past and the Company does not anticipate paying any dividends in the foreseeable future. Dividends paid by the Company would be subject to tax and, potentially, withholdings.
Any decision to declare and pay dividends in the future will be made at the discretion of the Company’s Board of Directors and will depend on, among other things, financial results, cash requirements, contractual restrictions and other factors that the Company’s Board of Directors may deem relevant. As a result, investors may not receive any return on an investment in the Common Shares unless they sell their Common Shares for a price greater than that which such investors paid for them.
Risk factors related to dilution.
The Company may issue additional securities in the future, which may dilute a shareholder’s holdings in the Company. The Company’s articles permit the issuance of an unlimited number of Common Shares. The directors of the Company have discretion to determine the price and the terms of further issuances. Moreover, additional Common Shares will be issued by the Company on the exercise of options under the Company’s Option Plan and upon the exercise of outstanding warrants.
Intellectual property and proprietary protection.
The success of the Company will depend, in part, on the ability of the Company and the Company’s investments to maintain, enhance and protect its intellectual property, including various existing and potential proprietary techniques and processes. The Company and the Company’s investments may be vulnerable to competitors who develop competing technology, whether independently or as a result of acquiring access to the proprietary products and trade secrets of the Company or the Company’s investments. In addition, effective future patent, copyright and trade secret protection may be unavailable or limited in certain foreign countries and may be unenforceable under the laws of certain jurisdictions.
The Company relies on a combination of laws and contractual provisions to establish and protect its rights in it intellectual property. There can be no assurance that the steps taken to protect proprietary rights will be adequate to deter misappropriation of intellectual property or technology. The Company may face claims alleging infringement of intellectual property rights held by others. Such claims, whether or not meritorious, may result in the expenditure of significant financial and managerial resources, legal fees, result in injunctions, temporary restraining orders and/or require the payment of damages. An adverse determination in legal proceedings, a costly litigation process or a costly settlement could have a material adverse effect on the Company’s business, prospects, revenues, operating results and financial condition.
| 19 |
Insurance coverage.
CordovaCann currently does not have insurance coverage. The Company is likely to require insurance coverage in the future. There can be no assurance that adequate insurance coverage will be available to the Company in the future, or that if available, that such insurance will be obtainable by the Company at a commercially justifiable premium. There also can be no assurance that any insurance coverage obtained by the Company will be sufficient to cover claims to which the Company may become subject. If insurance coverage is unavailable to cover any such claims, the Company’s financial resources, results of operations and prospects could be adversely affected. If the Company were to incur substantial liability and such damages were in excess of policy limits, there could be a material adverse effect on the Company’s business, financial condition and results of operations.
Operational risks.
CordovaCann and its investments may be affected by a number of operational risks and may not be adequately insured for certain risks, including: labour disputes; catastrophic accidents; fires; blockades or other acts of social activism; changes in the regulatory environment; impact of non-compliance with laws and regulations; natural phenomena, such as inclement weather conditions, floods, earthquakes and ground movements. There is no assurance that the foregoing risks and hazards will not result in damage to, or destruction of, the Company’s investments’ properties, grow facilities and extraction facilities, personal injury or death, environmental damage, adverse impacts on the Company’s investments’ operations, costs, monetary losses, potential legal liability and adverse governmental action, any of which could have an adverse impact on the Company’s future cash flows, earnings and financial condition on the Company. Also, the Company’s investments may be subject to or affected by liability or sustain loss for certain risks and hazards against which they may elect not to insure because of the cost. This lack of insurance coverage could have an adverse impact on the Company’s future cash flows, earnings, results of operations and financial condition.
Costs of maintaining a public listing.
As a public company, there are costs associated with legal, accounting and other expenses related to regulatory compliance. Securities legislation and the rules and policies of securities exchanges require listed companies to, among other things, adopt corporate governance and related practices, and to continuously prepare and disclose material information, all of which add to a company’s legal and financial compliance costs. CordovaCann may also elect to devote greater resources than it otherwise would have on communication and other activities typically considered important by publicly traded companies.
Holding Company.
CordovaCann is a holding Company and essentially all of its assets are the capital stock of its material subsidiaries. As a result, investors in CordovaCann are subject to the risks attributable to its subsidiaries. Consequently, CordovaCann’s cash flows and ability to complete current or desirable future enhancement opportunities are dependent on the earnings of its subsidiaries and investments and the distribution of those earnings to CordovaCann. The ability of these entities to pay dividends and other distributions will depend on their operating results and will be subject to applicable laws and regulations which require that solvency and capital standards be maintained by such companies and contractual restrictions contained in the instruments governing any debt arrangements. In the event of a bankruptcy, liquidation or reorganization of any of CordovaCann’s material subsidiaries, holders of indebtedness and trade creditors may be entitled to payment of their claims from the assets of those subsidiaries before CordovaCann.
| 20 |
Difficulty implementing business strategy.
The growth and expansion of the Company is heavily dependent upon the successful implementation of its business strategy. There can be no assurance that the Company will be successful in the implementation of its business strategy.
Conflicts of interest.
Certain of the Company’s directors and officers are, and may continue to be, involved in other business ventures through their direct and indirect participation in, among other things, corporations, partnerships and joint ventures, that may become potential competitors of the technologies, products and services the Company intends to provide. Situations may arise in connection with potential acquisitions or opportunities where the other interests of these directors and officers conflict with or diverge from the Company’s interests. In accordance with applicable corporate law, directors who have a material interest in or who are parties to a material contract or a proposed material contract with the Company are required, subject to certain exceptions, to disclose that interest and generally abstain from voting on any resolution to approve the transaction. In addition, the directors and officers are required to act honestly and in good faith with a view to the Company’s best interests. However, in conflict of interest situations, the Company’s directors and officers may owe the same duty to another Company and will need to balance their competing interests with their duties to the Company. Circumstances (including with respect to future corporate opportunities) may arise that may be resolved in a manner that is unfavourable to the Company.
Previous operations.
The Company recently changed its focus from the identification and evaluation of assets for purchase in the media, technology and consumer industries, to a provider of services and investment capital to companies in the cannabis sector. The Company also changed its name on January 3, 2018 from “LiveReel Media Corporation” to “CordovaCann Corp.”. While the Company has now divested all of its assets relating to its previous business, there is no guarantee that liabilities relating to the previous business will not negatively impact the Company’s current or future operations or financial performance. Management is not aware of any liabilities relating to its previous business operations.
Resale of Common Shares.
Although the Common Shares are listed on the CSE and the OTCQB, there can be no assurance that an active and liquid market for the Common Shares will develop or be maintained and an investor may find it difficult to resell any securities of the Company. In addition, there can be no assurance that the publicly-traded stock price of the Company will be high enough to create a positive return for investors. Further, there can be no assurance that the Common Shares will be sufficiently liquid so as to permit investors to sell their position in the Company without adversely affecting the stock price. In such event, the probability of resale of the Common Shares would be diminished.
Forward Looking Statements
Certain statements contained in this report are forward-looking statements. All statements, other than statements of historical facts, included herein or incorporated by reference herein, including without limitation, statements regarding the Company’s business strategy, plans and objectives of management for future operations and those statements preceded by, followed by or that otherwise include the words “believe”, “expects”, “anticipates”, “intends”, “estimates” or similar expressions or variations on such expressions are forward-looking statements. We can give no assurances that such forward-looking statements will prove to be correct.
| 21 |
Each forward-looking statement reflects the Company’s current view of future events and is subject to risks, uncertainties and other factors that could cause actual results to differ materially from any results expressed or implied by the Company’s forward-looking statements.
Risks and uncertainties include, but are not limited to:
| · | lack of substantial operating history; |
| · | the impact of competition; and |
| · | the enforceability of legal rights. |
Important factors that could cause the actual results to differ from materially from the Company’s expectations are disclosed in more detail set forth under the heading “Risk Factors” above. The Company’s forward-looking statements are expressly qualified in their entirety by this cautionary statement.
Business Plan and Strategy
CordovaCann is committed to assembling a premier cannabis business with a vision to becoming a worldwide industry leader. The Company is focused on working with leading cannabis production, processing and retail operators in key jurisdictions that will enable CordovaCann to serve national and international markets that have legal and regulated medical and/or recreational cannabis industries. The Company intends to leverage its production, processing and retail operations to establish a global multi-jurisdictional platform that delivers consistent formulations of best-of-breed brands that deliver predictable consumer experiences.
CordovaCann has entered into strategic relationships and investments with cannabis operators in Canada and the United States. The Company will provide a variety of resources and services to these respective operators including, but not limited to: capital commitments, strategic positioning, brand development, best operating practices, access to intellectual property, administrative assistance, and general business consulting. Over the next twelve months, CordovaCann is focused on growing its retail operations in both Canada and the United States, as well as expanding the throughput of its Oregon and Washington operations. Moving forward, the Company will also seek partnerships with cannabis operators in key legal markets not currently served by CordovaCann, as well as seek to expand operations in those markets where the Company already has a presence. CordovaCann plans to develop various end products for distribution in each of its current markets as well as to service other brands and intellectual property owners with its growing processing and manufacturing platforms with a view to allowing these clients and prospective clients to gain access to our distribution channels to generate additional revenue for the Company. The platform that the Company is building will seek to ensure that the end products are consistent across all jurisdictions by maintaining strict and professional standard operating procedures covering everything from formulation, packaging, branding, marketing and sales to deliver a superior end user experience.
CordovaCann’s long-term focus is to continue expanding its reach into additional legal markets, and the Company expects to organically build and forge strategic relationships with cannabis producers, processors and retailers globally. The Company will likely develop and acquire additional operations and products to further penetrate its current markets and move into new markets, and will leverage these additions to broaden its channels for distribution. Additionally, CordovaCann may invest in additional parts of the cannabis value chain in markets where such assets are legal and provide a competitive advantage and significant operating leverage for the Company.
| 22 |
Results of Operations
|
| June 30, 2021 $ |
|
| June 30, 2020 $ |
|
| June 30, 2019 $ |
| |||
Revenue |
|
| 10,318,845 |
|
|
| 166,773 |
|
|
| - |
|
Cost of sales |
|
| 6,826,605 |
|
|
| 106,742 |
|
|
| 30,529 |
|
Expenses |
|
| 6,049,280 |
|
|
| 3,368,656 |
|
|
| 5,547,863 |
|
Other expense |
|
| 1,927,871 |
|
|
| 1,396,624 |
|
|
| 258,144 |
|
Net loss for the year |
|
| (4,484,911 | ) |
|
| (4,705,249 | ) |
|
| (5,836,536 | ) |
Net loss per share |
|
| (0.06 | ) |
|
| (0.10 | ) |
|
| (0.15 | ) |
Revenue
For the year ended June 30, 2021, the Company earned $10,318,845 (June 30, 2020 - $166,773; June 30, 2019 - $nil) of revenue. The significant increase in revenue relates to the expanding retail operations of the Company initiated during the year ended June 30, 2021 in the provinces of Ontario, Manitoba and Alberta.
Cost of Sales and Gross Margin
For the year ended June 30, 2021, the Company incurred $6,826,605 (June 30, 2020 - $106,742; June 30, 2019 - $30,529) of cost of sales and gross margin of $3,492,240 (June 30, 2020 - $60,031; June 30, 2019 – $(30,529)), related to its retail operations.
Expenses
The Company incurred the following operating expenses over the years ended June 30, 2021, 2020 and 2019:
For the year ended |
| June 30, 2021 $ |
|
| June 30, 2020 $ |
|
| June 30, 2019 $ |
| |||
Consulting fees |
|
| 1,302,191 |
|
|
| 1,295,829 |
|
|
| 2,448,560 |
|
Share based compensation |
|
| 941,854 |
|
|
| 1,048,661 |
|
|
| 1,413,919 |
|
Professional fees |
|
| 362,479 |
|
|
| 488,902 |
|
|
| 371,079 |
|
Shareholders information services |
|
| 358,516 |
|
|
| 135,181 |
|
|
| 379,058 |
|
Salaries and wages |
|
| 1,030,580 |
|
|
| 23,039 |
|
|
| - |
|
Office and general |
|
| 749,522 |
|
|
| 208,484 |
|
|
| 605,334 |
|
Advertising costs |
|
| - |
|
|
| 2,825 |
|
|
| 88,917 |
|
Depreciation |
|
| 383,476 |
|
|
| 5,768 |
|
|
| - |
|
Amortization of right-of-use assets |
|
| 434,837 |
|
|
| 92,167 |
|
|
| - |
|
Amortization of licenses |
|
| 141,249 |
|
|
| - |
|
|
| - |
|
Leases and utilities |
|
| 344,576 |
|
|
| 67,800 |
|
|
| - |
|
Exclusivity fee |
|
| - |
|
|
| - |
|
|
| 48,367 |
|
Impairment of promissory note receivable |
|
| - |
|
|
| - |
|
|
| 85,114 |
|
Impairment of equipment |
|
| - |
|
|
| - |
|
|
| 107,515 |
|
|
|
| 6,049,280 |
|
|
| 3,368,656 |
|
|
| 5,547,863 |
|
| 23 |
The overall analysis of the key expenses above is as follows:
Consulting Fees
Consulting fees for the year ended June 30, 2021 were $1,302,191 (June 30, 2020 - $1,295,829; June 30, 2019 - $2,448,560). Changes in consulting fees are due to the overall changes in the number of consultants during the year ended June 30, 2021.
Share Based Compensation
Share based compensation expense for the year ended June 30, 2021 were $941,854 (June 30, 2020 – $1,048,661; June 30, 2019 – $1,413,919). The share-based compensation expense for the year ended June 30, 2021 was a result of vesting of warrants that were issued in the prior fiscal year.
Professional Fees
Professional fees for the year ended June 30, 2021 were $362,479 (June 30, 2020 – $488,902; June 30, 2019 – $371,079). Professional fees for the year ended June 30, 2021, 2020 and 2019 were comprised of legal and audit fees.
Shareholder Information Services
Shareholder information services for the year ended June 30, 2021 were $358,516 (June 30, 2020 – $135,181; June 30, 2019 – $379,058). Shareholder information services for the year ended June 30, 2021, 2020 and 2019 were comprised of director fees, transfer agent fees, other filing fees and investor relation services.
Salaries and wages
Salaries and wages during the year ended June 30, 2021 were $1,030,580 (June 30, 2020 – $23,039; June 30, 2019 – $nil). The salaries and wages expenses are related to the employees hired for the Company’s retail cannabis operations.
Office and General
Office and general costs for the year ended June 30, 2021 were $749,522 (June 30, 2020 – $208,484; June 30, 2019 – $605,334). Office and general costs were primarily comprised of administrative, travel and other expenses incurred by the Company and its employees and consultants. The increase in office and general costs for the year ended June 30, 2021 was primarily a result of increased activity related to the retail cannabis stores and associated administrative expenses for those locations.
Depreciation
Depreciation for the year ended June 30, 2021 were $383,476 (June 30, 2020 – $5,768; June 30, 2019 – $nil). Depreciation mostly relates to the depreciation of tangible assets purchased for the Company’s retail cannabis stores.
Amortization of right-of-use assets
Amortization of right-of-use assets for the year ended June 30, 2021 were $434,937 (June 30, 2020 – $92,167; June 30, 2019 – $nil). Amortization relates to the new leases entered into through the Star Buds and 273 acquisitions and the additional leases entered into in the provinces of Ontario and Manitoba since the acquisitions.
| 24 |
Amortization of licenses
Amortization of licenses for the year ended June 30, 2021 were $141,249 (June 30, 2020 – $nil; June 30, 2019 – $nil). Amortization of licenses relates to the retail cannabis license acquired as part of the acquisition of 2734158 Ontario Inc. during the year ended June 30, 2020 and the acquisition of 10062771 Manitoba Ltd. for the year ended June 30, 2021.
Leases and utilities
Leases and utilities for the year ended June 30, 2021 was $344,576 (June 30, 2020 - $67,800; June 30, 2019 · $nil). Lease and utilities expenses relate to the new leases entered into through the Star Buds and 273 acquisitions during the year ended June 30, 2020 and the new leases entered into during the year ended June 30, 2021.
Other Income
The overall analysis of other income is as follows:
For the year ended |
| June 30, 2021 $ |
|
| June 30, 2020 $ |
|
| June 30, 2019 $ |
| |||
Interest expenses |
|
| 606,830 |
|
|
| 564,897 |
|
|
| 39,215 |
|
Interest on lease liability |
|
| 223,798 |
|
|
| 46,171 |
|
|
| - |
|
Accretion expense |
|
| 184,410 |
|
|
| 249,518 |
|
|
| 24,680 |
|
Loss on settlement of fees |
|
| - |
|
|
| - |
|
|
| 12,700 |
|
Loss on settlement of other investment |
|
| - |
|
|
| 184,440 |
|
|
| - |
|
Impairment of assets |
|
| 664,543 |
|
|
| 16,316 |
|
|
| - |
|
Foreign exchange loss |
|
| 307,673 |
|
|
| 56,225 |
|
|
| 57,121 |
|
Gain on settlement |
|
| - |
|
|
| (51,023 | ) |
|
| - |
|
Loss on disposal of assets |
|
| 7,422 |
|
|
| - |
|
|
| - |
|
Other income |
|
| (66,805 | ) |
|
| (65,920 | ) |
|
| - |
|
Loss on deposit |
|
| - |
|
|
| 396,000 |
|
|
| 124,428 |
|
|
|
| 1,927,871 |
|
|
| 1,396,624 |
|
|
| 258,144 |
|
Interest expense
During the year ended June 30, 2021, the Company incurred interest expense in the amount of $606,830 (June 30, 2020 - $564,897; June 30, 2019 - $39,215). The interest expense during the year ended June 30, 2021 and 2020 was primarily in relation to convertible debentures, promissory notes and mortgages issued.
Interest on lease liability
Interest on lease liability during the year ended June 30, 2021 was $223,798 (June 30, 2020 - $46,161; June 30, 2019 - $nil). The increase in the expense reflects the new leases entered into through the Star Buds and 273 acquisitions as well as the new leases entered into in the provinces of Ontario and Manitoba during the year ended June 30, 2021.
Accretion expense
During the year ended June 30, 2021, the Company recorded accretion expenses in the amount of $184,410 (June 30, 2020 - $249,518; June 30, 2019 - $24,680). Accretion expense primarily relates to a discount on convertible debentures and promissory notes issued in relation to the Star Buds transaction as noted above.
| 25 |
Foreign exchange loss
Foreign exchange loss for the year ended June 30, 2021 was $307,673 (June 30, 2020 - $56,225; June 30, 2019 - $57,121). The foreign exchange losses during the year ended June 30, 2021, 2020 and 2019 were a result of the exchange rate fluctuations related to transactions based in United States Dollars.
Impairment of assets
Impairment of assets for the year ended June 30, 2021 was $664,543 (June 30, 2020 - $nil; June 30, 2019 -$nil). The impairment of assets relates to the write-down of the Oregon land, building and construction-in- progress during the year ended June 30, 2021.
Loss on deposit
The Company’s loss on deposit during the year ended June 30, 2020 amounted to $396,000. This loss on deposit relates to the Company’s non-refundable deposits made towards a transaction in California (the “California Transaction”) during fiscal year ended June 30, 2019. During the year ended June 30, 2020, the Company terminated the California Transaction resulting in this loss.
Other income
Other income during the year ended June 30, 2021 amounted to $66,805 (June 30, 2020 - $65,920; June 30, 2019 - $nil). Other income is related to rental of the Company’s Washington property as well sale of date related to its retail operations.
Liquidity and Capital Resources
Working Capital
As at June 30, 2021, the Company had total assets of $17,274,041 (June 30, 2020 – $14,693,789) consisting of the following:
|
| June 30, 2021 $ |
|
| June 30, 2020 $ |
| ||
ASSETS |
|
|
|
|
|
| ||
Current |
|
|
|
|
|
| ||
Cash and cash equivalents |
|
| 1,058,494 |
|
|
| 647,739 |
|
Accounts receivable |
|
| 7,924 |
|
|
| - |
|
Prepaid expenses and deposits |
|
| 332,771 |
|
|
| 188,674 |
|
Inventory |
|
| 504,521 |
|
|
| 118,682 |
|
Biological assets |
|
| 26,611 |
|
|
| - |
|
Harmonized sales tax receivable |
|
| - |
|
|
| 27,118 |
|
Other deposit - current portion |
|
| 199,463 |
|
|
| 74,450 |
|
Total current assets |
|
| 2,129,784 |
|
|
| 1,056,663 |
|
Other deposit |
|
| 101,351 |
|
|
| 330,764 |
|
Right-of-use assets |
|
| 3,169,655 |
|
|
| 2,539,670 |
|
Property and equipment, net |
|
| 6,059,622 |
|
|
| 4,979,813 |
|
Intangible assets |
|
| 5,243,967 |
|
|
| 5,243,967 |
|
Licenses |
|
| 569,662 |
|
|
| 542,912 |
|
Total assets |
|
| 17,274,041 |
|
|
| 14,693,789 |
|
The increase in assets from June 30, 2020 to June 30, 2021 was primarily the result of the increase in cash, inventory, right-of-use assets and increases in licenses and property and equipment as result of the Manitoba Transaction and the Washington Transaction, respectively, during the year ended June 30, 2021.
| 26 |
As at June 30, 2021, the Company had total liabilities of $9,955,668 (June 30, 2020 – $8,417,100) consisting of the following:
|
| June 30, 2021 $ |
|
| June 30, 2020 $ |
| ||
LIABILITIES |
|
|
|
|
|
| ||
Current |
|
|
|
|
|
| ||
Accounts payable and accrued liabilities |
|
| 3,326,171 |
|
|
| 2,800,206 |
|
Harmonized sales tax payable |
|
| 98,916 |
|
|
| - |
|
Mortgage payable |
|
| 1,566,067 |
|
|
| 766,531 |
|
Consideration payable |
|
| 39,292 |
|
|
| - |
|
Convertible debentures |
|
| - |
|
|
| 381,678 |
|
Income taxes payable |
|
| 315,362 |
|
|
| - |
|
Contract liability |
|
| 48,832 |
|
|
| - |
|
Lease liability |
|
| 438,856 |
|
|
| 253,205 |
|
Promissory notes payable |
|
| 1,017,772 |
|
|
| 1,314,427 |
|
Total current liabilities |
|
| 6,851,268 |
|
|
| 5,516,047 |
|
Promissory notes payable |
|
| - |
|
|
| 566,835 |
|
Deferred tax liability |
|
| 36,540 |
|
|
| 4,939 |
|
Contract liability |
|
| 178,071 |
|
|
| - |
|
Lease liability |
|
| 2,889,789 |
|
|
| 2,329,279 |
|
Total liabilities |
|
| 9,955,668 |
|
|
| 8,417,100 |
|
The increase in liabilities from June 30, 2020 to June 30, 2021 was primarily related to the consideration payable for the acquisition of an additional equity interest in 2734158 Ontario Inc as described above as well as mortgage debt incurred. During the year ended June 30, 2020, the Company issued debt through convertible debentures to assist in financing its operations and investments.
As at June 30, 2021, the Company had a working capital deficiency of $4,721,484 as compared to a working capital deficiency of $4,464,323 as at June 30, 2020. The Company’s ability to continue as a going concern is dependent upon its ability to access sufficient capital until it has profitable operations and raises a material concern. To this point, all cashflow shortfall from operational activities and overhead costs have been funded through equity issuances, debt issuances and related party advances.
Cash Used in Operating Activities
The Company used cash in operating activities in the amount of $221,155 (June 30, 2020 – $946,908) for the year ended June 30, 2021 due to the reasons discussed above.
Cash Used in Investing Activities
The Company used cash in investing activities in the amount of $872,052 (June 30, 2020 - $145,587) for the year ended June 30, 2021. The investing activities during the year ended June 30, 2021 were primarily related to the purchase of additional shares in 2734158 Ontario Inc. and additional property and equipment acquired for the 2734158 Ontario Inc. retail stores.
Cash From Financing Activities
The Company received proceeds from financing activities in the amount of $1,571,358 (June 30, 2020 - $1,632,643) during the year ended June 30, 2021. The financing activities proceeds during the year ended June 30, 2021 were in relation to the proceeds received from a common share offering that closed on August 17, 2020, and share subscriptions received for a common share offering that closed on February 19, 2021 and shares received in advance for an offering that closed subsequent to June 30, 2021. This was net of payments of lease liabilities and partial repayments of mortgages payable, convertible debentures, and promissory notes.
| 27 |
Share Capital
| The authorized share capital of the Company consists of an unlimited number of common shares.
During the year ended June 30, 2021, the Company had the following common share transactions: | |
|
|
|
| · | On February 26, 2021, the Company issued 3,000,000 common shares of the Company for the acquisition of Extraction Technologies, LLC; |
| · | On February 19, 2021, the Company issued 6,177,721 common shares of the Company at a price of $0.32 per share for gross proceeds of $1,976,870; of which $1,380,400 was received in cash and $596,570 was issued in settlement of outstanding fees and debt; |
| · | On January 6, 2021, the Company issued 9,000,000 common shares of the Company at a price of $0.17 per share in relation to the asset acquisition of Star Buds in relation to the opening of three cannabis retail stores under the Star Buds trade name; |
| · | On August 17, 2020, the Company issued 3,024,521 common shares of the Company at a price of $0.32 per share for gross proceeds of $967,846; of which $552,501 was received in cash and $415,345 was issued in settlement of outstanding fees and debt; and |
| · | On July 27, 2020, the Company issued 6,000,000 common shares of the Company at a price of $0.17 per share in relation to the asset acquisition of Star Buds in relation to the opening of two cannabis retail stores under the Star Buds trade name. |
| During the year ended June 30, 2020, the Company had the following common share transactions: | |
|
|
|
| · | On May 25, 2020, the Company issued 6,210,190 common shares of the Company at a price of $0.25 per share for gross proceeds of $1,552,548; of which $1,411,680 was received in cash and $140,868 was issued in settlement of outstanding fees and debt; |
| · | On May 8, 2020, the Company issued 6,000,000 common shares of the Company at a price of $0.17 per share in relation to the contingent consideration issued for the asset acquisition of Star Buds; |
| · | On May 8, 2020, the Company issued 181,250 common shares of the Company at a price of $0.40 per share for the settlement of a portion of Promissory Note E; |
| · | On April 8, 2020, the Company issued 12,500,000 common shares of the Company at a price of $0.17 per share in relation to the asset acquisition of Star Buds; and |
| · | On January 16, 2020, the Company issued 271,164 common shares of the Company at a price of $1.00 per share as a result of a partial conversion of the Debentures of Series A-1, as disclosed in Note 17. |
| During the year ended June 30, 2019, the Company had the following common share transactions: | |
|
|
|
| · | On May 4, 2019, and in connection with warrants previously issued to a consultant, warrants were exercised for the purchase of 750,000 common shares of the Company at an exercise price of $0.15 per share for total gross proceeds of $112,500. As a result of this exercise, contributed surplus in the amount of $44,087 was transferred into share capital. |
Shares to be issued
| As at June 30, 2020, 3,000,000 common shares of the Company at a price of $0.17 per share were to be issued in relation to the contingent consideration issued for the asset acquisition of Star Buds, amounting to $510,000. On July 27, 2020, these shares were issued. |
|
|
| As at June 30, 2021 and in connection with the automatic conversion of shares relating to Convertible Debentures Series A-3, 5,354,400 common shares were classified as shares to be issued.
As at June 30, 2021, the value of shares to be issued amounted to $923,590 (June 30, 2020 - $510,000). |
| 28 |
Contingently issuable shares
| As at June 30, 2021, there were 4,000,000 contingently issuable shares of the Company (June 30, 2020 – 12,000,000) in relation to the Washington Transaction. |
WARRANTS |
|
| Warrants Outstanding |
|
| Weighted Average Exercise Price |
|
| Weighted Average Life Remaining (years) |
| |||
June 30, 2019 |
|
| 8,375,000 |
|
| $ | 0.93 |
|
|
| 1.05 |
|
Issued |
|
| 8,424,500 |
|
|
| 0.33 |
|
|
| 2.23 |
|
Forfeited |
|
| (750,000 | ) |
|
| 2.00 |
|
|
| 0.00 |
|
Expired |
|
| (5,800,000 | ) |
|
| 0.62 |
|
|
| 0.00 |
|
June 30, 2020 |
|
| 10,249,500 |
|
|
| 0.53 |
|
|
| 2.00 |
|
Issued |
|
| 6,790,000 |
|
|
| 0.35 |
|
|
| 1.97 |
|
Expired |
|
| (1,450,000 | ) |
|
| 1.29 |
|
|
| 0.00 |
|
June 30, 2021 |
|
| 15,589,500 |
|
| $ | 0.38 |
|
|
| 1.30 |
|
| During the year ended June 30, 2021: | |
|
|
|
| · | the Company issued 6,790,000 common share purchase warrants in consideration for the acquisition of Manitoba, for the amendment of promissory notes payable, and a convertible debenture financing; |
| · | 1,450,000 common share purchase warrants expired, unexercised; and |
| · | No common share warrants were forfeited or cancelled. |
|
|
|
| The fair value of these issued warrants of was determined using the Black-Scholes Option Pricing Model with the following range of assumptions: | |
Stock price |
| $ | 0.19-0.35 |
|
Risk-free interest rate |
|
| 0.26-0.32 | % |
Expected life |
|
| 1-3 years |
|
Estimated volatility in the market price of the common shares |
|
| 87-89 | % |
Dividend yield |
|
| nil |
|
| During the year ended June 30, 2020: | |
|
|
|
| · | the Company issued 8,424,500 common share purchase warrants in consideration for convertible debenture financings, certain service providers and promissory notes; |
| · | 5,800,000 common share purchase warrants expired, unexercised; |
| · | 750,000 common share purchase warrants were forfeited; and |
| · | No common share warrants were cancelled. |
Stock price |
| $ | 0.19-0.30 |
|
Risk-free interest rate |
|
| 0.42-1.37 | % |
Expected life |
|
| 2-3years |
|
Estimated volatility in the market price of the common shares |
|
| 117-124 | % |
Dividend yield |
|
| nil |
|
| 29 |
| During the year ended June 30, 2021, the Company expensed $221,654 (June 30, 2020 – 179,359; June 30, 2019 – $1,413,919) in the fair value of warrants as a result of the issuances which have been recorded as share based compensation. |
Stock Options
|
| Options |
|
| Options |
|
| Exercise |
|
| Fair |
| ||||||
Grant Date |
| Expiry Date |
| Outstanding |
|
| Exercisable |
|
| Price |
|
| Value |
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Feb. 25, 2020(iii) |
| Feb. 24, 2023 |
|
| 800,000 |
|
|
| 800,000 |
|
| $ | 0.25 |
|
| $ | 103,838 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Apr. 7, 2020(iv) |
| Apr. 6, 2023 |
|
| 3,000,000 |
|
|
| 3,000,000 |
|
| $ | 0.25 |
|
| $ | 369,426 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
May 16, 2020(v) |
| May 5, 2023 |
|
| 1,500,000 |
|
|
| 1,500,000 |
|
| $ | 0.45 |
|
| $ | 396,036 |
|
| The fair value of these issued stock options were determined using the Black-Scholes Option Pricing Model with the following range of assumptions: |
| During the year ended June 30, 2021, 1,750,000 options expired unexercised. |
|
|
| During the year ended June 30, 2021, the Company expensed $nil (June 30, 2020 - $869,299, June 30, 2019 – $nil) of the fair value of the options. |
MORTGAGE PAYABLE
| Oregon Mortgage |
|
|
| On June 16, 2019, the Company obtained financing through a mortgage (the “Mortgage”) in the amount of $696,117 (US $531,915) against a property that has title to 6 acres of real estate in Clackamas County, Oregon (the “Property”). The Mortgage was due in nine months from the date of the agreement at an initial draw of $654,350 (US $500,000), implying interest at a rate of 12.77% per annum. The Mortgage after the date of default bears interest at 12% per annum, payable monthly, until the repayment of the outstanding amount. The Mortgage was secured by a first charge on the Property. |
| On June 12, 2020, the Company entered into a new mortgage (the “New Mortgage’), in the amount of $815,760 (US $600,000), and paid off the existing Mortgage and accrued interest of $724,894 (USD$531,914). The New Mortgage bears interest at 12%, is secured by a first charge on the Property and matures on December 15, 2020. The transaction cost of $52,045 was deducted from the initial carrying value of the mortgage payable and was recognized into profit and loss over the term of the mortgage payable. |
|
|
| The mortgage payable outstanding as at June 30, 2021 was $755,789 (June 30, 2020 – $766,531). Total interest expense in relation to the mortgage payable for the year ended June 30, 2021 amounted to $146,672 (June 30, 2020 – $88,667). On August 4, 2021, the Oregon Mortgage was fully paid off upon the closing of selling Oregon Property. |
| 30 |
| Washington Mortgage |
|
|
| On February 26, 2021, the Company completed the Washington Acquisition and assumed a mortgage payable in the amount of $829,305 (US $653,768). The Mortgage was entered into on September 28, 2020 by the vendors of the Washington Acquisition with an initial amount of $874,921 (US $654,000) and matures on October 1, 2021 (the “Washington Mortgage”). The Washington Mortgage bears interest at 12.5%, payable monthly, and secured by a first charge on the property acquired as part of the Washington Acquisition. |
|
|
| As at June 30, 2021, the amount outstanding under the Washington Mortgage amounted to $810,277. Total interest expense in relation to the Washington Mortgage amounted to $43,675 during the year ended June 30, 2021. |
PROMISSORY NOTES PAYABLE
| Promissory Note A – February 1, 2019 |
|
|
| On February 1, 2019, the Company issued an unsecured promissory note (the “Promissory Note A”) in the principal amount of $196,425 (US $150,000). The Promissory Note A matured on May 1, 2019 and bears interest at a rate of 10% per annum, accrued monthly and due at maturity. As at the date of these consolidated financial statements, the Promissory Note A is in default and remains outstanding. In connection with the Promissory Note A, the Company also issued warrants for the purchase of 150,000 common shares of the Company exercisable until January 31, 2020 at a price of $1.00 per share. |
|
|
| The Promissory Note A was determined to be a compound instrument, comprising a liability and warrants. The initial carrying amount of the financial liability was determined by discounting the stream of future payments of interest and principal at a market interest rate of 19% which is estimated to be the borrowing rate available to the Company for similar instruments of debt having no warrants. Using the residual method, the carrying amount of the warrants issued is the difference between the principal amount and the initial fair value of the financial liability. The fair value of the liability was determined to be $192,142 (US $146,729). The residual value of $4,283 (US $3,271) was allocated to warrants. The carrying value of the Promissory Note A, net of the warrant component, has been accreted using the effective interest rate method over the term of the Promissory Note A, such that the carrying amount of the financial liability will equal the principal balance at maturity. |
|
|
| As at June 30, 2021, $44,732 was outstanding under Promissory Note A (June 30, 2020 – $164,342). Interest expense of $7,149 (June 30, 2020 - $19,227; June 30, 2019 - $8,340) was recorded for the year ended June 30, 2021. |
| Promissory Note B – June 12, 2019 |
|
|
| On June 12, 2019, the Company issued a secured promissory note (the “Promissory Note B”) in the principal amount of $261,740 (US $200,000). The Promissory Note B matured on June 30, 2020 and bears interest at a rate of 15% per annum, accrued monthly and due at maturity. The Promissory Note B was secured by the convertible preferred shares investment in NWN. Due to the default provisions of Promissory Note B, the pledged Preferred Shares for NWN were called and resulted the loss on the settlement of debt in the amount of $184,540 during the year ended June 30, 2020. |
|
|
| As at June 30, 2021, the value of the Promissory Note B amounted to $nil (2020 – $nil). Interest expense in the amount of $nil, was recorded for the year ended June 30, 2021 (2020 - $40,280; 2019 - $1,950, respectively). |
| 31 |
| Promissory Note C – June 19, 2019 |
|
|
| On June 19, 2019, the Company issued secured promissory notes (the “Promissory Note C”) in the aggregate principal amount of $654,350 (US $500,000). The Promissory Note C matured on December 18, 2019 and bears interest at a rate of 15% per annum, accrued monthly and due at maturity. The Promissory Note C is secured by a general security interest over all the assets of Cordova OR Holdings, LLC, a wholly owned subsidiary of the Company and parent to OR Operations. In connection with the Promissory Note C, the Company issued warrants for the purchase of 200,000 common shares of the Company exercisable until June 18, 2021 at a price of $1.00 per share. |
|
|
| The Promissory Note C was determined to be a compound instrument, comprising of a liability and warrants. The initial carrying amount of the financial liability was determined by discounting the stream of future payments of interest and principal at a market interest rate of 19% which is estimated to be the borrowing rate available to the Company for similar instruments of debt having no warrants. Using the residual method, the carrying amount of the warrants issued is the difference between the principal amount and the initial fair value of the financial liability. |
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| The fair value of the liability was determined to be $652,675 (US $489,152). The residual value of $14,367 (US $10,848) was allocated to warrants. The carrying value of the Promissory Note C, net of the warrant component, has been accreted using the effective interest rate method over the term of the Promissory Note C, such that the carrying amount of the financial liability will equal the principal balance at maturity. |
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| On December 16, 2019, the Company extended the maturity date of the Promissory Note C to March 19, 2020 (the “Extension”) in exchange for a one-time fee in the amount $13,142 (US $10,000), due at maturity and the issuance of additional warrants for the purchase of 200,000 common shares of the Company exercisable until June 18, 2021 at a price of $0.30 per share. |
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| On the date of the Extension, the fair value of the liability was determined to be $696,151 (US $530,643). The residual value of $8,995 (US $6,857) was allocated to warrants. The carrying value of Promissory Note C, as a result of the Extension, net of the warrant component, has been accreted using the effective interest rate method over the term of the Promissory Note C, such that the carrying amount of the financial liability will equal the principal balance at maturity. |
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| On March 16, 2020, the Company extended the maturity date of the Promissory Note C to June 19, 2020 in exchange for a fee in the amount $13,142 (US $10,000), due at maturity. On June 15, 2020, the Company extended the maturity date of the Promissory Note C to December 19, 2020 in exchange for a fee in the amount $40,472 (US $29,750), due at maturity. |
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| On December 15, 2020, the Company extended the maturity date of the Promissory Note C to December 15, 2021 (the “Second Extension”) in exchange for a one-time fee in the amount $54,113 (US $42,200), the issuance of “Warrants – #A” for the purchase of 200,000 common shares of the Company exercisable until December 31, 2022 at a price of $0.32 per share and the issuance of “Warrants - #B” for the purchase of 200,000 common shares of the Company exercisable until December 31, 2022 at a price of $0.50 per share. |
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| On the date of the Second Extension, the fair value of the liability was determined to be $655,272 (US $515,070). The residual value of $15,823 (US $12,437) was allocated to warrants. The carrying value of Promissory Note C, as a result of the Extension, net of the warrant component, has been accreted using the effective interest rate method over the term of the Promissory Note C, such that the carrying amount of the financial liability will equal the principal balance at maturity. |
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| As at June 30, 2021, the value of the Promissory Note C amounted to $477,672 (June 30, 2020 - $817,935). Accretion expense of $11,536 (June 30, 2020 - $22,671; June 30, 2019 - $847) and interest expense of $179,720 (June 30, 2020 - $131,893; June 30, 2019 - $3,020) was recorded for the year ended June 30, 2021. |
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| Promissory Note D – October 28, 2019 |
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| On October 28, 2019, the Company issued a promissory note (the “Promissory Note D”) in the principal amount of $391,680 (US $300,000). The Promissory Note D matured on June 30, 2020 and bears interest at a rate of 5% per annum, accrued monthly and due at maturity. Subsequent to the issuance, the Promissory Note D was extended until October 31, 2020 for a one-time fee of US $40,000. Interest on the Promissory Note D subsequent to the maturity date bears interest at 15% per annum. The Promissory Note D is secured by a personal guarantee of vendors. |
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| As at June 30, 2021, the value of the Promissory Note D amounted to $Nil (June 30, 2020 - $332,149). Accretion expense of $24,334 (June 30, 2020 - $37,026) Interest expense of $78,827, was recorded for the year ended June 30, 2021 (June 30, 2020 – $55,139; June 30, 2019 - $nil) |
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| Promissory Note E – April 8, 2020 |
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| On April 28, 2020, the Company issued a promissory note (the “Promissory Note E-1”) in the principal amount of $527,967. The Promissory Note E-1 matures on April 8, 2023 and bears interest at a rate of 6% per annum, calculated in arrears, compounded annually and payable at maturity. The fair value of $381,093 for the Promissory Note E-1 was determined by discounting the stream of future payments of interest and principal at a market interest rate of 19% which is estimated to be the borrowing rate available to the Company for similar instruments of debt. |
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| On May 8, 2020, the Company repaid $90,803 of the principal in cash and issued 181,250 of its common shares to settle $72,500 of the principal outstanding. On June 30, 2020 the Company repaid $20,000 of the principal. |
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| On August 13, 2020 and August 17, 2020, the Company repaid a total of $15,000 of the principal in cash and issued 585,936 of its common shares to settle $187,500 of the principal. On March 5, 2021 and April 1, 2021, the Company repaid a total of $14,000 of the principal in cash. |
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| As at June 30, 2021, the value of the Promissory Note E-1 amounted to $124,008 (June 30, 2020 - $259,889). Interest and accretion expense of $9,847 and $60,003, respectively (June 30, 2020 - $6,454 and $6,851, respectively) was recorded for the year ended June 30, 2021. |
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| On June 8, 2020, the Company issued a promissory note (the “Promissory Note E-2”) in the principal amount of $225,000. The Promissory Note E-2 matures on April 8, 2023 and bears interest at a rate of 6% per annum, calculated in arrears, compounded annually and payable at maturity. The fair value of $160,603 for the Promissory Note E-2 was determined by discounting the stream of future payments of interest and principal at a market interest rate of 19% which is estimated to be the borrowing rate available to the Company for similar instruments of debt. |
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| As at June 30, 2021, the value of the Promissory Note E-2 amounted to $194,821 (June 30, 2020 - $162,868). Interest and accretion expense of $13,350 and $18,603, respectively (June 30, 2020 - $1,461 and $805, respectively) was recorded for the year ended June 30, 2021. |
|
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| On June 8, 2020, the Company issued a promissory note (the “Promissory Note E-3”) in the principal amount of $196,832. The Promissory Note E-3 matures on April 8, 2023 and bears interest at a rate of 6% per annum, calculated in arrears, compounded annually and payable at maturity. The fair value of $142,075 for the Promissory Note E-3 was determined by discounting the stream of future payments of interest and principal at a market interest rate of 19% which is estimated to be the borrowing rate available to the Company for similar instruments of debt. |
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| As at June 30, 2021, the value of the Promissory Note E-3 amounted to $172,347 (June 30, 2020 - $144,079). Interest and accretion expense of $11,810 and $16,457, respectively (June 30, 2020 - $772 and $1,292, respectively) was recorded for the year ended June 30, 2021. |
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CONVERTIBLE DEBENTURES
| a) Convertible Debentures Series A-1 – March 13, 2019 |
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| On March 13, 2019, the Company closed a non-brokered private placement of unsecured subordinated convertible debenture units (the “Debenture Units of Series A-1”) of the Company for gross proceeds of $600,000; of which $350,000 was received in cash and $250,000 was issued in settlement of outstanding fees with a fair value amounting to $237,300. The balance of $12,700 has been recorded as a loss on settlement of fees. |
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| Each Debenture Unit of Series A-1 consists of $1,000 principal amount of unsecured subordinated convertible debentures (the “Debentures of Series A-1”) and 500 common share purchase warrants (the “Warrants of Series A-1”) of the Company. The Debentures of Series A-1 mature on March 12, 2021 and bear interest at a rate of 10% per annum, accrued monthly and payable at maturity. The outstanding principal amount of the Debentures of Series A-1 and any accrued interest is convertible into common shares of the Company at the option of the holder at any time prior to the maturity date at a conversion price of $1.00 per share. The Company also has the option to force conversion of the Debentures of Series A-1 and any accrued interest at the same conversion price if the Company’s common shares trade above $2.50 per share for ten consecutive trading days on the Canadian Securities Exchange. Each full Warrant of Series A-1 entitles the holder to purchase one common share of the Company until March 12, 2021 at an exercise price of $1.20 per share. 300,000 Warrants of Series A-1 were issued related to the Debenture Units of Series A-1. |
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| The Debenture Units of Series A-1 are determined to be a compound instrument, comprising a liability, a conversion feature and warrants. Both conversion feature and warrants met the fixed for fixed criteria and were therefore presented as equity instruments in accordance with IAS 32. The fair value of the debt component was determined by discounting the stream of future payments of interest and principal at a market interest rate of 19% which is estimated to be the borrowing rate available to the Company for similar instruments of debt having no conversion rights. Using the residual method, the carrying amount of the conversion feature and the warrants issued is the difference between the principal amount and the initial fair value of the financial liability. |
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| The fair value of the liability was determined to be $508,439. The residual value of $91,561 was allocated to the equity portion of convertible debt and warrants based on their pro-rata fair values of $62,498 and $29,063, respectively. The carrying value of the Debentures of Series A-1, net of the equity components, have been accreted using the effective interest rate method over the term of the debentures, such that the carrying amount of the financial liability will equal the principal balance at maturity. |
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| The equity component from the initial recognition resulted taxable temporary difference. The Company recognized the deferred tax liabilities of 24,264, which was charged directly to the carrying amount of the two equity components. Subsequent changes in the deferred tax liability are recognized in profit and loss as deferred tax recovery. |
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| On January 16, 2020, the Company issued 271,164 common shares at $1.00 per share as a result of a partial conversion of the outstanding Debentures of Series A-1 with a face value of principal $250,000 and accrued interest of $21,164. The debt in the amount of $271,164 and the equity in the amount of $21,979, were transferred to share capital upon conversion. |
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| During the year ended June 30, 2021, the principal amount of $25,000 and accrued interest of $5,000 for a total of $30,000 was repaid on maturity. The remaining Debenture Units of Series A-1 were converted into the Convertible Debentures Series A-4 offering. The principal amount of $325,000, the accrued interest of $65,000, for total transfer of $390,000 were transferred to Convertible Debentures Series A-3. |
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| As at June 30, 2021, the value of the Debentures of Series A-1 amounted to $nil (June 30, 2020 – $381,678). Accretion expense of $17,440 (June 30, 2020 - $57,806; June 30, 2019 - $15,118) and interest expense of $24,382 (June 30, 2020 - $48,275; June 30, 2019 - $22,903) were recorded for the year ended June 30, 2021. |
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| b) Convertible Debentures Series A-2 – August 14, 2019 |
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| On August 14, 2019, the Company closed a non-brokered private placement of unsecured subordinated convertible debenture units (the “Debenture Units of Series A-2”) of the Company for gross proceeds of $713,000. |
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| Each Debenture Unit of Series A-2 consists of $1,000 principal amount of unsecured subordinated convertible debentures (the “Debentures of Series A-2”) and 500 common share purchase warrants (the “Warrants of Series A-2”) of the Company. The Debentures of Series A-2 mature on August 13, 2021 and bear interest at a rate of 10% per annum, accrued monthly and payable at maturity. The outstanding principal amount of the Debentures of Series A-2 and any accrued interest is convertible into common shares of the Company at the option of the holder at any time prior to the maturity date at a conversion price of $1.00 per share. The Company also has the option to force conversion of the Debentures of Series A-2 and any accrued interest at the same conversion price if the Company’s common shares trade above $2.50 per share for ten consecutive trading days on the Canadian Securities Exchange. Each full Warrant of Series A-2 entitles the holder to purchase one common share of the Company until August 13, 2021 at an exercise price of $1.20 per share. As a result, 356,500 Warrants of Series A-2 were issued related to the Debenture Units of Series A-2. |
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| The Debenture Units of Series A-2 were determined to be a compound instrument, comprising a liability, a conversion feature and warrants. The fair value of debt component was determined by discounting the stream of future payments of interest and principal at a market interest rate of 19% which is estimated to be the borrowing rate available to the Company for similar instruments of debt having no conversion rights. Using the residual method, the carrying amount of the conversion feature and the warrants issued is the difference between the principal amount and the initial fair value of the financial liability. |
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| The fair value of the liability was determined to be $604,195. The residual value of $108,805 was allocated to the equity portion of convertible debt and warrants based on their pro-rata fair values of $74,989 and $33,816, respectively. The deferred tax liability of $28,833 was charged directly to the carrying amount of these two equity components. The carrying value of the Debentures of Series A-2, net of the equity components, have been accreted using the effective interest rate method over the term of the debentures, such that the carrying amount of the financial liability will equal the principal balance at maturity. |
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| On April 22, 2020, the Debenture Units of Series A-2 were converted into the Convertible Debentures Series A-3 offering. The principal amount of $713,000, the accrued interest of 49,614 and a small loss of $1,614, for total transfer of $761,000 were transferred to Convertible Debentures Series A-3. The total amount of interest and accretion amounted to $49,614 and $33,454, respectively. The Company recorded deferred tax recovery of $28,833 for the year ended June 30, 2020. |
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| c) Convertible Debentures Series A-3 – April 22, 2020 |
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| On April 22, 2020, the Company closed a non-brokered private placement of unsecured subordinated convertible debenture units (the “Debenture Units of Series A-3”) of the Company for gross proceeds of $1,164,000. |
| 35 |
| Each Debenture Unit of Series A-3 consists of $1,000 principal amount of unsecured subordinated convertible debentures (the “Debentures of Series A-3”) and 2,000 common share purchase warrants (the “Warrants of Series A-3”) of the Company. The Debentures of Series A-3 mature on April 21, 2021 and bear interest at a rate of 15% per annum, accrued monthly and payable at maturity. The outstanding principal amount of the Debentures of Series A-3 and any accrued interest is convertible into common shares of the Company at the option of the holder at any time prior to the maturity date at a conversion price of $0.25 per share. The Company also has the option to force conversion of the Debentures of Series A-3 and any accrued interest at the same conversion price if the Company’s common shares trade above $0.50 per share for ten consecutive trading days on the Canadian Securities Exchange. Furthermore, the Debentures of Series A-3 and accrued interest shall automatically convert into common shares of the Company at maturity. Each full Warrant of Series A-3 entitles the holder to purchase one common share of the Company until April 21, 2022 at an exercise price of $0.30 per share. As a result, 2,328,000 Warrants of Series A-3 were issued related to the Debenture Units of Series A-3. |
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| Prior to closing of the Offering, the Company exercised its rights of early repayment in respect of certain of the Convertible Debentures of Series A-2 of the Company issued on August 14, 2019 and, in connection with its election for early repayment, holders of the Convertible Debentures of Series A-2 directed the Company to retain the funds representing such repayment and to apply such funds towards satisfaction of the purchase price for the respective Debenture of Series A-3. The Company issued an aggregate of 761 Debenture Units to the subscribers of the Debentures of Series A-2. |
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| The Debenture Units of Series A-3 were determined to be an equity instrument, comprising a conversion feature and warrants as a result of the Company being able to avoid a contractual obligation to pay cash related to the principal and interest at maturity. The subscription amount of $1,164,000 was allocated to the equity portion of convertible debt and warrants based on their pro-rata fair values of $748,990 and $415,010, respectively. The interest expense related to the Debenture Units of Series A-3 are added to the equity portion of convertible debt as accrued. |
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| On April 24, 2021, the Company elected to automatically convert the Debentures of Series A-3. Accordingly, these have been classified as shares to be issued. The Company expects to issue these shares by November 2021. |
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| During the year ended June 30, 2021, interest of $142,490 was recorded in the equity portion of the convertible debt (June 30, 2020 - $32,010). |
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| d) Convertible Debentures Series A-4 – March 12, 2021 |
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| On March 12, 2021, the Company closed a non-brokered private placement of unsecured subordinated convertible debenture units (the “Debenture Units of Series A-4”) of the Company for gross proceeds of $390,000. |
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| Each Debenture Unit of Series A-4 consists of $1,000 principal amount of unsecured subordinated convertible debentures (the “Debentures of Series A-4”) and 1,000 common share purchase warrants (the “Warrants of Series A-4”) of the Company. The Debentures of Series A-4 mature on March 12, 2022 and bear interest at a rate of 15% per annum, accrued monthly and payable at maturity. The outstanding principal amount of the Debentures of Series A-3 and any accrued interest is convertible into common shares of the Company at the option of the holder at any time prior to the maturity date at a conversion price of $0.50 per share. The Company also has the option to force conversion of the Debentures of Series A-4 and any accrued interest at the same conversion price if the Company’s common shares trade above $0.50 per share for ten consecutive trading days on the Canadian Securities Exchange. Furthermore, the Debentures of Series A-4 and accrued interest shall automatically convert into common shares of the Company at maturity. Each full Warrant of Series A-4 entitles the holder to purchase one common share of the Company until March 12, 2023 at an exercise price of $0.75 per share. |
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| Prior to closing of the Offering, the Company exercised its rights of early repayment in respect of certain of the Convertible Debentures of Series A-1 of the Company issued on March 13, 2019 and, in connection with its election for early repayment, holders of the Convertible Debentures of Series A-1 directed the Company to retain the funds representing such repayment and to apply such funds towards satisfaction of the purchase price for the respective Debenture of Series A-4. The Company issued an aggregate of 390 Debenture Units to the subscribers of the Debentures of Series A-1. |
| 36 |
| The Debenture Units of Series A-4 were determined to be an equity instrument, comprising a conversion feature and warrants as a result of the Company being able to avoid a contractual obligation to pay cash related to the principal and interest at maturity. The subscription amount of $390,000 was allocated to the equity portion of convertible debt and warrants based on their pro-rata fair values of $208,452 and$181,548, respectively. The interest expense related to the Debenture Units of Series A-4 are added to the equity portion of convertible debt as accrued. |
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| During the year ended June 30, 2021, interest of $16,512 was recorded in the equity portion of the convertible debt (June 30, 2020 - $nil). |
Key Contractual Obligations
There are no other key contractual obligations as at June 30, 2021 other than leases entered into through its retail operations disclosed in details in the accompanying financial statements.
On July 20, 2021, the Company entered into a lease agreement with the buyer of Oregon Property. The lease commenced on August 1, 2021 with the initial term of ten years and two subsequent ten-year renewal periods. There is no rent payable during the first three months of the Lease and subsequent payments amount to subsequent payments amount to $27,267 (US $22,000) per month for the reminder of the first year, with annual payment escalators thereafter.
Off Balance Sheet Arrangements
As at June 30, 2021, the Company did not have any off-Balance Sheet arrangements, including any relationships with unconsolidated entities or financial partnerships to enhance perceived liquidity.
Transactions with Related Parties
Related party transactions for the year ended June 30, 2021, 2020 and 2019 and the balances as at those dates, not disclosed elsewhere in these consolidated financial statements are:
| a) | During the year ended June 30, 2021, the Company expensed $842,500 (June 30, 2020 - $662,284; June 30, 2019 - $1,116,103), in fees payable to officers and directors of the Company and in fees payable to a corporation related by virtue of a common officer and director. As at June 30, 2021, the Company had fees payable to officers and directors of the Company of $1,494,228 (June 30, 2020 - $1,278,106); and |
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| b) | During the year ended June 30, 2021, the Company expensed $740,200 (June 30, 2020 - $559,846; June 30, 2019 - $nil) in share based compensation related to officers and directors of the Company. |
Financial and Derivative Instruments
The Company, through its financial assets and liabilities, is exposed to various risks. The Company has established policies and procedures to manage these risks, with the objective of minimizing any adverse effect that changes in these variables could have on these consolidated financial statements. The following analysis provides a measurement of risks as at June 30, 2021:
Credit risk is the risk of financial loss to the Company if a customer or counterparty to a financial instrument fails to meet its contractual obligations. The Company is not exposed to any significant credit risk.
Liquidity risk is the risk that the Company will not be able to meet its financial obligations as they fall due within one year. The Company’s approach to managing liquidity risk is to ensure, as far as possible, that it will have sufficient liquidity to meet its liabilities when due, under both normal and stressed conditions, without incurring unacceptable losses or risking damage to the Company’s reputation. As at June 30, 2021, there is substantial doubt about the Company’s ability to continue as a going concern primarily due to its history of losses. Liquidity risk continues to be a key concern in the development of future operations.
Interest rate risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market interest rates. The interest rates on all of the Company’s existing debt are fixed, and therefore it is not currently subject to any significant cash flow interest rate risk.
The Company is exposed to foreign currency risk from fluctuations in foreign exchange rates and the degree of volatility in these rates due to the timing of their accounts payable balances. The risk is mitigated by timely payment of creditors and monitoring of foreign exchange fluctuations by management. As at June 30, 2021, the Company did not use derivative instruments to hedge its exposure to foreign currency risk.
The Company’s operations do not involve the direct input or output of any commodities and therefore it is not subject to any significant commodity price risk. In addition, the Company does not have any equity investment in other listed public companies, and therefore it is not subject to any significant stock market price risk.
| 37 |
Critical Accounting Policies
These consolidated financial statements of the Company and its subsidiaries were prepared using accounting policies consistent with International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board (“IASB”) and interpretations of the IFRS Interpretations Committee (“IFRIC”).
The significant accounting policies used in the preparation of these consolidated financial statements are described below.
Basis of Presentation
These consolidated financial statements have been prepared on a historical cost basis, except where otherwise disclosed. Historical cost is based on the fair value of the consideration given in exchange for assets. In addition, these consolidated financial statements have been prepared using the accrual basis of accounting, except for cash flow information.
Functional and Presentation Currency
These consolidated financial statements are presented in Canadian dollars, which is the Company’s presentation currency.
Translation of foreign-currency transactions
Transactions in foreign currencies are translated to the respective functional currencies of each subsidiary at exchange rates at the dates of the transactions. Monetary assets and liabilities denominated in foreign currencies at the reporting date are translated to the functional currency at the exchange rate at that date. The foreign currency gain or loss resulting from the settlement of such transactions and from the translation at the reporting date of monetary assets and liabilities denominated in foreign currencies are recognized in profit or loss.
Translation of financial statements of subsidiaries
In translating the financial statements of the Company’s foreign subsidiaries from their functional currencies into the Company’s presentation currency of Canadian dollars, statement of financial position accounts are translated using the closing exchange rate in effect at the statement of financial position date and income and expense accounts are translated using an average exchange rate prevailing during the reporting period. Adjustments resulting from the translation, if any, are included in accumulated other comprehensive income (loss) in shareholders’ equity (deficiency).
Use of Estimates and Judgements
The preparation of these consolidated financial statements in accordance with IFRS requires management to make judgements, estimates and assumptions that affect the application of accounting policies and reported amounts of assets and liabilities at the date of the consolidated financial statements and reported amounts of expenses during the reporting period. Actual outcomes could differ from these estimates. These consolidated financial statements include estimates, which, by their nature, are uncertain. The impacts of such estimates are pervasive throughout these consolidated financial statements, and may require accounting adjustments based on future occurrences. The estimates and underlying assumptions are reviewed on a regular basis. Revisions to accounting estimates are recognized in the period in which the estimate is revised and in any future periods affected. The key assumptions concerning the future, and other key sources of estimation uncertainty as of the date of the statement of financial position that have a significant risk of causing material adjustment to the carrying amounts of assets and liabilities within the next fiscal year arise in connection with the valuation of financial instruments, valuation of acquired assets, fair value of share purchase warrants, share-based payments and deferred tax assets.
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Basis of Consolidation
These consolidated financial statements include those of the Company and of the entities controlled by the Company (the “subsidiaries”). Control over an investee is achieved when the Company has power over the investee, has exposure or rights to variable returns from its involvement with the investee and has the ability to use its power over the investee to affect the amount of its returns. The financial statements of subsidiaries are included in the consolidated financial statements from the date that control commences until the date that control ceases.
The following table lists the Company’s subsidiaries and their functional currencies.
Name of Subsidaries | Place of Incorporation | Proportion of Ownership | Currency |
CordovaCann Holdings Canada, Inc. | Ontario, Canada | 100% | Canadian Dollars |
Cordova Investments Canada, Inc. | Ontario, Canada | 100% | Canadian Dollars |
2734158 Ontario Inc. | Ontario, Canada | 60.45% | Canadian Dollars |
10062771 Manitoba Ltd. | Manitoba, Canada | 51.00% | Canadian Dollars |
CordovaCann Holdings, Inc. | Delaware, USA | 100% | Canadian Dollars |
Cordova CO Holdings, LLC | Colorado, USA | 100% | United States Dollars |
Cordova OR Holdings, LLC | Oregon, USA | 100% | United States Dollars |
CDVA Enterprises, LLC | California, USA | 100% | United States Dollars |
Cordova CA Holdings, LLC | California, USA | 100% | United States Dollars |
Cordova OR Operations, LLC | Oregon, USA | 100% | United States Dollars |
Cannabilt Farms, LLC | Oregon, USA | 100% | United States Dollars |
Cannabilt OR Retail, LLC | Oregon, USA | 100% | United States Dollars |
Cannabilt Holdings, Inc. | Oregon, USA | 100% | United States Dollars |
Future Processing, LLC | Oregon, USA | 100% | United States Dollars |
Extraction Technologies, LLC | Washington, USA | 100% | United States Dollars |
Cordova WA Holdings, LLC | Washington, USA | 100% | United States Dollars |
Share-based payments
Share-based payments to employees are measured at the fair value of the instruments issued and recognized over the expected service periods. Share-based payments to non-employees are measured at the fair value of goods or services received or the fair value of the equity instruments issued, if it is determined the fair value of the goods or services cannot be reliably measured, and are recorded at the date the goods or services are received. The corresponding amount is recorded to the stock options reserve. The fair value of options is determined using the Black-Scholes Option Pricing Model which incorporates all market vesting conditions. The number of shares and options expected to vest is reviewed and adjusted at the end of each reporting period such that the amount recognized for services received as consideration for the equity instruments granted shall be based on the number of equity instruments that will eventually vest.
Compound financial instruments
Compound financial instruments issued by the Company are comprised of convertible debentures that can be converted into common shares and promissory notes payable attached with warrants. The Compound financial instruments are segregated into their debt and equity components or derivative liability components at the date of issue, in accordance with the substance of the contractual agreements. The conversion feature of the convertible promissory notes is presumed to be classified as a derivative financial liability unless it meets all the criteria to recognize as equity instrument. One of criteria is that the conversion option exchanges a fixed amount of shares for a fixed amount of cash (“fixed for fixed”).
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If the conversion feature meets the fixed for fixed criteria, the conversion option will be classified as equity components. Equity instruments are instruments that evidence a residual interest in the assets of an entity after deducting all of its liabilities. Therefore, when the initial carrying amount of the compound financial instruments is allocated to its equity and liability components, the equity component is assigned the residual amount after deducting from the fair value of the instrument as a whole the amount separately determined for the liability component. The sum of the carrying amounts assigned to the liability and equity components on initial recognition is always equal to the fair value that would be ascribed to the instrument as a whole. No gain or loss arises from initially recognizing the components of the instrument separately.
If the conversion feature does not meet the fixed for fixed criteria, the conversion option will be recorded as derivative financial liability, which must be separately accounted for at fair value on initial recognition. The carrying amount of the debt component, on initial recognition, is recalculated as the difference between the proceeds of the convertible promissory notes as a whole and the fair value of the derivative financial liabilities. Subsequent to initial recognition, the derivative financial liability is re-measured at fair value at the end of each reporting period with changes in fair value recognized in the statement of operation for each reporting period, while the debt component is accreted to the face value of the debt using the effective interest method.
Transaction costs are allocated to the debt and equity components in proportion to the allocation of the proceeds on initial recognition. Transaction costs allocated to equity components will be accounted for as a deduction from equity, net of any related income tax benefit; cost allocated to the derivative financial liability component are expensed; and cost allocated to the debt component are offset against the carrying amount of the liability and included in the determination of the effective interest rate.
The liability component of a compound financial instrument is recognized initially at the fair value of a similar liability that does not have an equity conversion option. The equity component is recognized initially as the difference between the fair value of the computed financial instrument as a whole and the fair value of the liability component. Any directly attributable transaction costs are allocated to the liability and equity components in proportion to their initial carrying amounts. Subsequent to initial recognition, the liability component of a compound financial instrument is measured at amortized cost using the effective interest method. The equity component of a compound financial instrument is not re-measured subsequent to initial recognition except on conversion or upon expiration, when the carrying value of the equity portion is transferred to common shares or contributed surplus.
Financial instruments
The Company recognizes a financial asset or a financial liability when it becomes a party to the contractual provisions of the instrument. Under IFRS 9, such financial assets or financial liabilities are initially recognized at fair value and the subsequent measurement depends on their classification.
Financial assets
IFRS 9 uses a single approach to determine whether a financial asset is classified and measured at amortized cost or at fair value. The classification and measurement of financial assets is based on the Company’s business models for managing its financial assets and whether the contractual cash flows represent solely payments of principal and interest (“SPPI”). Financial assets are initially measured at fair value and are subsequently measured at either (i) amortized cost; (ii) fair value through other comprehensive income (“FVTOCI”); or (iii) at fair value through profit or loss (“FVTPL”).
Amortized cost - Financial assets classified and measured at amortized cost are those assets that are held within a business model whose objective is to hold financial assets in order to collect contractual cash flows, and the contractual terms of the financial asset give rise to cash flows that are SPPI. Financial assets classified at amortized cost are measured using the effective interest method.
Fair value through other comprehensive income - Financial assets classified and measured at FVTOCI are those assets that are held within a business model whose objective is achieved by both collecting contractual cash flows and selling financial assets, and the contractual terms of the financial asset give rise to cash flows that are SPPI. This classification includes certain equity instruments where IFRS 9 allows an entity to make an irrevocable election to classify the equity instruments, on an instrument-by-instrument basis, that would otherwise be measured at FVTPL to present subsequent changes in FVTOCI.
| 40 |
FVTPL - Financial assets classified and measured at FVTPL are those assets that do not meet the criteria to be classified at amortized cost or at FVTOCI. This category includes debt instruments whose cash flow characteristics are not SPPI or are not held within a business model whose objective is either to collect contractual cash flows, or to both collect contractual cash flows and sell the financial asset.
Financial liabilities
Under IFRS 9, financial liabilities are primarily classified at amortized cost with limited exceptions. Financial liabilities are derecognized when the obligation specified in the contract is discharged, cancelled or expires. The Company’s accounting policy for each category is as follows:
FVTPL - This category comprises derivatives, liabilities acquired or incurred principally for the purpose of selling or repurchasing it in the near term, and certain financial liabilities that were designated at FVTPL from inception.
Amortized cost - Financial liabilities are recognized initially at fair value net of directly attributable transaction costs. They are subsequently recognized at amortized cost using effective interest method with interest expense recognized on an effective yield basis.
Financial assets and liabilities are offset and the net amount is presented in the statement of financial position when the Company has a legal right to offset the amounts and it intends to either settle on a net basis or realize the asset and settle the liability simultaneously.
The following table summarizes the classification of the Company’s financial instruments:
|
| IFRS 9 |
|
Classification |
|
| |
Financial assets |
|
|
|
Cash and cash equivalents |
| Amortized cost |
|
Promissory note receivable |
| Amortized cost |
|
Other deposit |
| Amortized cost |
|
Other investment |
| FVTPL |
|
|
|
|
|
Financial liabilities |
|
|
|
Accounts payable and accrued liabilities |
| Amortized cost |
|
Convertible debentures |
| Amortized cost |
|
Mortgage payable |
| Amortized cost |
|
Debenture unit deposits |
| Amortized cost |
|
Promissory notes payable |
| Amortized cost |
|
The adoption of IFRS 9 did not have an impact on the Company’s classification and measurement of financial assets and liabilities. On adoption of IFRS 9 on July 1, 2018, there was no change in the carrying value of the financial instruments on transition from IAS 39. IFRS 9 uses an expected credit loss impairment model as opposed to an incurred credit loss model under IAS 39. The impairment model is applicable to financial assets measured at amortized cost where any expected future credit losses are provided for, irrespective of whether a loss event has occurred as at the reporting date. For accounts receivable excluding taxes receivable, the Company utilized a provision matrix, as permitted under the simplified approach, and has measured the expected credit losses based on lifetime expected credit losses taking into consideration historical credit loss experience and financial factors specific to the debtors and other factors. The carrying amount of trade receivables is reduced for any expected credit losses through the use of an allowance account. Changes in the carrying amount of the allowance account are recognized in the statement of comprehensive income. At the point when the Company is satisfied that no recovery of the amount owing is possible, the amount is considered not recoverable and the financial asset is written off. The adoption of the new expected credit loss impairment model had a negligible impact on the carrying amounts of financial assets at amortized cost.
| 41 |
Impairment of long-lived assets
Long-lived assets, including property, plant and equipment and intangible assets are reviewed for impairment at each statement of financial position date or whenever events or changes in circumstances indicate that the carrying amount of an asset exceeds its recoverable amount. For the purpose of impairment testing, assets that cannot be tested individually are grouped together into the smallest group of assets that generates cash inflows from continuing use that are largely independent of the cash inflows of other assets or groups of assets (the cash-generating unit, or “CGU”).
The recoverable amount of an asset or a CGU is the higher of its fair value, less costs to sell, and its value in use. If the carrying amount of an asset exceeds its recoverable amount, an impairment charge is recognized immediately in profit or loss equal to the amount by which the carrying amount exceeds the recoverable amount. Where an impairment loss subsequently reverses, the carrying amount of the asset is increased to the lesser of the revised estimate of recoverable amount, and the carrying amount that would have been recorded had no impairment loss been recognized previously.
Inventories
Inventories for finished cannabis goods are initially valued at cost, and subsequently at the lower of cost and net realizable value. Cost is determined using the average costing method. Net realizable value is determined as the estimated selling price in the ordinary course of business less the estimated costs of completion and the estimated costs necessary to make the sale. The Company reviews inventory for obsolete, redundant and slow-moving goods and any such inventories identified are written down to net realizable value.
Revenue
Revenue from the sale of cannabis goods is recognized when the significant risks and rewards of ownership have been transferred, generally at the date of transfer of ownership title. Revenue from the sale of goods is measured at the fair value of the consideration received.
Evaluation of Disclosure Control and Procedures
The term “disclosure controls and procedures” is defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, or the Exchange Act. This term refers to the controls and procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified by the Securities and Exchange Commission. Our management, including our Chief Executive Officer and Chief Financial Officer, together with the members of our Audit Committee have evaluated the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were ineffective as of the end of the period covered by this report.
There were no changes to our internal control over financial reporting since June 30, 2021 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
| 42 |
Outlook
Current Outlook
Management continues to take an active approach to examining business opportunities in the cannabis industry that could enhance shareholder returns. The focus in the near term is to continue to grow its retail operations in Canada where the Company has established a strong presence in the Province of Ontario, Manitoba and Alberta. The Company will continue to grow in these provinces while expecting to open its first store in Kelowna, British Columbia in the near future. With presence in four key provinces, the Company is expecting to grow its retail operations both through development of new stores as well as looking for acquisition opportunities in strategic markets.
Alongside the retail operations in Canada, the Company is also focussing on growth its presence over the west coast of the USA. Along with its growing operations in Oregon and Washington, the Company is actively pursuing new opportunities in additional states to add to its portfolio consistent with its goal of having vertically integrated operations in key global cannabis markets.
Public Securities Filings
Additional information regarding the Company is filed with the Canadian Securities Administrators at www.sedar.com and with the United States Securities and Exchange Commission and can be viewed at www.edgar.gov.
| 43 |
CordovaCann Corp.
Consolidated Financial Statements
For the Years Ended June 30, 2021, 2020 and 2019
(Expressed in Canadian Dollars)
INDEX
|
| Page |
| |
|
| F-2 |
| |
|
| F-6 |
| |
Consolidated Statements of Operations and Comprehensive Loss |
|
| F-7 |
|
| F-8 |
| ||
|
| F-10 |
| |
| F-11 |
| ||
| F-1 |
| Table of Contents |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and Board of Directors of CordovaCann Corp.
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated statements of financial position of CordovaCann Corp. and subsidiaries (the “Company”) as of June 30, 2021 and 2020, and the related consolidated statements of operations and comprehensive loss, changes in equity, and cash flows for the years then ended, and the related notes (collectively referred to as the “consolidated financial statements”).
In our opinion, the consolidated financial statements present fairly, in all material respects, the consolidated financial position of the Company as of June 30, 2021 and 2020, and the result of its operations and its cash flows for the years then ended, in conformity with International Financial Reporting Standards as issued by the International Accounting Standards Board.
Material Uncertainty Related to Going Concern
We draw attention to Note 1 in the consolidated financial statements, which describe the events and conditions that indicate the existence of material uncertainties that may cast significant doubt about the Company’s ability to continue as a going concern. Our opinion is not modified in respect of this matter.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audit. 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 U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audit, we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audit 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 audit 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. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
| F-2 |
| Table of Contents |
Intangible assets with indefinite useful lives - Starbuds trade name - Refer to Notes 12 to the financial statements
Critical Audit Matter Description
The Company’s evaluation of intangible assets with indefinite useful lives for impairment involves the comparison of the fair value of each indefinite lived intangible asset to its carrying value. The Company estimates the fair value using the income method, which is based on the present value of estimated future cash flows attributable to the respective assets. This requires management to make significant estimates and assumptions related to forecasts of future net sales and earnings. Changes in the assumptions could have a significant impact on either the fair value, the amount of any impairment charge, or both. The Company performed their annual impairment assessments of the intangible asset with indefinite useful life - the Starbuds trade name as of June 30, 2021. The estimated fair values exceeded their carrying values and therefore, no impairments were recorded. As of June 30, 2021, the Starbuds trade name was valued at $5,243,967.
We identified the Company’s impairment evaluations of the Starbuds trade name as a critical audit matter because of the significant judgments made by management to estimate its fair value. A high degree of auditor judgment and an increased extent of effort was required when performing audit procedures to evaluate the reasonableness of management’s estimates and assumptions related to the forecasts of future net sales and earnings, as well as the selection of royalty rates and discount rates.
How the Critical Audit Matter Was Addressed in the Audit
Our audit procedures focused on the forecasts of future net sales and earnings, and the determination of the royalty rates and discount rates used in the impairment test. The procedures included the following, among others:
| · | We evaluated management’s ability to accurately forecast net sales and earnings by comparing actual results to management’s historical forecasts. |
|
|
|
| · | We evaluated the reasonableness of management’s forecast of net sales and earnings by comparing the forecasts to: |
| o | Historical net sales and earnings. |
|
|
|
| o | Underlying analysis detailing business strategies and growth plans including consideration of the effects related to the COVID-19 pandemic. |
|
|
|
| o | Internal communications to management and the Board of Directors. |
|
|
|
| o | Forecasted information included in Company press releases as well as in analyst and industry reports for the Company and certain of its peer companies. |
| · | We evaluated the net sales and earnings growth rates, royalty rates, and discount rates by: |
| o | Testing the source information underlying the determination of net sales and earnings growth rates, royalty rates, and discount rates and the mathematical accuracy of the calculations. |
|
|
|
| o | Developing a range of independent estimates for the discount rates and comparing those to the discount rates selected by management. |
Comparative Information
The consolidated financial statements of the Company as at June 30, 2019 and for the year then ended were audited by another auditor who expressed an unqualified (unmodified) opinion on those financial statements on December 2, 2019.
We have served as the Company’s auditor since 2020.
Kreston GTA LLP
Chartered Professional Accountants
Licensed Public Accountants
Markham, Canada
October 28, 2021
| F-3 |
| Table of Contents |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and Board of Directors of
CordovaCann Corp.
Opinion on the Financial Statements
We have audited the accompanying consolidated statements of operations and comprehensive loss, changes in equity (deficiency) and cash flows for the year ended June 30, 2019, and the related notes, comprising a summary of significant accounting policies and other explanatory information (collectively referred to as the “financial statements”).
In our opinion, the financial statements present fairly, in all material respects, the consolidated financial performance and consolidated cash flows for the year ended June 30, 2019, in conformity with International Financial Reporting Standards as issued by the International Accounting Standards Board.
Material Uncertainty Related to Going Concern
Without modifying our opinion, we draw attention to Note 1 to the financial statements, which indicates that the Company incurred a comprehensive loss of $5,829,331 during the year ended June 30, 2019 and, has a total accumulated deficit of $19,570,801 at June 30, 2019. As stated in Note 1 to the financial statements, these events or conditions, along with other matters as set forth in Note 1, indicate that a material uncertainty exists that raises substantial doubt about the Company’s ability to continue as a going concern. The consolidated financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that might result from the outcome of this uncertainty.
Basis for Opinion
Management’s Responsibility for the Financial Statement
Management is responsible for the preparation and fair presentation of the financial statements in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board, and for such internal control as management determines is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error.
Marcum LLP n 6002 Rogerdale Road n Suite 300 n Houston, Texas 77072 n Phone 281.223.5500 n Fax 281.223.5501 n www.marcumllp.com
| F-4 |
| Table of Contents |
Auditor’s Responsibility
Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement, whether due to error or fraud. Those standards also require that we comply with ethical requirements, including independence. We are required to be independent with respect to the Company in accordance with the ethical requirements that are relevant to our audit of the financial statements in Canada, the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We are a public accounting firm registered with the PCAOB.
An audit includes performing procedures to assess the risks of material misstatements of the financial statements, whether due to error or fraud, and performing procedures to respond to those risks. Such procedures included obtaining and examining, on a test basis, audit evidence regarding the amounts and disclosures in the financial statements. The procedures selected depend on our judgement, including the assessment of the risks of material misstatement of the financial control relevant to the Company’s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Accordingly, we express no such opinion.
An audit also includes evaluating the appropriateness of accounting policies and principles used and the reasonableness of significant estimates made by management, as well as evaluating the overall presentation of the financial statements.
We believe that the audit evidence we have obtained in our audit is sufficient and appropriate to provide a reasonable basis for our audit opinion.
Marcum LLP
We served as the Company’s auditor for 2018 and 2019.
Houston, Texas
December 2, 2019
| F-5 |
| Table of Contents |
CordovaCann Corp.
Consolidated Statements of Financial Position
| (Expressed in Canadian Dollars) |
As at |
| June 30, 2021 $ |
|
| June 30, 2020 $ |
| ||
ASSETS |
|
|
|
|
|
| ||
Current |
|
|
|
|
|
| ||
Cash and cash equivalents |
|
|
|
|
|
| ||
Accounts receivable |
|
|
|
|
|
| ||
Prepaid expenses and deposits |
|
|
|
|
|
| ||
Inventory (Note 6) |
|
|
|
|
|
| ||
Biological assets (Note 7) |
|
|
|
|
|
| ||
Harmonized sales tax receivable |
|
| - |
|
|
|
| |
Other deposit - current portion (Note 26) |
|
|
|
|
|
| ||
Total current assets |
|
|
|
|
|
| ||
Other deposit (Note 26) |
|
|
|
|
|
| ||
Right-of-use assets (Note 8) |
|
|
|
|
|
| ||
Property and equipment, net (Note 9) |
|
|
|
|
|
| ||
Intangible assets (Note 12) |
|
|
|
|
|
| ||
Licenses (Note 13, 14, 16) |
|
|
|
|
|
| ||
Total assets |
|
|
|
|
|
| ||
LIABILITIES |
|
|
|
|
|
|
|
|
Current |
|
|
|
|
|
|
|
|
Accounts payable and accrued liabilities |
|
|
|
|
|
| ||
Harmonized sales tax payable |
|
|
|
|
|
| ||
Mortgage payable (Note 18) |
|
|
|
|
|
| ||
Consideration payable (Note 13) |
|
|
|
|
|
| ||
Convertible debentures (Note 22) |
|
| - |
|
|
|
| |
Income taxes payable (Note 30) |
|
|
|
|
|
| ||
Contract liability (Note 20) |
|
|
|
|
|
| ||
Lease liability (Note 17) |
|
|
|
|
|
| ||
Promissory notes payable (Note 19) |
|
|
|
|
|
| ||
Total current liabilities |
|
|
|
|
|
| ||
Promissory notes payable (Note 19) |
|
| - |
|
|
|
| |
Deferred tax liability (Note 30) |
|
|
|
|
|
| ||
Contract liability (Note 20) |
|
|
|
|
|
| ||
Lease liability (Note 17) |
|
|
|
|
|
| ||
Total liabilities |
|
|
|
|
|
| ||
SHAREHO LDERS’ EQUITY |
|
|
|
|
|
|
|
|
Share capital (Note 23) |
|
|
|
|
|
| ||
Contingently issuable shares (Note 23) |
|
|
|
|
|
| ||
Shares to be issued (Note 23) |
|
|
|
|
|
| ||
Share subscriptions received in advance (Note 21) |
|
|
|
|
|
| ||
Contributed surplus |
|
|
|
|
|
| ||
Equity portion of convertible debentures |
|
|
|
|
|
| ||
Accumulated deficit |
|
| ( | ) |
|
| ( | ) |
Accumulated other comprehensive income |
|
|
|
|
| ( | ) | |
Total shareholders’ equity attributable to Cordova shareholders |
|
|
|
|
|
| ||
Non-controlling interest |
|
|
|
|
|
| ||
Total equity |
|
|
|
|
|
| ||
Total liabilities and shareholders’ equity |
|
|
|
|
|
| ||
Nature of operations and going concern (Note 1)
Commitments (Note 26)
Related party transactions (Note 27)
Subsequent events (Note 32)
Approved on behalf of the Board:
| “Dale Rasmussen”, Director |
| “Thomas M. Turner, Jr.”, Director |
|
| (signed) |
| (signed) |
|
The accompanying notes are an integral part of these consolidated financial statements.
| F-6 |
| Table of Contents |
CordovaCann Corp.
Consolidated Statements of Operations and Comprehensive Loss
For the Years Ended June 30, 2021, 2020 and 2019
| (Expressed in Canadian Dollars) |
|
| 2021 $ |
|
| 2020 $ |
|
| 2019 $ |
| |||
Revenue |
|
|
|
|
|
|
|
| ||||
Cost of sales |
|
| ( | ) |
|
| ( | ) |
|
| ( | ) |
Gross profit (loss) |
|
|
|
|
|
|
|
| ( | ) | ||
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses |
|
|
|
|
|
|
|
|
|
|
|
|
Consulting fees |
|
|
|
|
|
|
|
|
| |||
Share based compensation (Note 24, 25) |
|
|
|
|
|
|
|
|
| |||
Professional fees |
|
|
|
|
|
|
|
|
| |||
Shareholders information services |
|
|
|
|
|
|
|
|
| |||
Salaries and wages |
|
|
|
|
|
|
|
|
| |||
Office and general |
|
|
|
|
|
|
|
|
| |||
Advertising costs |
|
| - |
|
|
|
|
|
|
| ||
Depreciation (Note 9) |
|
|
|
|
|
|
|
|
| |||
Amortization of right-of-use assets (Note 8) |
|
|
|
|
|
|
|
|
| |||
Amortization of licenses (Note 16) |
|
|
|
|
|
|
|
|
| |||
Leases and utilities |
|
|
|
|
|
|
|
|
| |||
Exclusivity fee (Note 26(a)) |
|
|
|
|
|
|
|
|
| |||
Impairment of promissory note receivable |
|
|
|
|
|
|
|
|
| |||
Impairment of equipment |
|
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
|
|
|
| |||
Loss before other income |
|
| ( | ) |
|
| ( | ) |
|
| ( | ) |
Interest expenses (Note 18, 19, 22) |
|
|
|
|
|
|
|
|
| |||
Interest on lease liability (Note 17) |
|
|
|
|
|
|
|
|
| |||
Accretion expense (Note 19, 22) |
|
|
|
|
|
|
|
|
| |||
Loss on settlement of fees |
|
|
|
|
|
|
|
|
| |||
Loss on settlement of other investment (Note 5) |
|
|
|
|
|
|
|
|
| |||
Impairment of assets (Note 10) |
|
|
|
|
|
|
|
|
| |||
Foreign exchange loss |
|
|
|
|
|
|
|
|
| |||
Gain on settlement |
|
| - |
|
|
| ( | ) |
|
|
| |
Loss on disposal of assets |
|
|
|
|
|
|
|
|
| |||
Other income |
|
| ( | ) |
|
| ( | ) |
|
|
| |
Loss on deposit (Note 11) |
|
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income taxes |
|
| ( | ) |
|
| ( | ) |
|
| ( | ) |
Income taxes payable (Note 30) |
|
| ( | ) |
|
|
|
|
|
| ||
Deferred tax recovery (Note 30) |
|
|
|
|
|
|
|
|
| |||
Net loss |
|
| ( | ) |
|
| ( | ) |
|
| ( | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss per share - basic and diluted |
|
| ( | ) |
|
| ( | ) |
|
| ( | ) |
Weighted average number of outstanding common shares -basic and diluted |
|
|
|
|
|
|
|
|
| |||
Net loss |
|
| ( | ) |
|
| ( | ) |
|
| ( | ) |
Foreign exchange translation adjustment |
|
| 119,474 |
|
|
| (49,488 | ) |
|
|
| |
Total comprehensive loss |
|
| ( | ) |
|
| (4,700,338 | ) |
|
| ( | ) |
Net loss attributable to: |
|
|
|
|
|
|
|
|
|
|
|
|
CordovaCann Corp. |
|
| ( | ) |
|
| ( | ) |
|
| ( | ) |
Non-controlling interest |
|
|
|
|
| ( | ) |
|
|
| ||
The accompanying notes are an integral part of these consolidated financial statements.
| F-7 |
| Table of Contents |
CordovaCann Corp.
Consolidated Statements of Changes in Equity For the Years Ended June 30, 2021, 2020 and 2019 (Expressed in Canadian Dollars) |
|
|
|
|
|
|
|
|
|
|
|
|
| Equity Portion of |
|
|
|
|
|
|
|
| Share |
|
|
|
|
| Accumulated |
|
|
|
|
|
|
| |||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
| Convertible |
|
| Contingently |
|
| Shares |
|
| subscriptions |
|
|
|
|
| Other |
|
| Non- |
|
|
|
| |||||||||||
|
|
|
| Common |
|
| Share |
|
| Contributed |
|
| issuable |
|
| issuable |
|
| to be |
|
| received in |
|
| Accumulated |
|
| Comprehensive |
|
| controlling |
|
| Shareholders’ |
| |||||||||||
|
|
|
| Shares |
|
| Capital |
|
| Surplus |
|
| Debentures |
|
| issuable |
|
| issued |
|
| advance |
|
| Deficit |
|
| Income |
|
| interests |
|
| Equity |
| |||||||||||
|
| Note |
| # |
|
| $ |
|
| $ |
|
| $ |
|
| $ |
|
| $ |
|
| $ |
|
| $ |
|
| $ |
|
| $ |
|
| $ |
| |||||||||||
Balance, June 30, 2018 |
|
|
|
|
|
|
|
|
|
|
|
|
| - |
|
|
|
|
|
| - |
|
|
|
|
|
| ( | ) |
|
|
|
|
|
|
|
|
| ||||||||
Issuance of warrants |
| 25 |
|
| - |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| - |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||
Equity portion of convertible debentures |
| 22 |
|
| - |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| - |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||
Warrant portion of promissory note payable |
| 19 |
|
| - |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| - |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||
Common shares issued for exercise of warrants |
| 23 |
|
| 750,000 |
|
|
|
|
|
| ( | ) |
|
|
|
|
|
|
|
| - |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Foreign currency translation gain |
|
|
|
| - |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| - |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||
Net loss for the year |
|
|
|
| - |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| - |
|
|
|
|
|
| ( | ) |
|
|
|
|
|
|
|
| ( | ) | |||||||
Balance, June 30, 2019 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| - |
|
|
|
|
|
| ( | ) |
|
|
|
|
|
|
|
|
| |||||||||
Issuance of warrants |
| 25 |
|
| - |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| - |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Issuance of options |
| 24 |
|
| - |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| - |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||
Forfeiture of warrants |
| 25 |
|
| - |
|
|
|
|
|
| ( | ) |
|
|
|
|
|
|
|
| - |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ( | ) | |||||||
Equity portion of convertible debentures |
| 22 |
|
| - |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| - |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||
Conversion of convertible debenture |
| 22 |
|
| 271,164 |
|
|
|
|
|
|
|
|
| ( | ) |
|
|
|
|
| - |
|
|
|
|
|
|
|
|
|
|
|
| - |
|
|
| 271,164 |
| ||||||
Warrant portion of promissory note payable |
| 19 |
|
| - |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| - |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||
Conversion of convertible debenture |
| 22 |
|
| - |
|
|
|
|
|
|
|
|
| ( | ) |
|
|
|
|
| - |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ( | ) | |||||||
Equity portion of convertible debentures |
| 22 |
|
| - |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| - |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 1,164,000 |
| ||||||||
Interest on equity portion of convertible debentures |
| 22 |
|
| - |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| - |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||
Issuance of shares for asset acquisition |
| 12 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| - |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||
Contingent consideration for asset acquisition |
| 12 |
|
| - |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 3,570,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||
Shares issued as part of contingent consideration |
| 12 |
|
| 6,000,000 |
|
|
|
|
|
|
|
|
|
|
|
| ( | ) |
|
| - |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Shares issued as part of settlement |
| 23 |
|
| 181,250 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| - |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||
Shares to be issued as part of contingent consideration |
| 23 |
|
| - |
|
|
|
|
|
|
|
|
|
|
|
| ( | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||
Common shares issued for private placement |
| 23 |
|
| 6,210,190 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| - |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||
Acquisition of 2734158 Ontario Inc. |
| 13 |
|
| - |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| - |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||
Deduction of deferred tax liabilities |
|
|
|
| - |
|
|
|
|
|
| ( | ) |
|
|
|
|
|
|
|
| - |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ( | ) | |||||||
Foreign currency translation gain |
|
|
|
| - |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| - |
|
|
|
|
|
|
|
|
| ( | ) |
|
|
|
|
| ( | ) | |||||||
Net loss for the year |
|
|
|
| - |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| - |
|
|
|
|
|
| ( | ) |
|
|
|
|
| ( | ) |
|
| ( | ) | ||||||
Balance, June 30, 2020 |
|
|
|
| 65,948,832 |
|
|
| 19,697,180 |
|
|
| 6,709,782 |
|
|
| 862,913 |
|
|
| 2,040,000 |
|
|
| 510,000 |
|
|
|
|
|
| (24,159,690 | ) |
|
| (41,599 | ) |
|
| 658,103 |
|
|
| 6,276,689 |
| |
The accompanying notes are an integral part of these consolidated financial statements.
| F-8 |
| Table of Contents |
CordovaCann Corp. Consolidated Statements of Changes in Equity For the years ended June 30, 2021, 2020 and 2019 (Expressed in Canadian Dollars) |
|
|
|
| Number of |
|
|
|
|
|
|
|
| Equity Portion of |
|
| Contingently |
|
| Shares |
|
| Share subscriptions |
|
|
|
|
| Accumulated Other |
|
| Non- |
|
|
|
| |||||||||||
|
|
|
|
| Common |
|
| Share |
|
| Contributed |
|
| Convertible |
|
| issuable |
|
| to be |
|
| received in |
|
| Accumulated |
|
| Comprehensive |
|
| controlling |
|
| Shareholders’ |
| ||||||||||
|
|
|
| Shares |
|
| Capital |
|
| Surplus |
|
| Debentures |
|
| shares |
|
| issued |
|
| advance |
|
| Deficit |
|
| Income |
|
| interests |
|
| Equity |
| |||||||||||
|
| Note |
| # |
|
| $ |
|
| $ |
|
| $ |
|
| $ |
|
| $ |
|
| $ |
|
| $ |
|
| $ |
|
| $ |
|
| $ |
| |||||||||||
Balance, June 30, 2020 |
| 23 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| - |
|
|
| ( | ) |
|
| ( | ) |
|
|
|
|
|
| ||||||||
Shares issued as part of contingent consideration |
| 23 |
|
|
|
|
| 2,550,000 |
|
|
| - |
|
|
| - |
|
|
| ( | ) |
|
| ( | ) |
|
| - |
|
|
| - |
|
|
|
|
|
| - |
|
|
| - |
| ||
Common shares issued for private placement |
| 25 |
|
| 9,202,242 |
|
|
|
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Issuance of warrants |
| 22 |
|
| - |
|
|
|
|
|
|
|
|
|
|
|
| - |
|
|
| - |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Issuance of convertible debentures |
| 22 |
|
| - |
|
|
|
|
|
|
|
|
|
|
|
| - |
|
|
| - |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Conversion of convertible debentures |
| 22 |
|
| - |
|
|
|
|
|
|
|
|
| ( | ) |
|
| - |
|
|
| 923,590 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Interest on convertible debentures |
| 13 |
|
| - |
|
|
|
|
|
|
|
|
|
|
|
| - |
|
|
| - |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Acquisition of 2734158 Ontario Inc. additional NCI |
| 14 |
|
| - |
|
|
|
|
|
|
|
|
|
|
|
| - |
|
|
| - |
|
|
|
|
|
| ( | ) |
|
|
|
|
| ( | ) |
|
| ( | ) | |||||
Acquisition of 10062771 Manitoba Ltd. |
| 15 |
|
| - |
|
|
|
|
|
|
|
|
|
|
|
| - |
|
|
| - |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Acquisition of Extraction Technologies, LLC |
| 13 |
|
| 3,000,000 |
|
|
|
|
|
|
|
|
|
|
|
| - |
|
|
| - |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Dividend paid to NCI |
| 19 |
|
| - |
|
|
|
|
|
|
|
|
|
|
|
| - |
|
|
| - |
|
|
|
|
|
|
|
|
|
|
|
| ( | ) |
|
| ( | ) | ||||||
Warrant portion of promissory note |
| 21 |
|
| - |
|
|
|
|
|
|
|
|
|
|
|
| - |
|
|
| - |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Share subscriptions received in advance |
|
|
|
| - |
|
|
|
|
|
|
|
|
|
|
|
| - |
|
|
| - |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Foreign currency translation gain |
|
|
|
| - |
|
|
|
|
|
|
|
|
|
|
|
| - |
|
|
| - |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Net loss for the year |
|
|
|
| - |
|
|
|
|
|
|
|
|
|
|
|
| - |
|
|
| - |
|
|
|
|
|
| ( | ) |
|
|
|
|
|
|
|
| ( | ) | ||||||
Balance, June 30, 2021 |
|
|
|
| 93,151,074 |
|
|
|
|
|
|
|
|
|
|
|
| - |
|
|
| 923,590 |
|
|
|
|
|
| ( | ) |
|
|
|
|
|
|
|
|
| |||||||
The accompanying notes are an integral part of these consolidated financial statements.
| F-9 |
| Table of Contents |
CordovaCann Corp.
Consolidated Statements of Cash Flows
For the Years Ended June 30, 2021, 2020 and 2019
| (Expressed in Canadian Dollars) |
|
| 2021 $ |
|
| 2020 $ |
|
| 2019 $ |
| |||
Operating activities |
|
|
|
|
|
|
|
|
| |||
Net loss for the year |
|
| ( | ) |
|
| ( | ) |
|
| ( | ) |
Adjusted for non-cash items: |
|
|
|
|
|
|
|
|
|
|
|
|
Shares issued on consulting agreement |
|
|
|
|
|
|
|
|
| |||
Income taxes payable |
|
|
|
|
|
|
|
|
| |||
Share based compensation |
|
|
|
|
|
|
|
|
| |||
Impairment of promissory note receivable |
|
|
|
|
|
|
|
|
| |||
Impairment of equipment |
|
|
|
|
|
|
|
|
| |||
Amortization of right-of-use assets |
|
|
|
|
|
|
|
|
| |||
Amortization of licenses |
|
|
|
|
|
|
|
|
| |||
Depreciation |
|
| 383,476 |
|
|
| 5,768 |
|
|
| 30,529 |
|
Loss on deposit |
|
|
|
|
|
|
|
| - |
| ||
Loss on settlement of other investment |
|
|
|
|
|
|
|
|
| |||
Impairment of assets |
|
|
|
|
|
|
|
|
| |||
Interest expense |
|
|
|
|
|
|
|
|
| |||
Interest on lease liability |
|
|
|
|
|
|
|
|
| |||
Deferred tax recovery |
|
| ( | ) |
|
| ( | ) |
|
|
| |
Loss on disposal |
|
|
|
|
|
|
|
|
| |||
Gain on settlement |
|
|
|
|
| ( | ) |
|
|
| ||
Accretion expense |
|
|
|
|
|
|
|
|
| |||
Promissory note extension |
|
|
|
|
|
|
|
|
| |||
Convertible debentures issued for settlement of fees |
|
|
|
|
|
|
|
|
| |||
Change in fair value of biological assets |
|
| ( | ) |
|
|
|
|
|
| ||
Foreign exchange loss |
|
| 307,673 |
|
|
| - |
|
|
| - |
|
Share issued on settlement of fees |
|
|
|
|
|
|
|
|
| |||
Changes in non-cash working capital items: |
|
|
|
|
|
|
|
|
|
|
|
|
Prepaid expenses and deposits |
|
| ( | ) |
|
| ( | ) |
|
| ( | ) |
Accounts receivable |
|
| ( | ) |
|
|
|
|
|
| ||
Inventory |
|
| ( | ) |
|
| ( | ) |
|
|
| |
Harmonized sales tax receivable |
|
|
|
|
| ( | ) |
|
|
| ||
Contract liability |
|
|
|
|
|
|
|
|
| |||
Accounts payable and accrued liabilities |
|
|
|
|
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| |||
Cash used in operating activities |
|
| ( | ) |
|
| ( | ) |
|
| ( | ) |
Investing activities |
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|
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|
Additions to property and equipment |
|
| ( | ) |
|
| ( | ) |
|
| ( | ) |
Proceeds from disposal of property and equipment |
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Repayment of deposit received |
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Acquistion of Manitoba |
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Acquistion of Extraction Tech |
|
| ( | ) |
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| ||
Investment in related party |
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| ( | ) | ||
Promissory note receivable |
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| ( | ) | ||
Acquistion of non-controlling interest shares |
|
| ( | ) |
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| ||
Cash used in investing activities |
|
| ( | ) |
|
| ( | ) |
|
| ( | ) |
Financing activities |
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Issuance of mortgage payable |
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Issuance of convertible debentures |
|
| - |
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| ||
Repayment of convertible debentures |
|
| ( | ) |
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| ||
Repayment of promissory notes |
|
| ( | ) |
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| ||
Repayment of mortgages payable |
|
| ( | ) |
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| |
Proceeds from debenture unit deposits |
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| |||
Payment of lease liabilities |
|
| ( | ) |
|
| ( | ) |
|
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| |
Proceeds from share subscriptions received in advance |
|
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|
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| - |
| ||
Proceeds from promissory note payable |
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| ( | ) |
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| ||
Proceeds from the exercise of warrants |
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Payment of dividends to non-controlling interest shareholders |
|
| ( | ) |
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Proceeds from issuance of common shares |
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Proceeds from financing activities |
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Effect of exchange rate changes on cash |
|
| ( | ) |
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| ||
Net increase (decrease) in cash and cash equivalents |
|
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| ( | ) | ||
Cash and cash equivalents, beginning of year |
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Cash and cash equivalents, end of year |
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The accompanying notes are an integral part of these consolidated financial statements.
| F-10 |
| Table of Contents |
CordovaCann Corp. Notes to the Consolidated Financial Statements For the Years Ended June 30, 2021, 2020 and 2019 (Expressed in Canadian Dollars) |
1. | NATURE OF OPERATIONS AND GOING CONCERN |
|
|
| CordovaCann Corp. (the “Company” or “CordovaCann” or “Cordova”) is a Canadian-domiciled company focused on building a leading, diversified cannabis products business across multiple jurisdictions including Canada and the United States. CordovaCann primarily provides services and investment capital to the processing, production and retail vertical markets of the cannabis industry. The Company’s principal address is 217 Queen Street West, Suite 401, Toronto, Ontario, M5V 0R2.
The Company’s common shares currently trade on the Canadian Securities Exchange under the symbol “CDVA” and in the United States on the OTCQB under the symbol “LVRLF”.
These consolidated financial statements of the Company have been prepared in accordance with International Financial Reporting Standards (“IFRS”) as promulgated by the International Accounting Standards Board (“IASB”) on a going concern basis which presumes the realization of assets and discharge of liabilities in the normal course of business for the foreseeable future. There is substantial doubt about the Company’s ability to continue as a going concern as the Company incurred a comprehensive loss of $
The Company believes that continued funding from equity and debt issuances will provide sufficient cash flow for it to continue as a going concern in its present form until its operations become profitable and cash flow positive, however, there can be no assurances that the Company will achieve this. Accordingly, these consolidated financial statements do not include any adjustments related to the recoverability and classification of recorded asset amounts or the amount and classification of liabilities or any other adjustments that might be necessary should the Company be unable to continue as a going concern. |
2. | BASIS OF PREPARATION |
| (a) | Statement of Compliance |
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|
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| These consolidated financial statements of the Company and its subsidiaries were prepared using accounting policies consistent with IFRS as issued by the IASB and interpretations of the IFRS Interpretations Committee (“IFRIC”).
These consolidated financial statements were authorized for issue by the Board of Directors on October 28, 2021. |
| F-11 |
| Table of Contents |
CordovaCann Corp. Notes to the Consolidated Financial Statements For the Years Ended June 30, 2021, 2020 and 2019 (Expressed in Canadian Dollars) |
2. | BASIS OF PREPARATION (continued) |
| (b) | Basis of Presentation |
|
|
|
|
| These consolidated financial statements have been prepared on a historical cost basis, except biological assets which were measured at fair value. Historical cost is based on the fair value of the consideration given in exchange for assets. In addition, these consolidated financial statements have been prepared using the accrual basis of accounting, except for cash flow information. |
|
|
|
| (c) | Functional and Presentation Currency |
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| These consolidated financial statements are presented in Canadian dollars, which is the Company’s presentation currency.
Translation of foreign-currency transactions
Transactions in foreign currencies are translated to the respective functional currencies of each subsidiary at exchange rates at the dates of the transactions. Monetary assets and liabilities denominated in foreign currencies at the reporting date are translated to the functional currency at the exchange rate at that date. The foreign currency gain or loss resulting from the settlement of such transactions and from the translation at the reporting date of monetary assets and liabilities denominated in foreign currencies are recognized in profit or loss.
Translation of financial statements of subsidiaries
In translating the financial statements of the Company’s foreign subsidiaries from their functional currencies into the Company’s presentation currency of Canadian dollars, statement of financial position accounts are translated using the closing exchange rate in effect at the statement of financial position date and income and expense accounts are translated using an average exchange rate prevailing during the reporting period. Adjustments resulting from the translation, if any, are included in accumulated other comprehensive income (loss) in shareholders’ equity (deficiency). |
|
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| (d) | Use of Estimates and Judgements |
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| The preparation of these consolidated financial statements in accordance with IFRS requires management to make judgements, estimates and assumptions that affect the application of accounting policies and reported amounts of assets and liabilities at the date of the consolidated financial statements and reported amounts of expenses during the reporting period. Actual outcomes could differ from these estimates. These consolidated financial statements include estimates, which, by their nature, are uncertain. The impacts of such estimates are pervasive throughout these consolidated financial statements, and may require accounting adjustments based on future occurrences. The estimates and underlying assumptions are reviewed on a regular basis. Revisions to accounting estimates are recognized in the period in which the estimate is revised and in any future periods affected. The key assumptions concerning the future, and other key sources of estimation uncertainty as of the date of the statement of financial position that have a significant risk of causing material adjustment to the carrying amounts of assets and liabilities within the next fiscal year arise in connection with the valuation of financial instruments, valuation of acquired assets, fair value of share purchase warrants, share-based payments and deferred tax assets. |
| F-12 |
| Table of Contents |
CordovaCann Corp. Notes to the Consolidated Financial Statements For the Years Ended June 30, 2021, 2020 and 2019 (Expressed in Canadian Dollars) |
2. | BASIS OF PREPARATION (continued) |
| (e) | Basis of Consolidation |
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| These consolidated financial statements include those of the Company and of the entities controlled by the Company (the “subsidiaries”). Control over an investee is achieved when the Company has power over the investee, has exposure or rights to variable returns from its involvement with the investee and has the ability to use its power over the investee to affect the amount of its returns. The financial statements of subsidiaries are included in the consolidated financial statements from the date that control commences until the date that control ceases.
The following table lists the Company’s subsidiaries and their functional currencies: |
Name of Subsidaries |
| Place of Incorporation |
| Proportion of Ownership |
|
| Currency | ||
CordovaCann Holdings Canada, Inc. |
| Ontario, Canada |
|
| 100 | % |
| Canadian Dollars | |
Cordova Investments Canada, Inc. |
| Ontario, Canada |
|
| 100 | % |
| Canadian Dollars | |
2734158 Ontario Inc. |
| Ontario, Canada |
|
| 60.45 | % |
| Canadian Dollars | |
10062771 Manitoba Ltd. |
| Manitoba, Canada |
|
| 51.00 | % |
| Canadian Dollars | |
CordovaCann Holdings, Inc. |
| Delaware, USA |
|
| 100 | % |
| Canadian Dollars | |
Cordova CO Holdings, LLC |
| Colorado, USA |
|
| 100 | % |
| United States Dollars | |
Cordova OR Holdings, LLC |
| Oregon, USA |
|
| 100 | % |
| United States Dollars | |
CDVA Enterprises, LLC |
| California, USA |
|
| 100 | % |
| United States Dollars | |
Cordova CA Holdings, LLC |
| California, USA |
|
| 100 | % |
| United States Dollars | |
Cordova OR Operations, LLC |
| Oregon, USA |
|
| 100 | % |
| United States Dollars | |
Cannabilt Farms, LLC |
| Oregon, USA |
|
| 100 | % |
| United States Dollars | |
Cannabilt OR Retail, LLC |
| Oregon, USA |
|
| 100 | % |
| United States Dollars | |
Cannabilt Holdings, Inc. |
| Oregon, USA |
|
| 100 | % |
| United States Dollars | |
Future Processing, LLC |
| Oregon, USA |
|
| 100 | % |
| United States Dollars | |
Extraction Technologies, LLC |
| Washington, USA |
|
| 100 | % |
| United States Dollars | |
Cordova WA Holdings, LLC |
| Washington, USA |
|
| 100 | % |
| United States Dollars | |
3. | SIGNIFICANT ACCOUNTING POLICIES |
|
The significant accounting policies used in the preparation of these consolidated financial statements are described below.
Related party transactions
Parties are considered to be related if one party has the ability, directly or indirectly, to control the other party or exercise significant influence over the other party in making financial and operating policy decisions. Parties are also considered to be related if they are subject to common control. Related parties may be individuals or corporate entities. A transaction is considered to be a related party transaction when there is a transfer of resources or obligations between related parties. |
| F-13 |
| Table of Contents |
CordovaCann Corp. Notes to the Consolidated Financial Statements For the Years Ended June 30, 2021, 2020 and 2019 (Expressed in Canadian Dollars) |
3. | SIGNIFICANT ACCOUNTING POLICIES (continued) |
|
|
| Cash and cash equivalents |
|
|
| Cash consists of bank balances and cash held in trust. Cash equivalents consist of short-term deposits with original maturities of three months or less. As at June 30, 2021 and June 30, 2020, there were no cash equivalents.
Share-based payments
Share-based payments to employees are measured at the fair value of the instruments issued and recognized over the expected service periods. Share-based payments to non-employees are measured at the fair value of goods or services received or the fair value of the equity instruments issued, if it is determined the fair value of the goods or services cannot be reliably measured, and are recorded at the date the goods or services are received. The corresponding amount is recorded to the stock options reserve. The fair value of options is determined using the Black-Scholes Option Pricing Model which incorporates all market vesting conditions. The number of shares and options expected to vest is reviewed and adjusted at the end of each reporting period such that the amount recognized for services received as consideration for the equity instruments granted shall be based on the number of equity instruments that will eventually vest.
Compound financial instruments
Compound financial instruments issued by the Company are comprised of convertible debentures that can be converted into common shares and promissory notes payable attached with warrants. The Compound financial instruments are segregated into their debt and equity components or derivative liability components at the date of issue, in accordance with the substance of the contractual agreements. The conversion feature of the convertible promissory notes is presumed to be classified as a derivative financial liability unless it meets all the criteria to recognize as equity instrument. One of criteria is that the conversion option exchanges a fixed amount of shares for a fixed amount of cash (“fixed for fixed”).
If the conversion feature meets the fixed for fixed criteria, the conversion option will be classified as equity components. Equity instruments are instruments that evidence a residual interest in the assets of an entity after deducting all of its liabilities. Therefore, when the initial carrying amount of the compound financial instruments is allocated to its equity and liability components, the equity component is assigned the residual amount after deducting from the fair value of the instrument as a whole the amount separately determined for the liability component. The sum of the carrying amounts assigned to the liability and equity components on initial recognition is always equal to the fair value that would be ascribed to the instrument as a whole. No gain or loss arises from initially recognizing the components of the instrument separately.
If the conversion feature does not meet the fixed for fixed criteria, the conversion option will be recorded as derivative financial liability, which must be separately accounted for at fair value on initial recognition. The carrying amount of the debt component, on initial recognition, is recalculated as the difference between the proceeds of the convertible promissory notes as a whole and the fair value of the derivative financial liabilities. Subsequent to initial recognition, the derivative financial liability is re-measured at fair value at the end of each reporting period with changes in fair value recognized in the statement of operation for each reporting period, while the debt component is accreted to the face value of the debt using the effective interest method. |
| F-14 |
| Table of Contents |
CordovaCann Corp. Notes to the Consolidated Financial Statements For the Years Ended June 30, 2021, 2020 and 2019 (Expressed in Canadian Dollars) |
3. | SIGNIFICANT ACCOUNTING POLICIES (continued) |
|
|
| Compound financial instruments (continued) |
|
|
| Transaction costs are allocated to the debt and equity components in proportion to the allocation of the proceeds on initial recognition. Transaction costs allocated to equity components will be accounted for as a deduction from equity, net of any related income tax benefit; cost allocated to the derivative financial liability component are expensed; and cost allocated to the debt component are offset against the carrying amount of the liability and included in the determination of the effective interest rate.
The liability component of a compound financial instrument is recognized initially at the fair value of a similar liability that does not have an equity conversion option. The equity component is recognized initially as the difference between the fair value of the computed financial instrument as a whole and the fair value of the liability component. Any directly attributable transaction costs are allocated to the liability and equity components in proportion to their initial carrying amounts. Subsequent to initial recognition, the liability component of a compound financial instrument is measured at amortized cost using the effective interest method. The equity component of a compound financial instrument is not re-measured subsequent to initial recognition except on conversion or upon expiration, when the carrying value of the equity portion is transferred to common shares or contributed surplus.
Financial instruments
The Company recognizes a financial asset or a financial liability when it becomes a party to the contractual provisions of the instrument. Under IFRS 9, such financial assets or financial liabilities are initially recognized at fair value and the subsequent measurement depends on their classification.
Financial assets
IFRS 9 uses a single approach to determine whether a financial asset is classified and measured at amortized cost or at fair value. The classification and measurement of financial assets is based on the Company’s business models for managing its financial assets and whether the contractual cash flows represent solely payments of principal and interest (“SPPI”). Financial assets are initially measured at fair value and are subsequently measured at either (i) amortized cost; (ii) fair value through other comprehensive income (“FVTOCI”); or (iii) at fair value through profit or loss (“FVTPL”).
Amortized cost - Financial assets classified and measured at amortized cost are those assets that are held within a business model whose objective is to hold financial assets in order to collect contractual cash flows, and the contractual terms of the financial asset give rise to cash flows that are SPPI. Financial assets classified at amortized cost are measured using the effective interest method.
Fair value through other comprehensive income - Financial assets classified and measured at FVTOCI are those assets that are held within a business model whose objective is achieved by both collecting contractual cash flows and selling financial assets, and the contractual terms of the financial asset give rise to cash flows that are SPPI. This classification includes certain equity instruments where IFRS 9 allows an entity to make an irrevocable election to classify the equity instruments, on an instrument-by-instrument basis, that would otherwise be measured at FVTPL to present subsequent changes in FVTOCI. |
| F-15 |
| Table of Contents |
CordovaCann Corp. Notes to the Consolidated Financial Statements For the Years Ended June 30, 2021, 2020 and 2019 (Expressed in Canadian Dollars) |
3. | SIGNIFICANT ACCOUNTING POLICIES (continued) |
|
|
| Financial instruments (continued) |
|
|
| FVTPL - Financial assets classified and measured at FVTPL are those assets that do not meet the criteria to be classified at amortized cost or at FVTOCI. This category includes debt instruments whose cash flow characteristics are not SPPI or are not held within a business model whose objective is either to collect contractual cash flows, or to both collect contractual cash flows and sell the financial asset.
Financial liabilities
Under IFRS 9, financial liabilities are primarily classified at amortized cost with limited exceptions. Financial liabilities are derecognized when the obligation specified in the contract is discharged, cancelled or expires. The Company’s accounting policy for each category is as follows:
FVTPL - This category comprises derivatives, liabilities acquired or incurred principally for the purpose of selling or repurchasing it in the near term, and certain financial liabilities that were designated at FVTPL from inception.
Amortized cost - Financial liabilities are recognized initially at fair value net of directly attributable transaction costs. They are subsequently recognized at amortized cost using effective interest method with interest expense recognized on an effective yield basis.
Financial assets and liabilities are offset and the net amount is presented in the statement of financial position when the Company has a legal right to offset the amounts and it intends to either settle on a net basis or realize the asset and settle the liability simultaneously. |
|
|
| The following table summarizes the classification of the Company’s financial instruments: |
Financial assets |
|
Cash and cash equivalents | |
Accounts receivable | |
Other deposit | |
|
|
Financial liabilities |
|
Accounts payable and accrued liabilities | |
Convertible debentures | |
Mortgage payable | |
Consideration payable | |
Contract liability | |
Promissory notes payable | |
Lease liabilities |
| F-16 |
| Table of Contents |
CordovaCann Corp. Notes to the Consolidated Financial Statements For the Years Ended June 30, 2021, 2020 and 2019 (Expressed in Canadian Dollars) |
3. | SIGNIFICANT ACCOUNTING POLICIES (continued) |
|
|
| Financial instruments (continued) |
|
|
| The adoption of IFRS 9 did not have an impact on the Company’s classification and measurement of financial assets and liabilities. On adoption of IFRS 9 on July 1, 2018, there was no change in the carrying value of the financial instruments on transition from IAS 39. IFRS 9 uses an expected credit loss impairment model as opposed to an incurred credit loss model under IAS 39. The impairment model is applicable to financial assets measured at amortized cost where any expected future credit losses are provided for, irrespective of whether a loss event has occurred as at the reporting date. For accounts receivable excluding taxes receivable, the Company utilized a provision matrix, as permitted under the simplified approach, and has measured the expected credit losses based on lifetime expected credit losses taking into consideration historical credit loss experience and financial factors specific to the debtors and other factors. The carrying amount of trade receivables is reduced for any expected credit losses through the use of an allowance account. Changes in the carrying amount of the allowance account are recognized in the statement of comprehensive income. At the point when the Company is satisfied that no recovery of the amount owing is possible, the amount is considered not recoverable and the financial asset is written off. The adoption of the new expected credit loss impairment model had a negligible impact on the carrying amounts of financial assets at amortized cost. |
|
|
| Impairment of long-lived assets
Long-lived assets, including property, plant and equipment and intangible assets are reviewed for impairment at each statement of financial position date or whenever events or changes in circumstances indicate that the carrying amount of an asset exceeds its recoverable amount. For the purpose of impairment testing, assets that cannot be tested individually are grouped together into the smallest group of assets that generates cash inflows from continuing use that are largely independent of the cash inflows of other assets or groups of assets (the cash-generating unit, or “CGU”).
The recoverable amount of an asset or a CGU is the higher of its fair value, less costs to sell, and its value in use. If the carrying amount of an asset exceeds its recoverable amount, an impairment charge is recognized immediately in profit or loss equal to the amount by which the carrying amount exceeds the recoverable amount. Where an impairment loss subsequently reverses, the carrying amount of the asset is increased to the lesser of the revised estimate of recoverable amount, and the carrying amount that would have been recorded had no impairment loss been recognized previously.
Inventories
Inventories for finished cannabis goods are initially valued at cost, and subsequently at the lower of cost and net realizable value. Cost is determined using the average costing method. Net realizable value is determined as the estimated selling price in the ordinary course of business less the estimated costs of completion and the estimated costs necessary to make the sale. The Company reviews inventory for obsolete, redundant and slow-moving goods and any such inventories identified are written down to net realizable value.
Equity
Common shares are classified as equity. Transaction costs directly attributable to the issue of common shares and share purchase options are recognized as a deduction from equity, net of any tax effects. When share capital recognized as equity is repurchased, the amount of the consideration paid, including directly attributable costs, is recognized as a deduction from total equity. |
| F-17 |
| Table of Contents |
CordovaCann Corp. Notes to the Consolidated Financial Statements For the Years Ended June 30, 2021, 2020 and 2019 (Expressed in Canadian Dollars) |
3. | SIGNIFICANT ACCOUNTING POLICIES (continued) |
|
|
| Revenue |
|
|
| Revenue from the sale of cannabis goods is recognized when the significant risks and rewards of ownership have been transferred, generally at the date of transfer of ownership title. Revenue from the sale of goods is measured at the fair value of the consideration received.
Service revenues, including long-term marketing contracts, are recognized over a period of time as performance obligations are completed. Payment of the transaction price for the marketing contract is typically due prior to the services being rendered and therefore, the transaction price is recognized as a contract liability, or deferred revenue, when payment is received. Contract liabilities are subsequently recognized into revenue as or when the Company fulfills its performance obligation.
Property and equipment, net
Equipment is stated at cost, less accumulated depreciation and any accumulated impairment losses. The gain or loss arising on the disposal or retirement of an item of equipment is determined as the difference between the sales proceeds and the carrying amount of the asset and is recognized in the statement of operations. Expenditures to replace a component of an item of equipment that is accounted for separately are capitalized and the existing carrying amount of the component written off. Other subsequent expenditures are capitalized if future economic benefits will arise from the expenditure. All other expenditures, including repair and maintenance, are recognized in the statement of operations as incurred.
Depreciation is charged to the income statement based on the cost, less estimated residual value, of the asset on a straight-line basis over the estimated useful life. Depreciation commences when the assets are available for use. The estimated useful lives are as follows: |
| Method: | Rate: |
Equipment | Straight-line | |
Furnitures and fixtures | Straight-line | |
Leasehold improvements | Straight-line | |
Computer equipment | Straight-line | |
Building | Straight-line |
| Property and equipment, excluding land, not yet ready for use are not amortized until they are available for use.
Loss per share
Basic loss per share is calculated by dividing net loss by the weighted average number of common shares outstanding during the period. Diluted loss per share reflects the dilution that would occur if outstanding stock options and share purchase warrants were exercised or converted into common shares using the treasury stock method and are calculated by dividing net loss applicable to common shares by the sum of the weighted average number of common shares outstanding and all additional common shares that would have been outstanding if potentially dilutive common shares had been issued. The inclusion of the Company’s stock options and share purchase warrants in the computation of diluted loss per share would have an anti-dilutive effect on loss per share and are therefore excluding from the computation. Consequently, there is no difference between basic loss per share and diluted loss per share. |
| F-18 |
| Table of Contents |
CordovaCann Corp. Notes to the Consolidated Financial Statements For the Years Ended June 30, 2021, 2020 and 2019 (Expressed in Canadian Dollars) |
3. | SIGNIFICANT ACCOUNTING POLICIES (continued) |
|
|
| Business combinations |
|
|
| A business combination is a transaction or event in which an acquirer obtains control of one or more businesses and is accounted for using the acquisition method. The total consideration paid for the acquisition is the aggregate of the fair values of assets given, liabilities incurred or assumed, and equity instruments issued in exchange for control of the acquiree at the acquisition date. The acquisition date is the date where the Company obtains control of the acquiree.
The identifiable assets acquired, and liabilities assumed are recognized at their acquisition date fair values, except for deferred taxes and share-based payment awards where IFRS provides exceptions to recording the amounts at fair value. Acquisition costs are expensed in statement of operations and comprehensive income (loss). Contingent consideration, if any, is measured at its acquisition date fair value and included as part of the consideration transferred in a business combination.
Contingent consideration that is classified as equity is not remeasured at subsequent reporting dates and its subsequent settlement is accounted for within equity. Contingent consideration that is classified as an asset or a liability is remeasured at subsequent reporting dates with the corresponding gain or loss being recognized in profit or loss.
Non-controlling interest in the acquiree, if any, is recognized either at fair value or at the non-controlling interest’s proportionate share of the acquiree’s net assets, determined on an acquisition-by-acquisition basis. For each acquisition, the excess of total consideration, the fair value of previously held equity interest prior to obtaining control and the non-controlling interest in the acquiree, over the fair value of the identifiable net assets acquired or net liabilities assumed, is recorded as goodwill. Certain fair values may be estimated at the acquisition date pending confirmation or completion of the valuation process. Where provisional values are used in accounting for a business combination, they may be adjusted retrospectively in subsequent periods. The measurement period is the period from the acquisition date to the date complete information about facts and circumstances that existed as of the acquisition date is received. However, the measurement period does not exceed one year from the acquisition date
Goodwill
Goodwill is initially measured at cost and is calculated as the excess of the purchase price for an acquired business over the fair value of acquired net identifiable assets and liabilities and is allocated to the cash- generating units (“CGU”) to which it relates. Goodwill is not amortized but is evaluated for impairment against the carrying amount of the CGU annually or more often if events or circumstances indicate that there may be an impairment. The carrying amount of a CGU includes the carrying amount of assets, liabilities and goodwill allocated to the CGU. If the recoverable amount is less than the carrying value, the impairment loss is first allocated to reduce the carrying amount of any goodwill allocated to the CGU and then to the other non- financial assets of the CGU proportionately based on the carrying amount of each asset. Any impairment loss is charged to income in the period in which the impairment is identified. Goodwill is stated at cost less accumulated impairment losses. Subsequent reversals of goodwill impairment are prohibited. |
| F-19 |
| Table of Contents |
CordovaCann Corp. Notes to the Consolidated Financial Statements For the Years Ended June 30, 2021, 2020 and 2019 (Expressed in Canadian Dollars) |
3. | SIGNIFICANT ACCOUNTING POLICIES (continued) |
|
|
| Intangible assets |
|
|
| Intangible assets acquired are measured on initial recognition at cost. The cost of an intangible asset acquired in a business combination is the fair value at the date of acquisition. The useful lives of intangible assets are assessed as either finite or indefinite. Intangible assets with finite lives are amortized over the useful economic life and assessed for impairment whenever there is an indication that the intangible asset may be impaired. The amortization expense on intangible assets with finite lives is recognised in the consolidated statement of operations and comprehensive loss. Intangible assets with indefinite useful lives are not amortized, but are tested for impairment annually or more frequently when circumstances indicate that the carrying value may not be recoverable. |
Asset type | Amortization method | Amortization term |
Licenses Starbuds trade name | Straight-line N/A | 3 - 5 years Indefinite |
| Estimated useful lives of intangible assets are shorter of the economic life and the year the right is legally enforceable. The estimated useful life, residual value and amortization method are reviewed at the end of each reporting period, with the effect of any changes in estimate being accounted for on a prospective basis.
Following initial recognition, intangible assets with indefinite useful lives are carried at cost less any accumulated impairment losses.
Income taxes
Income tax expense is comprised of current and deferred tax. Income tax expense is recognized in profit or loss except to the extent that it relates to items recognized in equity, in which case it is recognized in equity. Current income tax is the expected tax payable on the taxable income for the year, using tax rates enacted or substantively enacted at the reporting date, and any adjustments to tax payable in respect of previous years.
Deferred tax liabilities or assets are recognized using the balance sheet method, providing for temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and amounts used for taxation purposes. Deferred tax is not recognized on the initial recognition of assets or liabilities in a transaction that is not a business combination.
Deferred tax is measured at the tax rates that are expected to be applied to temporary differences when they reverse, based on the laws that have been enacted or substantively enacted by the reporting date. Deferred tax assets and liabilities are offset if there is a legally enforceable right to offset, and they relate to income taxes levied by the same tax authority on the same taxable entity, or on different tax entities, but they intend to settle current tax liabilities and assets on a net basis or their tax assets and liabilities will be realized simultaneously.
A deferred tax asset is recognized to the extent that it is probable that future taxable profits will be available against which the temporary difference can be utilized. Deferred tax assets are reviewed at each reporting date and are reduced to the extent that it is no longer probable that the related tax benefit will be realized. |
| F-20 |
| Table of Contents |
CordovaCann Corp. Notes to the Consolidated Financial Statements For the Years Ended June 30, 2021, 2020 and 2019 (Expressed in Canadian Dollars) |
3. | SIGNIFICANT ACCOUNTING POLICIES (continued) |
|
|
| Leases |
|
|
| The Company adopted IFRS 16 – Leases (“IFRS 16”) on July 1, 2019. The Company has applied IFRS 16 using the modified retrospective approach, under which the Company will not restate its comparative figures but will recognize the cumulative effect of adopting IFRS 16 as an adjustment to opening retained earnings. Additionally, the Company has elected not to recognize right-of use assets and lease liabilities for short-term leases that have a lease term of 12 months or less and leases of low-value assets. The following are the significant accounting policies which have been amended as a result of IFRS 16, and applied as at July 1, 2019:
Right-of use assets
At inception of a contract, the Company assesses whether a contract is, or contains, a lease. A contract is, or contains, a lease if the contract conveys the right to control the use of an identified asset of a period of time in exchange for consideration. At inception or on reassessment of a contract that contains a lease component, the Company allocates the consideration in the contract to each lease component on the basis of their relative stand-alone prices.
Lease obligations
The Company recognized lease obligation and right-of-use asset for its leased equipment at the date of adoption of IFRS 16. The lease obligation is measured at the present value of the remaining lease payments as of July 1, 2019, discounted using the interest rate implicit in the lease terms. If that rate cannot be readily determined, the Company will use its incremental borrowing rate.
The Lease term determined by the Company comprises: |
| · | The non-cancellable period of lease contracts, including a rent-free period if applicable; |
| · | Periods covered by an option to extend the lease if the Company is reasonably certain to exercise that option; |
| · | Periods covered by an option to terminate the lease if the Company is reasonably certain not to exercise that option. |
| For leases entered into after July 1, 2019, the commencement date of the lease begins on the date on which the lessor makes the underlying asset available for use to the Company. Lease payments included in the measurement of the lease obligation are comprised of the following: |
| · | Fixed lease payments, including in-substance fixed payments; |
| · | Variable lease payments that depend on an index or rate, initially measured using the index or rate at the commencement date; |
| · | Amounts expected to be payable under a residual value guarantee; |
| · | The exercise price of purchase options that the Company is reasonably certain to exercise; |
| · | Lease payments in an option renewal period if the Company is reasonably certain to exercise the extension option; |
| · | Penalties for early termination of the lease unless the Company is reasonably certain not to terminate early; and; |
| · | Less any lease incentives receivable; |
| F-21 |
| Table of Contents |
CordovaCann Corp. Notes to the Consolidated Financial Statements For the Years Ended June 30, 2021, 2020 and 2019 (Expressed in Canadian Dollars) |
3. | SIGNIFICANT ACCOUNTING POLICIES (continued) |
|
|
| Leases (continued) |
|
|
| Variable payments for leases that do not depend on an index or rate are not included in the measurement of the lease obligations. The variable payments are recognized as an expense in the period in which they are incurred. The Company accounts for any leases and associated non-lease components separately, as opposed to a single arrangement, which is permitted under IFRS 16. The Company records non-lease components such as an expense in the period in which they are incurred.
Interest on the lease obligations is calculated using the effective interest method and increases the lease obligation while rent payments reduce the obligation. The lease obligation is remeasured whenever a lease contract is modified, and the lease modification is not accounted for as a separate lease, or there is a change in the assessment of the exercise of an extension option. The lease obligation is remeasured by discounting the revised lease payments using a revised discount rate resulting in a corresponding adjustment to the right- of-use asset or is recorded in gain or loss if the carrying amount of the right-of-use asset has been reduced to zero or the modification results in a reduction in the scope of the lease.
As at July 1, 2019, the right-of-use asset have been initially calculated at an amount equal to the initial value of the lease obligation. There is no impact on retained earnings. For leases entered into, on or after July 1, 2019, the right-of-use asset will be initially calculated at an amount equal to the initial value of the lease liability, adjusted for the following items: |
| · | Any lease payments made at or before the commencement date, less any lease incentives received; |
| · | Any initial direct costs incurred by the Company; |
| · | An estimate of costs to dismantle and remove the underlying asset or to restore the site on which the asset is located. |
| For short-term leases that have a lease term of 12 months or less and low-value assets, the Company has elected to not recognize a lease obligation and right-of-use asset and instead will recognize a lease expense as permitted under IFRS 16. |
|
|
| The right-of-use assets will be depreciated using the straight-line from the date of adoption to the earlier of the end of the useful life of the asset or the end of the lease term as determined under IFRS 16. For leases entered into after July 1, 2019, the right-of-use assets will be depreciated from the date of commencement to the earlier of the end of the useful life of the asset or the end of the lease term.
Under IFRS 16, right-of-use assets are tested for impairment in accordance with IAS 36, Impairment of Assets which replaces the previous requirement to recognize a provision for onerous lease contracts under IAS 37, Provisions, Contingent liabilities and Contingent assets. |
| F-22 |
| Table of Contents |
CordovaCann Corp. Notes to the Consolidated Financial Statements For the Years Ended June 30, 2021, 2020 and 2019 (Expressed in Canadian Dollars) |
3. | SIGNIFICANT ACCOUNTING POLICIES (continued) |
|
|
| Standards adopted on July 1, 2020 |
|
|
| Biological assets
The Company’s biological assets consists of cannabis plants. The Company measures the biological assets in accordance with IAS 41 – Agriculture at fair value less costs to sell up to the point of harvest, which becomes the basis for the cost of finished goods inventories after harvest. Fair value is determined based on future cash flows of the in-process biological assets less costs to complete. Costs to sell include post-harvest production, shipping, and fulfilment costs. at fair value less costs to sell up to the point of harvest. The effect of unrealized gains or losses arising from the changes in fair value less costs to sell during the year are included in the consolidated results of operations in the appropriate year.
New standards not yet adopted and interpretations issued but not yet effective
The following IFRS standards have been recently issued by the IASB. Pronouncements that are irrelevant or not expected to have a significant impact have been excluded.
IFRS 10 - Consolidated Financial Statements (“IFRS 10”)
IFRS 10 and IAS 28 – Investments in Associates and Joint Ventures (“IAS 28”) were amended in September 2014 to address a conflict between the requirements of IAS 28 and IFRS 10 and clarify that in a transaction involving an associate or joint venture, the extent of gain or loss recognition depends on whether the assets sold or contributed constitute a business. The effective date of these amendments is yet to be determined, however early adoption is permitted.
Amendments to IFRS 3: Definition of a Business
In October 2018, the IASB issued “Definition of a Business (Amendments to IFRS 3)”. The amendments clarify the definition of a business, with the objective of assisting entities to determine whether a transaction should be accounted for as a business combination or as an asset acquisition. The amendment provides an assessment framework to determine when a series of integrated activities is not a business. The amendments are effective for business combinations occurring on or after the beginning of the first annual reporting period beginning on or after January 1, 2020. The Company has evaluated the potential impact of these amendments and concluded that there is no impact to the Company’s consolidated financial statements.
Amendments to IAS 1: Classification of Liabilities as Current or Non-current
The amendment clarifies the requirements relating to determining 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 of recognition. The amendment applies retrospectively for annual reporting periods beginning on or after January 1, 2022. The Company is currently evaluating the potential impact of these amendments on the Company’s consolidated financial statements. |
| F-23 |
| Table of Contents |
CordovaCann Corp. Notes to the Consolidated Financial Statements For the Years Ended June 30, 2021, 2020 and 2019 (Expressed in Canadian Dollars) |
3. | SIGNIFICANT ACCOUNTING POLICIES (continued) |
|
|
| New standards not yet adopted and interpretations issued but not yet effective (continued)
Amendments to IAS 37: Onerous Contracts and the cost of Fulfilling a Contract
The amendment specifies that ‘cost of fulfilling’ a contract comprises the ‘costs that relate directly to the contract’. Costs that relate directly to a contract can either be incremental costs of fulfilling that contract or an allocation of other costs that relate directly to fulfilling contracts. The amendment is effective for annual periods beginning on or after January 1, 2022 with early application permitted. The Company is currently evaluating the potential impact of these amendments on the Company’s consolidated financial statements. |
|
|
4. | SIGNIFICANT ACCOUNTING JUDGEMENTS AND ESTIMATES |
|
|
| Information about critical judgments in applying accounting policies and estimates that have the most significant effect on the amounts recognized in these consolidated financial statements is included in the following notes:
Determination of control
The control principle in IFRS 10 sets out the three elements of control: power over the investee; exposure, or rights, to variable returns from involvement with the investee; and the ability to use power over the investee to affect the amount of those returns. Judgement is required in assessing these three elements and reaching a conclusion on obtaining of control of a business.
Income taxes
The measurement of income taxes payable and deferred income tax assets and liabilities requires management to make judgments in the interpretation and application of the relevant tax laws. The actual amount of income taxes only becomes final upon filing and acceptance of the tax return by the relevant tax authorities, which occurs subsequent to the issuance of these consolidated financial statements.
Impairment of long-lived assets
Assets, including property and equipment, are reviewed for impairment whenever events or changes in circumstances indicate that their carrying amounts exceed their recoverable amounts. If an impairment assessment is required, the assessment of fair value often requires estimates and assumptions such as discount rates, exchange rates, commodity prices, rehabilitation and restoration costs, future capital requirements and future operating performance. Changes in such estimates could impact recoverable values of these assets. Estimates are reviewed regularly by management.
Useful lives of depreciable assets
The Company estimates the useful lives for an item of depreciable assets to its significant parts and depreciates separately each such part. Management reviews the useful lives of depreciable assets and their significant parts at each reporting date based on the expected utility of the assets to the Company. Actual results, however, may vary due to a variety of factors including technical obsolescence. |
| F-24 |
| Table of Contents |
CordovaCann Corp. Notes to the Consolidated Financial Statements For the Years Ended June 30, 2021, 2020 and 2019 (Expressed in Canadian Dollars) |
4. | SIGNIFICANT ACCOUNTING JUDGEMENTS AND ESTIMATES (continued) |
|
|
| Valuation of biological assets and inventory
Management is required to make a number of estimates in calculating the fair value of biological assets and harvested hemp inventory. These estimates include a number of assumptions including estimations of the stage of growth of the hemp, pre-harvest and post-harvest costs, sales price and expected yields. Inventories of harvested finished goods and packaging materials are valued at the lower of cost or net realizable value. Management determines net realizable value, which is the estimated selling price less the estimated costs to completion, and the estimated selling costs. The Company estimates the net realizable value of inventories by using the most reliable evidence available at each reporting date. The future realization of these inventories may be different from estimated realization. A change to these assumptions could impact the Company’s inventory valuation and gross profit from sales of inventories.
Share-based payment transactions
The Company measures the cost of equity-settled transactions with goods and services received by reference to the fair value of the equity instruments at the date at which they are granted. Estimating fair value for share-based payment transactions requires determining the most appropriate valuation model, which is dependent on the terms and conditions of the grant. This estimate also requires determining the most appropriate inputs to the valuation model including the expected life of the stock option, volatility and dividend yield and making assumptions about them. The assumptions and models used for estimating fair value for share-based payment transactions are disclosed in Note 24 and Note 25.
Provisions and contingencies
The amount recognized as provision, including legal, contractual, constructive and other exposures or obligations, is the best estimate of the consideration required to settle the related liability, including any related interest charges, taking into account the risks and uncertainties surrounding the obligation. In addition, contingencies will only be resolved when one or more future events occur or fail to occur. Therefore assessment of contingencies inherently involves the exercise of significant judgment and estimates of the outcome of future events. The Company assesses its liabilities and contingencies based upon the best information available, relevant tax laws and other appropriate requirements.
Determination of purchase price allocations and contingent consideration
Judgements are made in determining the fair value of assets and liabilities, including the valuation of separately identifiable intangibles acquired as part of an acquisition. Further, estimates are made in determining the value of contingent consideration payments that should be recorded as part of the consideration on the date of acquisition and changes in contingent consideration payable in subsequent reporting periods, if any. Contingent consideration payments are generally based on acquired businesses achieving certain performance targets. The estimates are based on management’s best assessment of the related inputs used in the valuation models, such as future cash flows and discount rates. Future performance results that differ from management’s estimates could result in changes to liabilities recorded, which are recorded as they arise through profit or loss. |
| F-25 |
| Table of Contents |
CordovaCann Corp. Notes to the Consolidated Financial Statements For the Years Ended June 30, 2021, 2020 and 2019 (Expressed in Canadian Dollars) |
4. | SIGNIFICANT ACCOUNTING JUDGEMENTS AND ESTIMATES (continued) |
|
|
| Valuation of convertible debentures
The convertible debentures were separated into their liability and equity components or derivative liability component at the date of issue, in accordance with the substance of the contractual agreements. The conversion options require an estimation of the fair value of a similar liability that doesn’t have an associated equity component by using a suitable discount rate at initial recognition and each extension date. The carrying amount of the conversion options is then determined by deducting the fair value of the financial liability from the fair value of the convertible debenture as a whole.
Leases
Management applies judgment in reviewing each of its contractual arrangements to determine whether the arrangement contains a lease. Leases that are recognized are subject to further management judgment and estimation in various areas specific to the arrangement, including lease term and discount rate. In determining the lease term to be recognized, Management considers all facts and circumstances that create an economic incentive to exercise an extension operation, or not to exercise a termination option. Where the rate implicit in a lease is not readily determinable, the discount rate of lease obligations are estimated using a discount rate similar to the Company’s specific incremental borrowing rate. This rate represents the rate that the Company would incur to obtain the funds necessary to purchase an asset of a similar value, with similar payment terms and security in a similar economic environment. |
5. | OTHER INVESTMENT |
|
|
| On September 18, 2018, the Company subscribed for |
6. | INVENTORY |
|
|
| The Company’s inventory includes purchased products. The Company’s purchased inventory during the year ended June 30, 2021 amounted to $ |
| F-26 |
| Table of Contents |
CordovaCann Corp. Notes to the Consolidated Financial Statements For the Years Ended June 30, 2021, 2020 and 2019 (Expressed in Canadian Dollars) |
7. | BIOLOGICAL ASSETS |
|
|
| The biological assets of the Company consist of cannabis plants. The Company’s cannabis operations are located in Clackamas County, Oregon. The composition of the biological assets for the year ended June 30, 2021 is as follows: |
| Assumptions:
Biological assets are valued in accordance with IAS 41 – Agriculture (“IAS 41”) and are presented at their fair values less costs to sell at the point of harvest. The estimates and assumptions used are subject to volatility in uncontrollable market conditions, may significantly impact the fair value of biological assets. Biological assets represent a level 3 asset in the fair value hierarchy. For in process biological assets, the fair value at the point of harvest is adjusted based on the stage of growth.
When determining the fair value of biological assets, the Company makes estimates and uses assumptions as follows: |
| · | Expected costs required to grow the cannabis up to the point of harvest; |
|
|
|
| · | Estimated selling price per lb; |
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|
| · | Expected yield from cannabis plants; and |
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|
| · | Estimated stage of growth - As at June 30, 2021, on average, the biological assets were estimated as 78% complete as to the next expected harvest date. |
The following table quantifies each significant unobservable input and provides the impact of a 5% increase or decrease that each input would have on the fair value of biological assets:
|
| Range of inputs |
| Sensitivity |
| Impact on fair value as at June 30, 2021 ($) |
| ||
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| |
Estimated selling price per lb |
| $ |
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| |||
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|
| ( | ||
Estimated yield per cannabis plant |
|
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|
| |||
|
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|
|
|
|
| ( | ) | |
| The estimations made by the Company, are subject to change, and differences from the anticipated yield will be reflected in the gain or loss on biological assets in future periods. |
| F-27 |
| Table of Contents |
CordovaCann Corp. Notes to the Consolidated Financial Statements For the Years Ended June 30, 2021, 2020 and 2019 (Expressed in Canadian Dollars) |
8. | RIGHT-OF-USE ASSETS |
|
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| The Company recognized the right-of-use asset for it leased properties as follows: |
|
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| $ |
|
Balance, June 30, 2019 |
|
| – |
|
Additions during the year |
|
|
| |
Depreciation for the year |
|
| ( | ) |
Balance, June 30, 2020 |
|
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| |
Additions during the year |
|
|
| |
Acquisition of a subsidiary |
|
|
| |
Depreciation for the year |
|
| ( | ) |
Balance, June 30, 2021 |
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| Leased properties are amortized over the terms of their respective leases. |
|
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9. | PROPERTY AND EQUIPMENT, NET |
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| Property and equipment, net consists of the following: |
| Land $ |
|
| Building $ |
|
| Construction in progress $ |
|
| Leasehold improvements $ |
|
| Machinery and equipment $ |
|
| Computer equipment $ |
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| Furnitures and fixtures $ |
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| Total $ |
| |||||||||
Cost |
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As at June 30, 2019 |
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Additions |
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Translation adjustment |
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Impairment charge |
|
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|
|
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| ( | ) |
|
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| ( | ) | ||||||
As at June 30, 2020 |
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Additions |
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Disposals |
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| ( | ) |
|
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| ( | ) |
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| ( | ) |
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| ( | ) | ||||
Acqusition of subsidiaries |
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Translation adjustment |
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| ( | ) |
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| ( | ) |
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| ( | ) |
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| ( | ) |
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| ( | ) | |||
Transfer |
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| ( | ) |
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Impairment charge |
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| ( | ) |
|
| ( | ) |
|
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| ( | ) |
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As at June 30, 2021 |
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Accumulated depreciation As at June 30, 2019 |
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Depreciation |
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| ( | ) |
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| ( | ) |
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| ( | ) |
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| (5,768 | ) | ||||
As at June 30, 2020 |
|
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| ( | ) |
|
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|
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| ( | ) |
|
| ( | ) |
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| ( | ) | ||||
Depreciation |
|
|
|
|
| ( | ) |
|
|
|
|
| ( | ) |
|
| ( | ) |
|
| ( | ) |
|
| ( | ) |
|
| (383,476 | ) | ||
Disposals |
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Translation adjustment |
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As at June 30, 2021 |
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| ( | ) |
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| ( | ) |
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| ( | ) |
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| ( | ) |
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| ( | ) |
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| ( | ) | ||
Net book value ($) |
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At June 30, 2019 |
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| 523,480 |
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| 1,361,048 |
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| - |
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At June 30, 2020 |
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| - |
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At June 30, 2021 |
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| - |
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| |||||||
| During the year ended June 30, 2021, the Company incurred a depreciation expense in the amount of $ |
| F-28 |
| Table of Contents |
CordovaCann Corp. Notes to the Consolidated Financial Statements For the Years Ended June 30, 2021, 2020 and 2019 (Expressed in Canadian Dollars) |
9. | PROPERTY AND EQUIPMENT, NET (continued) |
|
|
| Oregon - Land, building and construction in progress
On April 4, 2018, the Company entered into an agreement to acquire a 27.5% interest of Cordova OR Operations, LLC (“OR Operations”) for the acquisition of land and buildings. Under the terms of this agreement, the Company acquired a 27.5% membership interest in OR Operations for $534,311 (US $400,000). On June 19, 2019, the Company purchased the remaining 72.5% interest in OR Operations for $1,361,048 (US$1,040,000) (Note 11). The Company spent $1,760,861 in relation to construction in progress during the year ended June 30, 2019. Amortization expenses of $232,407 was recorded during the year ended June 30, 2021 (June 30, 2020 - $nil).
On August 4, 2021, OR Operations sold all of its land, building, and construction-in-progress (the “Oregon Property”) for $2,726,680 (US $2,200,000) and entered into an agreement to lease the Oregon Property from the buyer (the “Lease”). The Lease will allow the Company to operate on the Oregon Property for ten years, and provides options for two subsequent ten year renewal periods. Proceeds from the sale were used to retire debts related to the Oregon Property and to finance the planned expansion in Oregon. A total of $743,640 (US $600,000) of the purchase price has been placed in escrow by the buyer to allow the completion of the buildout. The Lease was signed on July 20, 2021 and commenced on August 1, 2021. There is no rent payable during the first three months of the Lease and subsequent payments amount to $27,267 (US $22,000) per month for the reminder of the first year, with annual payment escalators thereafter.
The selling price of $2,726,680 for the Oregon Property was lower than its carrying value, which indicated the impairment of these assets and resulted of impairment loss in the amount of $664,543. As at June 30, 2021, the value of Oregon Property amounted to $
Leasehold improvements
Leasehold improvements include those acquired as part of the asset acquisition of Star Buds International Inc., as disclosed in Note 12 in the amount of $1,060,224. Management assessed the indicators of impairment and determined that the leasehold improvements were impaired and resulted of impairment of assets in the amount of $ |
10. | ACQUISITION OF CORDOVA OR OPERATIONS, LLC |
|
|
| On April 4, 2018, the Company entered into an agreement to acquire a
On August 4, 2021, OR Operations sold all of its land, building, and construction-in-progress (the “Oregon Property”) for $ |
| F-29 |
| Table of Contents |
CordovaCann Corp. Notes to the Consolidated Financial Statements For the Years Ended June 30, 2021, 2020 and 2019 (Expressed in Canadian Dollars) |
11. | LOSS ON DEPOSIT |
|
On June 19, 2019, the Company entered into an asset purchase agreement to acquire certain assets and licenses. The Company made non-refundable payments of $ |
12. | ASSET ACQUISITION OF STAR BUDS INTERNATIONAL INC. |
|
|
| On April 8, 2020 (the “Closing date”), the Company completed the purchase of certain tangible assets and intellectual property (the “Assets”) of an arm’s length Canadian cannabis corporation (the “Transaction”), Star Buds International Inc. (the “Vendor” or “Star Buds”).
To acquire the Assets from the Vendor, the Company: |
| (i) | issued |
| (ii) | |
| (iii) | |
| (iv) | issued a three-year promissory note for $ |
| (v) |
| The consideration payables as per note (ii) and (iii) above are considered a contingent consideration. Management assessed the probability of the issuance of shares noted in (ii) and (iii) above to be highly probable. The total fair value of the
On May 8, 2020, the Company obtained two additional lease assignments in Alberta and issued 6,000,000 common shares of the Company to the Vendor. Accordingly, the value of the |
| F-30 |
| Table of Contents |
CordovaCann Corp. Notes to the Consolidated Financial Statements For the Years Ended June 30, 2021, 2020 and 2019 (Expressed in Canadian Dollars) |
12. | ASSET ACQUISITION OF STAR BUDS INTERNATIONAL INC. (continued) |
|
|
| On July 27, 2020, the Company issued
On January 6, 2021, the Company issued the final |
Consideration paid |
|
| $ |
|
33,500,000 common shares at $0.17 per share |
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| |
Initial promissory note (iv) |
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Additional promissory notes (v) |
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Liabilities assumed |
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Amount allocated to: |
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Leasehold improvements |
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| |
Rental deposits |
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Star Buds trade name |
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| |
|
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|
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| No amortization or impairment was recorded in relation to the intangible asset – Starbuds trade name during the year ended June 30, 2021 (June 30, 2020 - $nil). |
|
|
13. | ACQUISITION OF 2734158 ONTARIO INC. |
|
|
| On May 15, 2020, the Company entered into a subscription agreement to acquire 50.1% ownership interest in 2734158 Ontario Inc. (“273 Ontario”) by subscribing to |
| · | payment of $ |
| · | payment of $ |
| · | payment of $ |
| · | payment of $ |
The following table summarises the recognized amounts of assets acquired and liabilities assumed at the date of acquisition.
| F-31 |
| Table of Contents |
CordovaCann Corp. Notes to the Consolidated Financial Statements For the Years Ended June 30, 2021, 2020 and 2019 (Expressed in Canadian Dollars) |
13. | ACQUISITION OF 2734158 ONTARIO INC. (continued) |
Cash |
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| |
Other assets |
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Computer equipment |
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Furniture and fixture |
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| |
Leasehold improvement |
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| |
Liabilities assumed |
|
| ( | ) |
Total identifiable net assets acquired |
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|
On August 15, 2020, the total Subscription Price of $
The non-controlling interest is calculated as follow.
Consideration |
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| |
Ownership acquired |
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| % | |
Fair value of assets acquired |
|
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| |
Consideration |
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| ( | ) |
Non-controlling interest |
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|
Licenses allocated from the acquisition has been recognized as follows.
Consideration transferred |
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| |
Consideration received by 273 Ontario |
|
| ( | ) |
Non-controlling interest |
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| |
Fair value of identifiable net asets |
|
| ( | ) |
Fair value of licences |
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|
On September 17, 2020, the Company acquired an additional 10.35% of the common shares of 273 Ontario not previously owned by Cordova (the “Additional Shares”). The total purchase price for the Additional Shares amounted to $
| · | payment of $ |
| · | payment of $ |
| · | payment of $ |
As Cordova previously controlled 273 Ontario with 50.1% ownership interest, this transaction resulted in a change to Cordova’s ownership stake and was accounted for as an equity transaction.
| F-32 |
| Table of Contents |
CordovaCann Corp. Notes to the Consolidated Financial Statements For the Years Ended June 30, 2021, 2020 and 2019 (Expressed in Canadian Dollars) |
13. | ACQUISITION OF 2734158 ONTARIO INC. (continued) |
|
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|
During the year ended June 30, 2021, the Company paid $
During the years ended June 30, 2021, 273 Ontario paid dividends in the amount of $ |
14. | ACQUISITION OF 10062771 MANITOBA LTD. |
|
|
| On December 1, 2020, the Company acquired 51% of the issued and outstanding shares of 10062771 Manitoba Ltd. (“Manitoba Ltd”), a Manitoba-based cannabis retail venture (the “Transaction”). Manitoba Ltd is considered to be a related party by virtue of a common officer and director. Per the terms of the Transaction, the Company acquired 51% of the issued and outstanding shares of Manitoba Ltd on a fully-diluted basis (the “Purchased Shares”). The consideration for the Purchases Shares was one hundred fifty thousand dollars ($
The following table summarises the recognized amounts of assets acquired and liabilities assumed at the date of acquisition. |
|
| $ |
| |
Cash |
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| |
Prepaid expenses |
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| |
Inventory |
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Furnitures and fixtures |
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Leasehold improvements |
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| |
Right-of-use asset |
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| |
Lease liability |
|
| ( | ) |
Liabilities assumed |
|
| ( | ) |
Total identifiable net assets acquired |
|
|
| |
On December 1, 2020, the total Subscription Price of $
The fair value of non-controlling interest at the acquisition date was calculated as follows:
| F-33 |
| Table of Contents |
CordovaCann Corp. Notes to the Consolidated Financial Statements For the Years Ended June 30, 2021, 2020 and 2019 (Expressed in Canadian Dollars) |
14. | ACQUISITION OF 10062771 MANITOBA LTD. (continued) |
|
|
| The Company recognized the intangible assets – licenses at the acquisition date and calculated their fair value as follows: |
Cash consideration |
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| |
Consideration received by Manitoba Ltd. |
|
| ( | ) |
Non-controlling interest |
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Deferred taxliability |
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Fair value of identifiable assets |
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| ( | ) |
Fair value of licenses |
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|
15. | ACQUISITION OF EXTRACTION TECHNOLOGIES, LLC |
|
|
| On February 26, 2021, the Company, through its wholly-owned subsidiary, Cordova WA Holdings, LLC, completed the acquisition of Extraction Technologies, LLC (“Extraction Tech”), an arm’s length Washington- based company (the “Washington Acquisition”). The Washington Acquisition includes the purchase of a 10,900 sq. ft. manufacturing building, processing equipment, and contracts with tolling and white label customers. The Consideration for the Washington Acquisition is three million (3,000,000) common shares of the Company issued on closing and five hundred thousand (500,000) common shares for every US $125,000 in EBITDA generated by Extraction Tech during the 12-month period beginning on the 3-month anniversary post-closing and ending on the 15-month anniversary of the closing date (the “Earnout Payment”). The maximum Earnout Payment that can be earned by Extraction Tech is four million (4,000,000) common shares.
The Earnout Payment is considered a contingent consideration. As at February 26, 2021 and June 30, 2021, management has assessed that the Earnout Payment is considered highly improbable and accordingly has not recognized the Earnout Payment.
In accordance with the Company’s accounting polices and IFRS 3, the measurement period for the Transaction shall not exceed one year from acquisition date. Accordingly, the accounting for the Transaction date has only been provisionally determined as at June 30, 2021. The following table summarizes the fair value of consideration paid on acquisition date and the allocation of the Consideration to the assets and liabilities acquired. The Company has yet to determine and value any intangible assets that may have been acquired as part of the Transaction and the probably of the Earnout Payment being made. Once this has been determined, the value of the provisional goodwill may change. These changes may be material. |
| F-34 |
| Table of Contents |
CordovaCann Corp. Notes to the Consolidated Financial Statements For the Years Ended June 30, 2021, 2020 and 2019 (Expressed in Canadian Dollars) |
15. | ACQUISITION OF EXTRACTION TECHNOLOGIES, LLC (continued) |
Consideration paid |
| $ |
| |
3,000,000 Common shares |
|
|
| |
Earnout share consideration |
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Total consideration: |
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| |
Purchase Price Allocation |
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|
Accounts receivable |
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| |
Inventory |
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| |
Bank overdraft |
|
| ( | ) |
Capital assets |
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| |
Mortgage payable |
|
| ( | ) |
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| |
16. | LICENSE |
Cost |
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| |
As at June 30, 2019 |
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| |
Acquistion of a subsidiary (Note 13) |
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| |
As at June 30, 2020 |
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Acquistion of a subsidiary (Note 14) |
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As at June 30, 2021 |
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Accumulated amortization |
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As at July 1, 2019 |
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Amortiziation |
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As at June 30, 2020 |
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Amortization |
|
| ( | ) |
As at June 30, 2021 |
|
| ( | ) |
Net book value ($) |
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At June 30, 2019 |
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| |
At June 30, 2020 |
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At June 30, 2021 |
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| |
| F-35 |
| Table of Contents |
CordovaCann Corp. Notes to the Consolidated Financial Statements For the Years Ended June 30, 2021, 2020 and 2019 (Expressed in Canadian Dollars) |
17. | LEASE LIABILITY |
|
|
| The following table represents the lease obligations for the Company as at June 30, 2021: |
Balance, June 30, 2019 |
|
| - |
|
Additions |
|
|
| |
Interest expense |
|
|
| |
Lease payments |
|
| ( | ) |
Balance, June 30, 2020 |
|
|
| |
Additions |
|
|
| |
Acquisition of a subisidiary |
|
|
| |
Interest expense |
|
|
| |
Lease payments |
|
| (501,365 | ) |
Balance, June 30, 2021 |
|
|
|
Allocated as: |
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|
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| ||||
|
| As at June 30, 2021 $ |
|
| As at June 30, 2020 $ |
| ||
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Current |
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Long-term |
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| ||
Total |
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|
|
| ||
| The following table presents the contractual undiscounted cash flows for lease obligations as at June 30, 2021: |
|
|
| $ |
|
Less than one year |
|
|
| |
One to five years |
|
|
| |
More than five years |
|
|
| |
Total undiscounted lease obligation |
|
|
|
| When measuring the lease obligation, the Company discounted the lease payments using the implicit interest rate in the lease terms. The Company has a lease with a term less than 12 months and recorded $32,479 (2020 - $12,330) of rent expense attributed to short-term leases during the year ended June 30, 2021. |
| F-36 |
| Table of Contents |
CordovaCann Corp. Notes to the Consolidated Financial Statements For the Years Ended June 30, 2021, 2020 and 2019 (Expressed in Canadian Dollars) |
18. | MORTGAGE PAYABLE |
|
|
| Oregon Mortgage |
|
|
| On June 16, 2019, the Company obtained financing through a mortgage (the “Mortgage”) in the amount of $
On June 12, 2020, the Company entered into a new mortgage (the “New Mortgage’), in the amount of $
The mortgage payable outstanding as at June 30, 2021 was $
Washington Mortgage
On February 26, 2021, the Company completed the Washington Acquisition (Note 15) and assumed a mortgage payable in the amount of $
As at June 30, 2021, the amount outstanding under the Washington Mortgage amounted to $ |
19. | PROMISSORY NOTES PAYABLE |
|
|
| Promissory Note A – February 1, 2019
On February 1, 2019, the Company issued an unsecured promissory note (the “Promissory Note A”) in the principal amount of $196,425 (US $150,000). The Promissory Note A matured on May 1, 2019 and bears interest at a rate of 10% per annum, accrued monthly and due at maturity. As at the date of these consolidated financial statements, the Promissory Note A is in default and remains outstanding. In connection with the Promissory Note A, the Company also issued warrants for the purchase of 150,000 common shares of the Company exercisable until January 31, 2020 at a price of $1.00 per share. |
| F-37 |
| Table of Contents |
CordovaCann Corp. Notes to the Consolidated Financial Statements For the Years Ended June 30, 2021, 2020 and 2019 (Expressed in Canadian Dollars) |
19. | PROMISSORY NOTES PAYABLE (continued) |
|
|
| The Promissory Note A was determined to be a compound instrument, comprising a liability and warrants. The initial carrying amount of the financial liability was determined by discounting the stream of future payments of interest and principal at a market interest rate of 19% which is estimated to be the borrowing rate available to the Company for similar instruments of debt having no warrants. Using the residual method, the carrying amount of the warrants issued is the difference between the principal amount and the initial fair value of the financial liability. The fair value of the liability was determined to be $192,142 (US $146,729). The residual value of $4,283 (US $3,271) was allocated to warrants. The carrying value of the Promissory Note A, net of the warrant component, has been accreted using the effective interest rate method over the term of the Promissory Note A, such that the carrying amount of the financial liability will equal the principal balance at maturity.
As at June 30, 2021, $44,732 was outstanding under Promissory Note A (June 30, 2020 – $164,342). Interest expense of $7,149 (June 30, 2020 - $19,227; June 30, 2019 - $8,340) was recorded for the year ended June 30, 2021.
Promissory Note B – June 12, 2019
On June 12, 2019, the Company issued a secured promissory note (the “Promissory Note B”) in the principal amount of $261,740 (US $200,000). The Promissory Note B matured on June 30, 2020 and bears interest at a rate of 15% per annum, accrued monthly and due at maturity. The Promissory Note B was secured by the convertible preferred shares investment in NWN (Note 5). Due to the default provisions of Promissory Note B, the pledged Preferred Shares for NWN were called and resulted the loss on the settlement of debt in the amount of $184,540 during the year ended June 30, 2020. As at June 30, 2021, the value of the Promissory Note B amounted to $nil (2020 – $nil). Interest expense in the amount of $nil, was recorded for the year ended June 30, 2021 (2020 - $40,280; 2019 - $1,950, respectively).
Promissory Note C – June 19, 2019
On June 19, 2019, the Company issued secured promissory notes (the “Promissory Note C”) in the aggregate principal amount of $654,350 (US $500,000). The Promissory Note C matured on December 18, 2019 and bears interest at a rate of 15% per annum, accrued monthly and due at maturity. The Promissory Note C is secured by a general security interest over all the assets of Cordova OR Holdings, LLC, a wholly owned subsidiary of the Company and parent to OR Operations. In connection with the Promissory Note C, the Company issued warrants for the purchase of 200,000 common shares of the Company exercisable until June 18, 2021 at a price of $1.00 per share.
The Promissory Note C was determined to be a compound instrument, comprising of a liability and warrants. The initial carrying amount of the financial liability was determined by discounting the stream of future payments of interest and principal at a market interest rate of 19% which is estimated to be the borrowing rate available to the Company for similar instruments of debt having no warrants. Using the residual method, the carrying amount of the warrants issued is the difference between the principal amount and the initial fair value of the financial liability.
The fair value of the liability was determined to be $652,675 (US $489,152). The residual value of $14,367 (US $10,848) was allocated to warrants. The carrying value of the Promissory Note C, net of the warrant component, has been accreted using the effective interest rate method over the term of the Promissory Note C, such that the carrying amount of the financial liability will equal the principal balance at maturity. |
| F-38 |
| Table of Contents |
CordovaCann Corp. Notes to the Consolidated Financial Statements For the Years Ended June 30, 2021, 2020 and 2019 (Expressed in Canadian Dollars) |
19. | PROMISSORY NOTES PAYABLE (continued) |
|
|
| On December 16, 2019, the Company extended the maturity date of the Promissory Note C to March 19, 2020 (the “Extension”) in exchange for a one-time fee in the amount $13,142 (US $10,000), due at maturity and the issuance of additional warrants for the purchase of 200,000 common shares of the Company exercisable until June 18, 2021 at a price of $0.30 per share.
On the date of the Extension, the fair value of the liability was determined to be $696,151 (US $530,643). The residual value of $8,995 (US $6,857) was allocated to warrants. The carrying value of Promissory Note C, as a result of the Extension, net of the warrant component, has been accreted using the effective interest rate method over the term of the Promissory Note C, such that the carrying amount of the financial liability will equal the principal balance at maturity.
On March 16, 2020, the Company extended the maturity date of the Promissory Note C to June 19, 2020 in exchange for a fee in the amount $13,142 (US $10,000), due at maturity. On June 15, 2020, the Company extended the maturity date of the Promissory Note C to December 19, 2020 in exchange for a fee in the amount $40,472 (US $29,750), due at maturity.
On December 15, 2020, the Company extended the maturity date of the Promissory Note C to December 15, 2021 (the “Second Extension”) in exchange for a one-time fee in the amount $54,113 (US $42,200), the issuance of “Warrants – #A” for the purchase of 200,000 common shares of the Company exercisable until December 31, 2022 at a price of $0.32 per share, and the issuance of “Warrants - #B” for the purchase of 200,000 common shares of the Company exercisable until December 31, 2022 at a price of $0.50 per share.
On the date of the Second Extension, the fair value of the liability was determined to be $655,272 (US $515,070). The residual value of $15,823 (US $12,437) was allocated to warrants. The carrying value of Promissory Note C, as a result of the Extension, net of the warrant component, has been accreted using the effective interest rate method over the term of the Promissory Note C, such that the carrying amount of the financial liability will equal the principal balance at maturity.
As at June 30, 2021, the value of the Promissory Note C amounted to $477,672 (June 30, 2020 - $817,935). Accretion expense of $11,536 (June 30, 2020 - $22,671; June 30, 2019 - $847) and interest expense of $179,720 (June 30, 2020 - $131,893; June 30, 2019 - $3,020) was recorded for the year ended June 30, 2021.
Promissory Note D – October 28, 2019
On October 28, 2019, the Company issued a promissory note (the “Promissory Note D”) in the principal amount of $391,680 (US $300,000). The Promissory Note D matured on June 30, 2020 and bears interest at a rate of 5% per annum, accrued monthly and due at maturity. Subsequent to the issuance, the Promissory Note D was extended until October 31, 2020 for a one-time fee of US $40,000. Interest on the Promissory Note D subsequent to the maturity date bears interest at 15% per annum. The Promissory Note D is secured by a personal guarantee of vendors.
On May 25, 2020, the Company issued 453,720 common shares of the Company at a price of $0.25 per share for $113,317 (US $78,150) of Promissory Note D. On August 17, 2020, the Company issued 125,507 common shares of the Company at a price of $0.32 per share for $40,162 (US $29,750) of Promissory Note. On February 19, 2021, the Company issued 1,085,062 common shares of the Company at a price of $0.32 per share for $347,220 (US $257,200) of Promissory Note D. As at June 30, 2021, the $391,680 (US $300,000) of Promissory Note D with accrued interest payable were fully settled by common shares. |
| F-39 |
| Table of Contents |
CordovaCann Corp. Notes to the Consolidated Financial Statements For the Years Ended June 30, 2021, 2020 and 2019 (Expressed in Canadian Dollars) |
19. | PROMISSORY NOTES PAYABLE (continued) |
|
|
| Accretion expense of $24,334 (June 30, 2020 - $37,026) and interest expense of $78,827 (June 30, 2020 – $55,139; June 30, 2019 - $nil) were recorded for the year ended June 30, 2021.
Promissory Note E – April 8, 2020
On April 28, 2020, the Company issued a promissory note (the “Promissory Note E-1”) in the principal amount of $527,967 (Note 12 (iv)). The Promissory Note E-1 matures on April 8, 2023 and bears interest at a rate of 6% per annum, calculated in arrears, compounded annually and payable at maturity. The fair value of $381,093 for the Promissory Note E-1 was determined by discounting the stream of future payments of interest and principal at a market interest rate of 19% which is estimated to be the borrowing rate available to the Company for similar instruments of debt.
On May 8, 2020, the Company repaid $90,803 of the principal in cash and issued 181,250 of its common shares to settle $72,500 of the principal outstanding. On June 30, 2020 the Company repaid $20,000 of the principal.
On August 13, 2020 and August 17, 2020, the Company repaid a total of $15,000 of the principal in cash and issued 585,936 of its common shares to settle $187,500 of the principal. On March 5, 2021 and April 1, 2021, the Company repaid a total of $14,000 of the principal in cash.
As at June 30, 2021, the value of the Promissory Note E-1 amounted to $124,008 (June 30, 2020 - $259,889). Interest and accretion expense of $9,847 and $60,003, respectively (June 30, 2020 - $6,454 and $6,851, respectively) was recorded for the year ended June 30, 2021.
On June 8, 2020, the Company issued a promissory note (the “Promissory Note E-2”) in the principal amount of $225,000 (Note 12(v)). The Promissory Note E-2 matures on April 8, 2023 and bears interest at a rate of 6% per annum, calculated in arrears, compounded annually and payable at maturity. The fair value of $160,603 for the Promissory Note E-2 was determined by discounting the stream of future payments of interest and principal at a market interest rate of 19% which is estimated to be the borrowing rate available to the Company for similar instruments of debt.
As at June 30, 2021, the value of the Promissory Note E-2 amounted to $194,821 (June 30, 2020 - $162,868). Interest and accretion expense of $13,350 and $18,603, respectively (June 30, 2020 - $805 and $1,461, respectively) was recorded for the year ended June 30, 2021.
On June 8, 2020, the Company issued a promissory note (the “Promissory Note E-3”) in the principal amount of $196,832 (Note 12(v)). The Promissory Note E-3 matures on April 8, 2023 and bears interest at a rate of 6% per annum, calculated in arrears, compounded annually and payable at maturity. The fair value of $142,075 for the Promissory Note E-3 was determined by discounting the stream of future payments of interest and principal at a market interest rate of 19% which is estimated to be the borrowing rate available to the Company for similar instruments of debt.
As at June 30, 2021, the value of the Promissory Note E-3 amounted to $172,347 (June 30, 2020 - $144,079). Interest and accretion expense of $11,810 and $16,457, respectively (June 30, 2020 - $772 and $1,292, respectively) was recorded for the year ended June 30, 2021. |
| F-40 |
| Table of Contents |
CordovaCann Corp. Notes to the Consolidated Financial Statements For the Years Ended June 30, 2021, 2020 and 2019 (Expressed in Canadian Dollars) |
20. | CONTRACT LIABILITY |
|
|
| The Company’s contract liability is deferred revenue which relates to revenue expected to be recognized in the future related to performance obligations that are unsatisfied (or partially unsatisfied) which amounted to $226,903 (June 30, 2020 - $nil). Details of the Company’s contract liability is noted as follows: |
|
| June 30, 2021 |
|
| June 30, 2020 |
| ||
Opening balance |
| $ |
|
| $ |
| ||
Additions |
|
|
|
|
|
| ||
Revenue recognized from contract liability |
|
| ( | ) |
|
|
| |
Ending balance |
| $ |
|
| $ |
| ||
Current portion |
| $ |
|
| $ |
| ||
Long-term portion |
|
|
|
|
|
| ||
21. | SHARE SUBSCRIPTIONS RECEIVED IN ADVANCE |
|
|
| During the year ended June 30, 2021, the Company received a total of $647,296 in deposits related to a non- brokered private placement financing. On August 19, 2021, the Company closed the non-brokered private placement financing, pursuant to which the Company issued 3,379,379 units at a price of $0.30 per unit for gross proceeds of $1,013,814; of which $661,530 was received in cash and $352,284 was issued in settlement of outstanding fees and debt (Note 32). |
22. | CONVERTIBLE DEBENTURES |
|
|
| a) Convertible Debentures Series A-1 – March 13, 2019
On March 13, 2019, the Company closed a non-brokered private placement of unsecured subordinated convertible debenture units (the “Debenture Units of Series A-1”) of the Company for gross proceeds of $600,000; of which $350,000 was received in cash and $250,000 was issued in settlement of outstanding fees with a fair value amounting to $237,300. The balance of $12,700 has been recorded as a loss on settlement of fees.
Each Debenture Unit of Series A-1 consists of $1,000 principal amount of unsecured subordinated convertible debentures (the “Debentures of Series A-1”) and 500 common share purchase warrants (the “Warrants of Series A-1”) of the Company. The Debentures of Series A-1 mature on March 12, 2021 and bear interest at a rate of 10% per annum, accrued monthly and payable at maturity. The outstanding principal amount of the Debentures of Series A-1 and any accrued interest is convertible into common shares of the Company at the option of the holder at any time prior to the maturity date at a conversion price of $1.00 per share. The Company also has the option to force conversion of the Debentures of Series A-1 and any accrued interest at the same conversion price if the Company’s common shares trade above $2.50 per share for ten consecutive trading days on the Canadian Securities Exchange. Each full Warrant of Series A-1 entitles the holder to purchase one common share of the Company until March 12, 2021 at an exercise price of $1.20 per share. 300,000 Warrants of Series A-1 were issued related to the Debenture Units of Series A-1. |
| F-41 |
| Table of Contents |
CordovaCann Corp. Notes to the Consolidated Financial Statements For the Years Ended June 30, 2021, 2020 and 2019 (Expressed in Canadian Dollars) |
22. | CONVERTIBLE DEBENTURES (continued) |
|
|
| The Debenture Units of Series A-1 are determined to be a compound instrument, comprising a liability, a conversion feature and warrants. Both conversion feature and warrants met the fixed for fixed criteria and were therefore presented as equity instruments in accordance with IAS 32. The fair value of the debt component was determined by discounting the stream of future payments of interest and principal at a market interest rate of 19% which is estimated to be the borrowing rate available to the Company for similar instruments of debt having no conversion rights. Using the residual method, the carrying amount of the conversion feature and the warrants issued is the difference between the principal amount and the initial fair value of the financial liability.
The fair value of the liability was determined to be $508,439. The residual value of $91,561 was allocated to the equity portion of convertible debt and warrants based on their pro-rata fair values of $62,498 and $29,063, respectively. The carrying value of the Debentures of Series A-1, net of the equity components, have been accreted using the effective interest rate method over the term of the debentures, such that the carrying amount of the financial liability will equal the principal balance at maturity.
The equity component from the initial recognition resulted taxable temporary difference. The Company recognized the deferred tax liabilities of 24,264, which was charged directly to the carrying amount of the two equity components. Subsequent changes in the deferred tax liability are recognized in profit and loss as deferred tax recovery.
On January 16, 2020, the Company issued 271,164 common shares at $1.00 per share as a result of a partial conversion of the outstanding Debentures of Series A-1 with a face value of principal $250,000 and accrued interest of $21,164. The debt in the amount of $271,164 and the equity in the amount of $21,979, were transferred to share capital upon conversion.
During the year ended June 30, 2021, the principal amount of $25,000 and accrued interest of $5,000 for a total of $30,000 was repaid on maturity. The remaining Debenture Units of Series A-1 were converted into the Convertible Debentures Series A-4 offering. The principal amount of $325,000, the accrued interest of $65,000, for total transfer of $390,000 were transferred to Convertible Debentures Series A-3.
As at June 30, 2021, the value of the Debentures of Series A-1 amounted to $nil (June 30, 2020 – $381,678). Accretion expense of $17,440 (June 30, 2020 - $57,806; June 30, 2019 - $15,118) and interest expense of $24,382 (June 30, 2020 - $48,275; June 30, 2019 - $22,903) were recorded for the year ended June 30, 2021.
b) Convertible Debentures Series A-2 – August 14, 2019
On August 14, 2019, the Company closed a non-brokered private placement of unsecured subordinated convertible debenture units (the “Debenture Units of Series A-2”) of the Company for gross proceeds of $713,000.
Each Debenture Unit of Series A-2 consists of $1,000 principal amount of unsecured subordinated convertible debentures (the “Debentures of Series A-2”) and 500 common share purchase warrants (the “Warrants of Series A-2”) of the Company. The Debentures of Series A-2 mature on August 13, 2021 and bear interest at a rate of 10% per annum, accrued monthly and payable at maturity. The outstanding principal amount of the Debentures of Series A-2 and any accrued interest is convertible into common shares of the Company at the option of the holder at any time prior to the maturity date at a conversion price of $1.00 per share. The Company also has the option to force conversion of the Debentures of Series A-2 and any accrued interest at the same conversion price if the Company’s common shares trade above $2.50 per share for ten consecutive trading days on the Canadian Securities Exchange. Each full Warrant of Series A-2 entitles the holder to purchase one common share of the Company until August 13, 2021 at an exercise price of $1.20 per share. As a result, 356,500 Warrants of Series A-2 were issued related to the Debenture Units of Series A-2. |
| F-42 |
| Table of Contents |
CordovaCann Corp. Notes to the Consolidated Financial Statements For the Years Ended June 30, 2021, 2020 and 2019 (Expressed in Canadian Dollars) |
22. | CONVERTIBLE DEBENTURES (continued) |
|
|
| The Debenture Units of Series A-2 were determined to be a compound instrument, comprising a liability, a conversion feature and warrants. The fair value of debt component was determined by discounting the stream of future payments of interest and principal at a market interest rate of 19% which is estimated to be the borrowing rate available to the Company for similar instruments of debt having no conversion rights. Using the residual method, the carrying amount of the conversion feature and the warrants issued is the difference between the principal amount and the initial fair value of the financial liability.
The fair value of the liability was determined to be $604,195. The residual value of $108,805 was allocated to the equity portion of convertible debt and warrants based on their pro-rata fair values of $74,989 and $33,816, respectively. The deferred tax liability of $28,833 was charged directly to the carrying amount of these two equity components. The carrying value of the Debentures of Series A-2, net of the equity components, have been accreted using the effective interest rate method over the term of the debentures, such that the carrying amount of the financial liability will equal the principal balance at maturity.
On April 22, 2020, the Debenture Units of Series A-2 were converted into the Convertible Debentures Series A-3 offering. The principal amount of $713,000, the accrued interest of 49,614 and a small loss of $1,614, for total transfer of $761,000 were transferred to Convertible Debentures Series A-3. The total amount of interest and accretion amounted to $49,614 and $33,454, respectively. The Company recorded deferred tax recovery of $28,833 for the year ended June 30, 2020.
c) Convertible Debentures Series A-3 – April 22, 2020
On April 22, 2020, the Company closed a non-brokered private placement of unsecured subordinated convertible debenture units (the “Debenture Units of Series A-3”) of the Company for gross proceeds of $1,164,000.
Each Debenture Unit of Series A-3 consists of $1,000 principal amount of unsecured subordinated convertible debentures (the “Debentures of Series A-3”) and 2,000 common share purchase warrants (the “Warrants of Series A-3”) of the Company. The Debentures of Series A-3 mature on April 21, 2021 and bear interest at a rate of 15% per annum, accrued monthly and payable at maturity. The outstanding principal amount of the Debentures of Series A-3 and any accrued interest is convertible into common shares of the Company at the option of the holder at any time prior to the maturity date at a conversion price of $0.25 per share. The Company also has the option to force conversion of the Debentures of Series A-3 and any accrued interest at the same conversion price if the Company’s common shares trade above $0.50 per share for ten consecutive trading days on the Canadian Securities Exchange. Furthermore, the Debentures of Series A-3 and accrued interest shall automatically convert into common shares of the Company at maturity. Each full Warrant of Series A-3 entitles the holder to purchase one common share of the Company until April 21, 2022 at an exercise price of $0.30 per share. As a result, 2,328,000 Warrants of Series A-3 were issued related to the Debenture Units of Series A-3. |
| F-43 |
| Table of Contents |
CordovaCann Corp. Notes to the Consolidated Financial Statements For the Years Ended June 30, 2021, 2020 and 2019 (Expressed in Canadian Dollars) |
22. | CONVERTIBLE DEBENTURES (continued) |
|
|
| Prior to closing of the Offering, the Company exercised its rights of early repayment in respect of certain of the Convertible Debentures of Series A-2 of the Company issued on August 14, 2019 and, in connection with its election for early repayment, holders of the Convertible Debentures of Series A-2 directed the Company to retain the funds representing such repayment and to apply such funds towards satisfaction of the purchase price for the respective Debenture of Series A-3. The Company issued an aggregate of 761 Debenture Units to the subscribers of the Debentures of Series A-2.
The Debenture Units of Series A-3 were determined to be an equity instrument, comprising a conversion feature and warrants as a result of the Company being able to avoid a contractual obligation to pay cash related to the principal and interest at maturity. The subscription amount of $1,164,000 was allocated to the equity portion of convertible debt and warrants based on their pro-rata fair values of $748,990 and $415,010, respectively. The interest expense related to the Debenture Units of Series A-3 are added to the equity portion of convertible debt as accrued.
On April 24, 2021, the Company elected to automatically convert the Debentures of Series A-3. Accordingly, these have been classified as shares to be issued. The Company expects to issue these shares by November 2021.
During the year ended June 30, 2021, interest of $142,490 was recorded in the equity portion of the convertible debt (June 30, 2020 - $32,010).
d) Convertible Debentures Series A-4 – March 12, 2021
On March 12, 2021, the Company closed a non-brokered private placement of unsecured subordinated convertible debenture units (the “Debenture Units of Series A-4”) of the Company for gross proceeds of $390,000.
Each Debenture Unit of Series A-4 consists of $1,000 principal amount of unsecured subordinated convertible debentures (the “Debentures of Series A-4”) and 1,000 common share purchase warrants (the “Warrants of Series A-4”) of the Company. The Debentures of Series A-4 mature on March 12, 2022 and bear interest at a rate of 15% per annum, accrued monthly and payable at maturity. The outstanding principal amount of the Debentures of Series A-3 and any accrued interest is convertible into common shares of the Company at the option of the holder at any time prior to the maturity date at a conversion price of $0.50 per share. The Company also has the option to force conversion of the Debentures of Series A-4 and any accrued interest at the same conversion price if the Company’s common shares trade above $0.50 per share for ten consecutive trading days on the Canadian Securities Exchange. Furthermore, the Debentures of Series A-4 and accrued interest shall automatically convert into common shares of the Company at maturity. Each full Warrant of Series A-4 entitles the holder to purchase one common share of the Company until March 12, 2023 at an exercise price of $0.75 per share.
Prior to closing of the Offering, the Company exercised its rights of early repayment in respect of certain of the Convertible Debentures of Series A-1 of the Company issued on March 13, 2019 and, in connection with its election for early repayment, holders of the Convertible Debentures of Series A-1 directed the Company to retain the funds representing such repayment and to apply such funds towards satisfaction of the purchase price for the respective Debenture of Series A-4. The Company issued an aggregate of 390 Debenture Units to the subscribers of the Debentures of Series A-1. |
| F-44 |
| Table of Contents |
CordovaCann Corp. Notes to the Consolidated Financial Statements For the Years Ended June 30, 2021, 2020 and 2019 (Expressed in Canadian Dollars) |
22. | CONVERTIBLE DEBENTURES (continued) |
|
|
| The Debenture Units of Series A-4 were determined to be an equity instrument, comprising a conversion feature and warrants as a result of the Company being able to avoid a contractual obligation to pay cash related to the principal and interest at maturity. The subscription amount of $390,000 was allocated to the equity portion of convertible debt and warrants based on their pro-rata fair values of $208,452 and $181,548, respectively. The interest expense related to the Debenture Units of Series A-4 are added to the equity portion of convertible debt as accrued.
During the year ended June 30, 2021, interest of $16,512 was recorded in the equity portion of the convertible debt (June 30, 2020 - $nil). |
23. | SHARE CAPITAL |
|
|
| The authorized share capital of the Company consists of an unlimited number of common shares.
During the year ended June 30, 2021, the Company had the following common share transactions: |
| · | On February 26, 2021, the Company issued 3,000,000 common shares of the Company for the acquisition of Extraction Technologies, LLC (Note 15); |
| · | On February 19, 2021, the Company issued 6,177,721 common shares of the Company at a price of $0.32 per share for gross proceeds of $1,976,870; of which $1,380,400 was received in cash and $596,570 was issued in settlement of outstanding fees and debt; |
| · | On January 6, 2021, the Company issued 9,000,000 common shares of the Company at a price of $0.17 per share in relation to the asset acquisition of Star Buds for the opening of three cannabis retail stores under the Starbuds trade name; |
| · | On August 17, 2020, the Company issued 3,024,521 common shares of the Company at a price of $0.32 per share for gross proceeds of $967,846; of which $552,501 was received in cash and $415,345 was issued in settlement of outstanding fees and debt; and |
| · | On July 27, 2020, the Company issued 6,000,000 common shares of the Company at a price of $0.17 per share in relation to the asset acquisition of Starbuds for the opening of two cannabis retail stores under the Starbuds trade name. |
| During the year ended June 30, 2020, the Company had the following common share transactions: |
| · | On May 25, 2020, the Company issued 6,210,190 common shares of the Company at a price of $0.25 per share for gross proceeds of $1,552,548; of which $1,411,680 was received in cash and $140,868 was issued in settlement of outstanding fees and debt; |
| · | On May 8, 2020, the Company issued 6,000,000 common shares of the Company at a price of $0.17 per share in relation to the contingent consideration issued for the asset acquisition of Star Buds; |
| · | On May 8, 2020, the Company issued 181,250 common shares of the Company at a price of $0.40 per share for the settlement of a portion of Promissory Note E; |
| · | On April 8, 2020, the Company issued 12,500,000 common shares of the Company at a price of $0.17 per share in relation to the asset acquisition of Star Buds; and |
| F-45 |
| Table of Contents |
CordovaCann Corp. Notes to the Consolidated Financial Statements For the Years Ended June 30, 2021, 2020 and 2019 (Expressed in Canadian Dollars) |
23. | SHARE CAPITAL |
| · | On January 16, 2020, the Company issued 271,164 common shares of the Company at a price of $1.00 per share as a result of a partial conversion of the Debentures of Series A-1, as disclosed in Note 22. |
| During the year ended June 30, 2019, the Company had the following common share transactions: |
| · | On May 4, 2019, and in connection with warrants previously issued to a consultant, warrants were exercised for the purchase of 750,000 common shares of the Company at an exercise price of $0.15 per share for total gross proceeds of $112,500. As a result of this exercise, contributed surplus in the amount of $44,087 was transferred into share capital. |
| Shares to be issued | ||
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|
|
|
|
| As at June 30, 2020, 3,000,000 common shares of the Company at a price of $0.17 per share were to be issued in relation to the contingent consideration issued for the asset acquisition of Star Buds, amounting to $510,000. On July 27, 2020, these shares were issued. | |
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| |
|
| As at June 30, 2021 and in connection with the automatic conversion of shares relating to Convertible Debentures Series A-3, 5,354,400 common shares were classified as shares to be issued.
As at June 30, 2021, the value of shares to be issued amounted to $923,590 (June 30, 2020 - $510,000). | |
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| Contingently issuable shares | ||
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| |
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| As at June 30, 2021, there were 4,000,000 contingently issuable shares of the Company (June 30, 2020 – 12,000,000) (Note 15). | |
24. | OPTIONS |
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| On November 22, 2018, the Company’s shareholders approved and the Company adopted a rolling stock option plan (the “Option Plan”), under which the Board of Directors may from time to time, in its discretion, grant to directors, officers, employees and consultants of the Company. Pursuant to the Option Plan, the Company may issue options for such period and exercise price as may be determined by the Board of Directors, and in any case not exceeding ten (10) years from the date of grant with the total options issued under the Option Plan not exceeding ten percent (10%) of the common shares of the Company, outstanding at the time of the granting of such options. The minimum exercise price of an option granted under the Option plan must not be less than the market value of the common shares on the date such option is granted.
Outstanding options as at June 30, 2021 are as follows: |
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| Options Outstanding |
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| Weighted Average Exercise Price |
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| Weighted Average Life Remaining (yrs) |
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Executive Officers |
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Directors |
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| $ |
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Consultants |
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| $ |
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| F-46 |
| Table of Contents |
CordovaCann Corp. Notes to the Consolidated Financial Statements For the Years Ended June 30, 2021, 2020 and 2019 (Expressed in Canadian Dollars) |
24. | OPTIONS (continued) |
Grant Date |
| Expiry Date |
| Options Outstanding |
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| Options Exercisable |
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| Exercise Price |
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| Fair Value |
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Feb. 25, 2020(iii) |
| Feb. 24, 2023 |
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| $ |
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| $ |
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Apr. 7, 2020(iv) |
| Apr. 6, 2023 |
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| $ |
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May 16, 2020(v) |
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| $ |
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| $ |
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| The fair value of these issued stock options were determined using the Black-Scholes Option Pricing Model with the following range of assumptions: |
Stock price |
| $ |
| |
Risk-free interest rate |
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| % | |
Expected life |
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| |
Estimated volatility in the market price of the common shares |
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| % | |
Dividend yield |
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| nil |
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| During the year ended June 30, 2021, 1,750,000 options expired unexercised. |
|
During the year ended June 30, 2021, the Company expensed $nil (June 30, 2020 - $869,299, June 30, 2019 – $nil) of the fair value of the options. |
| F-47 |
| Table of Contents |
CordovaCann Corp. Notes to the Consolidated Financial Statements For the Years Ended June 30, 2021, 2020 and 2019 (Expressed in Canadian Dollars) |
25. | WARRANTS |
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| Warrants Outstanding |
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| Weighted Average Exercise Price |
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| Weighted Average Life Remaining (years) |
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June 30, 2019 |
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| $ |
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Issued |
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Forfeited |
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| 0.00 |
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Expired |
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| ( | ) |
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| 0.00 |
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June 30, 2020 |
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Issued |
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Expired |
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| ( | ) |
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| 0.00 |
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June 30, 2021 |
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| $ |
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| During the year ended June 30, 2021: |
| · | the Company issued 6,790,000 common share purchase warrants in to employees and directors, for the amendment of promissory notes payable, and a convertible debenture financing; |
| · | 1,450,000 common share purchase warrants expired, unexercised; and |
| · | No common share warrants were forfeited or cancelled. |
| The fair value of these issued warrants of was determined using the Black-Scholes Option Pricing Model with the following range of assumptions: |
Stock price |
| $ |
| |
Risk-free interest rate |
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| % | |
Expected life |
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| |
Estimated volatility in the market price of the common shares |
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| % | |
Dividend yield |
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| nil |
|
| During the year ended June 30, 2020: |
| · | the Company issued 8,424,500 common share purchase warrants in consideration for convertible debenture financings, certain service providers and promissory notes; |
| · | 5,800,000 common share purchase warrants expired, unexercised; |
| · | 750,000 common share purchase warrants were forfeited; and |
| · | No common share warrants were cancelled. |
Stock price |
| $ |
| |
Risk-free interest rate |
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| % | |
Expected life |
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| |
Estimated volatility in the market price of the common shares |
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| % | |
Dividend yield |
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| nil |
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| During the year ended June 30, 2021, the Company expensed $941,854 (June 30, 2020 – $179,362; June 30, 2019 – $1,413,919) in the fair value of warrants as a result of the issuances which have been recorded as share based compensation. |
| F-48 |
| Table of Contents |
CordovaCann Corp. Notes to the Consolidated Financial Statements For the Years Ended June 30, 2021, 2020 and 2019 (Expressed in Canadian Dollars) |
26. | COMMITMENTS |
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| (a) Exclusivity Fee
On March 7, 2018, the Company entered into a memorandum of understanding (the “MOU”) with a third party which granted the Company an exclusivity option on a transaction to acquire a majority stake in real estate and intellectual property owned by the third party. Under the terms of the MOU, the Company agreed to pay the third party up to US $100,000 for such exclusivity until termination by either party. In October 2019, the Company terminated the MOU. During the year ended June 30, 2021, the Company paid and expensed a total of $nil (June 30, 2020 - $nil; June 30, 2019 - $48,367).
(b) Employment Agreements
The Company is party to certain employments agreements with key executives of the Company that contain clauses requiring additional payments of up to two times the annual entitlements under these agreements upon occurrence of certain events, such as a change of control. As a triggering event has not taken place, the contingent payments have not been reflected in these consolidated financial statements.
(c) Deposit in Joint Forces
On November 7, 2019, the Company advanced CDN $408,840 (US $300,000) to a non-arm’s length party in exchange for Promissory Note D (the “Joint Forces Deposit”).
On October 12, 2020, the Company entered into a settlement agreement (the “Settlement”), settling the outstanding Joint Forces Deposit for a payment term over 2 years for a total of US $338,000. The proceeds of the Settlement will be received by the beneficiaries of Promissory Note D. As a result, a gain on Settlement was recorded in the amount of $51,023 (US $38,000) during the year ended June 30, 2020.
Accordingly, the Joint Forces Deposit was determined to be a financial instrument and recorded at amortized cost. The initial carrying amount of the financial asset was determined by discounting the stream of future payments of interest and principal at a market interest rate of 8% which is estimated to be the lending rate available to the Company for similar instruments. The balance as at June 30, 2021 was $300,814 (June 30, 2020 - $405,214). The current portion of the Joint Forces Deposit as at June 30, 2021 amounted to $101,351. Interest income in relation to the Joint Forces Deposit amounted to $28,939 during the year ended June 30, 2021 (2020 – $nil).
(d) Loss on Deposit
During the year ended June 30, 2019, the Company made certain non-refundable deposits towards a transaction in California (the “California Transaction”). During the year ended June 30, 2020, the Company termination the California Transaction and recorded a loss on a deposit in the amount of $396,000. |
| F-49 |
| Table of Contents |
CordovaCann Corp. Notes to the Consolidated Financial Statements For the Years Ended June 30, 2021, 2020 and 2019 (Expressed in Canadian Dollars) |
26. | COMMITMENTS (continued) |
|
|
| (e) Lease agreement
On July 20, 2021, the Company entered into a lease agreement with the buyer of Oregon Property. The lease commenced on August 1, 2021 with the initial term of ten years and two subsequent ten-year renewal periods. There is no rent payable during the first three months of the Lease and subsequent payments amount to subsequent payments amount to $27,267 (US $22,000) per month for the reminder of the first year, with annual payment escalators thereafter.
(f) COVID-19
On March 11, 2020, the World Health Organization declared the outbreak of the novel strain of coronavirus (“COVID-19”) a pandemic, which has resulted in governments worldwide enacting emergency measures to combat the spread of the virus. These measures, which include the implementation of travel bans, self-imposed quarantine periods and social distancing, have caused material disruption to businesses globally resulting in an economic slowdown. Global equity markets have experienced significant volatility and weakness. Governments and central banks have reacted with significant monetary and fiscal interventions designed to stabilize economic conditions. The duration and impact of the COVID-19 outbreak is unknown at this time, as is the efficacy of the government and central bank interventions. It is not possible to reliably estimate the length and severity of these developments and the impact on the financial results and condition of the Company and its operating subsidiaries in future periods as well as the Company’s ability to find new business opportunities, raise capital or restructure the Company’s finances |
27. | RELATED PARTY TRANSACTIONS |
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| Related party transactions for the year ended June 30, 2021, 2020 and 2019 and the balances as at those dates, not disclosed elsewhere in these consolidated financial statements are: |
| a) | During the year ended June 30, 2021, the Company expensed $842,500 (June 30, 2020 - $662,284; June 30, 2019 - $1,116,103), in fees payable to officers and directors of the Company and in fees payable to a corporation related by virtue of a common officer and director. As at June 30, 2021, the Company had fees payable to officers and directors of the Company of $1,494,228 (June 30, 2020 - $1,278,106); and |
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| b) | During the year ended June 30, 2021, the Company expensed $740,200 (June 30, 2020 - $559,846; June 30, 2019 - $nil) in share based compensation related to officers and directors of the Company. |
28. | FINANCIAL INSTRUMENTS AND RISK FACTORS |
|
|
| The fair value hierarchy that reflects the significance of inputs used in making fair value measurements is as follows:
Level 1: quoted prices in active markets for identical assets or liabilities;
Level 2: inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly (i.e. as prices) or indirectly (i.e. from derived prices); and
Level 3: inputs for the asset or liability that are not based upon observable market data. |
| F-50 |
| Table of Contents |
CordovaCann Corp. Notes to the Consolidated Financial Statements For the Years Ended June 30, 2021, 2020 and 2019 (Expressed in Canadian Dollars) |
28. | FINANCIAL INSTRUMENTS AND RISK FACTORS (continued) |
|
|
| Assets are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.
The fair values of the Company’s financial instruments consisting of cash and cash equivalents, promissory note and accounts payable and accrued liabilities approximate their carrying value due to the relatively short term maturities of these instruments.
Risk Management Policies
The Company, through its financial assets and liabilities, is exposed to various risks. The Company has established policies and procedures to manage these risks, with the objective of minimizing any adverse effect that changes in these variables could have on these consolidated financial statements. The following analysis provides a measurement of risks as at June 30, 2021:
Credit Risk
The Company's maximum exposure to credit risk, which will cause a financial loss to the Group due to failure to discharge an obligation by the counterparties, totals the carrying amount of these assets as stated in the consolidated statements of financial position. The Company's principal financial assets are cash, restricted investments and accounts receivable, which represent the Company's exposure to credit risk in relation to financial assets. The credit risk on cash and restricted investments is mitigated by transacting with banks with high credit ratings assigned by international credit-rating agencies. An allowance for expected credit losses is established based upon factors surrounding the credit risk of specific accounts, historical trends and other information when necessary.
Liquidity Risk
Liquidity risk is the risk that the Company will not be able to meet its financial obligations as they fall due within one year. The Company’s approach to managing liquidity risk is to ensure, as far as possible, that it will have sufficient liquidity to meet its liabilities when due, under both normal and stressed conditions, without incurring unacceptable losses or risking damage to the Company’s reputation.
As at June 30, 2021, there is substantial doubt about the Company’s ability to continue as a going concern primarily due to its history of losses and negative working capital. Liquidity risk continues to be a key concern in the development of future operations.
Market Risk
(i) Interest Rate Risk
Interest rate risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market interest rates. The interest rates on all of the Company’s existing debt are fixed, and therefore it is not currently subject to any significant interest rate risk. |
| F-51 |
| Table of Contents |
CordovaCann Corp. Notes to the Consolidated Financial Statements For the Years Ended June 30, 2021, 2020 and 2019 (Expressed in Canadian Dollars) |
28. | FINANCIAL INSTRUMENTS AND RISK FACTORS (continued) |
|
|
| (ii) Foreign Currency Risk
The Company is exposed to foreign currency risk from fluctuations in foreign exchange rates and the degree of volatility in these rates due to the timing of their accounts payable balances. The risk is mitigated by timely payment of creditors and monitoring of foreign exchange fluctuations by management. As at June 30, 2021, the Company did not use derivative instruments to hedge its exposure to foreign currency risk.
(iii) Price Risk
The Company’s operations do not involve the direct input or output of any commodities and therefore it is not subject to any significant commodity price risk. In addition, the Company does not have any equity investment in other listed public companies, and therefore it is not subject to any significant stock market price risk. |
29. | CAPITAL MANAGEMENT |
|
|
| The Company includes equity comprised of issued share capital, contributed surplus, deficit in the definition of capital and accumulated other comprehensive loss. As at June 30, 2021, the Company’s shareholders’ equity was $6,492,208 (June 30, 2020 – shareholders’ equity of $5,618,586). The Company’s objectives when managing capital are as follows:
(i) to safeguard the Company’s ability to continue as a going concern; and
(ii) to raise sufficient capital to meet its business objectives.
The Company manages its capital structure and makes adjustments to it, based on the general economic conditions, the Company’s long-term and short-term capital requirements. To secure the additional capital necessary to pursue these plans, the Company may attempt to raise additional funds through the issuance of equity or debt. |
| F-52 |
| Table of Contents |
CordovaCann Corp. Notes to the Consolidated Financial Statements For the Years Ended June 30, 2021, 2020 and 2019 (Expressed in Canadian Dollars) |
30. | INCOME TAXES |
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| Canadian |
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|
| Income Taxes
The major factors that cause variations from the Company’s combined federal and provincial statutory Canadian income tax rates were the following: |
|
| June 30, 2021 |
|
| June 30, 2020 |
|
| June 30, 2019 |
| |||
Loss from Canadian operations |
| $ | ( | ) |
| $ | ( | ) |
| $ | ( | ) |
Combined Canadian statutory income tax rates |
|
| % |
|
| % |
|
| % | |||
Income tax recovery at statutory income tax rates Increase in taxes resulting from: |
| $ | ( | ) |
| $ | ( | ) |
| $ | ( | ) |
Stock-based compensation expense |
|
|
|
|
|
|
|
|
| |||
Other |
|
|
|
|
|
|
|
|
| |||
Unrecognized benefit of non-capital losses |
|
|
|
|
|
|
|
|
| |||
Provision for income taxes, net of (recovery) |
| $ |
|
| $ | (54,349 | ) |
| $ |
| ||
| Deferred Income Taxes |
|
|
| Deferred tax assets have not been recognized in respect of the following deductible temporary differences: |
|
| June 30, |
|
| June 30, |
|
| June 30, |
| |||
|
| 2021 |
|
| 2020 |
|
| 2019 |
| |||
Amounts related to tax loss carry forwards |
|
|
|
|
|
|
|
|
| |||
| A deferred tax asset has not been recognized in respect of the above because it is not probable that future taxable profits will be available against which the temporary difference can be utilized. |
Deferred Tax Liabilities |
| June 30, 2021 |
|
| June 30, 2020 |
| ||
Convertible debt |
| $ |
|
| $ |
| ||
Licenses |
| $ |
|
| $ |
| ||
| Non-capital Losses |
|
|
| As at June 30, 2021, the Company has accumulated non-capital tax loss carry forwards for income tax purposes of carry-forward of approximately $13,720,000 which may be applied against future Canadian taxable income and expire as detailed below. No deferred taxes have been recognized in these consolidated financial statements in respect of the following as the probability that future taxable profit will allow the deferred tax asset to be recognized cannot be predicted at this time. |
| F-53 |
| Table of Contents |
CordovaCann Corp. Notes to the Consolidated Financial Statements For the Years Ended June 30, 2021, 2020 and 2019 (Expressed in Canadian Dollars) |
30. | INCOME TAXES (continued) |
|
|
| The net operating losses for these years will not be available to reduce future taxable income until the returns are filed. |
2027 |
|
|
| |
2028 |
|
|
| |
2029 |
|
|
| |
2030 |
|
|
| |
2031 |
|
|
| |
2032 |
|
|
| |
2033 |
|
|
| |
2034 |
|
|
| |
2035 |
|
|
| |
2036 |
|
|
| |
2037 |
|
|
| |
2038 |
|
|
| |
2039 |
|
|
| |
2040 |
|
|
| |
2041 |
|
|
| |
|
| $ |
|
| United States |
|
|
| Income Taxes
The major factors that cause variations from the Company’s combined United States federal and state level income tax rates were the following: |
|
| June 30, 2021 $ |
|
| June 30, 2020 $ |
|
| June 30, 2019 $ |
| |||
Loss from US operations |
|
| ( | ) |
|
| ( | ) |
|
| ( | ) |
Combined federal and state level taxes |
|
| % |
|
| % |
|
| % | |||
Expected income tax payable |
|
| ( | ) |
|
| ( | ) |
|
| ( | ) |
Temporary difference, Equipment |
|
|
|
|
|
|
|
|
| |||
Other |
|
| ( | ) |
|
| - |
|
|
|
| |
Unrecognized benefit of non-capital losses |
|
|
|
|
|
|
|
|
| |||
Provision for income taxes |
|
|
|
|
|
|
|
|
| |||
| Deferred Income Taxes |
|
|
| Deferred tax assets have not been recognized in respect of the following United States deductible temporary differences: |
|
| June 30, |
|
| June 30, |
|
| June 30, |
| |||
|
| 2021 |
|
| 2020 |
|
| 2019 |
| |||
Amounts related to tax loss carry forwards |
|
|
|
|
|
|
|
|
| |||
| F-54 |
| Table of Contents |
CordovaCann Corp. Notes to the Consolidated Financial Statements For the Years Ended June 30, 2021, 2020 and 2019 (Expressed in Canadian Dollars) |
30. | INCOME TAXES (continued) |
|
|
| A deferred tax asset has not been recognized in respect of the above because it is not probable that future taxable profits will be available against which the temporary difference can be utilized.
Non-capital Losses
As at June 30, 2021, the Company has accumulated non-capital tax loss carry forwards for income tax purposes of carry-forward of approximately $1,581,000 which may be applied against future United States taxable income and expire as detailed below.
No deferred taxes have been recognized in these consolidated financial statements in respect of the following as the probability that future taxable profit will allow the deferred tax asset to be recognized cannot be predicted at this time. |
2038 |
| $ |
| |
2039 |
|
|
| |
2040 |
|
|
| |
2041 |
|
|
| |
|
| $ |
|
31. | COMPARATIVE AMOUNTS |
|
|
| Certain comparative figures have been reclassified to conform to the consolidated financial statement presentation adopted for the current period. Such reclassifications did not have an impact on previously reported net and comprehensive loss. |
32. | SUBSEQUENT EVENTS |
|
|
| On August 4, 2021, the Company sold all of its land, building and equipment (the “Oregon Property”) for US $2,200,000 and entered into an agreement to lease the Oregon Property from the buyer (the “Sale Leaseback”). The Sale Leaseback will allow the Company to operate the Oregon Property for ten years, and provides options for two subsequent ten-year renewal periods. Proceeds from the sale were used to retire debts related to the Oregon Property and finance the planned Oregon expansion. A total of US $600,000 of the purchase price has been placed in escrow by the buyer to allow the Company to complete its buildout of the facility. The Sale Leaseback was signed on July 20, 2021 and commenced on August 1, 2021.
On August 19, 2021, the Company closed a non-brokered private placement financing, pursuant to which the Company issued 3,379,379 units at a price of $0.30 per unit for gross proceeds of $1,013,814; of which $661,530 was received in cash and $352,284 was issued in settlement of outstanding fees and debt. |
| F-55 |